Homebuilder Stocks Doubting a Janet Yellen-Led Fed
If a Fed run by Yellen increases QE, mortgage rates would likely fall, spurring demand for new homes. The only problem is that the homebuilders doubt it will happen.
-- Mark Twain
It appeared last night that markets would undergo a Yellen surge, thanks to news that indicated that President Obama will be nominating Janet Yellen as the world's most powerful woman, aka, the Chair of the Federal Reserve. Futures rallied, and my Twitter stream became overwhelmed with talk about how her nomination would counter near-term concerns over Washington and the government shutdown. I have argued for some time that if a Yellen-led Fed increases inflation expectations, it could resolve the reflation disconnect that has persisted all year in the US.
The prevailing impression the market has about Yellen is that she would be more accommodative/dovish than Ben Bernanke, given that she has gone on record saying that if she could, she would vote for negative interest rates. The implication is that QE, rather than being tapered next year, could actually be increased. I do not disagree with this whatsoever, but I am a bit troubled by the reaction of markets to her nomination in terms of discounting future monetary policy and effectiveness.
Take a look below at the price ratio of the SPDR S&P Homebuilders Index ETF (NYSEARCA:XHB) relative to the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/XHB is outperforming (up more/down less) the denominator/SPY.
Homebuilders have been poor performers this year, and they really started weakening as taper talk began, yields spiked, and mortgage rates rose. Note that the most recent performance on the far right of the chart indicates some sharp deterioration. If a Yellen-led Fed increases QE, this means mortgage rates likely fall, spurring demand for new homes. The problem is that homebuilder stocks, as of right now, are expressing significant doubt over this.
Bottom line? More time is needed to see if Yellen can juice reflation sustainably. If she can, it should be reflected through inflation expectations within the bond market, and through the outperformance of homebuilders. So far, neither are showing anything has really changed in terms of deflationary pressures that continue to persist. Honey badger continues to not care. He will when Gray-Haired Bears come out in full force to go after him.
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