A Head Fake, Maybe

The Current Vibe
Housing and Rents
Multiple Head Fakes
“We Want to be Absolutely Sure…”
Hurricanes and Family

In basketball and other sports, a “head fake” means the player moves their head as if they are about to turn left or right, but then doesn’t do so. This can fool an opposing player into moving the wrong way.

Head fake is a trading term, too. Some bit of information convinces investors a market is going to move a certain way. They reposition their portfolios accordingly… just in time to find out the information was wrong. Oof.

Market head fakes are sometimes intentional, as when a company tries to release news in a way that punishes short sellers. But more often, they’re just part of the fabric of the markets—a thread spun by the mythical Greek Fates which gets pulled and the tapestry that traders thought they saw changes before their eyes. No one knows the future. We can try to guess the odds but sometimes we’ll be surprised.

Today we are in another such position. Everyone thinks the Fed will cut rates next month in response to better inflation data and higher unemployment. And they might, but the market’s certainty about it is not unlike the certainty late last year that there would be six rate cuts in 2024. Those were indeed head fakes. And now…?

The Current Vibe

Going into the week, the case for a Fed loosening seemed pretty strong. Recent inflation data was starting to get within shouting distance of the Fed’s target. Unemployment hit 4.3% in July as job growth continued to soften, a 7-year high, taking out the COVID collapse. We’ve seen some short but serious market volatility episodes, suggesting Wall Street is getting more nervous. As always, you can find data points disputing all this. But that’s the current vibe.

Then this week we got July data for the Producer Price Index and Consumer Price Index, both of which again looked comforting. As I said a few weeks ago (see Going, Not Gone), the remaining inflation is almost entirely in services, mainly housing but also healthcare and insurance. Goods prices are becoming disinflationary as supply chains continue unsnarling and consumer sentiment normalizes from the post-COVID enthusiasm.

contributions

This is good news overall, but I don’t want to diminish the seriousness of high housing prices. It touches almost everyone and for most is the single largest living expense. A slower growth rate helps, but the rapid increases of the last few years haven’t reversed.

There are signs of moderation, though. Zillow reported last week that one-third of apartment listings are offering “concessions” like a period of free rent, free parking, etc. That’s not the same as lower base rent, of course, but it’s a step in that direction. Zillow Chief Economist Skylar Olsen sounded optimistic.

“Rents are still growing, but it's a far cry from the steep rent hikes of two or three years ago, and renters will find sweeteners being offered by more than half of rentals in some places. A slowing job market and lower mortgage rates could mean falling rents if the current trends hold."

Both supply and demand are at work here. Many areas have seen a lot of new multifamily construction which is beginning to hit the market. And as Olsen notes, a slowing job market probably deters some people from paying higher rents. Further job weakness, and certainly an outright recession, would hit apartment demand even more.