The Market Today
Housing Data Continues String of Disappointing Economic Reports
by Craig Dismuke, Dudley Carter
Today’s Calendar – The Economic Hits Keep Coming: May’s housing starts and building permits data continued the recent run of disappointing data. Despite 30-year mortgage rates dropping from 4.25% at the beginning of the year to 3.95% in the May report, the trends remain decidedly negative for the new construction metrics (FN 30Y Commitment Rate). Housing starts dropped 5.5% to their lowest level of the year versus an expected increase of 4.1%. Multi-family starts fell 9.7% and are now at their second lowest level since 2013. Total starts are now down 17.8% since last October. Building permits were expected to rise 1.7% in May but dropped 4.9%. Single family permits fell 1.9% and multi-family permits fell 10.4%. Total building permits are now down 10.0% since the beginning of the year. The weak economic data continues.
At 9:00 a.m. CT, the May Labor Market Conditions index is expected to weaken fractionally from 3.5 to 3.0. More importantly, the University of Michigan’s Consumer Confidence report will also be released and is projected to pull back fractionally. Perhaps more important will be the reading on consumer inflation expectations. Longer term inflation expectations are currently at 2.4%, the second lowest level in the data’s 37-year history.
Overnight Activity – Bank of Japan Leaves Policy Unchanged, Upgrades Outlook: Global equities are attempting to end a volatile week on a positive note as sovereign yields have continued to edge higher, oil prices recovered, and the Yen weakened to a two-week low. The Yen weakened after the BoJ opted to leave monetary policy unchanged – an overnight deposit rate of -0.1% and a 10-year JGB yield peg of 0.00% – but indicated a more optimistic economic outlook, premised on stronger domestic consumption and an improving global economy. However, Governor Kuroda cautioned against speculating on a potential path for exiting accommodation, saying there remains “some distance to achieving 2 percent inflation.” Sovereign yields are rising across most of Europe. The one exception – Greece – where news of a short-term debt fix alleviated fears of an imminent July cash crisis and sent yields to a one-month low. Creditors agreed Thursday to unlock E8.5B of new funding. While the IMF agreed in principle to the arrangement, it withheld any new funds until EU creditors agree to some level of debt relief; a condition that has so far proved to be unworkable. After this morning’s housing data, equity futures were flat, the 2-year Treasury yield was down 2.0 bps with the 10-year yield off 0.5 bps, and the Dollar slid from a two-week high.
Yesterday’s Trading Activity – Stocks Fall as the Dollar Rebounds with Treasury Yields: Thursday morning trends were intact when markets closed as yields rebounded from Wednesday’s rally, the Dollar bounced back, and tech stocks helped drag the major indices lower. Yields started the day higher after the Bank of England’s decision to hold rates unchanged was backed by a vote count of five to three. The three dissents caught markets off guard, eliciting a sharp sell-off in European sovereign debts. The 2-year yield rose 2 bps to 1.35% while the 5-year yield added 4.8 bps to 1.76% and the 10-year yield increased 3.8 bps to 2.16%. The Dollar was lifted by the rebound in Treasury yields and gained against every major currency. The energy sector also weighed on equities as crude prices fell another 1.1%, closing below $45 per barrel in back-to-back sessions for the first time since mid-November. Crude prices are down 14% since their most recent peak on May 23 and have completely erased all gains since OPEC announced an extension of production cuts last November.
The Problem with the Fed’s Wage Growth Assumption: As we highlighted in yesterday’s special Fed policy/interest rate webinar, one of the big problems for the FOMC’s current path is the continued weakness in wage growth. The FOMC continues to count on wage growth accelerating because the unemployment rate is so low. However, the evidence thus far has not proven to warrant that faith. According to a Greg Ip article in the WSJ entitled Lousy Pay Raise? That May Be as Good as It Gets, “First, the bad: Unemployment may be at a 16-year low and the economic expansion may be third-longest on record, yet wage growth is miserable, clocking in between 2.5% and 3% for the past year. When unemployment was this low in the late 1990s and the mid-2000s, wages grew 4%. … Now, the worse: If a labor market this tight can’t generate better pay, quite possibly it never will. In Japan and Germany, where unemployment is plumbing generation lows, wages are moribund. This suggests the problem transcends borders: Minimal corporate pricing power, lackluster productivity growth and an aging workforce have all undercut employers’ ability to pay better.”