The Market Today

Fed Officials Diverge

by Craig Dismuke, Dudley Carter


Housing Starts and Building Permits Mixed in October; Multi-Family Continues Recent Strength: Housing starts disappointed expectations in October, down 0.7% MoM as single family starts dropped another 3.9%. Single-family starts are now down 23% from January’s peak.  Multi-family starts, however, were up 7.1% in October. Building permits for the month beat expectations, rising 4.0% MoM.  The positive result came from a 2.7% gain in single family and a 6.6% jump in multi-family permits.

Mortgage Applications Dip on Higher Rates: Mortgage applications for the week ending November 12 fell 2.8% as purchases apps gained 1.5% but refi apps fell 5.1%.  The 30-year mortgage rate rose 4 bps to 3.20%. Despite mortgage rates grinding higher since late July, purchase applications have also trended higher during that period.

Flood of Fed Communications: There are seven Fed officials speaking today: New York’s Williams (8:10 a.m. CT), Governor Bowman (10:00 a.m.), Cleveland’s Mester (10:20 a.m.), San Francisco’s Daly (11:40 a.m.), Governor Waller (11:40 a.m.), Chicago’s Evans (3:05 p.m.), and Atlanta’s Bostic (3:10 p.m.)


Industrial Production Tops Expectations on Autos Boost and Hurricane Recovery: Industrial production recovered 1.6% in October after a 1.3% September decline, easily clearing expectations for a 0.9% rebound. The Fed’s release noted that “about half of the gain in October reflected a recovery from the effects of Hurricane Ida.” Utilities output rose 1.2% while mining jumped 4.1%. Manufacturing output rose 1.2% (expected +0.9%) to its highest level since March 2019 on strength in both durable and nondurable production. Manufacturing of petroleum and coal products jumped 5.0% to lead the nondurable categories while resurgent auto production led all durables categories. Manufacturing of autos and auto parts jumped 11% after dropping 9.9% from July to September. Auto-related production matched its best level since January but remains 6.5% below February 2020’s level. Excluding the auto categories, manufacturing rose 0.6%. Capacity utilization rose 1.2 percentage points to 76.4%, its highest level since December 2019.

Home Builder Confidence Rose Unexpectedly to Match Best Level Since February: The NAHB’s Housing Market Index rose unexpectedly in November. The 3-point gain to 83 marked a third monthly increase and matched the best level for the index since February. The improvement in home builder confidence reflected stronger current sales and an increase in the number of prospective buyers viewing properties. Sales expectations for the next six months were flat. Although the NAHB cited continued headwinds from the supply-chain, labor shortages, and a scarcity of buildable lots, the improvement in confidence points to stronger single-family housing starts in the months ahead.

Bullard Wants Fed to Sound More Hawkish at Upcoming Meetings: St. Louis Fed President Bullard thinks “it behooves the committee to go in a more hawkish direction in the next couple of meetings, so we are managing the risk of inflation appropriately.” “We could move faster – we kept optionality on this that we could speed up the taper if it is appropriate,” he noted, again signaling support for finishing tapering by the end of the first quarter. He said the Fed should consider allowing the balance sheet to runoff once the tapering process is complete. On the rate path, Bullard disclosed his forecast is for two rate hikes next year, but pushed back against comments from a couple of former Fed officials on Monday that the fed funds rate could peak between 3% and 4%. Bullard said he expects the Fed’s target rate will return to where it was prior to the pandemic.

Daly Diverges from Bullard on Appropriate Policy Response: Providing a counter narrative to Bullard, San Francisco Fed President Daly said again that the Fed should remain patient. While “we can’t say for sure that the eye-popping rates of inflation won’t leave a more lasting imprint on overall price setting,” Daly acknowledged, there are “good reasons” to believe the strong current pressures will fade with time. Daly cited an expected shift from spending on goods to services as the virus eases, fading fiscal stimulus, and easing supply-chain pressures as key drivers of her belief. “The Fed is well positioned to act should inflation begin to look more persistent,” Daly said, but, “Reacting in response to things that aren’t likely to last will move us farther from – not closer to – our goals.” “It’s much harder to unwind a preemptive action that turns out to be wrong,” Daly concluded.


Stocks and Yields Rose after Day of Solid Economic Data: U.S. equities rose Tuesday after a round of morning economic reports and corporate earnings from major U.S. retailers boosted confidence that U.S. consumers continue to spend. Prior to the open, Walmart and Home Depot both posted quarterly results that included revenue and earnings that exceeded analyst expectations. A couple of hours later, October’s retail sales report showed broad strength across categories that lifted spirits about consumer spending heading into the holiday shopping season, countering a dreadful reading on consumer confidence last week. Separately, a reading of home builder confidence and industrial and manufacturing production all surpassed the median economist forecast. The solid economic signals sent the S&P 500 up 0.4%, although sectors split. The two most heavily weighted sectors, technology and consumer discretionary, were among four of eleven sectors that gained on the day. Treasury yields were choppy in morning trading following the economic data but gradually grinded higher as stocks rose to session highs. By the close, the 2-year yield had added 0.2 bps to 0.52%, a new high since March 2020. The 5-year yield rose 1.3 bps to 1.27%, its highest level since February 2020. The 10-year yield added 1.9 bps to 1.63%, the highest level since October 21.

The market’s focus remains on the U.S. consumer and inflation early Wednesday as Target and Lowe’s reported better-than-expected financial results on the heels of similarly strong announcements from their top competitors and U.K. inflation jumped to its highest level in ten years. Yields in the U.K. declined despite inflation quickening from 3.1% to 4.2%, past expectations of 3.9%, at a time when the Bank of England has already indicated rate hikes are likely to be warranted soon amid rising prices. Target posted revenue and earnings that beat expectations and, similar to Walmart on Tuesday, said they have adequate inventory to meet what executives expect to be strong holiday spending “right up to Christmas Eve.” Nonetheless, shares were lower in pre-market trading as, also similar to Walmart, the company’s gross margin missed estimates amid rising product, shipping, and labor costs. Lowe’s shares, however, were higher on better-than-expected financial results all around. More broadly, equity index futures were mixed and little changed. At 7:40 a.m. CT, the 2-year Treasury yield was 0.2 bps higher at 0.52% while the 10-year yield had added 0.7 bps to 1.64%.

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