Stocks are higher as we await the Fed’s decision. Bonds and MBS are up.
The Fed decision is due at 2:00 pm today. Warsh will be holding a press conference after the decision. We will also get a fresh set of projections and (hopefully) a new dot plot.
Two things to watch for in the Fed forecasts: The first is whether the Fed considers this a “one and done” hike and second whether the long-range Fed Funds rate moves up. The long run Fed Funds rate is thought to be the neutral policy rate, which is r* or called r-star. R-star cannot be derived directly from the data, it can only be estimated.
Historically, r-star has been thought to be in the 3% – 3.5% range. Many Fed speakers have suggested that the current Fed Funds rate of 3.5% – 3.75% is not restrictive, which means r-star might be higher than people originally thought. If r-star estimates move up, it would imply a higher Fed Funds rate than 4% will be needed to slow the economy and bring down inflation.
Retail sales rose 1.2% MOM in August, which was a sharp reversal from July’s negative numbers. Ex-autos and gasoline retail sales rose 1.2%. On a year-over-year basis, sales rose 6%. Census does not adjust these numbers for inflation, so on an inflation-adjusted basis sales rose 2.6%. Still decent.
August is the beginning of the back-to-school shopping season which can be a good tell for holiday sales. Since consumption is such a large part of GDP, we might see the estimates for Q3 and Q4 GDP rise. This also gives the Fed more confidence to raise rates.
Mortgage applications decreased 4.1% last week as purchases fell 1% and refis fell 9%. “Ongoing market concerns over spiking energy prices, persistently high inflation, and future monetary policy pushed bond yields and mortgage rates higher last week. As the 10-year Treasury inched closer to the 5% mark, mortgage rates followed and were almost 7%. The 30-year fixed rate at 6.97% was at its highest level since May 2025,” said Joel Kan, CMB, MBA’s VP and Deputy Chief Economist. “After adjusting for the Labor Day holiday, purchase applications dipped relative to the week prior as higher mortgage rates caused many buyers to pause their purchase decisions. The current level of rates also eliminated much of the benefit to refinance for many borrowers, resulting in declines in conventional, FHA, and VA refinance applications.”
Note there was an adjustment for the Labor Day holiday.
Single family building permits have declined YTD as more building are focusing on multifamily. This has been the story since COVID as construction continues largely in the cities. Multifamily construction has been highest in the Northeast (where the pace of single family construction could be best described as glacial) and the West.
Single family permits were most prevalent in Texas. I guess the difference is if you have the space to build out, you see more single family and if you don’t you build up. Many of the Northeast cities are seeing residential building in formerly industrial and commercial sites. This is particularly evident in places like Stamford and Norwalk Connecticut and is even moving into Bridgeport. Younger renters prefer walkable urban areas and this is where the action is. Places like Baltimore and Philly are also seeing a lot of decrepit properties turned into new modern apartments.
