The Week Ahead: Housing And Retail

1. Hottest News This Week

Retail Sales

📣 Retail Sales

The monthly retail sales report for May, set to be released on Tuesday, stands as a key indicator of economic health and consumer confidence. Economists are projecting a 0.3% increase in retail sales from the previous month. This anticipated rise follows a surprising flat performance in April, where retail sales unexpectedly showed no growth. A rebound in spending would signal that consumers are still opening their wallets despite the pressures of higher borrowing costs.

📣 Housing Data

This week, the housing market takes center stage with a series of crucial economic indicators and earnings reports. Investors will gain a clearer picture of the housing sector's health and the impact of high mortgage rates on both homebuilders and homebuyers. The week begins with the NAHB/Wells Fargo Housing Market Index on Wednesday, revealing home builder confidence by reflecting their perspectives on current sales, prospective buyer traffic, and future sales expectations. On Thursday, data on new residential construction projects, including housing starts, will be released. Housing starts are a leading indicator of economic activity; an increase suggests that builders are optimistic about future demand, while a decline could signal caution amid economic uncertainties. Finally, existing home sales data on Friday will provide insights into the overall health of the housing market by showing the number of pre-owned homes sold during May.

NOTE: THE STOCK MARKET IS CLOSED ON WEDNESDAY

2. Matt Allen’s Corner

Central Bank’s Tools

Since the Federal Reserve was in the headlines this past week, I received multiple DMs and emails with people asking questions about the Fed. So, let's break down their tools in simple terms.

In the intricate dance of global finance, few players hold as much sway as central banks. These powerful institutions, including the Federal Reserve (Fed) in the United States and the European Central Bank (ECB) in Europe, wield significant influence over the economy and financial markets. Central banks manage a country’s monetary policy, which involves controlling the supply of money, setting interest rates, and regulating the banking system. Their primary goals include maintaining price stability (controlling inflation), fostering economic growth, and achieving low unemployment rates.

Central banks use several key tools to influence the economy. One critical tool is setting benchmark interest rates, which influence borrowing and lending rates across the economy. Lowering rates can stimulate economic activity by making borrowing cheaper, while raising rates can help cool an overheating economy. Another essential tool is open market operations, where central banks buy or sell government securities to adjust the amount of money circulating in the economy. Buying securities injects money into the economy, while selling securities withdraws money. In times of economic distress, central banks may use quantitative easing (QE), a policy where they purchase long-term securities to increase the money supply and encourage lending and investment. On the flip side, there is quantitative tightening (QT), where central banks reduce their balance sheets by selling off securities or letting them mature without reinvestment, effectively pulling money out of circulation to cool down the economy. Additionally, central banks can alter reserve requirements, changing the amount of money banks must hold in reserve and thus influencing their ability to lend.

Historical examples vividly illustrate the profound impact central banks can have on economies and markets. In the early 1980s, Fed Chairman Paul Volcker aggressively raised interest rates to combat rampant inflation, which had been running at double-digit rates for several years. While the move initially led to a deep recession, with unemployment peaking at over 10%, it ultimately stabilized prices and set the stage for prolonged economic growth throughout the 1980s and 1990s. This period, known as the Volcker Shock, is a testament to the power of central bank intervention in curbing inflation.

Another significant example is the Federal Reserve's response to the Great Recession in 2008. In the wake of the financial crisis, the Fed slashed interest rates to near zero and launched multiple rounds of QE, purchasing over $2 trillion in mortgage-backed securities and government bonds. These actions helped stabilize financial markets, restored liquidity, and supported the economic recovery. The Fed's aggressive intervention was instrumental in preventing a deeper economic collapse and fostering a recovery that eventually led to a long bull market in equities.

More recently, during the COVID-19 pandemic in 2020, central banks worldwide took swift and unprecedented actions to mitigate the economic impact of lockdowns and reduced economic activity. The Federal Reserve implemented aggressive rate cuts, extensive QE, and emergency lending programs to support the economy. These measures included purchasing corporate bonds for the first time in history and providing direct loans to businesses and municipalities. These actions were crucial in preventing a financial crisis and stabilizing markets during a period of extreme uncertainty.

Conclusion

Central banks play a pivotal role in shaping the economic landscape and influencing financial markets. By understanding their tools and the rationale behind their decisions, investors can better anticipate market reactions and position their portfolios accordingly.

Cheers,

Matt Allen

3. Comin’ Up

EARNINGS AND ECONOMIC DATA

💰 Earnings:

Monday: 3D Systems

Tuesday: Woodside Energy

Wednesday: Market Closed

Thursday: Accenture, Kroger, Darden

Friday: FactSet

📈 Major Economic Events:

Monday: Empire State survey

Tuesday: U.S. retail sales

Wednesday: Market Closed

Thursday: Initial Jobless Claims, Housing starts

Friday: Existing home sales

The author of this newsletter owns ETF’s (exchange traded funds) that may hold ownership interests in the companies discussed in this newsletter as of the published date of this newsletter.