Plunge in Homebuilder Sentiment Bearish for U.S. Dollar, Stocks but Bullish for Gold, Japanese Yen

Another drop in shares of Apple may be grabbing the headlines, but it’s the housing stocks you should be watching. Shares related to the housing sector are under pressure on Monday after a survey of national homebuilders showed a steep drop in home builder confidence.

The National Association of Home Builders/Wells Fargo Housing Market Index (NAHB) dropped eight points in November to 60, the lowest level since August 2016. That compared with the median estimate of economists for a one-point drop to 67.

The NAHB attempted to downplay the news a little saying in a press release that the reading of 60 is still “positive”, but that “customers are taking a pause.” Any reading over 50 signal improvement.

However, investors did take notice of the drop in the number since the eight-point plunge brought to mind the nine-point drop just after the 9/11 attacks and one other instance of a 10-point plunge in early 2014.

What’s Behind the Plunge?

According to NAHB Chief Economist Robert Dietz, “Rising mortgage rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall.”

“Given that housing leads the economy, policy makers need to focus more on residential market conditions.”

First Sign of Economic Weakness Under Trump’s Watch

Bloomberg said, “The homebuilder index represents one of the first breaks in high levels of business and consumer confidence that have persisted since Donald Trump was elected president in November 2016. While the index remains in positive territory, the group called on policy makers to take note of the housing situation as a possible warning sign about the broader economy.”

More Problems for Fed Policymakers

Last week ended with traders pointing out that consumer inflation could ease a little because of the steep drop in crude oil and gasoline prices. The plunge in prices was partly blamed on rising supply due to a combination of increasing production and lower demand.

Later in the week, Federal Reserve Chair Jerome Powell mentioned a slowdown in the global economy. This was followed by Atlanta Fed President Raphael Bostic, who said that the federal funds rate is “not too far” from neutral. Finally, Federal Reserve Vice Chair Richard Powell said the central bank is close to the point of being “neutral” on interest rates and should predicate further increases on economic data.

Today’s housing news is not likely to take the expected December rate hike off the table, but it could encourage Fed policymakers to change their September growth projections for the economy. This could mean the Fed may have to reduce the number of expected rate hike for 2018, which currently stands at three.

How Will the Markets Be Affected?

Not only will the news drive down demand for housing stocks and related-homebuilding shares, but it should drive down Treasury yields which will have a negative impact on the U.S. Dollar by making it a less-desirable asset.

Any talk of an easing of current Fed policy is also bullish for gold since it is a dollar-denominated asset. Furthermore, the Japanese Yen, Australian Dollar and New Zealand Dollars could be big winners if the dollar plunges from the news.