The Market Today
Job Openings Hit Another Record; Rates Take a Toll on Housing Data
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook Webinar, Thursday October 18 – Vining Sparks will host our 4Q Economic Outlook Webinar on Thursday to summarize the economic environment as well as provide our updated growth and interest rate projections. We will look briefly at the recent economic strength and then focus on some brewing challenges. Those challenges include 1) rising interest rates and the impact on housing, federal interest expense, and corporate balance sheets; 2) divergent growth between the U.S. and other economies; and 3) still-inflated (it appears) asset valuations. To register, click here.
Housing Disappointment – Applications Plunge: Mortgage applications, a notoriously volatile weekly measurement, fell 7.1% for the week ending October 12. The decline came from a 5.9% dip in purchase apps and a 9.0% plunge in refi apps. For a volatile data series, this report was notably volatile – the largest drop in applications since September 2017 and the largest drop in refi apps since July 2017. Two factors likely contributed to the weakness, the recent rise in interest rates and the hurricane Michael making landfall in the Florida panhandle during the observation week. Thirty-year mortgage rates rose 18 bps in September, setting the stage for a pullback in new applications. That increase was only exacerbated by the 18 bps increase over the three days ending October 5.
Housing Disappointment – New Construction Data Drop: Mortgage rates are now up 89 bps YoY (+20 bps MoM) which weighing on a number of housing metrics, including the new construction data. Housing Starts fell 5.3% in September along with a weaker revision to August’s gains. Combined, starts ended up missing their expected tally by 0.7% in September. Single family starts fell 0.9% MoM but multi-family starts tanked 15.2%. On a year-over-year basis, starts are now up just 1.6%. Permits for new construction projects also disappointed in September, falling 0.6% MoM.
Yesterday – Sharp Stock Rally Couldn’t Budge Treasury Yields: U.S. stocks rallied hard on Tuesday as the major indices clawed back another chunk of last week’s losses. Tech companies led the charge as the Nasdaq rallied 2.9%. The index closed just 1.2% from its level from last Tuesday, before strong U.S. economic data led to a fear of higher rates that ultimately sent global stocks reeling. The Dow and S&P 500 both climbed 2.2%, their biggest daily gains since March, and saw each of their underlying sectors improve on the day. The S&P’s tech sector closed up more than 3% to finish in first place. Three sectors gained over 2% while six others added more than 1%. Energy companies were the laggard, notching a still-respectable 0.9% increase. Pre-market futures trading had indicated an opening jump after a batch of corporate earnings releases topped estimates. There was also a discernable tick up after another record-setting JOLTS report, confirming the U.S. labor market is hot (more below), and the positive momentum persisted for the remainder of the day. But despite the enthusiasm from equities, Treasury yields barely budged. The 2-year yield rose 1.0 bps on the day while the 10-year yield added 0.4 bps, almost in line with where they were before U.S. trading began.
Overnight – Global Investors Showed Little Response to Strong U.S. Performance: Yesterday’s outstanding U.S. equity gains, the strongest in nearly seven months, have failed to enthuse global markets in the overnight session. Most Asian markets improved but indices across Europe have so far been lethargic. While yesterday’s broad-based U.S. optimism has failed to sustain, tech companies, which led the U.S. rally, have remained among Wednesday’s top performers. Asian tech companies were near the top of most indices’ sector ladders. In Europe, those gains have combined with several other sectors to offset losses in a handful of industry groups, including European autos. The U.K.’s FTSE 100 was the only major to tick higher, likely helped by a weaker Pound. The currency tumbled after a weaker-than-expected CPI Inflation report. Yields in the U.K. also dropped on the report and are leading most yield curves in the region lower. The U.K.’s 10-year yield was 3.5 bps lower while those in Germany and France both slipped roughly 3 bps. U.S. futures have retreated roughly 0.5% on the lack of global follow through and extended the week-long stint of volatility. In Treasurys, the 2-year yield was 0.4 bps lower while the 10-year yield had dropped 1.5 bps.
Tuesday’s Economic Data Topped Estimates: The three economic reports released after 8 a.m. all topped economists’ estimates. Industrial production was 0.1% stronger than expected in September as manufacturing rose for a fourth month in a row, albeit at its slowest pace of the period, and mining activity increased a solid 0.5% from August. Utilities production was flat as declining electricity usage offset firmer figures for natural gas. In the second wave of morning data, a modest increase in the sales outlook was helped out by a strong rebound in foot traffic from prospective buyers to give the NAHB’s headline home builder confidence index an unexpected boost. The index tracking potential buyers perusing new homes hit its highest level since February.
But the most impressive data point from Tuesday’s slate was another record high openings number in the August JOLTS report. Job openings jumped to 7.136MM in August and, in part because of positive prior revisions, easily cleared the 6.9MM expected. The openings rate rose to a new cycle high and for a sixth month in a row there was fewer than one unemployed person available for each open position (0.87x). In unit terms, there were just under 1.2MM more open jobs than unemployed workers. Different sectors experienced different results, with Professional and Business Services (+74k) posting the most new vacancies while Trade/Transports/Utilities companies (-54k) shed out the most. The other metrics were mixed as the quits rate held at its cycle high, layoffs picked up to push the layoffs rate up 0.1% to 1.2% (average over the last six years), and the hires rate matched its best level of the cycle. The data told the same old story of a labor market that is becoming increasingly tight.
Daly Sounds Like a “Yea” for a December Hike: For the first time, Mary Daly made public remarks as the head of the San Francisco Federal Reserve Bank. Daly, who will vote in December to determine if the Fed delivers the fourth rate increase they’ve projected since June, gave no indication that her opinion diverged with the consensus. In fact, she noted “The way I’m approaching [interest rates]” is “very consistent with the way the FOMC has been approaching it.” In her presentation, she included bullet points that read “GDP growth is robust, …Labor market beyond full employment, …Inflation effectively at 2% target, …Notable tailwinds.” Under the last bullet point, she included a sub-bullet that pointed to boosts from financial conditions, global growth, and fiscal stimulus. As a result of that optimism, she indicated she expected the Fed to keep gradually raising rates to keep those trends in place.
Trump Keeps Public Pressure on the Fed: While economists don’t expect it to sway the Fed’s future policy decisions, President Trump continued to sound off on their plans for further rate increases. On Tuesday, President Trump called the Fed his “biggest threat.” He said “You looked at the last inflation numbers, they’re very low,” using the data at support his belief “it’s going too fast,” a reference to the Fed’s raising its overnight Fed Funds rate. President Trump, who’s been asked on multiple occasions recently if Powell’s future as Fed Chair could be in jeopardy, said “[The Fed’s] independent so I don’t speak to [Chair Powell], but I’m not happy with what he’s doing. … I put him there, and maybe it’s right, maybe it’s wrong, …I put a couple of other people there that I’m not so happy with too. For the most part, I’m very happy with people.”