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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Two events next week could have a big impact not only on the markets, but your chance to profit from them…
On Thursday, we’ll hear the latest interest rate decision from the Federal Reserve… followed by key employment data on Friday.
Before we get to those, though, I want to take a closer look at another important piece of data that came out just a couple of days ago…
New home sales are clawing back
The economic importance of new homes sales is often overlooked…
From the moment a plot of land is bought, to handing the keys over to a new owner, dozens of different interactions take place.
Add up all the new homes across the country, and those interactions combine to employ millions of workers.
Apart from the obvious benefit of generating jobs when busy, this sector also feeds massive supply chains… And that’s what drives the economic cycle.
Simply put, the cash and jobs from new home sales growth has a multiplier effect across the economy.
That’s why the number of new home sales for September (released on Wednesday) are so positive… and in some ways surprising.
As you can see in the chart below, new home sales have declined since the beginning of the year but are now perking up again…
2021 kicked off with a rocky start… Sales dropped over 30% from January to June.
However, after the slowdown, new home sales for September came in at 800,000.
That’s 40,000 higher than expected. It’s also a massive 14% growth over the previous month’s data – the biggest jump since July 2020.
But, it’s fair to say this jump comes off a relatively low base.
That’s why the next test is to see if those numbers can get back up towards 850,000-900,000 – the amount that carried over from 2020 and into the start of this year.
If September’s numbers turn out to be an anomaly and sales fall again, then that will be bad for both the economy and the markets.
That’s why next week’s data is so important…
What to expect next week
With inflation rapidly rising, the Fed is concentrating on the two things it can control: interest rates and bond buying.
While no one expects a rate rise any time soon (late next year is the current forecast), the Fed recently indicated that it might start reducing (or tapering) its current $120 billion of monthly bond purchases soon.
The increase in bond buying was an emergency measure. But the market has already factored in the tapering beginning somewhere in November or December.
However, as I’ve written over previous weeks, while inflation could force the Fed to raise rates sooner than they’d like, they have to consider its effect on jobs.
Increasing interest rates as employment softens would be an obvious way to disrupt the economy, especially considering last month’s figures.
For example, the economy added just 194,000 jobs in September – less than half of the 500,000 expected.
Apart from when the economy shed 306,000 jobs last December, it was the worst performance since April 2020 – right at the peak of the COVID outbreak.
While non-farm payrolls have increased by 17.4 million since then (according to the Bureau of Labor Statistics), this is still around five million below the number of jobs prior to COVID.
With that kind of job deficit, it’s no wonder the Fed is so hesitant to engage its interest rate lever.
That’s why the market will be watching the non-farm payroll numbers so closely – and the associated unemployment rate – when they’re released next Friday.
If job numbers stay low, the Fed will be even less likely to raise rates sooner than expected…
However, should job numbers bounce back strongly – along with another jump in inflation – that could really force the Fed to raise rates sooner than the market is predicting.
Either way, I’ll be sure to let you know if anything interesting stands out.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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