The Market Today

Housing Data Comes Up Short; Equities Firm Up As Bond Yields Rise

by Craig Dismuke, Dudley Carter


Housing Starts and Building Permits Both Come Up Well Short: Housing starts and building permits both fell more than expected in February and January’s gains were revised lower, continuing the general disappointment around housing activity. Total housing starts were expected to decline 1.6% in February but sank 8.7% instead. In offsetting fashion, January’s 18.6% gain was revised down to 1.7% but February 14% plunge was revised up to -5.5%. The single family series has been noisy to start the year, declining 17% in February after surging 19.2% in January. Single family starts are down 10.6% from a year ago and at their weakest level since May 2017. Multi-family starts rose 17.8% after a 7.1% pullback in January. Total housing starts are down 10% YoY and near the low end of a two-year range. All four regions saw weaker single family activity MoM while three of the four saw weaker overall activity


Building permits also disappointed in February with a 1.6% pullback, worse than the 0.9% easing expected. Single family permits were unchanged from January while multi-family permits fell 4.2%. The decline in overall permits was concentrated in the West as each of the other three regions registered modest monthly improvements. Total permit activity was 2% lower than in February 2018.


At 8 a.m. CT, the FHFA is expected to report home prices rose 0.4% in January while S&P CoreLogic may show a slightly smaller 0.3% gain. At 9 a.m. CT, the Richmond Fed Manufacturing Index is projected to continue this week’s disappointing run for regional Fed reports. The index is forecasted to have pulled back in March, but remain above worse levels from December and January. Also at 9 a.m., the Conference Board’s latest report on consumer confidence is expected to show a second month of healing and a four-month high for sentiment. The index dropped 16.2 points from October to a 16-month low in January, but subsequently recovered 9.7 points in February, its best single month since August 2015. Finally, at 2:05 p.m. CT, San Francisco Fed President Daly is scheduled to discuss her views on managing inflation in today’s environment.



Yesterday – Another Rate Rally: Last week’s rally kept its momentum Monday as the Treasury curve moved sharply lower for a third time in the last four sessions. The Fed kicked off the current downshift in yields last Wednesday by calling off its previous plans for two rate increases in 2019 amid slower domestic growth and continued concerns about the global economy. Reinforcing the Fed’s cautious tone on the global economy, weaker PMIs from Europe were responsible for an equally impressive move lower in yield last Friday. In the absence of a new catalyst, Monday’s rally was attributed to follow through of the fear tied to a possible global recession. One difference in Monday’s move was that the flight into Treasurys was led by shorter maturities and actually steepened the curve by 3.4 bps between 2s and 10s. Price action last Wednesday and Friday was led by longer maturities and had resulted in 1.4 bps and 0.8 bps of flattening, respectively. After tipping into an inversion on Friday, the 10-year note yield fell even further below the yield of a 3-month T-bill. The 2-, 3-, and 5-year yields all closed below the low end of the Fed Funds range (2.25%) while the 7- and 10-year yields ended underneath the 2.41% effective Fed Funds rate. Adding in Monday’s 7.5 bps decline, the 2-year yield (2.24%, lowest since March 2018) has dropped 22.7 bps in four sessions as market expectations for the Fed has repriced aggressively lower. Fed Funds futures are pricing in a 60% chance of an ease by September. Accounting for Monday’s 4.1 bps decline, the 10-year yield has dropped 21 bps in four sessions to 2.40%, a new low since 2017. Considering the calamity across the rates curve and all the headlines discussing a possible economic downturn, stocks have been relatively stable. The Dow rose 0.1% Monday while the S&P 500 dipped 0.1%, extending the year-to-date divergence between Treasury yields and stocks prices. The S&P 500 remains up 19% from its December low and less than 4.6% below its all-time high.


Overnight – Equities Firm Up as Bond Yields Rise: Global equities have continued to dismiss the bond market’s signaling a possible slowdown, with European and Asian indices firmer, U.S. equity futures up nearly 0.5%, and bond yields rising off yesterday’s low closes. Japan’s Nikkei jumped 2.2% Tuesday, its best day in six weeks, after sinking more than 3% on Monday, its poorest performance of the year. Chinese stocks dipped for a second day, however, as unsettled trade tensions with the U.S., a major culprit behind the concerns of a global slowdown, continue to call into question the CSI 300’s 27% rally so far this year. Europe’s Stoxx 600 was 0.5% higher will all 11 sectors stronger. A day after German business confidence topped estimates in March, consumer confidence dipped unexpectedly in April back near its lows since early 2017. Brexit uncertainty remains high with Parliament voting Monday night to take control of the Brexit process and call for a series of votes on Wednesday to test support for alternative plans. Equities’ overnight gains come after Treasurys rallied again Monday and the 10-year yield closed below the yield on the 3-month T-bill for a second day. Overnight, however, yields were up with the 10-year yield erasing all of yesterday’s decline. The 10-year yield was up 4.6 bps earlier to 2.44%, still hovering around the yield of a 3-month T-bill but back above the effective Fed Funds rate. The 2-year yield was up 5.2 bps at 2.29%.


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