Rate hikes are already squeezing these businesses

1. Tapping the brakes: The American economy is soaring, but yellow lights are flashing in t...

Posted: Oct 29, 2018 11:37 AM
Updated: Oct 29, 2018 11:37 AM

1. Tapping the brakes: The American economy is soaring, but yellow lights are flashing in two critical industries that boomed during the era of easy money.

Auto and home sales have sputtered in recent months despite high consumer confidence and low unemployment.

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The slowdowns have been driven at least in part by the Federal Reserve's efforts to wean the economy off near-zero rates. Higher borrowing costs are squeezing the auto and real estate industries that benefited from a decade of cheap money.

"It's very clear that higher interest rates are having an effect on the economy," said Nicholas Colas, co-founder of DataTrek Research. "The two most expensive purchases a consumer makes are a house and a car. Both are credit sensitive."

Now that the economy has recovered from the Great Recession, the Fed is trying to take the training wheels off. That delicate task is even trickier now because of how low rates got -- and how long they stayed there.

The auto and real estate industries are at the frontlines of this shift in borrowing costs. Mortgage rates recently topped 5% for the first time since 2011. Even though mortgage rates are still low historically, homebuyers are taking notice.

New home sales tumbled 5.5% in September to the lowest level in nearly two years, the Commerce Department said last week. Sales plunged nearly 41% in the Northeast and dropped 12% in the West, though they rose modestly in the Midwest. New home sales are now 22% below their recent peak in November 2017, according to Barclays.

And it's tough to blame the slump on tight supply, which rose to the most since 2011.

"With rising mortgage rates and high prices, conversations about the possible benefits of renting over buying have begun to pop up," Lawrence Yun, the chief economist of the National Association of Realtors, said in a report last week.

The S&P Case-Shiller Home Price Index, due out on Tuesday, is expected to show price gains decelerated in August.

Wall Street has punished housing stocks. The SPDR S&P Homebuilders ETF (XHB) has plunged nearly 30% since late January. Toll Brothers (TOL), a luxury homebuilder, has tumbled 31%, KB Home's (KBH) stock has been nearly halved.

Prominent auto stocks are also in a bear market. Ford (F) has lost a third of its value since January, while General Motors (GM) is down 28% from its peak last October.

Higher borrowing costs have added to the headaches in the auto world, which is also grappling with rising costs caused by tariffs.

GM suffered a 16% plunge in sales in September, while Ford's sales dropped 11%. Toyota and Honda also experienced declines. October sales figures are set to be released on Thursday. GM is scheduled to report earnings on Wednesday.

The auto and housing slumps underscore the growth fears at the heart of the recent market mayhem. Is the Fed moving too fast? Are the best days of the recovery over?

"It's not a death knell for the bull market or the economy," said Colas, "but it does give people concern that we are beyond the peak of the economic cycle."

2. Jobs report: Fresh numbers on the state of the economy are due out on Friday when the Bureau of Labor Statistics releases its October jobs report.

If last month is any indication, the economy is maintaining its strong momentum. The US economy added 134,000 jobs in September and the unemployment rate fell to 3.7%, the lowest level since December 1969. The bad news, however, was wage growth isn't growing as fast.

3. General Electric earnings: Recently named CEO Larry Culp's first earnings report arrives on Tuesday. The struggling multinational company desperately needs new direction -- it has shed half a trillion dollars from its market value over the past 18 years.

Wall Street is cautiously optimistic Culp is the right person for the job. GE shareholders are anxious to hear about whether Culp plans to cut the dividend and go forward with plans to break up the conglomerate.

4. Food earnings: Set the table for a platter of edible earnings from food companies. IHOP-owner Dine Brands, Denny's, Yum! and Cheesecake Factory will all report next week.

But the biggest shaker will be Starbucks, which reports on Thursday. Investors will be seeing if Starbucks' new-ish CEO Kevin Johnson is turning the brand around, which has been marred with controversy, sluggish sales and saddled with underperforming stores. Its stock is up just 1% for the year.

5. Apple event: Apple is hosting an event on Tuesday in Brooklyn. The company is expected to announce more product updates before the holiday shopping season kicks into high gear. Expected to debut are new iPads, Macs and perhaps second-generation AirPods.

On Thursday, Apple will report its fourth quarter earnings with expected revenue between $60 and $62 billion -- a sizable increase of its 2017 fourth quarter earnings when it reported $53 billion in revenue. Investors will also get a glimpse of how its new batch of iPhones are selling.

6. Coming this week:

Monday — Mondelez (MDLZ), Rockwell Collins (COL) and Wingstop (WING) earnings

Tuesday — Electronics Arts (EA), Under Armour (UAA), Aetna (AET), Caesars Entertain Group (CZR), Tribune (TPCO), Coca-Cola (KO), Hyatt (H), Denny's (DENN), Fiat Chrysler (FCAU), Cheesecake Factory (CAKE), eBay (EBAY), Herbalife Nutirtion (HLF), GE (GE), Yelp (YELP), T-Mobile (TMUS), Sony (SNE) earnings; Apple product event in Brooklyn

Wednesday — Allstate (ALL), Anthem (ANTM), Yum! Brands (YUM), Dine Brands (DIN), Express Scripts (ESRX), Clorox (CLX), General Motors (GM), Fitbit (FIT), Pandora Media (P), NXP Semiconductors (NXPI) earnings

Thursday — Apple (AAPL), AMC Networks (AMC), Progressive (PGR), CBS Corp. (CBS), Cigna (CI), Starbucks (SBUX), Shake Shack (SHAK), Kraft Heinz (KHC), GoPro (GPRO), Wayfair (W), IHeartMedia (IHRTQ), and Spotify (SPOT) earnings

Friday — Chevron (CVX), Exxon (XOM), Newell Brands (NWL), United States Steel Corp (X), MSG Networks (MSGN), and Seagate Technology (STX) earnings; Jobs report

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