Good morning and welcome to the Morning Market Briefing.Today is Friday, November 8th, 2024.We did it.We made it through the last week and a half.We roll straight into retail sales and Home Depot next week and consumer price inflation.
But I do feel like knocking on wood here that the biggest events are potentially in the rearview mirror for 2024.You never know that for sure, but it seems unlikely that there would be some more significant events. Um, that's where we are right now.
Uh, and so today we're going to talk a little bit about what's going on in China.Uh, there were some companies that reported earnings that I care less about these companies.
Um, Pedro and I will talk about this and I care about what their read is on the macro reality. And there's some really interesting comments from Redfin about the role that the election has played in the home buying market.
So we'll talk a little bit about that.But first, Tom, I want to talk to you about the Fed meeting yesterday.So the Fed delayed its meeting.
Usually they meet on Tuesday and Wednesday, and then they come out with their press conference on the Wednesday afternoon.But because of the election on Tuesday, they decided to move this back.This is usually done in election years.
And so they moved it back. And the final day of the meeting was on Thursday, yesterday.Jay Powell comes out, a unanimous agreement to cut interest rates to a range of 450 to 4.75%.And that was largely expected.
And so the biggest question was, is he going to pre-announce what they do in December.Bear in mind that when they came out with the summary of economic projections back in September, they suggested that there would be two more rate cuts in 2024.
So the fact that Powell backed off that just a little bit saying, we'll see what happens in December, suggests that he is not entirely sold on definitely going in December, but certainly left that door open.
Yeah, I think there are a number of takeaways, really not at all from the press conference but more from the actual verbiage that they gave us in their official press release.
And the first part is then what was scratched out and what was added in, and the biggest piece that I think that was. removed is the previous statement said the committee has gained greater confidence that inflation is moving sustainably towards 2%.
That entire line came out.And instead it just says the committee judges that the risks to achieving its employment inflation goals are roughly in balance.
So I think it's pretty telling that they have basically intentionally removed the idea that inflation is moving to 2%, which we've been talking about for the longest time.
I think that that's fantasy land and I think that they know it and they might as well stop saying it.
They also struck out the piece where they said that the initial statement was job gains have slowed and the unemployment rate has moved up but remains low.
They struck out job gains entirely and they replaced it with since earlier in the year, labor market conditions generally have eased, which is basically saying,
they've moved away from the idea that the labor market is in good shape, and it's probably in bad shape.So you basically have them saying, one, inflation is not going back to two, and two, we're not seeing job gains anymore.
And then the third piece is who voted for what.And if you recall the last meeting, there was one voter who wanted to not cut rates last time, Michelle Bowman, who did in
deed joint on this one to cut rates, which would be 25 basis points lower than she initially wanted, which was not changing last time, which indicates to me that the Fed is generally in favor of cutting rates.
combination of all of those changes in the statement to me says they're probably still going to cut rates at least one more time this year.They're always worried about their credibility, how their board guidance hurts or helps their credibility.
So I think that what they're going to do is they're going to cut in December, but from there, they're probably not going to be firm on the schedule.
And I think Jay Powell's testimony when he, I guess, his responses to the question were him trying to avoid the idea that people should immediately be front running an additional cut.It's kind of how I think it's like they basically said,
If you can read into this statement, we're probably going to cut again, but I'm not going to say it.And therefore, I'm not going to make it so in the markets immediately.That's how I took the entire meeting to go.
And I think that a lot of times you got to listen to what the Fed says.We've seen so many times where the market extrapolates what they say out months, even years in terms of cuts, and then they have to walk it back.
gut would say, listen to what the Fed is saying in their official statement, they're probably going to cut.But after that, I think it's up for grabs.
they do contend that they are still well above neutral rate.Um, and so, and, and they have talked about wanting to be a rate cutting cycle in the past.
And so at the very least, if they don't cut, I expect it to be a dovish pause saying we're not cutting right now in December, but, um, we'll probably cut again, you know, beginning next year.
And then they'll be able to pronounce, to announce their summary of economic projections.So they have a lot of flexibility and tools at the December meeting.It will be on December 18th.
They have a lot of flexibility and tools in order to massage things the way that they want.I think that they'll be able to navigate it fairly well.If you recall last December meeting or big December meeting in December 2018,
I think it was 2018, the Fed was hiking rates at that time and aggressively hiked rates at the December meeting and that was not so good.And so then ultimately had to walk back.
Steve Mnuchin came out, Trump came out, they weren't happy with Jay Powell.And on that note, Tom, So, first of all, my perspective is I think there's a decent chance that they don't cut in December.
I think the market's saying 70%, maybe I'm a little bit more 50-50.I think you're probably closer to the... At the end of the day, it probably doesn't matter what they do in December.One Fed rate cut is not going to change things.Yeah, I agree.
I think some of the bigger questions are, number one, is Jay Powell going to get the ax?Can he get the ax?And he talked about that yesterday.I'll get your thoughts on that.
And number two, how does the 10-year behave and which people, which really influences mortgage rates and that sort of thing.
Yeah.I mean, we've seen the 10-year come down a little bit and the Friday had actually come up a little bit after the meeting.So I think that people are still trying to digest exactly where the market's going to go.
I think we've seen quite a bit of movement on the 10-year.You don't typically see this much this quickly.
I think any reaction we would have gotten from the Fed was pulled forward by Trump winning the election and seeing a massive move on the 10-year, which we've seen walk back a little bit over the last couple of days.
And yeah, I think, honestly, I think the questions asked during that meeting were, I mean, you know, we're back.The media is back on it, man.Any way they can attack Trump, they will.
And so, of course, they were trying to sow the seeds of discontent in the meeting yesterday.I mean, half the questions were about how adversarial Donald Trump is towards Jay Powell.What's he going to do if he calls for his resignation?
Are you going to resign?And he doesn't have to.I mean, it's an independent body.The president does not hire and fire the Fed chief.
And so it's just one of those things where I think they were just trying to get the optics in play, as always, which is, this guy's a bad guy, you know he's a bad guy, what if he acts like a bad guy towards you?And it's really pretty irrelevant.
Anyone involved in listening to or participating in that should know that the rules are such that
Donald Trump calling for the resignation of Jay Powell is, I mean, he can do it, but he has, I mean, it's like Donald Trump calling for Ben's resignation.Ben doesn't work for Donald Trump.
This is an independent institution from the government and you can do whatever you want. Uh, and that's how it is, but they wanted to make sure to get it on the record.
They wanted to make sure, uh, to set the tone, which is just, you know, this is how it's going to be in every, uh, in every capacity for the next four years as it was in the previous administration.
And if you're Trump, I mean, don't distract yourself by trying to get rid of him or replace him because for one, Powell's pretty, I mean, he's definitely messed up a few times.Um, But he's been fine.And I think he's been better than the last two.
And so when I put that together with the idea that now you have someone where if inflation does come back, you can kind of blame the Federal Reserve for it.
I mean, he's certainly more neutral than Janet Yellen.
Then I think from a political standpoint, I think it actually helps Trump to have someone in there where I can't do anything about it because the Federal Reserve keeps screwing up, but I can't.I don't have the power to change any of that.
So, I mean, it's politically good for him.
Yeah.He's a politically neutral guy who wants to have power.He doesn't care who's in charge.He just wants to make sure that he continues to maintain his status. within the government, or I guess the quasi-government entity that is the Fed.
He doesn't care.He meets with everybody.He schmoozes with everybody.He just doesn't want to get fired.And so if he's asked to resign, he won't.
So on that point, so we talked a little bit about the 10-year kind of popping up, Pedro.Redfin reported, the realty company reported earnings last night
And they actually said things to the effect of, yes, there has been an uptick since the Federal Reserve cut interest rates on September 18th.
But what they saw is that even in October after the Fed cut and mortgage rates came straight back up, that home buying interest was actually quite strong.
I think the CEO said that he was talking to his colleague, the CFO, and said, look, we were talking to each other and we'd keep pinching ourselves because the volume in the market remains strong.Touring activity remains very strong.
And they say, what ended up happening was they underappreciated the degree to which just the anxiousness around the election had contributed to a slowdown in home purchases.
He says, in my 19 years of running Redfin, I've never seen home buyers react so slowly to a rate drop that lowered monthly payments, and so unflinching as those savings disappeared.He went on to say,
As we live in our own reality, that reality is increasingly political.In September and even October, a common source of anxiety among homebuyers has been the election, not just higher rates.
With the election now over, many people who put off plans to buy or sell a home over the last two years may have run out of reasons to wait.
And so ultimately, although the earnings were dreadful from Redfin, they fell short of their goal to post a profit this year. They're actually going on a big hiring spree.
They're hiring hundreds of agents and they're saying they're about ready to go on the attack, which I think is a dramatic and bold move from a company when mortgage rates are 7%.
So elaborate on that, Pedro, and then any potential implications as we go from here.
Yeah.So they're hiring a bunch of agents.Um,
The, the CEO kind of spoke a little bit in the call and he exact kind of just reiterating what Ben said just that housing market conditions are worse and then the effects of the election were a lot stronger than they would have anticipated worse.
I've ever seen. Yeah.So they're, they're hiring buyer agents.
I, I presume, uh, instead of, but yeah, Redfin puts you in contact with, um, buyer agents when you go on their website and if you want to tour something, you put in your phone number, all that stuff.
And yeah, they put you through to a buyer agent to get toured.Um, don't, I'm not too, uh, too bullish on Redfin, but they are investing through the down cycle, which I do admire.
And I think that's the question, Tom, as we think about companies and Warren Buffett famously, he buys all of his banks in the middle of 2008, 2009.He puts money to work in the down cycle and goes on the attack.
You want to buy when there's blood in the streets.And so similarly, from a business perspective, you want to get bigger when things are really bad.And I think that's what Redfin's doing right now.
The question is, are they going to get rewarded in the market?Right now the stock's down 8%.I think the biggest thing is I look forward to it.And as we go into 2025, I think we're going to see more and more of this.
We're going to see some animal spirits from the C-suite that are emboldened and optimistic about growth, and they're going to invest.And the question is, do they get rewarded by the market for it, or do they get punished?
Restoration hardware this last year. they haven't been rewarded for it yet.They may still be, but they bought back a ton of their stock.So the question is, is Redfin going to ultimately be rewarded from this?
I think one of the big litmus tests that we watch as analysts and portfolio managers is when companies start to invest and their stock goes up,
that is actually a good sign for the stock market, but it probably means you're a little bit more mid cycle and early cycle.You're going to continue to get punished for investing.
So Tom, just your thoughts on that and whether or not you think this is a good move from Redfin.I think they're toast and here's why.
Rents are coming down and simultaneously we're on the back end of the biggest inflation cycle we've seen in 30 years.So the cost of living on essentials is the highest point it's ever been.
And we're seeing the 10-year treasury tick up at an extremely accelerated rate.So you simultaneously have a difficult time, one, affording day-to-day, two, your rent's either stable or going down, and three, the cost of a house is going up rapidly.
And all three of those things are in pretty bad macro positioning for Redfin.So I think that something's going to have to change in terms of the macro environment for the housing market to really take off.
Because I mean, even if you're buying a $300,000 house, you're probably going to end up paying more than you would for a two bedroom apartment in most places, and by a significant margin.
And on top of that, what's the stickiest piece of inflation right now?It's insurance.And you don't pay homeowners insurance when you live in an apartment, but you do when you live in a house.
So that accelerates your mortgage payment, while usually stable, will go up with the insurance costs every year as well.So I think it's just a bad macro environment for them.I don't think it's a great time.
I think it's a time to tighten the belt for them. survive for the next two years as we get things moving on, uh, you know, trying to figure out what the backend of this inflation situation looks like.
And the backend of this rate situation looks like, I don't think it's a time to be like, man, we're going full bore.We're just going to open the taps.Uh, I think it's a bad move for them.
What signs would you look at to pull the trigger?Like if you're, if you're them, what are you, what are you looking for? Because I would agree with you.I wouldn't fall for these.
Um, things like over the last two months, touring activity has been really strong.Um, I think that's good for now, but that might be a little bit of a cathartic reaction.I, I wanted to buy a house before this year was up.
Uh, rates are going to come down.I can refinance.Uh, we have news on the election, blah, blah, blah.Um, people are pulling the trigger now toward the end of the year unseasonably.Um, but
I agree with you that that might be a momentary thing because the fundamental is you want to go when the tide is at your back, when the wind is at your back, and that's when rates are going down more clearly.So, when would you pull the trigger?
I think it's when you start to see rents coming up.When we saw the biggest boom for real estate, it was during 2020 when housing was very affordable and rents were not. And rates were very low and rents were accelerating.
I mean, these are all the things that you need to make that decision where like, I could pay $2,000 a month for this two bedroom apartment in Atlanta, or I'd go pay $2,500 to live in a 500,000.
dollar house in Marietta, that scenario doesn't exist right now.And I think it could take a long time.I think they need to get to the point where rents are rising and maybe- People are getting forced out of apartments.Yeah.
They're getting forced out of apartments because they're either too expensive or there aren't enough of them or there's more inventory.And I can tell you, I go on Redfin and Zillow five, six times a week.
I look at every single house within three miles of my house that goes on the market.I still have the alerts on from when we try to buy our house here in Marietta.
So what's better than knowing what the inside of somebody else's house looks like when they live 10 doors down from you?It's one of life's great joys that's been enhanced by the internet. So they're like, oh man, people really look at these houses.
Yeah, I'm sure.I look at every single one of them.I'm not going to buy that house.I might even go to the open house if I've got some free time just to poke around because I'm nosy.But it is what it is, man.
So I wouldn't take a ton of traffic to the website as a signal that people are buying houses.I think they're just being looky-loos like myself.Or if there are people in apartments wishing they could
move into a house in their area that has quadrupled in value in the last 10 years.
I just mis-executed.Some of their bookings accelerated.It was only a 5%.I believe that was kind of right in line with expectations.They missed on EPS by a good margin, but everything else they seemed to have done pretty well on.That was for Airbnb.
And Expedia, on the other hand, did do pretty well.I think they're up like one or 2% pre-market accelerated bookings on the quarter, despite hurricane headwinds.
And kind of the important thing that was seen is that bookings accelerated every month of the quarter, got better and better every month, as opposed to kind of what everybody else has been seeing.
But these last like two months have been pretty poor due to the election and a bunch of other uncertainties.
Yeah, I think similarly to what we're seeing in housing, I think you might see a little bit of an acceleration now after, now that the election's over people, I don't know, maybe people, some people are getting one way tickets.
Um, I think other people may just be going on vacation.So on that note, have a great weekend, everybody, uh, enjoy the fall football.Hopefully we'll get some fall weather.I can't believe we're already in mid mid November.
Um, so, uh, on to next week, it'll be a quieter week.Thank goodness.And, uh, we'll rest up and be back with you all Monday.Have a great one.Bye.
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