Morning Report: Strong retail sales

Vital Statistics:

 

Last Change
S&P futures 2857 14.5
Oil (WTI) 54.92 -0.64
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.84%

 

Stocks are up after strong retail sales numbers. Bonds and MBS are flat. The German Bund hit a new low this morning, trading at negative 66 basis points.

 

Strong retail sales numbers out this morning. The headline number was up 0.7%, well above the Street expectations of 0.4%. The control group, which strips out volatile gas and autos, was up 1.0% MOM, exceeding the Street estimate by 0.7%. Note that Trump’s delay of Chinese tariffs means they won’t hit until mid-December, or after the holiday shopping season. These numbers bode well for the back-to-school shopping season, which is the second most important of the year. Note that Walmart also reported strong numbers this morning, another bellwether for the retail sector. Expect strategists to take up their GDP estimates on these figures.

 

In other economic news, initial jobless claims rose to 220,000 last week, while industrial production fell 0.2% MOM and rose half a percent YOY. Capacity Utilization fell to 77.5%. The industrial and manufacturing numbers are probably influenced by trade.

 

Productivity rose 2.3% in the second quarter, way more than expectations as output rose 1.9%, hours worked fell 0.4% and compensation rose 4.8%. The biggest surprise however came in the revisions, where compensation in the first quarter was revised upward from -1.5% to +5.5%! These are inflation-adjusted numbers, so we had real compensation growth of 5.2% in the first half of the year. Where was the growth strongest? Manufacturing.

 

With the inversion of the yield curve, the business press is chattering about an imminent recession. Don’t buy it. Most of them are talking their partisan book and are sticking with their preferred narrative: (Trump’s trade war is causing a recession!). It helps that it is the most convenient and easy to explain scenario, and let’s face it: it is hard to talk about overseas interest rates when most journalists wouldn’t know a Bund if it bit them in the begonias. Reality check: you generally don’t get recessions with a dovish Fed, unemployment at 50 year lows, strong consumer spending and accelerating wage growth. In fact, the bullish case is that with strong wage growth, overseas deflation keeping inflation in check, and a dovish Fed, you could see what a scenario similar to the mid / late 90s. Food for thought.

 

The new FHA guidance for condos is available in its unpublished form here. The new rule will become effective 60 days after publication in the Federal Register (which should be any day now) and will make more condos eligible for FHA insurance.

 

Home prices rose 3% in July, according to Redfin. “July home prices and sales were weaker than I had expected, especially given that falling mortgage rates have been luring homebuyers back to the market since early spring,” said Redfin chief economist Daryl Fairweather. “Even though we’ve seen increased interest from homebuyers—especially compared to a year ago when mortgage rates were climbing—uncertainties in the overall economy and talk of a looming recession have people feeling jittery about making a huge purchase and investment. But I think the odds are that we won’t see a recession within the next year. If rates stay low and the economy continues to grow, we’ll see more homebuyers come back in a serious way in 2020, and the market will be much more competitive.” Home sales were down 3.4%, while supply fell by the same amount. In terms of price, the previously hot markets of San Jose and Seattle fell, while many of the laggards (like Cleveland and Rochester) rose.

 

Redfin price chart

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Morning Report: Incomes and spending rise

Vital Statistics:

 

Last Change
S&P futures 3004 -17.5
Oil (WTI) 57.21 0.34
10 year government bond yield 2.06%
30 year fixed rate mortgage 4.07%

 

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

 

The FOMC begins its 2 day meeting today. The decision is expected to come out at 2:00 pm tomorrow afternoon.

 

Personal consumption and personal incomes came in as expected, with consumption rising 0.3% and personal incomes rising 0.4%. The core PCE inflation index (which is the Fed’s preferred measure of inflation) rose 0.2% month-over-month and 1.6% YOY, which was slightly lower than expectations. Finally, disposable personal income rose 0.4%, while the savings rate was 8.1%. Overall, this report won’t move the needle with respect to the Fed’s thinking about the economy. The economy is moving along, and inflation remains below the Fed’s target rate.

 

You can see how much the savings rate has increased since the bubble days. Remember when the business press was wringing its hands over the drop in the savings rate?

 

savings rate

 

Home Prices rose 0.2% MOM and 3.4% YOY according to the Case-Shiller home price index. YOY home price appreciation has been decelerating for some time as higher interest rates and higher home prices begin to bite. Erstwhile market darling Seattle reported a YOY decline of 1.2%, while the gainers were Las Vegas, Phoenix and Tampa.

 

Bloomberg has an interesting chart of the global real estate and looks at home prices versus rents and incomes. It shows Canada and New Zealand as the most vulnerable markets. It doesn’t show China, which has a huge bubble and probably doesn’t fit on the diagram. Scandinavia also has a bubble issue as well. For those that admire the Scandinavian economies, remember that whenever a country appears to have have “cracked the code” economically (like the US in the 20s, Japan in the 80s, etc) it usually has a real estate bubble lurking in the background.

 

Note that despite all the talk about real estate bubbles in the US, we are actually on the cheap side, as is Japan.

 

global real estate

 

The US vacancy rate was 6.8% for rental properties and 1.5% for homeowner housing in the second quarter of 2019. The homeownership vacancy rate of 1.5% is the lowest since 1981, and illustrates the supply issue that is only going to get worse as homebuilding fails to keep up with household formation.

 

 

Morning Report: Foreign investment in US real estate falls

Vital Statistics:

 

Last Change
S&P futures 2984 -0.5
Oil (WTI) 57.04 0.24
10 year government bond yield 2.07%
30 year fixed rate mortgage 4.09%

 

Stocks are flattish after erstwhile market darling Netflix stunk up the joint with lousy earnings. Bonds and MBS are up small.

 

Initial Jobless Claims were flat at around 219k last week.

 

Negotiations continue over spending and the debt ceiling, which will probably be hit in September. Treasury Secretary Steve Mnuchin cited “progress” in negotiations, and there is general agreement on the “top line” which includes spending increases from the previous year. That said, Republicans want some spending cuts elsewhere to offset the increase, and Democrats are against cuts. We’ll see if this goes to the mat (and another shutdown), but in the end, we’ll probably just raise the ceiling again and things will go on their merry way. Remember the last time we had a long shutdown, lenders were unable to get tax transcripts out of the IRS so it is something to keep in mind.

 

The Fed’s Beige Book of economic activity showed that the economy continued to expand at a “modest” pace, with slightly higher sales and flat manufacturing. Employment grew at a modest pace, and appears to be decelerating somewhat, especially as the slack in the labor market gets taken up. The Boston Fed noted that tariffs are having a negative effect, and at least one company is moving some production overseas to escape them. The proposed 5% tariff on Mexican goods was mentioned as a significant shock.

 

Canary in the coal mine for international asset markets, particularly China? International buyers of US residential real estate fell by 36% over the past year, following a 20% decrease in the prior year. China has been dealing with a real estate bubble for years, and prices are way out of whack compared to incomes – you can see just how bad it is here. This may explain some of the emerging weakness at the high end, especially in the big West Coast markets like San Francisco, Vancouver, and Seattle. The first step in any bursting bubble is a “buyer’s strike,” followed by rising inventory, and then finally a market-clearing event. We may be at the first stage right now.

 

Macroeconomically, a downturn in China means several things. First, they are going to try and export their way out of it, which means more trade tensions especially if they go the currency devaluation route. Second, it will mean a global growth slowdown, which will act as an anchor on global interest rates. Don’t worry about inflation, the world is awash in capacity. Finally, it could mean a return to a time like the 1990s, where the US was able to have its cake and eat it too, with fast growth but little to no inflation. I wonder if the Fed sees the same thing (after all central bankers do coordinate policy somewhat) and that is part of the reason why they are planning on easing when there is absolutely zero evidence the US is entering a recession.