The Market Today
Housing Data Continues to Look Soft, Despite Headline Gain for Housing Starts
by Craig Dismuke, Dudley Carter
Mortgage Applications Rose 1.6% WoW: Total mortgage applications rose last week for the first time in four weeks and just the second time in the last 10 weeks. A 3.7% improvement in refinancing activity added to a smaller 0.3% increase in purchase applications. The four-week average for the purchase applications index rose for two weeks in a row for the first time since June. However, the average remains near its lowest levels since late last year. The gain for the refinance index occurred even as the MBA reported its average 30-year mortgage rate ticked up from 4.84% to 4.88%, its highest level since 2011. On a four-week average basis, refinancings are at their lowest level of the cycle.
Housing Starts and Permits Were Mixed in August: Roles reversed in the August housing starts and building permits data, as total starts jumped an impressive 9.2% from July while building permits sank 5.7%. In July, it was permits that surprised to the high side of estimates and starts that missed big. The 9.2% MoM gain in total housing starts follows back-to-back monthly losses that had pushed activity to its slowest level in 10 months. The details showed an outsized 29.3% jump in multi-family projects drove most of the headline while single family activity rose a more modest 1.9%. Gains for multi-family were firm across all four geographic regions while the bounce for single family was concentrated in the West and South, the two regions that drive the most volume for new home sales.
In the building permits data, the 5.7% drop in total permit activity was the sharpest since February 2017 and the number of units planned was the weakest since May 2017. The disappointment was driven by losses in both single family and multi-family projects. Single family permits fell 6.1%, the largest one-month drop since early 2011, and was the result of weakness across all four regions. Multi-family permits fell in three of four. The pace for single family activity was the slowest since August while multi-family dropped for a fifth month in a row to its weakest pace since March 2016.
The housing data continues to look weak and, despite a generally positive uptrend for housing starts, the more leading permits data points to more potential struggles to come.
Yesterday – Big Moves in U.S. Assets as Trade Actions Prove Less Severe than What Could Have Been: The White House announced that tariffs on the next $200B of Chinese imports will take effect September 24 and threatened action against the remaining balance, should China hit back against certain sectors of the U.S. economy. Nonetheless, China responded with retaliatory tariffs against $60B of U.S. goods, also starting September 24. All of that occurred prior to the U.S. trading session, and still, stocks had their best day in three weeks and the Treasury curve climbed higher and steeper. Many pointed out that the actual actions taken were less severe than what had previously been threatened. The U.S. tariffs will be applied first at a 10% rate and increased to 25% on January 1, assuming no deal is made in the interim. The initial 5% and 10% rates chosen by China were also less than feared. The S&P 500 forged ahead with a 0.5% gain in response, which left the index less than 0.3% from a new all-time high. The Dow and Nasdaq both rose more than 0.7% with the Dow’s close at 26,247 marking its highest level since January 29. The Treasury curve ended higher and steeper, with the 2-year yield adding 2.1 bps to 2.80%, a new cycle high. The 5-year yield rose 5.5 bps to 2.94%, its highest level since 2008. The 10-year yield pushed up 6.8 bps to 3.06%, the highest since May 22. The 10-year yield jump was the seventh biggest in a single day so far for 2018 and the resultant steepening was the sixth strongest of 2018.
Overnight – Asian Shares Gained Despite the Additional Tariffs: Even in the face of yesterday’s tariff escalation, yesterday’s post-tariff push higher by U.S. equities moved across the Pacific and translated into more gains for risk assets in Asia and Europe overnight. Asian markets finished up with shares in China gaining over 1.3%. Improvements in Europe have been mixed across various countries but the Stoxx 600 had earlier ticked up into positive territory for the day earlier. U.S. futures have leveled off but held around break even following the solid gains in Tuesday’s trading. The U.S. announced a 10% tariff on $200B of Chinese imports, a rate that will move up to 25% on January 1. China responded with 5%-10% tariffs on $60B of American goods and a complaint to the WTO. Both sets of tariffs go into effect next week on the 24th. While equities showed sanguine swings after the announcement, global sovereign yields have hesitated to join in the risk-on sentiment and match yesterday’s move up in U.S. Treasury yields. After testing its highest level since May at 0.50%, the 10-year German Bund has rallied back. Treasury yields have closely tracked European yields up and down and up again, but are essentially unchanged for the day.
Home Builder Confidence Holds Steady in September: Instead of slipping 1 point as expected, the NAHB’s Home Builder index held steady at 67 in September. There were only modest changes in the underlying details, with slight improvement to indexes tracking current and expected sales and no movement in the index gauging prospective buyer traffic, which remained at its lowest level since last October. Geographically, the signs of stability were uneven. Sentiment gained only in the Northeast, which generally accounts for less than 10% total new home sales activity. Sentiment in the South, which accounts for just under two-thirds of new home sales, actually slipped to match its lowest level in a year. The NAHB’s Chief Economist said “…builders continue to report firm demand for housing, especially as millennials and other newcomers enter the market,” but noted “Housing affordability is becoming a challenge, as builders face overly burdensome regulations and rising material costs exacerbated by an escalating trade skirmish. Interest rates are also forecasted to keep rising.”