The Market Today
Homebuilders Confident Despite Weak Housing Sales and Construction Activity
by Craig Dismuke, Dudley Carter
Today’s Calendar – Another Batch of Rotten Housing Data: Housing starts fell 4.7% in September, the apparent result of the September storms and another big drop in multi-family activity. Starts were expected to be down just 0.4%. Multifamily starts were down another 5.1% while single family starts dropped 4.6%. By region, the decline was led surprisingly by a 20.2% drop in the Midwest followed by a 9.3% drop in the South (hurricanes), a 9.2% drop in the Northeast. Only the West saw an increase in activity, up 15.7% thanks to a 34% increase in multi-family starts. Building permits also disappointed, falling 4.5% after rising just 3.4% in August (revised down from a 5.7% increase). The weakness in permits came from a 16.1% drop in multi-family activity. Multi-family permits are now down 24% YoY and portend a slowing pace of new construction going forward. Mortgage rates have risen 41 bps YoY but rose just 1 bps for the month of September. Multi-family activity has proven to be very rate sensitive (see Chart of the Day) or reaching supply capacity coincidentally with the 2016 increase in rates.
Mortgage applications for the week ending October 13 rose 3.6% as purchase apps rose 4.2% and refi apps rose 3.0%. The Fed will release its Beige Book report at 1:00 p.m. CT in anticipation of its November 1 FOMC Meeting. New York Bank President Dudley is speaking publicly this morning.
Overnight Activity – Firmness in Global Equities Pressures Sovereign Yields Higher: Sovereign yields pushed higher during European trading as equities there firmed following a mixed start in Asia. Treasury yields are leading most core Eurozone countries’ debt with the 2-year yield 1.3 bps higher compared with 1.0 bps and 1.2 bps in France and Germany, respectively. The 10-year Treasury yield added 3.2 bps compared with increases of 2.3 bps and 2.7 bps in France and Germany. After yesterday’s mixed performance for shares of U.S. companies, Wednesday’s global trading started unevenly in Asia. Japan’s Nikkei 225 rose for a twelfth consecutive session to hit another fresh 20-year high, shares in China gained, but most other national exchanges weakened. The sentiment strengthened in Europe, however, with all national exchanges outside of Spain in the green and Germany’s DAX recovering to a new record high. The broader Stoxx Europe 600 is up 0.42% in its best day in more than two weeks. Futures contracts on the Dow are leading overall futures higher. With Wednesday’s risk appetite on firm footing, the Yen weakened with gold and other precious metals while the Dollar gained for a fifth session. Crude prices continued to rise as U.S. WTI approached is highest price since mid-April. The API reported yesterday that it expects U.S. crude inventories fell more than 7MM barrels last week while gasoline and other refined products rose a more modest 3.6MM barrels. The bullish inventory data added to the price support from the ongoing tensions in Kirkuk, Iraq.
Yesterday’s Trading Activity – Health Care Gains Offset Losses in Financials as Dow and S&P Inch to New Records: Treasury prices rallied back from a brief bout of early-morning selling and two of the three major stock indices improved Tuesday. The 5-year yield ended up 0.8 bps at 1.96% after earlier rising to as high as 1.975%. The 10-year yield actually moved lower for the day, dropping 0.4 bps to 2.30%, after climbing as high 2.325% in early trading. The 2-year yield was less volatile, ending up 0.8 bps and less than 1 bp off its daily high. President Trump confirmed Tuesday that his choice for the next Fed chair will come from the five names already floated (Warsh, Powell, Yellen, Taylor, Cohn) and another White House source said the decision will be made by November 3. The Dow closed up 0.18% at 22,997 after creeping above 23,000 a couple of times during mid-morning trading. An uplift from most health care components of the Dow was enough to offset a drag from financials. UnitedHealth was the biggest positive contributor in the Dow after reporting better-than-expected earnings and providing a positive outlook for 2018. Goldman subtracted the most after reporting better-than-expected quarterly profits as a pick-up in financial advisory fees and returns on equity investments offset slumping trading revenues. A similar sector result played out within the S&P where health care companies finished first and financials finished last.
Industrial Production Recovers on Widespread Improvements: Industrial production recovered in September and the hurricane-related drop in August activity was slightly less negative after revisions. Total industrial production rose an as-expected 0.3% in September after declining 0.7% (previously -0.9%) in August. The improvement was driven improvements in all three major industry groups. Manufacturing output improved 0.1% in September, softer than the 0.2% expected, but a positive result nonetheless. Capacity utilization also recovered. Mining was also better but utilities made the steepest rebound. Output of both electricity and natural gas gained. From a market groups perspective, the gains were spread across almost every category; consumer goods, business equipment and non-industrial supplies all gained while materials was modestly weaker. While the hurricane-effect clearly lessened in September, the Fed indicated the storm still shaved 0.25% from total output.
NAHB Housing Market Index Bounces Back in October: Despite broad-based concerns around a wide range of actual housing activity in recent months, the NAHB housing market index improved unexpectedly in October. The biggest percentage gain was registered by the present sales index but the index tracking sales expectations over the coming six months also notched a healthy improvement. Traffic of prospective buyers improved more modestly. Price appreciation has continued to outpace wage gains as inventory of available homes across the country remains tight. The rebound in homebuilder confidence was a positive surprise and could be welcome relief for a sector that has struggled in 2017 if it is a prescient predictor of a pick-up in near-term activity.