The Market Today
Housing Sector Continues to Stand Out as Starts and Permits Blow Away Expectations
by Craig Dismuke, Dudley Carter
Monitoring the Virus Headlines: Most of the virus updates were upbeat on Monday as positive trends in some key U.S. states kept the recent downward trajectory of new infections intact. U.S. cases rose 0.8% compared to last week’s 1.0% average pace as California and Florida both posted below-average figures. The 2,760 new cases Governor Desantis said were identified on Sunday was the smallest addition to the total since June. New York’s governor said gyms could open next Monday at 33% capacity as long as masks were worn. On stimulus, Senator McConnell said he is “still hoping” negotiators can reach a compromise on a stimulus agreement while Chief of Staff Meadows said he’s not betting on Democrats initiating a resumption of talks.
Housing Sector Continues to Stand Out as Starts and Permits Blow Away Expectations: While the risks seemed to be tilted to the high-side of expectations considering trends in recent housing data, total housing starts and building permits blew away expectations in July. Total housing starts rocketed 22.6% higher while building permits spiked 18.8%, crushing expectations for respective gains of 5.0% and 5.4%. Adding in positive prior revisions, both housing starts and building permits rose to annualized pace just shy of 1.5 million units, some of their strongest readings of the cycle. Starts have recovered to within 7.5% of their pre-pandemic pace while permits closed the gap to 2.6%. In the details, the volatile multi-family sector was exceptionally strong, as starts jumped 58% while permits gained 23%. However, the single family series also posted strong results. Starts of single family homes jumped 8.2% while permits shot 17% higher pointing to more strength ahead. The housing sector continues to be an upside outlier amid broader pandemic destruction and this morning’s data should keep estimates for a mathematical 3Q growth rebound firm.
Stocks Climbed Back Towards Records: The major U.S. equity indices finished with mixed results on Monday as rising tech stocks boosted the Nasdaq and S&P 500 while losses for financials and industrials weighed on the more concentrated Dow Jones. The Nasdaq jumped 1% to start the week, setting a new all-time for the first time since August 6. The S&P 500 benefited from tech’s gain but was led by a more-than-1.2% jump in consumer discretionary stocks. Auto companies jumped nearly 4% and home improvement leaders Home Depot and Lowe’s gained before their earnings announcements. The latest update from the NAHB released earlier in the day showed home builder confidence matched a 35-year high in August. The S&P 500 as a whole gained 0.3% to 3,383.61, closing less than 3 points off February’s all-time high. The Dow lagged behind, slipping 0.3% on the day.
Treasury Yields Trimmed an Overnight Decline, But Longer Yields Finish Lower: As equities kept their momentum throughout the day, Treasury yields trimmed an overnight decline that had shaved off some of last week’s climb which was spurred by stimulus hopes and record Treasury supply. After shedding as many as 4.4 bps earlier in the day, the 10-year yield closed down 2.1 bps at 0.688%. The 2-year yield fully erased its decline, finishing up 0.6 bps to 0.151%.
S&P 500 May Open at a Record after Strong Earnings: The S&P 500 looks set to open around February’s record high as strong earnings from Home Depot and Walmart provided a positive force to the crosscurrent of developments currently affecting investor sentiment. Home Depot’s sales surged 23.4% in 2Q on a same-store basis compared with expectations for a 11.4% gain, results the company’s CEO called “record-breaking” and credited to Americans taking up DIY projects as government restrictions kept them locked at home. The dynamics were consistent with messaging from other indicators, such as resilient retail sales of building materials and soaring lumber prices amid a shortage. Walmart shares were also higher in pre-market trading as revenue and earnings beat expectations on strong in-store transactions and a 97% surge in online sales.
Treasury Yields Hold Lower Amid Crosscurrents: The results had nudged Dow and S&P 500 futures up more than 0.1% just after 7 a.m. CT. Further support came from a positive reversal in Europe that lifted the Stoxx 600 by 0.2% after a weaker start following mixed trading in Asia. South Korea’s KOSPI was an outlier on Tuesday, tumbling 2.5% as the country’s government announced new temporary restrictions to curb the biggest jump in infections since March. There are growing concerns of a new wave of infections in some countries, including South Korea and several in Europe, that had previously slowed their epidemics. China’s CSI 300 finished essentially unchanged despite new U.S. restrictions on Huawei adding to already rising tensions between the world’s two largest economies. Despite equities’ gains, Treasury yields were lower by less than 1 bps around 7:20 a.m. CT.
Mortgage Delinquencies Spiked in 2Q, a Blemish on the Boom in Other Housing Data: While the monthly housing data have recovered sharply since April, a quarterly survey from the Mortgage Bankers Association of the status of outstanding mortgages showed the surprisingly strong rebound doesn’t fully tell the housing market’s story. A spike in the number of homeowners with loans in forbearance led to a record jump in mortgage delinquencies in the second quarter. As COVID-19 rocked the U.S. economy and unemployment jumped to its highest level since the Great Depression, millions of Americans (~4.2 million as of June 30) sought forbearance as they fell behind on payments. Overall delinquencies nearly doubled from 4.36% to 8.22%, with FHA loans leading deterioration across all loan types. More than 15% of outstanding FHA mortgages, a popular loan product for first-time home buyers, were delinquent at the end of the quarter as historic labor market destruction hit lower-income workers inequitably hard; 6.68% of conventional mortgages were delinquent. The number of loans between 60 and 90 days past due rose to 2.15%, the highest in records back to 1979, while those delinquent for at least 90 days increased to 3.72%, the highest since 2010. For now, however, government actions and programs to prevent evictions led to a small decline in foreclosures, from 0.73% to 0.68%. Still, the data portend the dire outcomes that could occur if the downturn is prolonged or more assistance is not provided to consumers.