A River Runs Through It
Last year at the Jackson Hole Economic Symposium, Federal Reserve Chair Powell indicated that the Fed would begin cutting interest rates at its next meeting, which occurred in September 2024. Powell stated that “The time has come for policy to adjust,” and that the “direction of travel is clear”. He attributed this decision to the progress made in controlling inflation, which had fallen significantly from its peak. This year, the Fed chair’s Friday morning speech is unlikely to give as clear a signal of easing ahead.
In 2024, Powell expressed confidence that inflation was moving sustainably towards the Fed’s target of 2% from a peak of 7.1% two years prior. This year, the latest report from July showed a 2.8% increase in the core inflation rate. In 2024, Powell acknowledged a moderation in the labor market, with the unemployment rate at 4.3%. This year’s July unemployment rate? A similar 4.2%. Powell’s remarks in 2024 signaled that the Fed was ready to ease monetary policy. This statement set the stage for a half-point rate cut in September 2024, followed by additional quarter-point cuts in November and December. This year, a rate cut in September is pegged as having an 85% chance of being implemented. However, with tariff impacts still looming in the background, a rate cut is not a layup as the Fed vows to remain independent, data-dependent and flexible.
A Moving Experience
Americans are moving and switching jobs at much lower rates than before, and the housing market has felt the effects. In the 1950s and ’60s, some 20% of Americans would typically move each year. In 1994, the rate was about 17%, but has been on a downward trend ever since. The share of people moving has steadily slowed in part because the U.S. population has aged, resulting in less moves. More Americans also live in households with two earners, which makes uprooting more challenging. During Covid, there was an increase in people moving farther away from work and deeper into the suburbs. However, that surge was brief. In 2024, only 7.8% of Americans moved, the lowest rate since records began in 1948. Home sales have been stuck in a rut for a while, partly due to demographics, but also due to low home supply and relatively high mortgage rates.
On the earnings front, high-end home builder Toll Brothers# posted a return to revenue and earnings growth this past quarter and gave a more optimistic outlook. Toll has benefitted from the resilience of its luxury business and more affluent customer base. This was a record third quarter as home sales revenue showed a 5% increase in units and a 6% increase in dollars compared to last year’s third quarter. Average selling prices increased 4.5% from the prior year, and gained 3% versus last quarter. The stock ended flat yesterday but had bounced about 11% in August through yesterday.
Home Depot# reaffirmed guidance for about 2.8% revenue growth for the year, though earnings are expected to decline about 2% overall. Customers are engaged in smaller home improvement projects while larger projects will require more turnover in the housing market. Regarding tariffs, Home Depot reiterated that it will not have to implement price increases this year due to tariffs. Competitor Lowe’s# reported same store sales growth of 1.1% marking a positive inflection from its first fiscal quarter decline of 1.7%. Both Professional and Do-It-Yourself (DIY) customers aided performance despite challenging weather. The company raised full-year sales and earnings guidance as well. Sales comparisons actually accelerated into July for both companies. LOW rose 15% in August and HD gained 9%, compared to a 1% gain in the S&P 500 so far. Conversely, technology stocks have sold off this week while value stocks have rebounded sharply.
Target# did not fare as well as second quarter results were soft and the stock sold off about 6% yesterday. Sales comps declined by 1.9% as traffic declined by 1.3% marking the 11th consecutive quarter of flat or falling sales. Walmart#, one of the largest U.S. retailers, reported 4.8% higher revenue for the second quarter this morning, although earnings came up a bit short. Walmart did raise guidance for annual sales growth of 3.75% to 4.75%, ahead of expectations, although earnings guidance was a slight disappointment even as tariff impacts have been limited thus far.
The Snake River Can Be Treacherous
The Snake River, which runs through Jackson Hole, provides an apt backdrop for the Fed’s meeting where the waters can be rough and winding. In the month following each of Powell’s last seven Jackson Hole speeches, the 10-year Treasury yield has actually risen by an average of 21 basis points. This will be the Chairman’s last major speech at Jackson Hole, while crosscurrents have created murky economic signals. Fed Chair Powell will have to navigate the turbulence of inflation, tariffs, unemployment and growth of the economy carefully in order to bring markets toward calmer waters.
Usain Bolt, the fastest human alive, turns 39 today. Meanwhile, Ethel Caterham, the oldest verified living person, turns…116!
Christopher Crooks, CFA®, CFP® 610-260-2219