Two highly-followed portions of the US economy are experiencing demand and pricing movements, and investors are taking note. Let’s take a quick look.
By Kris Rosemann
Homebuilders (XHB, ITB) faced selling pressure early in the October 17 trading session after concerns over slowing demand and affordability continue to be present. Housing starts for the month of September revealed a more significant than expected decline from the previous month as the measure fell 5.3% to 1.201 million compared to the 1.216 million expected. Building permits came in at 1.241 million in the month compared to 1.272 million expected. Meanwhile, mortgage applications dropped as interest rates continue to rise, and total mortgage applications fell 7.1% in the week ended October 12.
The average 30-year fixed mortgage rate came in at 5.10% at the end of the week, which is the highest mark since February 2011. A combination of higher prices resulting from tight supply and rising borrowing rates may be taking some optimism out of the housing market, which was running high earlier this year, but some observers expect solid demand resulting from a strong economy to help the market back into equilibrium, possibly at the expense of home price appreciation.
Railroads, another historically important portion of the US economy, are experiencing an attractive pricing environment, as evidenced by CSX’s (CSX) top-line guidance raise following its third quarter report. Healthy demand levels, tight trucking capacity, higher fuel prices, and support of export coal benchmarks all contributed to a positive pricing environment for the company as it raised its 2018 revenue growth guidance to 6%-8% from a mid-single-digit rate. Intermodal and merchandise pricing was particularly strong in the third quarter, continuing the same trend from the first half of the year. Backing the demand trends noted by CSX were Genesee & Wyoming (GWR) reporting 9.4% year-over-year growth in total carloads in its North American operations in the third quarter of 2018 and Norfolk Southern (NSC) noting last month that it continues to expect “very good” pricing in the current transportation market.
Railroads: ARII, CNI, CSX, GWR, KSU, NSC, UNP
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.