The Market Today

Today’s Calendar – Housing Starts and Building Permits Remain Volatile, Jump Big in October:  Housing starts rose 13.7% in October, a sizeable surprise to the upside, to 1.29 million units.  This marks the second highest level of this housing cycle, only surpassed by October 2016.  The increase was driven by a solid month for single family starts, up 5.3%, but an even more impressive 36.8% increase for multi-family starts.  After a year of weaker multi-family starts, they seem to have all come back in one month.  Of the 155k increase in starts, 43k of those came from the Northeast, 33k from the Midwest, 91k from the South, and the West saw starts fall 12k.  Building permits also rose a solid 5.9%, again boosted by a good 1.9% increase in single family permits and an even more impressive 13.9% increase in multi-family.  It is no wonder that homebuilder confidence jumped so strongly in yesterday’s NAHB report.  This will be yet another positive for the 4Q GDP tally.

 

At 9:00 a.m. CT, the 3Q MBA Mortgage Delinquency report is scheduled for release.  At 10:00 a.m., the Kansas City Fed’s Manufacturing activity index is expected to pull back from 23 to 21, remaining at a strong level.  The markets are more likely to be focused on developments on the Senate tax plan.

 

House Passes Very Different Tax Plan Than Senate Plan:  As mentioned below, the market had a fairly muted response to the House passing its tax reform plan yesterday, and for good reason.  The Senate and House versions are materially different, particularly with the Senate plan now repealing the individual mandate from the ACA.  As such, there are likely to be some major obstacles to reconciling these two plans even if Senate Republicans are able to circle their wagons and get 50+ votes.  The baseline expectation from several prominent Street research groups remains a low probability of passage in 2017.

 

Overnight Activity – Equities Hold, Yields Mixed in Relatively Quiet Overnight Session: Global equities are looking to end the week with positive back-to-back sessions but losses in the first three days have most non-U.S. indices negative on net. Asian markets remained firm and despite some positive results for various European national bourses, the wide-reaching Stoxx 600 is hovering around unchanged. U.S. futures reflect a similar steadiness with contracts on the big three mixed but less than 0.1% changed in either direction. Yields on Treasurys and European sovereigns tracked closely overnight before diverging following a speech from ECB’s Draghi. Reported snippets from Draghi’s speech in Frankfurt continued to signal a positivity towards economic activity in the Eurozone but reflect a sense of prudence towards the self-sustainability of inflation trends. After the remarks, European yields move to their lows of the day while Treasury yields mostly held. The 10-year yield is lower by 0.7 bps at 2.37% after yesterday’s big move higher. The 2-year yield, however, rose 1.1 bps to 1.72%, a new higher for the cycle. Despite the weekly volatility on the long end, the 2-year yield has generally continued its march higher as markets anticipate a probable Fed hike in December. If the higher shorter yields hold through to the close, the 2-year yield will have risen in 10 of November’s 13 sessions.

 

Yesterday’s Trading Activity – Stocks Rebound After Two Days of Disappointment Supporting a Bounce Back in Treasury Yields: After two days of disappointing results, the “buy-the-dip” trade finally worked and U.S. stocks more than recouped two days of losses. All three major indices rallied sharply to their highest levels of the week with the Dow and S&P both gaining 0.8% in their best day since September 11. The Nasdaq outperformed the with a 1.3% gain representing its biggest daily gain since October 27 and its seventh best daily result of 2017. The back-to-back days of equity volatility was one of the strongest two-day stretches for 2017 in what has been a historically subdued year of trading. Those gains materialized despite shares of energy companies continuing to drag on the broader indices. Crude prices fell for a third day in their longest losing streak since early October. Although the House’s passage of the tax bill was likely a shot in the arm for the indices, the positive momentum was already well cemented in the day’s trading patterns. Treasury yields had risen overnight but longer yields actually pulled back from their daily highs even as stocks began their trek higher. After moving sideways for most of the day, however, those yields jumped in the afternoon to close at their daily peak. After tightening 10.5 bps over the last three sessions, the spread between the 2-year and 10-year yields widened 2.8 bps. The 2-year yield rose 2.5 bps to 1.71% while the 10-year yield climbed 5.3 bps to 2.38%.

 

Industrial Production Topped Estimates on Big Bounce in Manufacturing: Industrial production was much stronger than expected in October, rising 0.9% in its best month since April. The strong results were thanks in large part to manufacturing output more than doubling economists’ estimates. Manufacturing output rose 1.3% in October (versus an expected 0.6% improvement) which marked the strongest monthly increase in 8 years. While there is likely some positive payback from storm-related disruptions in previous months, the big bounce starts the 4Q data on the right foot. In addition to a potentially transitory effect form the storms, good foreign demand, strong business investment in equipment, and a short-term renaissance in auto sales should provide more sustainable support for manufacturing.