Rising expectations for a Fed rate hike in the near future are beginning to influence the financial markets.
Yesterday's announcement by the Census Bureau on the surge in new home sales at lower price points in July signals the nascent return of first-time home buyers to the market, and the return of home builders meeting that demand.
That news also overshadowed the decrease in existing home sales for July, reported this morning, and is ultimately considered a net positive for the housing industry -- and economy.
The increase in first-time home-buyer activity for July may simply be a reflection of the decrease in mortgage rates that month, that have since rebounded a bit. But it also shows that first-time home buyers can be coaxed back into the market, if mortgage rates can be maintained close to the 3% threshold for a 30-year fixed rate. And it implies that demand for housing, if record-low mortgage rates can be sustained, could be substantial.
This activity is indicative of gathering forces that are supporting the return of first-time home buyers to the market -- which I discussed in the column, "2 Homebuilder Stocks Worth Watching" -- regardless of what the Fed does.
I continue to believe homebuilders represent excellent long-term prospects from current prices. In support of that idea is the fact that Beazer Homes USA (BZH) is the only large, publicly traded builder that is positive today, up by about 0.55%.
In terms of the Fed, this activity supports the case for a rate hike soon, and if expectations for that outcome continue to increase, the immediate impact, as is playing out today, is upward pressure on the U.S. dollar, which exerts downward pressure on commodities -- especially oil and gold.
As I write, West Texas Intermediate is down by 3.25%, and the spot gold price is off by just under 1%. That is dragging down the SPDR Gold Shares ETF (GLD) by about 1.25%, and the VanEck Vectors Gold Miners ETF (GDX) by 3.5%.
If Fed Chair Yellen advances a similar narrative as that expressed by Vice Chair Fischer and New York Federal Reserve Bank President Dudley concerning the need for a rate hike soon, when she speaks on Friday, these movements in the dollar, gold, and oil will likely be exaggerated.
As I discussed in the column, "Gold Crowd Awaits Clarity from the Fed," I view such activity as a buying opportunity for gold and the miners, but am not advising selling current positions in anticipation of it.
None of this activity is having an impact on the long end of the U.S Treasury market, however. The 10- and 30-year bond yields have been trading in a tight band for the past month, after popping up from the short-lived crash in yields during July.
The conventional wisdom is that in the early stages of a process of increasing short-end rates, long-end rates should do the same. The fact that that isn't happening is a bit of a conundrum at this stage, but likely is less about bond market participants disagreeing about the need for a rate hike, and more simply a reflection of the fact that there's no alternative market for institutional bond holders, globally.
That may change if the Fed actually follows through on a rate hike, but if that occurs, I think it's more probable long-end yields decline rather than increase.
This brings me to the issue of the mortgage REITS, which I last addressed a year ago in the column, "Mortgage REITs Remain Great Income Vehicles."
I continue to believe that the MREIT's are excellent income vehicles, but holders should be prepared for volatility as their prices are particularly sensitive to rate changes at both short and long end of the curve.
The MREIT's are all down today as a result of this, and it is probable that this will become a cyclical trend if expectations for a Fed rate hike continue to rise.
The money centers are all positive today, as the conventional wisdom is that rate hikes work in their favor.
I advise being cautious about that continuing though, because of the asymmetry of risks posed by a Fed rate hike that occurs too soon -- and results in a decrease in lending activity that more than offsets the increase in interest income the banks receive as the result of a hike.
I last addressed that issue in the column, "Is Mutiny Brewing Within the Fed?"
The bottom line right now is that volatility appears poised to increase across the entire capital market structure, as concerns about the Fed raising rates again, and what the economic response to it will be, increases.