The Market Today
Headwinds Continue to Mount for Home Sales; Consumer Outlook Weakens
by Craig Dismuke, Dudley Carter
Mortgage Applications Decline Again: Mortgage applications for the week ending May 21 fell another 4.2% on a 7.2% decline in refis and a slight, 1.7% gain for purchase apps. Mortgage rates began rising at the turn of the year and housing activity, including mortgage applications, have shown the effects of declining affordability – on top of the supply/demand imbalances. Purchase apps are down 20% from their January level and a growing number of consumers see housing prices as a deterrent to buying.
Fedspeak and Bank CEOs Go to Washington (Virtually): Fed Vice Chair Quarles is scheduled to speak twice today (9:00 a.m. CT and 2:00 p.m.). Quarles, the Vice Chair for Supervision, is expected to be replaced when his term concludes later this year. Also today, large bank CEOs will appear before a House panel today to face questions regarding their banks’ roles in helping Americans during the pandemic.
24 HOURS OF MARKET ACTIVITY
Stocks Fade Early Gains as Treasury Curve’s Recent Declines Continued Amid More Fed Downplay of Faster Inflation: U.S. equities quickly gave up opening gains foreshadowed by strong futures trading and Europe’s Stoxx 600 retraced all of its earlier rally to end little changed at session lows. The S&P 500 opened up 0.4% before stumbling back into negative territory, weakening slowly and steadily from there to end down 0.2% near session lows. Energy was the biggest drag despite crude prices holding steady near year-to-date highs and a boost from tech stocks faded even as Treasury yields grinded lower. After a steady decline, the 10-year Treasury yield fell 4.2 bps to 1.56%, near a five-week low and marking the fourth consecutive decline since a taper mention in the Fed’s April Minutes boosted yields last Wednesday. The final print left the benchmark yield a few basis points above a technically interesting level of 1.53%, a level it has bounced higher from several times over the last couple of months.
Early Wednesday, index futures were up between 0.2% and 0.4% while the Treasury curve was essentially flat at session lows, erasing an earlier rise as European yields declined.
Another Report Shows Consumer Confidence Cooled in April, Despite Strong Labor Market Assessment: The Conference Board’s Consumer Confidence Index inched down from April’s pandemic high of 117.5 (revised lower from 121.7) to 117.2 (expected 118.8). The current assessment jumped from 131.9 to a pandemic-era high of 144.3, while future expectations cooled from 107.9 to a three-month low of 99.1. Encouragingly, the stronger current assessment was driven by a sharp rise for the labor market differential (jobs plentiful minus jobs hard to get) to near its pre-pandemic levels. However, six-month forward expectations for business conditions, employment opportunities, and income growth all pulled back. Notably, plans to buy autos (second lowest since a break in the data in 2010), homes (lowest since 2013), and major appliances (second lowest since the 2010 data break) were weaker as one-year inflation expectations bounced back near highs since 2011.
New Home Sales Disappointed Expectations Near Low End of Pandemic Range, Albeit Still Well Above Pre-Pandemic Levels: New home sales of 863k annualized units in April disappointed expectations for sales of 950k and cumulative sales over the prior three months were revised down 113k. April’s pace marked the second-lowest level of the pandemic but remained well above the post-Great Recession high of 756k from January 2020. Benefitting from a solid monthly gain and sharp drop in April 2020, the median transaction price jumped by a record of more than 20% YoY. Data earlier in the day from the FHFA and S&P CoreLogic showed annual price gains of more than 13%, the highest for both series since at least 2005. Tight inventories and rising input costs have been blamed for sharp price increases amid stronger demand. Against that backdrop, sales of homes not yet started jumped to 325k units, the most since 2006, while those under construction dropped to 306k, the lowest since June 2020.
Richmond Fed Manufacturing Index Shows Record Price Increases amid Solid Activity and Record Supplies Shortages: The Richmond Fed’s Manufacturing Index inched up 1 point in May to 18, a high for 2021 but shy of the 19 expected. The details showed weaker current shipments, stronger orders, a growing backlog of activity, and continued hiring. However, raw material shortages continued to worsen and prices paid continued to accelerate, with both measures reaching records in data back to the late 1990s. Looking ahead, respondents expected both solid activity and supply-issue price pressures to continue.
Fed’s Clarida Said Tapering Discussions “May” Begin at an Upcoming Meeting; Still Sees Strong Inflation as Transitory: Fed Vice Chair Clarida said last Monday that April’s jobs report showed the economy had “not made substantial further progress” toward the Fed’s goals, meaning discussing tapering asset purchases now would not be appropriate. However, he noted yesterday that there “may be a time in upcoming meetings when the Fed can discuss scaling back purchases; depends on data flow.” The “Fed needs to acknowledge risks still exist on both up and down sides,” he added. He called April’s hot CPI report a “very unpleasant surprise” but said his “baseline case remains for transitory inflation.” He’s closely watching and placing a lot of weight in inflation expectations.
Fed’s Evans Said “Important to Emphasize” Recent Inflation Data Not a “Precursor” for “Undesirably High” Inflation: Chicago Fed President Evans said that, “To generate larger and persistently higher inflation, you need higher inflation expectations,” and that, even after recent increases, the current levels “certainly are not levels suggesting inflation is spiraling out of control.” Inflation expectations are, however, “imperfect” and “The challenge will be to cut through the effects of temporary supply pressures and post-pandemic price renormalization to get a clearer picture of underlying inflation dynamics. This won’t be an easy task.” Nonetheless, “it is important to emphasize that the recent increase in inflation does not appear to be the precursor of a persistent movement to undesirably high levels of inflation.”
Fed’s Daly Said “Considerable Momentum” Is Building Behind the Recovery, But She Remains “Firmly” in the Transitory Inflation Camp: San Francisco Fed President Daly said, she “would smooth through the volatility of the monthly [economic] data,” and notice, “There is considerable momentum that is building.” However, she followed that up by saying “I am firmly in the transitory [inflation] camp.” She won’t determine if stronger inflation is persistent based on the number of months with higher readings, but rather on the nature of the drivers of those higher readings and whether or not those forces are expected to abate. Officials are “talking about talking about” when tapering asset purchases might be appropriate. “But I want to make sure that everyone knows it’s not about doing anything new,” Daly clarified, adding “We haven’t seen substantial further progress just yet.” “Right now, policy is in a very good place,” she stressed.