Wall Street Breakfast: Housing Crunch

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Housing crunch

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This week's housing data did much to confirm a slowdown sought by the Federal Reserve. Along with what may have been peak inflation last week, cooler housing data is another piece in the puzzle as the FOMC tightens conditions. The outlier remains the labor market, where jobless claims dropped this week and payroll growth remains strong.

By the numbers: the August NAHB measure of homebuilder confidence fell below 50 for the first time since May 2020. Housing starts for July dropped 9.6%, more than expected, (although permits dropped less than forecast). And most recently the NAR reported that July existing home sales fell 5.9%, more than anticipated.

"Existing home sales have now fallen for six months in a row, and are 26% lower than the January peak," Pantheon Macro Economist Ian Shepherdson said. "But the bottom is still some way off, given the degree to which demand has been crushed by rising rates; the required monthly mortgage payment for a new purchaser of an existing single-family home is no longer rising, but it was still up by 51% year-over-year in July."

"To make matters worse, the market is now grappling with rapidly rising supply as well as crumbling demand," he added. "Our measure of seasonally adjusted existing single-family homes for sale rose 6% in July, but it has a long way to go before it reaches pre-Covid levels."

"Home sales likely have further to fall," Odeta Kushi, deputy chief economist at First American Financial, tweeted. "Mortgage applications so far in August point to another decline in existing-home sales. This month's number of 4.81 million puts us at about 2014 sales level." (See chart at bottom.)

Fed reaction: The market predictions for the Fed's move next month have been volatile through the week and there is still Jackson Hole coming next week. But while chatter from members remains hawkish, after all the housing figures expectations are back to a 65% chance of 50-basis-point hike over 75.

"Fed officials pay particularly close attention to the housing market and are monitoring how higher mortgage rates are impacting home sales and housing prices in order to gauge how tighter monetary policy is affecting the broader economy," Wells Fargo economists wrote.

In the July FOMC minutes just released, members said housing activity “had slowed notably."

"We agree with the Fed's assessment that home sales likely have further to fall," Wells Fargo said. "As of August 12, mortgage applications for purchase have declined on a week-to-week basis in seven of the previous eight weeks."

Retail resilience? While housing is struggling there were also signs for some optimism. Results from Home Depot (HD) and Lowe's (LOW) showed that the home improvement consumer is "holding up quite well," according to Oppenheimer analyst Brian Nagel.

"The single most startling number in the July retail sales report was the 1.5% jump in the building materials component, the best performance in the sector since January," Pantheon's Shepherdson said. "But don’t be fooled; this is noise, not signal. The monthly data are erratic, but the trend is clear."

"In short, the worst is yet to come for housing-sensitive retailers," he said. "Their sales will fall even as other retailers and providers of domestic services benefit from the rebound in discretionary incomes now underway as gas prices drop and payrolls continue to rise rapidly." (1 comment)

Bed Bath & Beyond plunge

Bed Bath & Beyond (BBBY) is down 40% in premarket trading after GameStop Chairman Ryan Cohen’s RC Ventures cut its entire stake in the retailer.

RC Ventures reduced its stake to zero, according to a regulatory filing. RC Ventures sold almost 8 million shares on Tuesday and Wednesday at prices ranging from $18.68 to $29.22. The news comes after it was disclosed on Thursday that RC Ventures had filed for the right to sell its 9.45 million shares of Bed Bath & Beyond through JP Morgan Securities.

The company has tapped restructuring experts Kirkland & Ellis as legal help, Bloomberg reports, with a focus on addressing the firm's debt load. The firm will advise the retailer on options for raising new money, refinancing its debt, or both. (138 comments)

Starbucks COO exit

Starbucks (SBUX) Chief Operating Officer John Culver is leaving his post, according to an SEC filing. His departure, effective October 3, comes after he spent 20 years with the company, working his way from VP of food service to his present role. Culver's role is to be eliminated, according to the report. Instead, Culver's subordinates will report directly to either CEO Howard Schultz or chief strategy and transformation officer Frank Britt.

Culver's exit comes only two months after North America Chief Rossann Williams left her post and four months after former General Counsel Rachel Gonzalez departed. The company continues to seek a replacement for former CEO Kevin Johnson, who retired in April. Only external candidates are being considered for the role, according to Schultz. (20 comments)

Big Ten’s Big deal

The Big Ten Conference has struck a deal for media rights to its college sports that is reportedly worth up to $7.5B, amping up an already competitive arms race in sports programming as power among colleges continues to concentrate in a few buckets.

The conference reached a seven-year deal with CBS (PARA) (PARAA), NBC (CMCSA), Fox (FOX) (FOXA) and NBCU streaming platform Peacock, and will also show sports on the Big Ten Network and Fox Sports 1. The approach resembles the NFL's stance of spreading media rights over several partners, and the breadth will "place conference football, women's and men's basketball and Olympic sports student-athletes on the biggest stage and provide fans with the most exciting matchups across traditional over-the-air linear television and direct-to-consumer streaming," the Big Ten says. (76 comments)

AMAT’s solid guidance

Applied Materials (AMAT) posted third-quarter results that beat expectations and issued guidance that seemed to stave off fears of a slowdown. For the period ending July 31, Applied Materials said it earned $1.94 a share, on $6.52B in revenue. Gross margins ticked down year-over-year to 46.1% from 47.9%.

The company also said that it expects fourth-quarter earnings to be between $1.82 and $2.18 per share, with the midpoint of $2 above the $1.94 analysts were anticipating. Fourth-quarter sales are expected to be between $6.25B and $7.05B. (19 comments)

Today's Market

In Asia, Japan -0.04%. Hong Kong +0.05%. China -0.59%. India -0.85%.
In Europe, at midday, London +0.19%. Paris -0.50%. Frankfurt -0.69%.
Futures at 6:30, Dow -0.58%. S&P -0.76%. Nasdaq -0.92%. Crude -1.23% at $89.41. Gold -0.21% to $1767.50. Bitcoin -7.20% to $21,770.6.
Ten-year Treasury Yield +4 bps to 2.92%.

Today's Economic Calendar

9:00 Fed's Barkin Speech
10:00 E-Commerce Retail Sales
10:00 Quarterly Services Report
1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

What else is happening...

Apple (AAPL) could see another 30% upside if it surpasses its December 2021 highs.

Elon Musk reportedly seeks ad tech company data in lawsuit with Twitter (TWTR).

AMC (AMC) responds to Cineworld (OTCPK:CNWGY), touting liquidity and Q4 rebound.

MoffettNathanson downgrades Verizon (VZ).

Court orders Starbucks (SBUX) to reinstate union-supporting workers in Tennessee.

Shell (SHEL) slashes production at Germany's biggest oil refinery.

White House making additional 1.8M doses of monkeypox vaccine available.

Bill.com (BILL) stock jumps after strong fiscal Q4 results, robust guidance.

Robinhood (HOOD) net cumulative funded accounts unchanged in July.

This article was written by

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Wall Street Breakfast, Seeking Alpha's flagship daily business news summary, is a one-page summary that gives you a rapid overview of the day's key financial news. It's designed for easy readability on the site or by email (including on mobile devices), and is published before 7:30 AM ET every market day. Wall Street Breakfast readership of over 3.4 million includes many from the investment-banking and fund-management industries. Sign up here to receive the Wall Street Breakfast in your inbox every business day: http://seekingalpha.com/account/email_preferences Podcast RSS feed: https://www.spreaker.com/show/5725002/episodes/feed

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