Strong Retail Sales Shock Market

The 25-day moving average proved too tough of an adversary yesterday, as mortgage bonds were pushed off this level all the way down to land on the bottom of the trading channel. This fall came after a surprisingly strong reading on Retail Sales, which improved by 0.4% last month. This strong report caused both stock and bond holders concern that the Fed would not gift the market with a .5% rate cut later this month when the Fed is set to announce their next policy statement. With Retail Sales picking up, estimates for a stronger GDP are being revised. With the labor market strong, consumers spending and the stock market near record highs, many are questioning why the Fed would consider cutting in the first place. My answer to this is that the Fed is anticipating where things are going, not where we are. I believe this to be a prudent move that will help soften the blow when the economy stalls.

One question I am often asked is regarding the housing market and how it will perform when the US economy slips into a recession. This is truly a difficult thing to predict. With a recession, we will see a slowing labor market, which means we will also see more layoffs. Good people will lose jobs and have a difficult time making their house payments. As people turn to lower cost rentals or their parents’ basements as an alternative, housing inventory will rise. This will add downward pressure to home prices. It will take investors stepping in to absorb the inventory and help maintain pricing levels. As stocks fall, real estate could be the beneficiary, as it has been many times in the past. Of course, we will have to wait and see how this plays out.

Although we have a strong floor of support, I’m not liking the pattern formation on the bond chart. We are at risk of breaking below support. The safe play will be to lock. However, standard market predictors would say we will likely bounce higher.