The Market Today

Eurozone Data Continues Positive Trend; U.S. Housing Data Mixed

by Craig Dismuke, Dudley Carter

Today’s Calendar – New Housing Data Weighed Down by Weak Multi-Family Activity:  Over the past 24 hours, the housing data has shown results that mirror the larger economic trend – improving confidence but weaker activity.  After homebuilder confidence rose to its second-highest level since 2005 in yesterday’s reports (more below), housing starts and building permits both fell unexpectedly in the April data.  Housing starts were expected to rise 3.7% but fell 2.6%, following a March report that saw starts fall 6.6%.  Building permits were expected to rise 0.2% but fell 2.5%.  As for new starts, they are now up just 0.7% YoY, down from a rate of +11.4% as of December.  The weakness has come, as it did in April, from declining multi-family activity.  Multi-family starts were down 9.2% MoM in April and are now down 15.1% YoY.  Single family starts were actually up 0.4% MoM and are up 8.9% YoY.  As for new permits, single family permits fell 4.5% MoM while multi-family permits rose 1.4%.  There is a lot of noise in these indicators of new housing activity, but the larger trends remain mostly positive.


At 8:15 a.m. CT, the April Industrial Production report is expected to show a 0.4% MoM increase in manufacturing activity.  This would be positive news for the sector after the New York Fed’s report on manufacturing activity in its region kicked the May manufacturing reports off on a weak note yesterday, unexpectedly falling from +5.2 to -1.0.


Overnight Activity – Euro Hits Six-Month High as Dollar Continues Slide: Sovereign yields continue to signal a risk-on bias despite another mixed session for global equities. Yields in Europe are higher in the stronger economies and lower on the periphery. Equities in China and Japan strengthened while Germany’s DAX was unchanged and France’s CAC provided the soft spot in Europe. The Dollar slid further and is down more than 1 percent since last Friday’s weak CPI inflation and retail sales reports. The euro jumped to its strongest level against the Dollar since the U.S. election. Crude prices added modestly to yesterday’s 3% gains and are up more than 7% over the last five trading sessions. In a crowded EU economic calendar, April’s PPI, CPI, and RPI (retail price index) inflation metrics in the U.K. were all stronger than expected; core CPI matched its strongest level since November 2012. Expectations for economic growth in the Eurozone improved for a third month to the strongest level since August 2015. The 1Q GDP data showed as-expected actual growth in the Eurozone of 0.5% QoQ, or 1.7% YoY. Treasury yields are up roughly a 0.5 bps inside of 30 years and equity futures point to an extension of yesterday’s record gains.


Yesterday’s Trading – Another Record for Stocks as Crude Gains on Talks of OPEC Extending Production Cuts: Stocks went on a run Monday as gains in materials and the financials sector pushed the S&P and Nasdaq to their 17th and 32nd record-high closes of the year, respectively. Energy was the third best performing sector within the S&P thanks in big part to healthy gains in crude prices. Both U.S. and Brent crude gained on the day but were roughly one percent off of their session highs by the time markets closed. The strong start for U.S. equities emboldened their European counterparts, turning a mixed session in Europe almost exclusively positive by the time traders there flipped off their computers. The Dollar fell for a third day and its momentum has the currency headed back towards its lowest levels since the U.S. presidential election. The strength in equities and commodities was directionally consistent with the higher Treasury yields. The 2-year Treasury yield rose 0.8 bps to 1.30%, the 5-year yield added 1.5 bps to 1.86%, and the 10-year note closed 1.8 bps higher at 2.34%.


Hopes of Future Sales Lifts the NAHB Market Index: The NAHB’s Housing Market Index bounced back in May and continues to hover near its highest levels of the cycle. The headline index rose 2 points to 70, one point shy of the almost 12-year high set in March. Traffic of prospective buyers slowed slightly for a second month but responses showed stronger current sales and expectations for future sales. The future sales index experienced the biggest gain to register its highest result since June 2005. New home sales strengthened in each month of 1Q helping drive a 14% increase in residential investment in the first release of 1Q GDP. The persistent strength in the home builder index signals the housing recovery could continue to be accretive to near-time economic growth despite tight supply and elevated mortgage rates weighing on affordability.


Why Homebuilders Remain So Confident (WSJ): According to a WSJ report yesterday, “A key reason is that there simply aren’t as many builders in business as there used to be. While large, publicly traded builders weathered the housing bust and financial crisis remarkably well, the same wasn’t true for many of their small and midsize counterparts. … By the Commerce Department’s count, there were about 368,000 construction firms operating in the U.S. as of 2014 (the last year with available data). That compares with about 530,000 in 2005, and is the lowest number on record going back to 1977. The Labor Department reports that there are now 763,000 workers involved in the construction of residential buildings, compared with 996,000 at the end of 2005. … So even though there are fewer homes being built than there used to be, the market is getting split among far fewer builders.”


Downside Surprise in May’s Empire Manufacturing Survey: The May Empire State Manufacturing Survey was much weaker than expected as metrics tracking current conditions and expectations for six months from now were generally softer relative to April’s levels. The headline index fell 11 points to its first negative result since October of last year. Disappointingly, the biggest declines in May’s current conditions occurred in the new orders and unfilled orders indices. As has been the case for multiple economic data sets, the forward-looking expectations fared better than the actual current data. While many of the indices tracking expectations for six months from now were a bit weaker than in the April survey, new orders expectations improved in May and most other indices remained positive relative to recent historical trends. However, the biggest blemish in the forward looking data was a 14 point drop in the capital expenditures index (lowest since November).

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