The Market Today

FOMC Set to Begin New Phase of Tightening Cycle


by Craig Dismuke, Dudley Carter

Today’s Calendar – Starts Disappoint but Permits Offer Some Hope; FOMC Begins Deliberations:  In this morning’s economic data, August’s housing starts data was weaker-than-expected with starts falling 0.8% MoM (exp. +1.7%).  However, July’s starts were revised up from -4.8% to -2.2%.  As a result of the positive July revisions, actual starts of 1.30 million SAAR actually surpassed economists’ expectations.  On the flip side, housing starts have now been negative for two consecutive months and in six of eight months of 2017.  On a YoY basis, starts are now down to +1.4%.  Weaker multi-family starts were, once again, the cause for the weakness in August, dropping 6.5% while single family starts rose 1.6%.  On a positive note, building permits were quite solid, rising 5.7% in August (exp. -0.8%) while July’s permits were revised up from -4.1% to -3.5%.  Ironically, the strength in the permits data was a big 19.6% jump in multi-family permits while single family permits actually pulled back 1.5%.  On a YoY basis, new building permits are now up 8.3%, an encouraging indicator for the languishing starts data. Also released, the August import price index rose more-than-expected, up 0.6% MoM (exp. +0.4%).  However, the July data was weaker than initially reported.  Export prices were also firmer than expected.

 

FOMC to Begin New Phase of Tightening Cycle: Today kicks off the FOMC meeting during which a significant shift in the overall posture of monetary policy is expected to change.  The Fed has often characterized their rate hikes as simply lightening their foot from the gas pedal – not pressing on the brakes.  In such an analogy, their quantitative easing program has been a turbo-booster.  In this week’s meeting, they are effectively planning to cut off the turbo-booster.  Since the announcement of QE1 back in November 2008, the Fed has been either actively growing their balance sheet or maintaining its size (through cashflow reinvestment) every month except for three at the conclusion of QE1.  During that time, as the balance sheet began to naturally shrink from paydowns, they lamented the de facto tightening of financial conditions from the shrinking balance sheet.  As such, they enter this decision presumably with the same mindset – that it will be a tightening of policy coinciding with a tightening of the overnight target rate.  They are likely to continue this path until the markets balk (most likely cause for a change in policy by our estimates) or the economic data proves weak enough to warrant a change.

 

Overnight Activity – Sovereign Yields Fall Back as Fed Gathers in Washington: Global equities shied away from blindly tracking the major U.S. indices higher and sovereign yields finally paused their persistent climb. The Dow and S&P reached new highs Monday (more below) but equities elsewhere have shown some hesitancy Tuesday. While certain national bourses in Europe edged higher, Germany’s DAX drifted 0.17% lower and the pan-European Stoxx 600 slipped 0.10%. Asian shares were softer except for a rally in Japan. Japanese markets, which were closed Monday, played catch-up overnight after missing out on the global strength that started the week. The Dollar remains weaker as the Euro recovered from a tumble that followed a Reuters’ report of disagreement at the ECB about whether to announce in October a hard-and-fast end date for the QE program. The division is apparently the result of the Euro’s recent strength. Earlier, a popular survey of Eurozone growth expectations rose for the first time in three months to its fourth strongest level since 2015. Treasury yields are little changed but lower inside of 30 years. The 2-year yield is 0.6 bps lower at 1.39% with the 10-year down 0.4 bps to 2.23%.

 

Yesterday’s Trading Activity – Yields Keep Rising and Stocks Keep Reaching Records: U.S. Treasury yields added to last week’s climb as stocks recovered from early-afternoon selling to finish near session highs and at new record levels. Global sentiment strengthened ahead of the U.S. session and helped jumpstart markets at the open. Coming off its best week of the year, the Dow gained 0.28% to lead the major three indices. Fifteen of the 30 Dow companies added value Monday and the industrials and financials sectors led the gains. These same sectors finished near the top of the S&P as well and helped the broader index move up 0.15% to its latest record close. Financial companies have improved in six of the last seven sessions as (longer) rates have popped back from year-to-date lows just short of two weeks ago. Over that same period (since Thursday, September 7), the 2-year and 10-year yields have risen in six of seven trading days and the 5-year yield is up in seven straight. The 2-year yield is up a total of 13 bps and ended 2 bps shy of its highest level since 2009. The 5-year and 10-year yields have both added roughly 20 bps over that streak. The Dollar recovered with Treasury yields and stocks after falling last Thursday and Friday.

 

NAHB’s Housing Market Index Backs Off in September: The NAHB’s September housing market index fell more than expected as sales expectations cooled. Actual home sales data has been choppy and slower so far in 2017. In yesterday’s homebuilder survey results, there was little to lean on to support hopes of a brisk turnabout. The indices tracking both current sales levels and sales expectations fell and matched their lowest readings of the year. And while both remain at some of their highest levels of the cycle, the pace of improvement has slowed. Also disappointing was another decline in the level of foot traffic from prospective buyers. The index slipped to its lowest level since before the election. The bottom line is that sales of new homes in coming months are likely to continue to struggle.

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