Internals of Housing Data Less "Hot" than Headline Figure. Inflation Expectations Remain Anchored Which Is The Key To Us

HEADS UP: Tom will not be able to publish the First Word/Macro Minute Videos today or Friday this week, so Ken Xuan (aka “tireless Ken”) will be publishing on his behalf. Tom will continue publishing First Word/Macro Minute Videos as of next Monday (10/2).

We discuss: The weak market sentiment, today’s housing data, and their implications on the forward inflation trajectory.

Please click below to view today’s Macro Minute (Duration: 5:39).

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Equities have further weakened to start this week, with the S&P 500 falling ~1% as of Tuesday’s close. There were two key data points that investors digested this week, those being the July Case Shiller Home Price Index and the September Conference Board’s release. Markets weakened after both of these reports as the “higher than expected” Case Shiller reading and “weaker than expected” Conference Board consumer confidence startled investors. This weakening means investors are still in their “vortex of pain” we mentioned at the start of the week. GS Prime data shows this, with Hedge Funds adding the most short exposure (week over week) since the COVID-19 Pandemic. So there is clearly a level of panic within markets that is starting to form. The 0DTE Vix is now in a “fear zone” (>20), a level where “local bottoms” have formed this year. It is understandable that investors are cautious in the near term given market visibility is poor and short-term risks still loom, but we remain constructive through year-end given the underlying inflation story remains unchanged. This remains the “key” to us.

• Many data points on the housing market were released on Tuesday, the most important being the Case Shiller Home Price Index
  – Consensus called for 0.70% MoM, but actual came in at 0.87%. So 17 bps “hot”
  – On a year over year basis, the Case-Shiller 20-city home price index turned positive after being negative 4 months in a row.
  – But digging deeper into the data, the rise in the YoY change was primarily due to “base effects” of weak July 2022 data being excluded. These same “base effects” will likely cause the Case Shiller YoY figure to pivot higher in the next few months.
  – Internally, of the 20 cities Case Shiller tracks, 8 (40%) are seeing home prices in outright deflation YoY <– This is double the average (since 1988) of 20%
  – So the change in home prices is still “weak” relative to history
• We remind investors of the 17-month lag that home price declines have on Shelter CPI. So this “hot release” will have an impact, but far in the future, likely in 17 months (Dec 2024). And recall, the San Francisco Fed is forecasting home price deflation by that point (link). So, this hotter than expected release will not alter the Shelter CPI trajectory in the near-term, which is most important to us.
• The Census Bureau also released new home sales (Aug) data Tuesday. August’s new home sales and the monthly growth rate were both below expectations.
  – Compared to the previous month, new home sales dropped by 64K units (SAAR), marking the largest MoM decline this year.
  – Due to differences in data collection methods, new home sales data typically leads existing home sales data by 1-2 months.
  – So the weak new home sales data this month suggests weak existing home sales data next month.
  – Additionally, Since February, the data for new and existing home sales have been diverging under the influence of higher mortgage rates.
  – So these two data sets might converge soon.
• While consensus seemed focused on the consumer confidence reading within the Conference Board release, our eye was on consumers’ 1Y inflation expectation, which remained tame (falling from 4.9 to 4.8). This defies the recent rise in gasoline which has been concurrent with inflation expectations historically. To us, this is the important takeaway from the Conference Board release as it shows inflation expectations remain well anchored.
• As for sentiment, this tweet caught our eye which showed hedge funds increased short exposure on a week over week basis at the highest rate since COVID-19. This underscores the level of pessimism in markets and “no belief” in the 11% S&P 500 rally YTD. And keep in mind, this level of pessimism directly marked the bottom in 2020.
• And it is possible stocks gain footing over the next few days. The 0DTE Vix is now >20 putting it in the “Fear Zone.” This happened on 4 separate occasions since April.
  – 4/25 –> local bottom next day
  – 5/3 –> local bottom next day
  – 5/24 –> local bottom same day
  – 6/14 –> local bottom same day
  – 9/26 –> ?
  While this indicator is constructive, investors should still be mindful of looming headline risks ahead including:
  – UAW Strike
  – Government Shutdown
  – These risks are ongoing and worth keeping an eye on

BOTTOM LINE:The price action endured in markets this week does not change our thesis that inflation remains the key macro driver for markets.

The decline of inflation expectations (Conf Board) is confirmation that expectations remain well anchored. While YoY home price turned positive in July, remember we are already in October, so should we give much credence to where housing conditions were nearly two months ago? Additionally, we explained how this number will not show up in the official CPI figure until late 2024, and by this point the San Francisco Fed already forecasts shelter CPI deflation. Also, a high 30Y Mortgage rate and tame new home sales/existing home sales show the housing market is contained.

Key incoming data September

•  9/1 8:30am ET August Jobs ReportTame
•  9/1 10am ET August ISM ManufacturingTame
•  9/6 10am ET August ISM ServicesMixed
•  9/6 2pm ET Fed releases Beige BookTame
•  9/8 9am ET Manheim Used Vehicle Index August FinalTame
•  9/8 2Q23 Fed Flow of Funds ReportTame
•   9/13 8:30am ET August CPIMixed
•  9/14 8:30am ET August PPITame
•  9/15 8:30am ET September Empire Manufacturing SurveyTame
•  9/15 10am ET U. Mich. September prelim 1-yr inflationTame
•  9/18 8:30am ET September New York Fed Business Activity SurveyTame
•  9/18 10am ET September NAHB Housing Market IndexTame
•  9/19 9am ET Manheim September Mid-Month Used Vehicle Value IndexMixed
•  9/20 2pm ET September FOMC rates decisionMarket saw Hawkish
•  9/21 8:30am ET September Philly Fed Business Outlook SurveyMixed
•  9/22 9:45am ET S&P Global PMI September PrelimTame
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity SurveyTame
•  9/26 9am ET July S&P CoreLogic CS home priceHot
•  9/26 10am ET September Conference Board Consumer ConfidenceMixed
• 9/29 8:30am ET: August PCE
• 9/29 10:00am ET: Sep F UMich Sentiment and Inflation expectation

Key incoming data August

• 8/1 10am ET July ISM ManufacturingTame
• 8/1 10am ET JOLTS Job Openings JunTame
• 8/2 8:15am ADP National Employment ReportHot
• 8/3 10am ET July ISM ServicesTame
• 8/4 8:30am ET July Jobs reportTame
• 8/7 11am ET Manheim Used Vehicle Index July FinalTame
• 8/10 8:30am ET July CPITame
• 8/11 8:30am ET July PPITame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker JulyTame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook SurveyPositive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity SurveyTame
• 8/29 9am ET June S&P CoreLogic CS home priceTame
• 8/29 10am ET Aug Conference Board Consumer ConfidenceTame
• 8/29 10 am ET Jul JOLTSTame
• 8/31 8:30am ET July PCETame

Key incoming data July

• 7/3 10am ET June ISM ManufacturingTame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM ServicesTame
• 7/6 10 am ET May JOLTSTame
• 7/7 8:30am ET June Jobs reportMixed
• 7/10 11am ET Manheim Used Vehicle Index June FinalTame
• 7/12 8:30am ET June CPITame
• 7/13 8:30am ET June PPITame
• 7/13 Atlanta Fed Wage Tracker JuneTame
• 7/14 10am ET U. Mich. June prelim 1-yr inflationMixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Indexin-line
• 7/18 Manheim July Mid-Month Used Vehicle Value IndexTame
• 7/25 9am ET May S&P CoreLogic CS home priceTame
• 7/25 10am ET July Conference Board Consumer ConfidenceTame
• 7/26 2pm ET July FOMC rates decisionTame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM ManufacturingTame
• 6/2 8:30am ET May Jobs reportTame
• 6/5 10am ET May ISM ServicesTame
• 6/7 Manheim Used Vehicle Value Index MayTame
• 6/9 Atlanta Fed Wage Tracker AprilTame
• 6/13 8:30am ET May CPITame
• 6/14 8:30am ET May PPITame
• 6/14 2pm ET April FOMC rates decisionTame
• 6/16 10am ET U. Mich. May prelim 1-yr inflationTame
• 6/27 9am ET April S&P CoreLogic CS home priceTame
• 6/27 10am ET June Conference Board Consumer ConfidenceTame
• 6/30 8:30am ET May PCETame
• 6/30 10am ET June Final U Mich 1-yr inflationTame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
• 5/2 10am ET Mar JOLTSSofter than consensus
• 5/3 10am ET April ISM ServicesTame
• 5/3 2pm Fed May FOMC rates decisionDovish
• 5/5 8:30am ET April Jobs reportTame
• 5/5 Manheim Used Vehicle Value Index AprilTame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
• 5/10 8:30am ET April CPITame
• 5/11 8:30am ET April PPITame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutesDovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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