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    Homebuilder sentiment drops sharply, as mortgage rates surge over 7%

    Builder sentiment dropped 6 points to 50 in August, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Anything over 50 is considered positive.
    Mortgage rates are now holding solidly over 7%, hitting 7.24% on Monday, according to Mortgage News Daily.
    The share of builders cutting prices rose to 25% in August from 22% in July.

    Residential home construction by Shea Homes builders is shown in Encinitas, California, May 16, 2023.
    Mike Blake | Reuters

    Rising mortgage rates are hitting potential homebuyers hard, and that is taking steam out of the homebuilding market.
    Builder sentiment in the market for newly built homes dropped 6 points to 50 in August, according to the National Association of Home Builders/Wells Fargo Housing Market Index. That is the first decline in seven months and the lowest level since May, when sentiment first rose out of negative territory. Anything over 50 is considered positive.

    “Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said Alicia Huey, NAHB chair and a homebuilder and developer from Birmingham, Alabama.
    Mortgage rates are now holding solidly over 7%, hitting 7.24% on Monday, according to Mortgage News Daily. The average rate on the 30-year fixed loan rose over 7% in the last week of July.
    Of the index’s three components, current sales conditions fell 5 points to 57, and sales expectations in the next six months fell 4 points to 55. Buyer traffic dropped 6 points to 34.
    “Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%,” said Robert Dietz, NAHB’s chief economist, who added that the market currently has a shortfall nationwide of about 1.5 million housing units.
    Higher mortgage rates and the decline in buyer activity have more builders using sales incentives once again. They had done that in the second half of last year, when interest rates first moved higher. They then pulled back this spring, when demand surged.

    Now, after dropping for four straight months, the share of builders cutting prices rose to 25% in August from 22% in July. The average price cut, however, remained at 6%. The share of builders using all types of incentives, including buying down interest rates, rose to 55% in August from 52% in July. But it was still lower than the 62% share at the end of last year.
    Regionally, on a three-month moving average, builder sentiment in the Northeast rose 4 points to 56. In the Midwest and South, sentiment was unchanged at 45 and 58, respectively. In the West, where housing is most expensive, sentiment fell 1 point to 50. More

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    in Finance

    Stocks making the biggest moves midday: Discover, D.R. Horton, Nvidia, Cleveland-Cliffs, and more

    A man wearing a mask walks past a Nvidia logo in Taipei, Taiwan.
    Sopa Images | Lightrocket | Getty Images

    Check out the companies making headlines in midday trading.
    Banks — Major Wall Street banks slid during midday trading after CNBC reported Tuesday that Fitch Ratings may once again downgrade the health of the banking sector. Shares of Bank of America and JPMorgan Chase slid 2%, while Citigroup and Morgan Stanley each fell more than 1%. Regional banks also slid, with Citizens Financial Group falling more than 3%.

    Cleveland-Cliffs — Shares of the steel company shed 2.7% as investors weighed the latest developments in potential consolidation in the industry. Cleveland-Cliffs’ stock jumped more than 8% on Monday after U.S. Steel announced that it was rejecting a takeover offer from its rival. Industrial conglomerate Esmark announced its own offer for U.S. Steel on Monday.
    Discover Financial Services — Shares of the credit card issuer dropped 9% after the company announced late Monday that president and CEO Roger Hochschild will step down and John Owen will take over in the interim. The changes take effect immediately.
    Hannon Armstrong Sustainable Infrastructure Capital — Hannon Armstrong Sustainable Infrastructure Capital rose 2.3% after Bank of America upgraded the renewable energy investment firm to buy. The Wall Street firm said Hannon Armstrong will likely get a boost from the Inflation Reduction Act.
    Paramount Global — Paramount Global shares climbed 2% in midday trading. The Alliance of Motion Pictures & Television Producers, which represents companies including Paramount Global, reportedly offered screenwriters on strike a new deal that includes crediting humans as screenwriters, rather than artificial intelligence, according to a Bloomberg report citing people familiar with the discussions.
    Homebuilders — A slew of homebuilding stocks gained Tuesday after regulatory filings revealed fresh positions from Warren Buffett’s Berkshire Hathaway during the second quarter. That included D.R. Horton and Lennar, last up about 2% and 1.5%, respectively. NVR shares added about 0.5%.

    Nvidia — The artificial intelligence stock advanced 1.7% after UBS, Wells Fargo and Baird all raised their estimates for where they believe share prices will go in the next year. The stock climbed 7.1% Monday, regaining ground after dropping 8.6% last week.
    Turnstone Biologics — The biotechnology stock added 1.96% in midday trading. Investment firm Piper Sandler initiated coverage of the stock earlier Tuesday with an overweight rating, while Bank of America began coverage of Turnstone, also on Tuesday, with a buy rating.
    — CNBC’s Alex Harring, Jesse Pound, Tanaya Macheel, Pia Singh and Samantha Subin contributed reporting More

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    Chick-fil-A to release new riff on its iconic chicken sandwich with pimento cheese, jalapenos

    Chick-fil-A customers can buy the chain’s new Honey Pepper Pimento Chicken Sandwich in restaurants nationwide, starting Aug. 28.
    Unlike many other fast-food chains, Chick-fil-A has focused on keeping its menu short and simple, making its kitchens and drive-thru lanes more efficient.
    The Honey Pepper Pimento Chicken Sandwich was a project five years in the making.

    Chick-fil-A’s Honey Pepper Pimento Chicken Sandwich.
    Source: Chick-fil-A

    Chick-fil-A is adding a new spin on its iconic chicken sandwich to menus for a limited time.
    Starting Aug. 28, customers can buy the Honey Pepper Pimento Chicken Sandwich at the chicken chain’s restaurants nationwide, while supplies last.

    The new item uses the same breaded chicken filet as a typical Chick-fil-A sandwich but features a spread of pimento cheese and drizzle of honey on top. Pickled jalapenos replace the pickles usually used in the sandwich.
    Chick-fil-A has released seasonal menu items, such as milkshake flavors, for more than a decade. But the limited release of the Honey Pepper Pimento Chicken Sandwich shows how the chain is shifting its menu strategy as it expands nationwide. Unlike many other fast-food chains, Chick-fil-A has tried to keep its menu short and simple, making its kitchens and drive-thru lanes more efficient.
    Even without an extensive menu, Chick-fil-A has grown to be the No. 3 restaurant chain by sales in the U.S., trailing only Starbucks and McDonald’s. Chick-fil-A’s revenue rose 11% to $6.37 billion in 2022, according to franchise disclosure documents. Founder S. Truett Cathy’s family still owns the Atlanta-based company.
    The Honey Pepper Pimento Chicken Sandwich was a project five years in the making, according to Stuart Tracy, Chick-fil-A’s principal culinary lead. Chick-fil-A tasked Tracy with creating a spin on its chicken sandwich, and his team came up with nearly 30 different flavor options after more than a year. The chain tested the Honey Pepper Pimento Chicken Sandwich in 2020 in Asheville, North Carolina, and upstate South Carolina.
    Tracy didn’t rule out Chick-fil-A permanently adding the menu item. After supply runs out, the chain will assess responses from customers and franchisees to decide if it’s worth bringing back.
    Chick-fil-A is also adding a new seasonal milkshake to its fall menu: the Caramel Crumble Milkshake. The milkshake includes butterscotch caramel flavors and blondie crumbles. The chain tested the menu item in Salt Lake City in 2021. More

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    Home Depot beats earnings estimates, but sales slide as consumers pull back on big-ticket buys

    Home Depot beat quarterly earnings and revenue estimates.
    Yet the company reiterated its full-year guidance after it lowered the outlook last quarter.
    CFO Richard McPhail said consumers are still holding back on big-ticket discretionary purchases.

    A sign is seen posted on the exterior of a Home Depot store on February 21, 2023 in El Cerrito, California. 
    Justin Sullivan | Getty Images

    Home Depot topped earnings expectations on Tuesday, but posted a 2% year-over-year sales decline as customers remained wary of big purchases and major projects.
    It marked the first time in three quarters that the company beat Wall Street’s revenue expectations.

    Yet the Atlanta-based home improvement retailer reiterated its muted forecast for the fiscal year despite the beat, saying it still expects sales and comparable sales to decline between 2% and 5% compared with the year-ago period. It had lowered the forecast last quarter.
    In an interview on Tuesday, Chief Financial Officer Richard McPhail said the company has seen “continued caution on the part of consumers when it comes to larger ticket, more discretionary spending.” He said in some cases, homeowners already made those bigger purchases during the pandemic. In other instances, they are likely deferring them because of higher interest rates.
    McPhail said key pandemic dynamics are reversing, too. Transportation costs have dropped. Vendors aren’t coming to Home Depot with as many requests for price increases. He added that supply-chain disruption is “largely behind us.”
    “We don’t expect to see meaningful inflation in the second half of the year,” McPhail said.
    Here’s what the retailer reported for the three-month period that ended July 30 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

    Earnings per share: $4.65 vs. $4.45 expected
    Revenue: $42.92 billion vs. $42.23 billion expected

    The company reported fiscal second-quarter net income of $4.66 billion, or $4.65 per share, down from $5.17 billion, or $5.05 per share, a year earlier. Revenue fell year-over-year from $43.79 billion.
    The retailer’s shares were down nearly 1% premarket trading.

    Arrows pointing outwards

    Home Depot faces a more challenging sales backdrop, as demand for do-it-yourself projects and contractors normalizes after nearly three years of unusually high demand. McPhail, the company’s CFO, told investors earlier this year that 2023 would mark a year of moderation, as customers returned to more typical pre-pandemic patterns.
    On top of that, the retailer faces a weakening housing market, inflation and consumers’ shift to spending more on services instead of goods.
    But McPhail said Tuesday that Home Depot’s typical customers are in good financial shape, thanks in part to sharp home equity gains during Covid. They are still hiring contractors, but for more small projects.
    “Generally speaking, the homeowner customer — who is really our customer — remains healthy and remains engaged in home improvement,” he said.
    Cooling inflation has also shown up in Home Depot’s sales trends. McPhail said the company has not seen deflation, but is now in a period of “price settling.” Home Depot has lowered retail prices in some cases, he said. The reductions are not concentrated in any particular category.
    Home Depot noticed that as the company’s ticket, or typical amount spent by a customer, decreased, its number of shopper transactions began to rise, he said.

    Comparable sales in the U.S. and company-wide declined by 2% in the fiscal second quarter, but that exceeded expectations for a 3.9% decline, according to FactSet. It marked the third straight quarter of falling comparable U.S. sales.
    Total customer transactions fell by about 2% compared with the year-ago period, but the average ticket was roughly flat at $90.07.
    On an earnings call, CEO Ted Decker said sales to home professionals were stronger than sales to do-it-yourself customers, but both were negative compared to the year-ago period. He said the backlog of jobs for pros has dropped since a year ago, but is still higher than historic levels.
    Home Depot said in its earnings release that the company’s board of directors approved $15 billion in share buybacks, which will take effect Tuesday.
    As of Monday’s close, Home Depot’s shares are up 4% so far this year. That’s trailed behind the nearly 17% gain of the S&P 500. Shares closed at $329.95 on Monday, down less than 1%.  More

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    Fitch warns it may be forced to downgrade dozens of banks, including JPMorgan Chase

    Fitch Ratings cut its assessment of the banking industry’s health in June, a move that analyst Chris Wolfe said went largely unnoticed because it didn’t trigger downgrades on banks.
    But another one-notch downgrade of the industry’s score from AA- to A+ would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe told CNBC.
    “If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions,” Wolfe said.

    A Fitch Ratings analyst warned that the U.S. banking industry has inched closer to another source of turbulence — the risk of sweeping rating downgrades on dozens of U.S. banks that could even include the likes of JPMorgan Chase.
    The ratings agency cut its assessment of the industry’s health in June, a move that analyst Chris Wolfe said went largely unnoticed because it didn’t trigger downgrades on banks.

    But another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe told CNBC in an exclusive interview at the firm’s New York headquarters.
    “If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions,” Wolfe said.
    The credit rating firms relied upon by bond investors have roiled markets lately with their actions. Last week, Moody’s downgraded 10 small and midsized banks and warned that cuts could come for another 17 lenders, including larger institutions like Truist and U.S. Bank. Earlier this month, Fitch downgraded the U.S. long-term credit rating because of political dysfunction and growing debt loads, a move that was derided by business leaders including JPMorgan CEO Jamie Dimon.

    This time, Fitch is intent on signaling to the market that bank downgrades, while not a foregone conclusion, are a real risk, said Wolfe.
    The firm’s June action took the industry’s “operating environment” score to AA- from AA because of pressure on the country’s credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest rates.

    The problem created by another downgrade to A+ is that the industry’s score would then be lower than some of its top-rated lenders. The country’s two largest banks by assets, JPMorgan and Bank of America, would likely be cut to A+ from AA- in this scenario, since banks can’t be rated higher than the environment in which they operate.
    And if top institutions like JPMorgan are cut, then Fitch would be forced to at least consider downgrades on all their peers’ ratings, according to Wolfe. That could potentially push some weaker lenders closer to non-investment-grade status.
    Shares of lenders including JPMorgan, Bank of America and Citigroup dipped in premarket trading Tuesday.

    Hard decisions

    For instance, Miami Lakes, Florida-based BankUnited, at BBB, is already at the lower bounds of what investors consider investment grade. If the firm, which has a negative outlook, falls another notch, it would be perilously close to a non-investment-grade rating.
    Wolfe said he didn’t want to speculate on the timing of this potential move or its impact on lower-rated firms.
    “We’d have some decisions to make, both on an absolute and relative basis,” Wolfe said. “On an absolute basis, there might be some BBB- banks where we’ve already discounted a lot of things and maybe they could hold onto their rating.”
    JPMorgan declined to comment for this article, while Bank of America and BankUnited didn’t immediately respond to messages seeking comment.

    Rates, defaults

    In terms of what could push Fitch to downgrade the industry, the biggest factor is the path of interest rates determined by the Federal Reserve. Some market forecasters have said the Fed may already be done raising rates and could cut them next year, but that isn’t a foregone conclusion. Higher rates for longer than expected would pressure the industry’s profit margins.
    “What we don’t know is, where does the Fed stop? Because that is going to be a very important input into what it means for the banking system,” he said.
    A related issue is if the industry’s loan defaults rise beyond what Fitch considers a historically normal level of losses, said Wolfe. Defaults tend to rise in a rate-hiking environment, and Fitch has expressed concern on the impact of office loan defaults on smaller banks.
    “That shouldn’t be shocking or alarming,” he said. “But if we’re exceeding [normalized losses], that’s what maybe tips us over.”
    The impact of such broad downgrades is hard to predict.
    In the wake of the recent Moody’s cuts, Morgan Stanley analysts said that downgraded banks would have to pay investors more to buy their bonds, which further compresses profit margins. They even expressed concerns some banks could get locked out of debt markets entirely. Downgrades could also trigger unwelcome provisions in lending agreements or other complex contracts.
    “It’s not inevitable that it goes down,” Wolfe said. “We could be at AA- for the next 10 years. But if it goes down, there will be consequences.” More

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    The ‘internet’s favorite underwear’ goes mainstream: Gen Z brand Parade agrees to be bought

    Beloved Gen Z underwear brand Parade has agreed to be bought by Ariela & Associates International, an intimates manufacturer and licensee of Fruit of the Loom.
    Parade was last valued at $200 million in August 2022. The price of the deal was not disclosed.
    Digitally native, direct-to-consumer retailers that haven’t reached profitability have struggled against a tough funding environment and some are eyeing an exit.

    Parade underwear
    Source: Parade

    Privately owned Ariela & Associates International has agreed to buy Parade, the VC-backed intimates startup that created “the internet’s favorite underwear,” CNBC has learned. 
    The deal brings Parade’s relevance, digital savviness and loyal customer base to Ariela, a Fruit of the Loom licensee that’s been a longtime player and manufacturer in the intimates space. In turn, it offers the startup its infrastructure, know-how and the ability to scale as some digitally-native companies look for an exit amid a tough funding environment.

    “[It] does fit with the whole ‘DTC winter’ thing. As interest rates rose, VC money for a lot of startups dried up,” Nikki Baird, a longtime retail analyst and current vice president of strategy at retail technology company Aptos, said about the deal. “Consolidation is the big opportunity, especially for big, traditional brands to acquire more digitally savvy upstarts. This fits right into that pattern.” 
    Parade was last valued at $200 million in August 2022. The price of the deal and Parade’s current valuation wasn’t disclosed. The Information first reported that Parade was exploring a sale. 
    “Parade’s commitment to inclusive fast fashion which doesn’t compromise on its sustainable mission aligns seamlessly with our core principles and we believe that this union will allow us to create powerful synergies,” Ariela Esquenazi, Ariela & Associate’s CEO, said in a statement.
    Parade didn’t immediately comment.
    Founded in 2019 by Columbia University dropout Cami Téllez, Parade has been on a mission to disrupt the intimates category and be the opposite of Victoria’s Secret by focusing on inclusivity, body positivity and sustainable manufacturing. 

    The rise of Parade is part of an ongoing trend in the intimates space, which has been evolving over the last decade to focus more on sizing and comfortability and move away from a sole focus on sexiness. The category is valued at $13 billion in the U.S. and is growing. Globally, it’s valued at $45 billion.
    Soon after it launched, Parade won big online through its use of micro-influencers. It quickly became a favorite among Gen Z consumers eager for comfortable and affordable underwear that fit their body style and personal values. 
    However, scaling a direct-to-consumer business and charting a path to profitability amid high interest rates and rising customer acquisition costs has become increasingly difficult for retailers, which is leading to more consolidation. While some digitally native retailers have managed to achieve profitability and go public and others will continue to do so, some have opted for strategic acquisition to help them get to the next level.
    In July, FullBeauty Brands announced its acquisition of CUUP, a digitally native intimates company that focuses on size inclusivity, just three months after it announced its acquisition of ELOQUII, a plus-size apparel brand, from Walmart. 
    Earlier this year, Parade went beyond its direct-to-consumer roots and rolled out a series of products with Target in a bid to acquire more customers and meet consumers off of its website. As part of Ariela, Parade will now be able to tap on the firm’s manufacturing muscle to scale up and become more of a mass-market brand, said Jessica Ramirez, a senior analyst with Jane Hali and Associates. 
    It’ll also be able to lean on Ariela’s supply chain, product design and development prowess, as well as its gmdistribution abilities both on the wholesale level and digitally, said a person familiar with the matter.
    Ariela sells more than 60 million garments a year. It already owns Curvy Couture, which it acquired in 2019, and Smart & Sexy. It has also held the master license to Fruit of the Loom’s bras for more than 20 years.
    “They have the design, they have the sourcing, so they seem to have it all under one umbrella and they are intimate specialists,” said Ramirez. “From the brands that have kind of come through the disrupter stage, there’s other ones that have grown more. I think Parade hasn’t as much … this would make sense to propel it on a larger level.” More

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    China reports big data miss in July, stops releasing youth unemployment numbers

    Retail sales rose by 2.5% in July from a year ago, below expectations for a 4.5% increase, according to analysts polled by Reuters.
    Industrial production rose by 3.7% in July from a year ago, below the 4.4% increase analysts had expected.
    Fixed asset investment rose by 3.4% for the first seven months of the year from a year ago, below the 3.8% forecast by the Reuters poll.

    BEIJING — China reported July data that broadly missed expectations. The National Bureau of Statistics report also did not include the unemployment figure for young people, which has soared to record highs in recent months.
    Retail sales rose by 2.5% in July from a year ago, below expectations for a 4.5% increase, according to analysts polled by Reuters.

    Industrial production rose by 3.7% in July from a year ago, below the 4.4% increase analysts had expected.
    Fixed asset investment rose by 3.4% for the first seven months of the year from a year ago, below the 3.8% forecast by the Reuters poll.
    The urban unemployment rate ticked up to 5.3% in July from 5.2% in June.

    We must intensify the role of macro policies in regulating the economy and make solid efforts to expand domestic demand, shore up confidence and prevent risks.

    National Bureau of Statistics

    Contrary to prior reports, the latest release did not break down unemployment by age. The age 16 to 24 category has seen unemployment far above the overall jobless rate, reaching a record high of 21.3% in June.
    A spokesperson for the National Bureau of Statistics said the bureau is suspending the youth unemployment number release due to economic and social changes, and is reassessing its methodology.

    On a year-to-date basis, real estate investment fell by 8.5% from a year ago as of July, a greater decline than as of June.

    China’s massive real estate market has struggled after decades of debt-fueled, rapid growth.
    Bloomberg | Bloomberg | Getty Images

    Online retail sales of physical goods rose by 6.6% in July from a year ago, a sharp slowdown from double-digit increases in recent months, according to CNBC calculations of official data.
    Within retail sales, catering saw the biggest increase of 15.8%, while sports and entertainment products saw a 2.6% year-on-year increase. Big-ticket items such as autos and home appliances saw sales declines in July from a year ago.
    Jewelry saw sales drop by 10% during that time.
    Retail sales posted the slowest growth since a decline in December, according to official data.
    The statistics bureau on Tuesday released retail sales from services for the first time — showing a 20.3% increase for the first seven months of the year from a year ago, pointed out Bruce Pang, chief economist and head of research for Greater China at JLL.
    He added that some services sector spending, especially in tourism, isn’t captured by the official data because it looks at businesses operating above a certain scale.
    The bureau did not release monthly figures or a monetary amount for retail sales of services.

    The statistics bureau noted an “intricate and complicated” situation overseas and domestically, and “insufficient” domestic demand.
    “We must intensify the role of macro policies in regulating the economy and make solid efforts to expand domestic demand, shore up confidence and prevent risks,” the bureau said in an English-language release.

    Slowing growth, deflation concerns

    Domestic demand has remained muted outside of summer tourism. Imports fell by 12.4% year-on-year in July and have mostly declined each month from the same period in 2022.
    The consumer price index fell in July, adding to growing worries about deflation.
    However, core CPI, which strips out food and energy prices, actually posted its fastest increase in July since January. Factory activity in July picked up to its highest since March, despite a continued decline.

    Real estate worries

    Weighing on the economy is an ongoing slump in the massive real estate sector. Property market troubles have come to the forefront again with developer Country Garden now on the brink of default.
    When asked Tuesday about Country Garden and the real estate slump, statistics bureau spokesperson Fu Linghui said those events have affected market expectations.
    But he described the real estate sector overall as being in a period of “adjustment” and that the current “phase” would pass as policy changes took effect. That’s according to a CNBC translation of his Mandarin-language remarks.
    Top leaders in late July signaled a shift away from its crackdown on real estate speculation. Authorities have announced a raft of measures to boost consumption, private sector investment and foreign investment.

    Read more about China from CNBC Pro

    Earlier on Tuesday, the People’s Bank of China unexpectedly cut a key interest rate called the medium-term lending facility (MLF) — to 2.50% from 2.65%.
    The last time the central bank cut by more than 10 basis points was in April 2020, according to Larry Hu, chief China economist at Macquarie.
    “To be sure, cutting rate is far from enough. The biggest issue in the Chinese economy right now is the property sector,” Hu said.
    “The property sector is at a critical juncture and the key concern is the downward spiral between sales and confidence,” he said. “Therefore, it’s hard for individual developers to save themselves. Policy is the only game changer for now.”
    So far the overall approach to additional stimulus has been cautious, especially in real estate.
    “Beijing has already done some things to ease the tensions in the property sector, but it has been too slow and too little, in our view,” Ting Lu, chief China economist at Nomura said in a note Monday.
    “We believe that at some point in time Beijing will be compelled to take more measures to stem the downward spiral.” More