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Rising Rates and Inflation are Creating a Dilemma for the Housing Market

By:JJ Kinahan

But, improved U.S.-China relations are boosting economic confidence

  • The stock market is rebounding after losses, but the first quarterly dip is looming and economic challenges persist.
  • Rising interest rates are impacting the housing market; homeowners face a dilemma but inflation may slow down.
  • U.S.-China relations are improving; but a potential summit is boosting confidence and the economy is growing as inflation stabilizes.

Both the S&P 500 and Nasdaq Composite have managed to break their two-day losing streaks, concluding on a positive note yesterday. The S&P 500 saw a 0.6% increase in its value, while the Nasdaq Composite performed even better with a 0.8% gain. This marked the most successful trading day for both indices in more than two weeks. However, despite this recent uptick, the overall picture suggests stocks may be heading for their first quarterly loss of the year. As of the closing bell yesterday, the S&P had dipped by 3.5% for the quarter, while the Nasdaq was down by 4%.

Investors have faced a challenging quarter, characterized by a surge in interest rates not witnessed in over a decade. Additionally, oil prices have surged, with crude oil trading above $90 per barrel and showing a slight increase in pre-market trading. Simultaneously, a United Auto Workers strike continues without any signs of resolution, potentially driving up car prices. In fact, unless substantial progress is made by lunchtime, more strikes are scheduled. Furthermore, the specter of a government shutdown looms if lawmakers fail to reach an agreement by tomorrow. However, there are also some positive factors to consider as we transition into the fourth quarter.

Bonds managed to halt a three-day losing streak yesterday with yields rising substantially, particularly on the long end of the yield curve. Rates on 30-year bonds reached an intraday high of 4.74% before retreating and settling at 4.65%. The benchmark 10-year bond had briefly touched 4.67% before closing at 4.56%. The surge in rates has had a palpable impact on the housing market. Pending home sales for August, expected to decline by just 0.8%, actually plummeted by a staggering 7.1%. Homeowners currently face a dilemma. With many locked into mortgages at or near 3%, moving could entail significantly higher financing rates. According to Freddie Mac, the average 30-year mortgage now stands at 7.31%, the highest level since December 2000. While this poses challenges for homeowners, it may also help in curbing inflation.

Optimism may be warranted in the realm of U.S.-China relations. High-level talks between the Biden Administration and senior Chinese officials are underway, and discussions regarding a summit between President Biden and President Xi are in progress. The strained relationship between the two countries has been a source of economic and geopolitical concern, and a thawing could instill confidence among U.S. companies that rely on China for both manufacturing and sales.

Despite numerous predictions of a looming recession, the U.S. has thus far managed to avoid one. The final GDP reading for the second quarter showed a gain of 2.1%, indicating ongoing economic growth, while inflation appears to be coming under control. The most recent report on personal consumption expenditures (PCE), the preferred inflation metric of the Federal Reserve, reported a 0.1% increase on a month-over-month basis, slightly below the projected 0.2%. Year-over-year, there was a 3.9% rise, in line with expectations. Expectations for a rate hike remained small heading into the PCE release, with the CME indicating an 83% chance that rates will remain unchanged in November and a 66% chance they will remain unchanged in December. These probabilities remained consistent following the release of the report.

In pre-market trading, shares of Nike (NKE) are surging, driven by earnings that exceeded expectations. Nike reported a 5% increase in sales in China, a significant concern for many investors. Apple (AAPL) is also showing a slight pre-market uptick after initially dropping yesterday before recovering. Blue Apron (APRN) has agreed to be acquired by privately held Wonder Group for $13 per share, with shares of the meal kit company closing just below $5.50 on Thursday. Reports of the iPhone 15 Pro model overheating during charging have emerged, possibly because of the phone's titanium body, which conducts heat. Finally, market volatility, which hit an intraday high of 19.71 on Wednesday, has since stabilized. The volatility index (VIX) now sits comfortably below 17, suggesting investors may be feeling more optimistic about market prospects moving forward.

As always, it is advisable to adhere to your investment plans and long-term objectives.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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