The Market Today

Bullard Broaches 75 Basis Point Hikes; Housing Data Fluctuates


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Housing Starts Remain at Highest Level Since 2006: The March housing construction data were stronger than expected as multi-family activity offset weaker results in single family.  Building permits figures were 2.9% stronger than expected after a 0.4% gain in March and positive revisions to the previous months’ figures.  The gain in building permits came from a 10.0% jump in multi-family activity which more-than-compensated for a 4.8% decline in new single family permits.  Likewise, housing starts were 3.0% better than expected on a positive March result and positive revisions to prior results. This brought housing starts to a new-high dating back to 2006.  Both single family and multi-family have contributed to the post-pandemic strength.  Single family starts fell 1.7% in March but multi-family gained another 4.6% to its second-highest level since 1987.

Fed Communications: Chicago Fed Bank President Evans (NV) is scheduled to speak at 11:05 a.m. CT today at the Economic Club of New York.  Also on the calendar is Minneapolis Bank President Kashkari (NV) at 7:00 p.m.


OTHER ECONOMIC NEWS

Home Builder Confidence Hits 7-Month Low As Expected: The NAHB’s Housing Market Index, a popular gauge of home builder confidence, cooled for a fourth consecutive month in April. The 2-point drop was in line with expectations and landed the index at 77, its weakest level since September 2021. Interestingly, the softer tone was concentrated in the current assessment as the outlook for future sales recovered modestly from a 24-month low. The current sales index fell to a seven-month low and a gauge of prospective buyer interest slid to its lowest level since August 2021. An historically fast surge in mortgage rates this year has pushed the Mortgage Bankers Association’s 30-year mortgage rate estimate to its highest level since 2018 and Freddie Mac’s 30-year average rate up to its highest level since 2011. Combined with surging prices amid low current inventories and rising construction costs, estimates of monthly payments on a new mortgage have soared, signaling deteriorating affordability. The NAHB cited these dynamics as headwinds for housing and the future sales index, despite the small recovery in April, remained at its second lowest level since the first half of 2020.

Bullard Beats His Hawkish Drum, Says 75-BP Hikes Not the Base Case but Always an Option: St. Louis Fed President Bullard repeated his hawkish preferences Monday, saying the Fed needs to raise the fed funds rate to around 3.5% to ensure inflation expectations remain tethered near the Fed’s 2% target. “You can’t do it all at once, but I think it behooves us to get to that level by the end of the year,” Bullard noted, adding “I’ve even said we want to get above neutral as early as the third quarter and try to put further downward pressure on inflation at that point.” While many of his remarks were more of the same, Bullard garnered some attention with a comment that he wouldn’t rule out a 75-bp rate hike at a later meeting, “but it is not my base case here,” he said.


TRADING ACTIVITY

Treasury Curve Steepens to Two-Month High in Quiet Monday Trading: Stocks flipped between gains and losses Monday but finished in close proximity to where they started and the Treasury curve steepened for the ninth time in the last ten trading days. After gaining as much as 0.4% and falling as far as 0.5%, the S&P 500 ended the day almost exactly where it began. Sectors diverged with energy outperforming all other sectors and financials finishing in the second spot. Shares of Bank of America gained 3.5% after announcing better-than-expected quarterly financial results ahead of the U.S. market open. The Dow and Nasdaq both slipped 0.1%. Like equities, Treasuries traded with thinner volumes to start the week as European markets remained closed for Easter Monday. The 10-year yield rose as high as 2.88% during trading in Asia before closing Monday at 2.85%, a 2.5-bps increase that pushed the benchmark yield up to a new high since December 2018. The 5-year yield also inched up to its highest level since December 2018, tilting 0.2 bps higher to 2.79%. With the 2-year yield down 0.6 bps on the day to 2.45%, the spread between the 2-year and 10-year Treasury yields widened 2.9 bps to 39.9 bps, its steepest close since February 21.

Treasury yields continued to creep higher overnight ahead of Tuesday’s U.S. trading session and stock index futures remained moribund as global equities struggled for direction amid persistent uncertainties. Asian equities closed with a mix of gains and losses for a second day and Europe’s Stoxx 600 slumped more than 1% as trading reopened after the Easter Monday holiday. Chinese-linked stocks continued to struggle despite the PBOC publishing a list of 23 measures it plans to use to cushion the economy from the severe virus outbreak that has shuttered large swaths of the country under the government’s zero-COVID-19 policy. Despite the wide-ranging pledges of support, China’s CSI 300 lost another 0.8% Tuesday. Oil prices pulled back amid countervailing forces of China’s slowdown and the war in Ukraine, ending a strong four-day rally that had pushed U.S. WTI above $108 per barrel for the first time since late March. Still, energy was the only sector to notch a daily gain during a broadly weaker day of trading in Europe. Despite weakness in European equities, which some analysts partially blame on Russia’s intensifying attacks in eastern Ukraine, European yields were notably higher. Bounding increases for 10-year European sovereign yields, Italy’s 10-year yield rose 6.3 bps to 2.55%, its highest level since mid-2019, and Germany’s jumped 9.4 bps to 0.93%, a new high since May 2015. While European curves were steepening, the Treasury curve shifted flatter and higher. The 2-year yield was 6.7 bps higher at 2.52%, a session peak that also marked a new high for the cycle. The 5-year yield added 4.8 bps to 2.84% and the 10-year yield rose 4.5 bps to 2.90%, both also setting new cycle highs.


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