Pre-market stocks: The Fed could crash the housing market

A version of this story first appeared in the CNN Business “Before the Bell” newsletter. Not a subscriber? You can register over here. You can listen to an audio version of the newsletter by clicking on the same link.

New York
CNN business

Investors are horrified that sharp increases in the Federal Reserve could damage the US economy (Just look at the sale on Tuesday).

One area of ​​growing concern: housing. Increased interest rates can lead to higher mortgage rates, which can cause people to think twice before buying a home.

So far, sales are declining, while prices remain constant. But some economists warn that a continued historic interest rate hike by the Federal Reserve could lead to a housing market crash, underscoring the difficult task ahead for the central bank.

What’s happening: According to Tuesday’s CPI report, Housing costs rose 0.7% in August It rose 6.2% year over year, the largest increase since 1991.

That increase was largely responsible for the higher-than-expected pace of inflation in August. Combined with a tight labor market, these higher rates give the Fed a reason to keep working hard at next week’s policy meeting and beyond, Marvin Low, chief analyst at State Street, told me.

Lu added that the Fed needs to see housing costs ease by about half a percentage point to reach the final inflation target.

The task will not be easy. Home prices can remain stubbornly high, even as the Federal Reserve works to counter it.

Joseph Brusolas, chief economist at RSM US, told me that home prices are “the kind of constant inflation that isn’t going away anytime soon.” “That’s why the Fed will need to show resolve by increasing the policy rate by 75 basis points at its September meeting despite encouraging declines in transportation and energy.”

The risks: Some economists note that weakness in the housing market is starting to emerge. Home sales fell in July for the sixth month in a row. Housing starts, a measure of new home construction, also fell that month as the cost of building materials remained high and potential buyers were priced out of the market.

Should the Federal Reserve continue its historic highs? The central bank must walk a fine line – The slowdown in the housing sector was preceded by nine out of 12 recessionsAnd investors haven’t forgotten the catastrophic housing crisis in America in 2008.

Keep in mind: While there are some reasons why the CPI report on housing lag is what is really happening in the market, and that home prices may already be on the way down, we’re nowhere near a market crash.

However, Fed officials will face a difficult decision in the coming months. Are they using housing market resilience as a mandate to go ahead with aggressive rate hikes and risk crash?

Gas prices are falling in the United States. But winter is coming and the CEO of Chevron, one of the world’s largest energy companies, warns that the pump’s comfort may soon be offset by sweat-inducing heating bills.

“There is definitely a risk of higher costs” for American consumers, said Mike Wirth, Chevron’s chairman and CEO, in an interview with CNN’s Bobby Harlow.

Wirth does not anticipate the rise in volume seen in Europe, where natural gas prices have skyrocketed as Russia’s exports are limited, My colleague Paul R La Monica reports.

But in an interview broadcast on Tuesday, Wirth warned that prices in the US could be “significantly higher” this winter.

Oil prices are still Over 15% so far this year. This helped boost sales, profits and stock prices for companies like Chevron. Oil producer shares are up 36% since the start of the year, while the broader S&P 500 is down 17.5%.

Wirth admitted that his company was making big profits while Americans struggled.

Realize that rising energy prices are hard on consumers. This is why we talked about increasing production, trying to increase supply to markets in the commodity business. “You go through these cycles. Two years ago, we were losing billions of dollars a quarter. We are now making solid profits.”

In more gloom and gloom on Wall Street, pessimistic fund managers are selling stocks and accumulating cash, according to a Bank of America survey published Tuesday.

“Investors’ perception of the global economic outlook remains bleak in September,” Michael Hartnett, chief investment analyst at Bank of America, wrote in the report of 212 fund managers. With more than half a trillion dollars in assets under management in September.

About 72% of respondents expected the economy to weaken in the next 12 months, up 5 percentage points from August. The share of investors saying a recession is likely rose in September to 68%, the highest level since May 2020.

The survey showed that, unsurprisingly, Wall Street is bracing for plunging corporate profits and a continuing stock crash. The levels of cash held by investors jumped from 5.7% last month to 6.1%, its highest levels Since the September 11 attacks in 2001.

The Producer Price Index for August, another key gauge of US inflation, was released at 8:30 AM ET.

Join CITIZEN by CNN at 2 p.m. ET for a session on inflation, jobs and the economy featuring reporters Paul Lamonica, Phil Mattingly, Kristin Romance and Vanessa Yurkevich. RSVP here.

Coming tomorrow: All eyes will be on a meeting between Russian President Vladimir Putin and China, Xi Jinping.