The Market Today
Fed Chair Meets with President Trump, Discuss Policy and Negative Rates
by Craig Dismuke, Dudley Carter
Housing Starts and Building Permits Continue to Show Strength Amidst Lower Rates: Housing starts slightly undershot expectations in October but building permits soared to their highest level since 2007. New housing starts rose 3.8% in October, driven higher by a 2.0% MoM increase in single family and a 8.6% jump in multi-family. Single-family construction is now up 6.0% YoY while multi-family construction is up 9.4%. In addition to the positive October data, September’s 9.4% decline in starts was revised up to -7.9%. However, even with the revision, total starts tallied 1.314 million units (annualized) in October versus expectations of 1.320 million.
The same general trends held in the building permits data, a precursor to future starts. Building permits rose a solid 5.0% in October driven by a 3.2% increase single family and a 8.2% increase in multi-family. Single-family permits are now up 7.6% YoY and multi-family are up 5.7%. Total permits are now up 15.7% YoY.
New housing starts and permits both troughed in early 2019 and have shot convincingly higher ever since. After peaking at 4.94% in November, 30-year mortgage rates pulled back to 3.49% in October, now up to 3.75% (Freddie Mac 30-year mortgage commitment rate). The drop in mortgage rates has clearly been a sufficient catalyst to get new construction back on track.
Stocks Managed Records Despite Mixed Trade Headlines: In less-than-flashy fashion, U.S. equities managed new records after mixed headlines left investors cautiously clinging to hopes for a trade deal. Equity futures strengthened with global stocks during Asian and European trading after China’s Commerce Ministry said top ministers from the U.S. and China held “constructive” phase-one discussions over the weekend. Treasury yields were also nudged a couple of basis points higher by the broader risk on-tone. However, a tweet from a CNBC correspondent, just before U.S. trading kicked off, that Beijing was “pessimistic” about a trade deal briefly halted the optimism.
Treasury Yields Held Lower as Caution Remained: Stocks erased their overnight gains and yields quickly turned lower. After floundering early, stocks recovered back near unchanged, slid sideways throughout the afternoon, and inched up in the final minutes of trading to new records. Aiding the stability, Fox Business reported midday that the White House would extend an exemption for U.S. companies to work with China’s Huawei by another 90 days, an act later confirmed by the Commerce Department. Through all the noise, Treasury yields remained lower despite the recovery in equities. The 2-year yield fell 1.2 bps to 1.60% while the 10-year yield settled down 1.6 bps to 1.82%.
Global Stocks Strengthen In the Face of Persistent Trade Uncertainty: Global stocks mostly strengthened Tuesday in the face of mixed trade developments on Monday that left U.S. equities essentially flat and Treasury yields modestly lower. Stocks in China and Hong Kong posted solid gains to lead a mixed Asian session despite continued uncertainty around the former’s trade talk with the U.S. and the latter’s struggle to quell tensions between protesters and the government. In Europe, the Stoxx 600 rose 0.5% to a level last seen in May 2015. U.S. equity futures also firmed modestly to new records, although the Dow lagged after dipping on disappointing earnings from Home Depot. Shares of the home improvement retailer slumped nearly 5% after posting third quarter sales that missed estimates and cutting expectations for full-year same-store sales growth for a second time since January. After initially adding to Monday’s dip at the open of the overnight session, Treasury yields had recovered back to nearly unchanged for the day ahead of U.S. trading.
Home Builder Confidence Cooled: The National Association of Home Builders’ confidence index edged down in November despite brighter expectations for sales over the next six months. The headline index dropped for the just the second time in 2019, down 1.0 point to 70, but held near the top end of its cyclical range. The index has improved steadily this year as mortgage rates have drifted lower with Treasury yields amid shifting Fed policy in response to global uncertainty and muted inflation. In November, present sales softened 2 points and traffic of prospective buyers cooled. However, sales expectations for the next six months inched up 1 point to match the best level since March 2018. Lower mortgage rates have supported green shoots for a struggling housing sector, which snapped a six-quarter contractionary run in the third quarter.
Fed Chair Powell Invited to the Oval Office: A week expected to be filled with Fed headlines started with news that, “at the President’s invitation,” Fed Chair Powell met with President Trump and Treasury Secretary Mnuchin on Monday morning. The Federal Reserve’s statement said Powell “did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming information” and be “based solely on careful, objective and non-political analysis.” President Trump tweeted after the “very good & cordial meeting” that “Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.” In a later follow-up tweet, the President said he “protested fact that our Fed Rate is set too high relative to…other competitor countries.”
Mester Said the Fed’s “Basically on Hold”: Cleveland Fed President Mester, who rotates onto the voting committee in January, said that it was “really a close call” in her opinion as to whether the Fed should have cut rates for a third time in October. “I would have preferred that we just hold the interest rate where it was and wait for more signs the economy was slowing down more than anticipated,” Mester noted. However, she said policy is now “in a good spot” and stressed “we’re basically on hold” and “are really going to be looking at the data going forward” to determine if any adjustments to interest rates are warranted.
Rosengren Doesn’t Support Risking Financial Stability to Lift Inflation: Boston Fed President Rosengren, a current-year voter and dissenter to each of the Fed’s three rate cuts this year, said the economy is in a good place and inflation remains near the Fed’s 2% target. Rosengren, who has previously stated concerns about low rates possibly leading to increased financial stability risks, said he is against cutting rates for the purpose of boosting inflation. “I don’t think there’s a big cost to being a little below 2%,” Rosengren said, adding “I’d rather be higher, but I wouldn’t want to distort financial markets to get that outcome.”