Morning Report: Jerome Powell signals more rate hikes

Vital Statistics:

Stocks are lower as we await another day of testimony from Jerome Powell. Bonds and MBS are down after the Bank of England hiked rates by 50 basis points.

Jerome Powell testified in front of the House yesterday, and will speak to the Senate today. His overarching message is that the fight against inflation is not done, and there will be more rate hikes this year. They will remain data-dependent and are aware that the effects of past rate hikes are not fully reflected in the economy yet. Democrats worried about a recession while Republicans worried about bank regulation overreach.

Atlanta Fed President Raphael Bostic thinks the Fed should stand pat:

“My baseline is that we should stay at this level for the rest of the year” to assess the impacts of the Federal Reserve’s rate-hiking cycle on the real economy, Atlanta Fed President Raphael Bostic told Yahoo Finance in an interview Wednesday.

“I actually think that we are still at the very early stages of our monetary policy tightening, starting to influence the economy in a significant way. I just feel like we have a little bit of time to just let that play out and see exactly how much the economy is responding to our policy,” he said.

Existing Home Sales were basically flat in May, rising only 0.2%. On a year-over-year basis, sales were down 20%. The median home price fell 3.1%, while inventory remains tight. “Mortgage rates heavily influence the direction of home sales,” said NAR Chief Economist Lawrence Yun. “Relatively steady rates have led to several consecutive months of consistent home sales.”

Homebuilder KB Home reported earnings last night. Revenues rose 3% while gross margins fell from 25.3% to 21.1%. Average selling prices were flat. The decrease in margins in the context of flat average selling prices means that KB had cost pressures and used all sorts of concessions to move the merchandise.

Rising mortgage rates have been a major headache for the builders because many buyers can no longer afford the homes they ordered at current rates. Instead of cutting prices, builders are finding other ways (below market mortgage rates, free upgrades etc.) to give more value to the buyer without impacting the comps. The cancellation rate rose on a year-over-year basis however it did decline from Q1.

Overall, the company does see things improving for the sector overall: “The improvement in demand we started to see in February was sustained throughout our second quarter, as we achieved monthly sequential increases in our net orders, resulting in an overall absorption pace of 5.2 net orders per month, per community. Operationally, our divisions are executing well, driving reductions in both build times and direct construction costs as well as opening new communities. We believe our orders, starts and production are well-balanced and, with the sequential increase in our backlog at quarter-end, we are well-positioned to achieve our revenue target for 2023.”