Inside Markets — Narrative Shift

Last week’s macro data saw the prevailing market narrative shift from Goldilocks to soft landing. The shift was mostly triggered by weaker than expected ISM data with ISM services falling -5 points MoM into contraction. Last week’s downbeat durable/capital goods data also fits with signs of a weakening housing sector. Last week’s labor market data including Friday’s Jobs Report point to softening but not soft labor market conditions. The soft-landing narrative only needs inflation data to cooperate with Thursday’s CPI and Friday’s PPI prints as key catalysts.

The housing market is a key space to watch given that construction employment has long been a leading indicator for national employment and a decent proxy for an impending recession. The SPDR S&P Homebuilders ETF (XHB) outperformed the SPX in Q1 by ~6.6 percentage points, but has recently come under pressure, losing -9.4% in Q2 vs. the SPX up +3.9%. We’re only a week in, but QTD the XHB is down -3.1% vs. a +2% gain for the SPX. From a fundamental perspective, we can say that affordability remains challenged with buying cheaper than renting in only 1% of US metro areas. And rent prices continue to moderate in the largest metro areas and nationally. Utilization of adjustable rate and interest-rate only mortgages also remain near all-time lows. Given its impact on household net worth, falling home prices could negatively impact confidence and consumption.