The Market Today

TODAY’S CALENDAR

Housing Starts and Building Permits Fall; Industrial Production; Central Banker-Speak: April Housing Starts disappointed expectations, falling 3.7% (exp. -0.7%) but March’s figures were revised up from +1.9% to +3.6%.  By region, starts were notably weak in the Midwest (-16.3%), the West (-12.0%), and the Northeast (-8.1%).  However, the largest region, the South, showed a gain of 6.4%.  Ironically, the South’s strength was driven by a 17% gain in single family starts, the only region to register gains in single family activity.

 

Building permits beat low expectations for April, falling just 1.8% (exp. -2.1%).  The trends in permits were similar to those of starts with weakness in the Midwest (-4.4%),the West (-13.2%), and the Northeast (-31.9%).  Permits in the South rose 12.0% including a 5% gain in single family and a 29% gain for multi-family.

 

April’s Industrial Production report is expected to show a solid rebound in manufacturing activity for April at 8:15 a.m. CT.  Capacity Utilization is expected to continue tightening to its highest rate since a brief peak in 2015.  However, capacity utilization, a measure of how close the manufacturing sector is running to full capacity, continues to run well below levels during previous expansions.  St. Louis Fed Bank President Bullard is on the tape today along with Atlanta Fed Bank President Bostic.  ECB President Maria Draghi is currently making public comments on monetary policy as well.

 

TRADING ACTIVITY

Yesterday – Yields Made New Milestones after Retail Sales Data Supported Story of a Resurgent Consumer: U.S. assets were active Tuesday as Treasury yields made new milestones after Census Bureau data showed solid retail sales activity in April. The 2-year yield rose 2.7 bps to 2.58% and the 5-year yield added 5.6 bps to 2.92%, both representing new highs for the cycle. But it was the 7.0 bps increase in the 10-year yield that drew the most attention. The benchmark note broke through its Taper Tantrum high early after that retail sales report and closed at 3.07%, the highest finish since July 2011. Compared with Germany’s 10-year note, the 10-year Treasury yielded an extra 2.43%, the second widest on record (2.45% last Wednesday). That boosted the Dollar, which reached its firmest level against a basket of major currencies since late December. Higher yields and a firmer Dollar foiled equities attempt to add to Mondays’ modest gains. The S&P 500 lost 0.7% on widespread weakness with 10 of 11 sectors lower by the close. The Dow fell for the first time in nine sessions. Oil prices had reached new multi-year highs overnight but retreated as the Dollar strengthened.

 

Overnight – Excitement in Government Bonds Moves from the U.S. to Italy: U.S. Treasury yields were a bit lower and flatter ahead of U.S. trading after reaching their highest levels in several years on Tuesday. The 2-year yield was unchanged at 2.58% while the 10-year yield had edged down 1.1 bps to 3.06%. U.S. equity futures were marginally weaker. But it wasn’t a sleepy overnight session everywhere. Wednesday’s excitement shifted from the U.S. across the Atlantic into Western Europe. Italian assets were jarred by a proposal being discussed by leaders attempting to form a coalition government that would petition the ECB to write-off 250B Euro of its national debt. The entire Italian yield curve inside of 10 years was up over 13 bps and Italian stocks were down over 2%. Also making news headlines, but having little market impact, was North Korea canceling a meeting with the South and saying it could call off the meeting with the U.S. in June. The actions were reportedly in response to joint military drills by South Korea and the U.S. Also worth highlighting was data that showed growth in Japan slowed more than expected in 1Q, the worst quarter since 2015 and a continuation of the downtrend over the prior four quarters.

 

NOTEWORTHY NEWS

Home Builders Were More Confident in May: The NAHB’s Home Builder Index rose from a revised-lower 68 to 70 in April, four points shy of a nearly two-decade high from last December. The first monthly improvement since that December report was driven solely by stronger current activity, as the expected sales and prospective buyers indexes were both unchanged. All three major indexes have moderated from recent peaks, but remain at solid levels. While construction costs and rising mortgage rates should serve as headwinds for demand, the NAHB’s Chief Economist remained sanguine saying, “Tight housing inventory, employment gains and demographic tailwinds should continue to boost demand for newly-built single-family homes. …With these fundamentals in place, the housing market should improve at a steady, gradual pace in the months ahead.”