HOT AIR BALLOON FLIGHT

By Julia Horowitz • Monday, January 10

Good morning. In today's newsletter: Why stocks of homebuilders are taking a beating. Plus, the debate brewing over taxing Big Oil as energy prices shoot up, and why it could get harder to find Nike shoes and Ralph Lauren shirts.

 

US stock futures are down after the tech-heavy Nasdaq Composite finished last week 4.5% lower. Markets in Europe pulled back in early trading, while stocks in Asia mostly rose. The yield on the 10-year US Treasury is up to 1.775%.

 

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MARKET FLASH

Why shares of homebuilders just plunged

 

Looming interest rate hikes are slamming US tech stocks, which dropped sharply last week as investors reassessed how higher borrowing costs could hit their portfolios. 

 

But it's not the only sector to take a beating.

 

What's happening: Shares of US homebuilders including Toll Brothers, Lennar and PulteGroup were among the biggest losers on Friday. The iShares US Home Construction exchange-traded fund fell 4.5% and finished the week 9% lower.

 

Shares of these companies soared in 2021 as the US housing market took off. Average home prices logged their biggest increases on record thanks to limited stock and easy access to cheap loans, which helped fuel demand.

 

One year ago, the 30-year fixed mortgage rate stood at 2.65%, the lowest on record. Stories of crazy offers and dejected first-time buyers became commonplace. Even Wall Street investors dove into the rush.

 

"It was an insane year," Matt Holm, an agent with Compass in Austin, Texas, recently told my CNN Business colleague Anna Bahney. 

 

He recalled a smaller five-year-old home that he put on the market last January for $425,000, already higher than listings for comparable properties. Interest was overwhelming.

 

"I stopped counting at 35 offers," he said. The home sold for $545,000, a 30% increase over the list price.

 

Shares of Toll Brothers rallied almost 67% in 2021, compared to a 27% jump in the S&P 500. Lennar gained 52%, and PulteGroup climbed 33%.

 

But the prospect of interest rate hikes, which serve as a crucial benchmark for mortgages, is shaking things up.

 

The Federal Reserve has indicated that the era of rock-bottom rates will end soon given the need to fight inflation and signs the economy is getting back to normal. Jobs data published Friday firmed up expectations on this front.

 

See here: American employers added 199,000 jobs in December, a weaker reading than economists had expected. Still, the unemployment rate fell to 3.9%. That's very close to the historic low of 3.5% reached in February 2020. Wages also rose 0.6% as companies scrambled to attract workers, which could feed price rises.

 

"With an unemployment rate below 4% and pay pressure building, the Fed looks set to respond swiftly," ING's chief international economist James Knightley told clients.

 

In a note published late Sunday, Goldman Sachs said it now expects the Fed to hike interest rates four times this year starting in March. It had previously penciled in three increases.

 

Mortgage rates have already started to tick higher, with US bond yields rising as investors brace for action. The 30-year fixed mortgage rate averaged 3.22% for the week ending on Jan. 6, the highest level since May 2020. That's still low by pre-pandemic standards, but could start to take some of the heat out of the housing market.

 

That could be good news for would-be buyers that have been edged out by affordability concerns — but lead to a weaker year for companies like Toll Brothers and Lennar that have been riding the wave.

VOICES

Facebook is still under the microscope

"I do think there needs to be more soul searching around how [Facebook] could have done better as a company."

 

KATIE HARBATH, FACEBOOK'S FORMER ELECTIONS BOSS

 

Read more from CNN Business.

EYE ON EUROPE

Could taxes on Big Oil rise alongside energy costs?

Should governments hike taxes on companies like Shell and BP as energy prices soar this winter?

 

That's a question the UK government is under mounting pressure to answer as British households cope with skyrocketing bills, my CNN Business colleague Charles Riley reports.

 

The main opposition Labour Party this weekend called on Prime Minister Boris Johnson to impose a windfall tax on companies pumping oil and gas from the North Sea, saying that the money raised could be used to cut £200 ($272) from soaring household bills.

The party reportedly says the rate of corporate tax the companies pay should be increased by 10 percentage points for a year. That would also allow the government to increase energy subsidies for the poorest households.

 

Big picture: British consumers will pay roughly $1,075 more to heat and light their homes this year, according to Bank of America, following a dramatic surge in wholesale energy prices that has caused dozens of UK energy suppliers to collapse in recent months.

Wholesale European gas prices have jumped by 400% over the previous year and electricity prices have increased by 300%, according to Bank of America. The increases have been driven by cold weather, nuclear plant outages in France and reduced gas flow from Russia.

 

BP and Shell both operate in the North Sea, and have benefited from rising gas and oil prices. BP CEO Bernard Looney told the Financial Times in November that surging commodity prices had turned the company into a "cash machine." The company posted profits of $3.3 billion in the third quarter of 2021, and said it planned to return an extra $1.25 billion to shareholders.

 

The rebuttal: Industry group OGUK, which represents UK offshore producers including Shell and BP, said last week that a windfall tax would make energy companies less likely to invest in the country, causing "irreparable damage to the industry" that would "leave consumers even more exposed to global shortages."

UP NEXT

Tilray reports earnings before US markets open.

 

Coming up: All eyes are on the latest data on US consumer prices due Wednesday.

WHAT WE'RE READING AND WATCHING

▸ Take-Two to buy FarmVille maker Zynga in $12.7 billion deal (Reuters)
▸ Disney still won the box office in a turbulent year (CNN Business)
▸ Omicron threatens to spoil IPO coming-out parties (WSJ)
▸ Asia's richest man is buying the Mandarin Oriental (CNN Business)
▸ Amazon cuts Covid paid leave time for US workers (CNN Business)
▸ The man behind the world's biggest crypto fortune (Bloomberg)

FINAL WORD

Why Nike and Ralph Lauren items are getting tougher to find

Looking to buy Nike sneakers, Adidas sweats, Crocs clogs, Polo shirts or Canada Goose parkas?

 

You're likely to have better luck these days snagging them from their own stores or on their websites than at smaller chains.

 

Breaking it down: Major brands are cutting back on the number of outside retailers that carry their goods, my CNN Business colleague Nathaniel Meyersohn reports.

 

Instead, they're focusing their efforts on getting customers to buy directly from their own channels as well as a narrow group of wholesale partners.

 

The strategy: Selling to customers directly allows brands to make more money, control their prices and showcase products exactly the way they want in store displays. They also can prevent their labels from being discounted too heavily, which could weaken their brand image and pricing power.

 

But the shift means shoppers will have fewer places to buy some of their favorite products. It also puts pressure on retailers that will no longer be able to stock highly-sought after shoes and clothing items.

 

Under Armour and Ralph Lauren have pulled back on sending merchandise to discount stores like T.J. Maxx, while Nike is halting new shipments to shoe warehouse DSW.