Morning Report: Housing starts still weak

Vital Statistics:

 

Last Change
S&P futures 2865.5 10
Oil (WTI) 62.69 0.66
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.17%

 

Stocks are higher this morning as the market continues its rebound. Bonds and MBS are flat.

 

Housing starts rose 5.7% MOM to 1.23 million in April, which is down about 2.5% from a year ago. March was revised upward to 1.17 million. Building Permits rose to 1.3 million, up a touch from March, but down 6% YOY. We saw an increase in activity in the historically lagging areas – the Midwest and the Northeast. You would have thought that increasing home prices would drive more construction, but so far there is no evidence of that. Costs are increasing, especially labor costs. Tariffs are also being blamed, but lumber prices are down over 50% from a year ago.

 

lumber

 

Despite the slow and steady pace of new homebuilding, builder confidence did improve markedly in April, according to the NAHB Housing Market Index. “Builders are busy catching up after a wet winter, and many characterize sales as solid, driven by improved demand and ongoing low overall supply,” said NAHB Chairman Greg Ugalde. “However, affordability challenges persist and remain a big impediment to stronger sales.” “Mortgage rates are hovering just above 4% following a challenging fourth quarter of 2018 when they peaked near 5%. This lower interest rate environment, along with ongoing job growth and rising wages, is contributing to a gradual improvement in the marketplace,” said NAHB Chief Economist Robert Dietz.  “At the same time, builders continue to deal with ongoing labor and lot shortages and rising material costs that are holding back supply and harming affordability.”

 

Initial Jobless Claims rose to 220,000 last week. The labor market continues to be strong.

 

 

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Morning Report: Commodity prices falling

Vital Statistics:

 

Last Change
S&P futures 2778 -30
Eurostoxx index 364.14 -1.6
Oil (WTI) 60.5 0.31
10 year government bond yield 3.19%
30 year fixed rate mortgage 4.98%

 

Stocks are lower this morning on no real news. Bonds and MBS are flat.

 

Markets are open today, however many people are taking the day off in observance of Veteran’s Day.

 

There won’t be much in the way of market-moving data this week (CPI on Wednesday and retail sales on Thursday are the only potential market movers), however we do have a lot of Fed-speak, with Jerome Powell speaking on Wednesday.

 

Inflation at the wholesale level was a little hotter than expected, rising 0.6% MOM and 2.9% YOY. Ex food and energy, it rose 0.5% / 2.8% and ex food, energy and trade services (the core rate) it rose 0.2% / 2.8%. Inflation using the PPI metric is higher than the Fed’s 2% target, but the PPI isn’t the measure they target. We will get inflation at the consumer level on Wednesday.

 

Consumer sentiment improved in the first reading of the November numbers, according to the University of Michigan sentiment survey.

 

Amazing statistic: 20% of China’s apartments are vacant. That works out to be 50 million apartments. One of the biggest symptoms of a bubble is oversupply, and a 20% vacancy rate would qualify. In the big cities, apartments are ridiculously expensive, trading for something like 40 – 50 times income. For reference, prices in the US topped out at just under 5 times income in 2006. Chinese economic statistics are heavily massaged by government, but there is no doubt that they have the sort of real estate bubbles that seem to occur after decades of rapid growth, similar to the US in the 20s and Japan in the 80s. Once their bubble bursts, China will try and export their way out of it, which will probably spark more trade tensions, but will also put downward pressure on inflation and interest rates globally. The US could go through another period of having its cake and eating it too – a period where they go through strong economic growth without inflation worries.

 

Speaking of inflation, oil has been getting shellacked over the past month, losing over 20% from mid-October. Part of this has been driven by the US allowing 8 companies to buy Iranian oil despite sanctions. OPEC is now entertaining production cuts, which has stabilized prices at least today.

 

Also note that lumber prices (which have been soaring due to Canadian tariffs) have now reversed and are heading lower. This should help lower new home construction costs, although the biggest bottleneck remains labor and affordable lots.

 

lumber

 

So, while we are seeing inflationary pressures building in the labor market, commodities are going the other way.

 

California passed a couple of housing affordability initiatives last week, which were mainly targeted to the Bay Area. Similar measures in Oregon and Florida also passed.

 

 

Morning Report: Housing starts jump despite increasing lumber prices

Vital Statistics:

Last Change
S&P futures 2752 -28
Eurostoxx index 382.86 -3.1
Oil (WTI) 64.89 -0.96
10 Year Government Bond Yield 2.88%
30 Year fixed rate mortgage 4.57%

Stocks are lower this morning on increasing trade tensions with China. Bonds and MBS are up.

Trump threatened $200 billion in sanctions on Chinese goods, which sent global markets down and bonds up. This is in addition to the $50 billion in tariffs he threatened on Friday. Stock market investors are swapping out of S&Ps and Nasdaqs into smaller cap stocks, as they are more insulated from international trade tensions.

Housing starts improved to 1.35 million in May, which is up 5% MOM and 20% YOY. Building permits came in at 1.3 million, down 5% MOM, but up 8% YOY. Most of the activity was in the Midwest, where they increased by 100k. The Northeast was down, while everywhere else was flattish. Tariffs on Canadian lumber certainly aren’t helping. Lumber prices peaked in May and are starting to decline, but they have had quite the run. The NAHB report yesterday discussed lumber prices are hurting builder confidence.

lumber

Trump formally nominated Kathleen Kraninger to replace Mick Mulvaney as the head of the CFPB. This promised to be a contentious confirmation fight, and the usual suspects are already complaining. That may actually work out in the Administration’s favor however. The tougher the confirmation fight, the longer Mick Mulvaney can remain in place and fix some of the excesses of the Bureau. Under the Vacancies Act, Mulvaney’s term as Acting Director expires on June 22. He can remain in place while her nomination is pending. If she is defeated, he would get another 210 days. If that nominee is defeated, he gets another 210. So basically, this gambit would keep Mick Mulvaney in place until 2020.

Where are Millennials moving? Where the jobs are.