The Market Today
Governments Respond to Coronavirus; U.S. Housing Data Remain Strong
by Craig Dismuke, Dudley Carter
Housing Starts and Building Permits Carry Exceedingly Strong Momentum into 2020: New housing starts fell 3.6% in January but remained well above expectations. The Census Bureau reported 1.567 million new units started (annualized), the second highest level of the cycle and only surpassed by December’s activity. A 77% gain in multi-family starts over the past year has helped drive overall starts up 25.4% YoY. Single family starts are up a more modest 7.0% YoY. Additionally, the number of new building permits filed rose 9.2% to 1.551 million, the strongest reading since March 2007. On a year-over-year basis, total permits are up 19.7% on a 21.2% gain in single family and a 33.9% gain in multi-family. Part of the December/January strength in the housing data has been attributed to warmer-than-normal weather; but, the overall pace of activity remains quite strong, arguably unsustainably strong absent another leg lower for mortgage rates.
Mortgage Applications Inch Lower but Remain Positive Indicator: Mortgage applications for the week ending February 14 fell 6.4% on a 3.4% drop in purchase apps and a 8.0% drop in refis. Despite the softer results, the broader trends remain positive for housing. According to Freddie Mac’s Mortgage Market Survey of 30-year commitment rates, the average 30-year rate is now down to 3.47%. While it is up 2 bps from the previous week, mortgage rates remain within 5 bps of the 2016 low and 15 bps of the 2012 low.
More Evidence of Inflation Traction in January PPI Report: Producer price inflation was hotter than expected in January as both services and goods inflation showed more evidence of traction. After some soft readings, producer prices snapped back 0.5% in December. Combined with with unfavorable base effects, January’s strength pushed the year-over-year rate up from 1.3% to 2.1%. In the details, retail margins on consumer goods were unusually strong. Airfares dropped sharply on a month-over-month basis after a strong December gain, but also potentially reflecting the impact of the coronavirus. Several of the inputs flowing through to the January PCE report were firm, including medical care services and investment services.
FOMC Minutes and Fedspeak: There is a flurry of Fed communication today. The January Meeting Minutes are scheduled for release at 1:00 p.m. CT. The meeting took place when there were only 4,593 confirmed cases of the coronavirus, including 56 outside of mainland China. Cleveland Bank President Mester (voter), Minneapolis Bank President Kashkari (voter), Dallas Bank President Kaplan (voter), and Richmond Bank President Barkin (alternate voter) are all on the tape today.
Apple’s Woes Weighed Globally Tuesday: A global risk-off tone welcomed U.S. investors back from a three-day weekend capped by the Presidents Day holiday. Ahead of the U.S. session, Apple issued a warning that its revenue guidance was now unrealistic considering supply and demand disruptions from COVID-19 and a key economic expectations survey in Germany dropped more sharply than expected. After sinking 4.5% overnight, Apple shares recovered to finish down 1.8% and just shy of the daily high. The woes of the U.S. tech giant, a poster child for potential business interruptions caused by the virus, weighed heavily around the globe. Weakness in tech led broader losses that dropped stocks more than 1% across Asia and nudged European equities 0.4% lower. The drop in German economic confidence disrupted a three-month recovery that had pushed the index to a more-than-four-year high, offering some hope that activity could pick up in 2020. A preliminary estimate of 4Q19 GDP last week showed activity stalled in Europe’s largest economy.
Risk-Off Moderated Some During U.S. Session: The money that fled riskier assets found its way into safer investment options in other asset classes. The Dollar continued strengthening, reaching its highest level since May 2017. The Euro has been pummeled by worries that the virus will neutralize some early signs of a tenuous turn up in economic activity. The common currency has weakened 2.7% against the Dollar since the virus scare began in mid-January, closing Tuesday at a nearly three-year low against the greenback. Gold also rallied, gaining more than 1% to close at a seven-year high above $1,600 per ounce. Oil ended close to unchanged on offsetting worries around demand (virus) and supply (U.S. sanctions). Treasury yields finished down across the curve but well up from their daily lows. The 2-year yield ended 1.6 bps lower at 1.4% while the 10-year yield fell 2.6 bps to 1.56%.
Global Equities and Oil Recover: The downward pressure on global equities and oil has eased up overnight as China reported another decline in the number of new coronavirus cases. However, persistent uncertainty around the ultimate effect of the virus on economic activity continued to support gold and prevent global bond yields from moving higher. Investors are faced with the dilemma of determining how much of the potential economic damage from virus disruptions can be absorbed by global stimulus measures. Already this week, Japan’s economy contracted at the end of 2019, Apple said expects a significant hit to its revenue, and confidence in the Eurozone economy took a step back. Overnight, Japanese exports fell for fourteenth month in January, although the decline was less than expected. Asian stocks rose 0.3% while equities in Europe have gained 0.6%.
Other Markets Remain Cautious: Those factors are examples of symptoms of COVID-19 that global policymakers hope to treat with new stimulus measures to keep their economies afloat. China has previously injected significant liquidity into its market and economy as investors returned from the Lunar New Year. Earlier this week, the central bank offered new one-year loans to Chinese banks at a lower rate than before. Singapore’s government announced it was including stimulus measures in its latest budget and South Korea’s President said Tuesday, “An emergency situation warrants an emergency prescription.” Gold had risen another 0.4% so far Wednesday, extending yesterday’s seven-year high, and global yields were mixed but close to unchanged. Before this morning’s influx of U.S. data, the 2-year Treasury yield was 0.8 bps higher while the 10-year yield was flat.
Home Builder Confidence Edged Back in February but Remains Solid for the Cycle: Home builder confidence cooled unexpectedly in the February update from the NAHB, still holding near its cycle-high from last December. The index dropped 1 point in February to 74 on softer details related to current sales activity and sales expectations over the next six months. The number of prospective buyers looking at new homes also edged lower. Sales of new homes climbed steadily early in 2019 as mortgage rates fell from 4.55% at the end of 2018 to 3.64% by September. However, activity started to come back as mortgage rates leveled off and moved sideways into the end of the year. Data from other areas of the housing sector have also been mixed in recent months, keeping an aspect of uncertainty around expectations for housing to remain a positive contributor to growth in 2020.