The US economy has shown significant weakness and further evidence of a high inflation rate with the significant drop in the number of new home sales recorded on Tuesday.
The number of new home sales recorded in the US in July dropped to 511K, against a forecast of 574K. This marks a 12.6% decline from its record of 585K in June. According to the available data, the current level is also the lowest since January 2016.This points to the high cost of purchasing new homes, leading investors to slow down their budgets and purchases.
New home sales have depreciated by 29.6% YoY after peaking at 993K units in January 2021, which marked its highest level since 2006.
It was further reported that the National Association of Home Builders/Wells Fargo Housing Market sentiment index fell below the median of 50 in August for the first time since May 2020.
Further, the median house price was up by 8.2% to $439,400 from the previous year’s record.
The reduction in the number of new home sales in the US seems to contradict the conclusion that inflation has peaked in the US economy after the series of aggressive interest rate hikes embarked on by the Fed. This disappointed investors who hoped to slow down the interest rate hike after the inflation rate report cooled to 8.5% in July.
The Fed has stated its intention to keep raising interest rates, regardless of the effects on economic growth, until it finds a shred of clear evidence from available data that inflation has slowed.This has pushed many to predict a reduction in the Fed’s aggressiveness towards the interest rate during its session in September after the inflation rate fell to 8.5% in July, marking a significant 0.6% drop from its forty-year high record created at 9.1% in June 2022.
However, many believe that the current reduction in the number of new home sales stands out as a harsh opposition to the claims that inflation has peaked and will possibly push the Fed to maintain its aggressive stance toward the interest rate hike in September.
US New Home Sales vs Inflation Rate
The new home sales report is essential economic data that, in the absence of the CPI, can give insights into the state of the economy concerning the inflation rate. This is because home purchases are one of the most valuable assets with a ripple effect on the economy. Each new purchase creates more jobs, such as renovations, furnishings, mortgage loans, etc.
The new home sales report measures the annualised number of new homes sold in the previous month. People tend to buy more new homes when the prices are affordable and refrain from doing so when the prices are exorbitant.
Hence, the massive reduction in the sales of new homes in the US signals a withdrawal from buyers due to high prices. Sociologists have always classified shelter (a new home) as one of the basic needs of man, and only exorbitant prices could cause him to slow down in purchasing his basic needs.
Consequently, the reduction in new home sales could be seen as clear testimony of an endemic inflation rate in the US economy against the supposition that inflation has peaked; this means the Fed has more work to do to contain inflation.
What effect will the reduction in the number of new home sales in the US have on the Fed’s decision on the interest rate?
The rising inflation rate, which climaxed in 2022, has pushed the Fed towards adopting very aggressive monetary policies, more than it ever did since 1980, when it saw the need to raise the interest rate to control inflation.
So far, the Fed has embarked on a series of four consecutive interest rate hikes in 2022, raising its interest rates thus far by 2.25% from this hike. The committee believes that tightening interest rates is the best way to combat rising inflation and hopes to keep doing so until inflation reaches its target of 2% by the end of 2024.
The report given in July showed that the Fed has not yet neared half of its target since the inflation rate is currently at 8.5%.
The Fed’s only condition for slowing their aggressive interest rate hikes is when available data shows that inflation is now dying a natural death and slowing in all sectors of the economy.
The only victory recorded so far was the first slowdown in the inflation rate by over 0.6% YoY in July. The August CPI will be crucial this time ahead of the Fed’s session in September.
However, the current high decrease in the number of new home sales signals that the previously perceived victory is largely delusional as inflation has not peaked yet.
With new home sales declining by 12.6% due to high costs in the market, many fear the Fed might continue with its aggressive stance during its next session.
However, during the Jackson Hole Symposium economic submission to begin tomorrow, the Fed’s Chairman-Jerome Powell’s tone will be a perfect opportunity for investors to know what the policy members still think about raising the interest rate.
Will the new home sales results affect the US dollar’s performance this week?
The results of the new home sales are an important economic data point that strongly influences the US dollar’s performance in the market.
Evidence of a constant inflation rate often attracts investors to buy the US dollar, hoping for a more aggressive interest rate hike from the Fed during their next session.
Thus far, the report on new home sales has strengthened the US dollar index, pushing it as high as 109.24 yesterday. Other pairs crossed with the US dollar crashed because of this, especially EURUSD, which fell to a new low of $0.9906.
More dollar strength is expected this week, especially as investors price in a more aggressive interest rate hike from the Fed due to the evidence of persistent inflation from the New Home Sales report.
The only exception will be if the Fed disappoints investors by slowing down its aggressiveness towards monetary policy during the Jackson Hole Symposium economic symposium to begin tomorrow.