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US September inflation figures are due in the week of October 12. Fed officials hope to avoid a late-October hike, but a troubling price rise could force one. Bond yields react first. Homebuilders Lennar and D.R. Horton come next, because higher mortgage rates shrink what buyers can pay.
Source: Bloomberg ↗
The September consumer price index, a broad measure of what households pay, decides whether the Fed can skip a hike at its late-October meeting. Forecasters expect headline inflation near 3.7%, driven by energy, with core inflation steady near 2.4%. Bond traders feel a surprise first, through higher yields. Mortgage rates follow those yields. A hotter reading than expected makes it likelier that rates stay elevated or climb, and buyers then qualify for smaller loans. Lennar reported earnings of $1.19 a share for the quarter ended August 31, down from $2.29 a year earlier, with new orders down 9%, and blamed rising mortgage rates. D.R. Horton's revenue was flat in the quarter ended June 30, and management said sales softened late in that quarter.
Lennar shares fell 3.9% over the five trading days to October 9. D.R. Horton was nearly unchanged over the same stretch, down 0.1%.
September inflation could come in at or below forecasts, and Chairman Kevin Warsh could signal patience. The clearest sign would be the Fed holding rates at its October 27-28 meeting. Another would be the Freddie Mac weekly 30-year mortgage rate dropping clearly below 7.40% by late October.
Much of the damage from high mortgage rates may already be in builders' results and in the rate itself, which rose before the release. Lennar has already reported its August quarter, and a hike that bond traders expect could change little for buyers. A mild inflation reading could even pull mortgage rates down and help both builders.
Forecasters already expect headline inflation near 3.7%. Only a reading hotter than expected, not a high level alone, would push Treasury yields higher. That would also raise the odds of a late-October Fed hike.
Higher long-term yields would keep the 30-year mortgage rate near or above 7.40%, so buyers qualify for smaller loans.
Lennar's new orders fell 9% in the quarter ended August 31. D.R. Horton's revenue was flat in the quarter ended June 30, and it cut its full-year guidance after softer demand. Both builders are likely to sell fewer homes or cut prices to keep sales moving.
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