The Market Today
Earnings Reports; Housing Data Improves; ECB/BOJ on the Clock
by Craig Dismuke, Dudley Carter
Today’s Calendar – Housing Data Improves While Builder Sentiment Pulls Back; ECB Ahead: Mortgage applications for the week ending July 14 rose 6.3% on a 1.1% increase in purchase apps and a 13.0% increase in refi apps. Mortgage rates were largely unchanged on the week with the 30-year rate steady at 4.22% and the 15-year rate down 2 bps to 3.48%. Eliminating the WoW noise, the 4-week moving average for purchase apps shows a continued, albeit small, rise in new applications. The 4-week moving average for refi apps remains very low but has trended fractionally higher since hitting an 8-year low in January.
The June Housing Starts and Building Permits data were stronger than expected with starts rising 8.3% (exp. +6.2%) and permits rising 7.4% (exp. 2.8%). There were also positive revisions to the May housing starts data. Starts were bolstered by a 6.3% increase in single family activity and a 13.3% jump in multi-family. On a YoY basis, housing starts are now up 2.1%, the best rate of gain in four months. Meanwhile, permits were lifted by a 4.1% increase in single family permits and a 13.9% jump in the volatile multi-family series. Building permits are now up 5.1% YoY. The starts and permits data, one of the primary indicators of future new construction activity, have been weak of late and this morning’s data provides a bit of relief. Ironically, the stubbornly optimistic homebuilder confidence report actually pulled back in yesterday’s data releases. The headline index fell back from 66 to 64, the lowest reading since the election with analysts speculating that builders are becoming 1) less confident in legislative changes from Washington and 2) more concerned the Fed could lose control of longer interest rates – with mortgage rates rising accordingly. Additionally supply-side costs are rising putting more pressure on builders to contain costs at a time when buyers could be becoming more price sensitive.
Looking ahead, the ECB will conclude its policy meeting overnight with their decision announced early tomorrow morning. This has the potential to create market volatility given the recent market trends and shifting ECB communications. Also concluding its policy meeting will be the Bank of Japan, but their position has remained more committed to accommodation and has, thus, not moved the markets like the ECB.
Morgan Stanley Continues Positive Earnings Trend for Biggest U.S. Banks: Another quarterly earnings release from a major U.S. bank included better-than-expected earnings despite a decline in trading revenues. Both revenue and earnings were better than expected in Morgan Stanley’s second quarter results. Morgan Stanley joins a long list of big banks to post above-estimate earnings – J.P. Morgan, Citigroup, Wells Fargo, Bank of America, and Goldman Sachs. As has been the trend so far in 2Q earnings data, Morgan Stanley saw trading revenues dip in the second quarter. Trading revenues slipped 2.1%, the best result from the big banks that have already reported.
Overnight Activity – Dollar Recovers in Calmer Overnight Session: The waters calmed overnight as Tuesday’s drop in sovereign yields eased, the Dollar climbed off an almost 11-month low, and global equities generally trended higher. Sovereign yields are mixed (but little changed) across Europe. The Dollar was stronger against the Euro and British pound but weaker against the Yen and most other major currencies. Based on the relative importance weights of each, however, the greenback recovered from its lowest level in almost a year. Tech companies are leading the equity gains in Europe following the Nasdaq’s record-high close on Tuesday. Asian equities were firmer across the board, providing a positive start to Wednesday’s session. The daily economic calendars were uneventful but both the Bank of Japan and European Central Bank kicked off two-day policy meetings. Both will announce their latest decision early Thursday. In the U.S., equity futures indicate another strong start for tech companies. The 2-year Treasury yield is up 0.4 bps (1.35%) with the 10-year yield 1.4 bps higher (2.27%).
Yesterday’s Trading Activity – Stocks Diverge on Corporate Results, Treasury Yields and the Dollar Fall on Health Care Failure: The big three equity indices diverged notably Tuesday as the Dow fell 0.3%, the Nasdaq rallied 0.5% (new record high), and the S&P’s 0.1% gain (new record high) put it right in the middle. Forty-one of the Dow’s 55-point drop were accounted for by Goldman Sachs. Goldman’s woes began after the company reported a 17% drop in trading revenue; a 40% drop in fixed income revenue. The Nasdaq’s rally was sparked by a big day for Netflix Inc. The streaming-video provider reported big gains in the number of subscribers which was enough to offset below-estimate earnings and push the company’s stock up more than 13%. The S&P barely budged as a result of the push and pull of these two forces. Treasury yields added more pressure to financial companies as the curve hit its flattest point between 2s and 10s since June 29. The 2-year yield fell just 0.8 bps to 1.35% while the 10-year yield tumbled 5.3 bps to 2.26%. The Senate’s health care saga continued throughout the day. Enough Senator’s came out against a clean repeal of the ACA to dim the chances for any sort of health care reform and increase concerns about the likelihood of meaningful tax reform. The Dollar remained weaker after the health care failure, closing at its lowest level since late August.