- U.S. existing home sales expected to be curbed by low supply and high prices
- Fed tip-toes toward possible QE tapering by later this year
- House Democrats continue to work on job and family legislation
U.S. existing home sales expected to be curbed by low supply and high prices — The consensus is for today’s April U.S. existing home sales report to show a small increase of +1.1% m/m to 6.08 million, recovering some ground after March’s -3.7% decline to 6.01 million.
Home demand is still very strong. However, home sales fell by a combined -21.8% in February and March due to the very tight supply of homes on the market. The supply of homes on the market in March was very low at 2.0 months, which is just slightly above the record low of 1.8 months posted in December and January.
In addition, very high home prices may also be starting to deter potential buyers. The FHFA U.S. home price index has surged by +11.9% over the past year.
On the other hand, low mortgage rates continue to give the housing sector a boost by making homes more affordable. The current 30-year mortgage rate of 3.00% is up by only 35 bp from January’s record low of 2.65%. Moreover, the 30-year mortgage rate is still a hefty 74 bp below the 3.74% level seen at the end of 2019 before the pandemic emerged in early 2020.
Fed tip-toes toward possible QE tapering by later this year — The markets were a bit surprised on Wednesday when the April 27-28 FOMC meeting minutes said that “a number” of FOMC members suggested that discussions might have to begin at some point on QE tapering.
The minutes said, “A number of participants suggested that if the economy continued to make rapid progress towards the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
That statement was couched with an “if,” a “might” and a “begin discussing.” The statement made clear that QE tapering is not imminent. However, the statement was a step in the direction of getting the markets ready to hear more about QE tapering.
Dallas Fed President Kaplan has been doing a good job on his own of getting the markets prepped for QE tapering by bringing it up every few days, even while the rest of the Fed plays good-cop and says that now is not the time to begin discussing QE tapering. Just yesterday, Mr. Kaplan said that “gently” scaling back Fed bond purchases would be the wise thing to do as bond buying can contribute to “imbalances” and “excessive risk taking.”
The U.S. economy is ripping along at a pace that is causing bottlenecks and price hikes. In a normal business cycle, the Fed would already be raising interest rates. However, in this cycle, the U.S. labor market is still down by 8 million jobs from the pre-pandemic level. The Fed in this cycle is intent on making sure that its employment and inflation targets are actually being hit, as opposed to previous cycles when the Fed relied on its forecasts, some of which turned out to be wrong.
Over the next three weeks, the markets may get a little more nervous about whether the Fed will step up its QE tapering talk at its next meeting on June 15-16. However, the consensus is that the actual tapering will not come until Q4 or early 2022. A survey taken by Bloomberg several weeks ago found that 14% of the analysts surveyed expect the Fed to start tapering its QE program in Q3, and 45% of the analysts expect tapering to begin in Q4. Opportunities for the Fed to announce the tapering could come at the July or September FOMC meetings or at the Fed’s late-August Jackson Hole conference.
The markets are still not expecting the Fed’s first rate hike until early 2023, according to the federal funds futures market and the 3-month Eurodollar futures market.
House Democrats continue to work on job and family legislation — A group of Republicans led by Senator Shelley Moore Capito (R-WV) is still negotiating with the White House about an infrastructure deal. However, the chances for a deal are virtually nil since Republicans will only accept core infrastructure projects and will not accept any roll-back of the 2017 tax cuts.
The real action is going on behind the scenes in the House committees, where Democrats are drafting the legislation to implement President Biden’s $2.25 trillion infrastructure/jobs plan and his $1.8 trillion family plan. However, time is already short for the committees to produce the legislation because House Speaker Pelosi has set a target of passing the job/infrastructure bill by the July 4th holiday.
The stock market continues to closely watch how the Democratic legislation takes shape since the Democrats plan to pay for the jobs/infrastructure bill with corporate tax hikes. The stock market is hoping that President Biden will not get his wish of raising the corporate income tax from 21% to 28% due to opposition from Democratic Senator Manchin and perhaps other moderate Democratic Senators.
Meanwhile, the Treasury yesterday released a statement proposing a 15% global minimum tax on corporations. The Treasury is trying to talk other major nations into a coordinated minimum tax so that countries stop trying to undercut each other with lower corporate taxes in what Treasury Secretary Yellen likes to call “a race to the bottom.”
