The Market Today
Markets Look for a Calm Close after Chaotic Week
by Craig Dismuke, Dudley Carter
Stable Single Family Activity Hidden Underneath the Multi-Family Noise: Multi-family weakness dragged housing starts down unexpectedly in July while permits bounced back more than expected. Overall housing starts slumped 4.0%, worse than the 0.2% gain expected, as a 16.2% drop in multi-family projects offset a modest 1.3% gain for single family activity. The gain for the single family sector was spread across three of four regions that offset a 3.9% decline in the South. Building permits, however, rebounded 8.4% after declining 5.2% in June, easily outpacing the 3.1% improvement expected. Single family interest rose for a third month and was 1.8% stronger than in June. The multi-family category recovered 21.8% after tumbling 16.4% the month before. Both series were modestly positive on a year-over-year basis but the trendline, through monthly ups and downs, has essentially been sideways for the last 18 months.
University of Michigan Expected to Show Slightly Softer Consumer Assessment: At 9 a.m. CT, the University of Michigan will release its preliminary August assessment of consumer confidence, which is expected to show a slightly weaker outlook. The index has been moving sideways over the last two and a half years, and an as-expected reading of 97.0 will keep the index roughly in line with its 12-month average. A strong consumer has taken on an increasingly important role as other sectors of the economy have become more suspect amid global softening in response to the trade tensions.
Yesterday – Yields Tumbled As Volatility Continued to Exhaust Investors: Markets were incredibly volatile Thursday as investors were overwhelmed by conflicting trade headlines, strong consumer indications from the retail sales report and Walmart’s earnings announcement, and an ECB official saying “significant” action needed to be taken in September. China sent yields and equities tumbling overnight with a statement that it would be forced to retaliate to planned U.S. tariffs that broke the agreement Presidents Trump and Xi at the June G-20. Sentiment shifted positively, however, after a subsequent statement from China sounded more open to a negotiated deal and Walmart’s earnings and forward guidance surprised to the upside of expectations. The positive consumer implications of Walmart’s announcement sent the company’s stock surging more than 6%, and was echoed by stellar retail sales report for July. The resultant move up in yield proved short-lived, however, and Treasury yields reversed lower as European yields tumbled on dovish ECB remarks. A top ECB official told the WSJ that, “It’s important that we come up with a significant and impactful policy package in September,” adding, “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.” Treasury yields followed the subsequent downshift in European yields, and seemingly hit an air pocket just after lunch. After spiking as low as 1.47%, the 10-year yield settled down 5.2 bps at 1.53%. The 2-year yield fell 8.1 bps to close at 1.48%. Through all the noise, the S&P 500 closed 0.2% higher on the back of greater-than-1% gains for consumer staples (Walmart), real estate, and utilities.
Overnight – Market Nerves Calm Friday to Close Out Turbulent Week: Treasury yields rose overnight and equity futures snapped back in the final day of what has been an incredibly volatile week for global markets. While Friday’s news cycle has been a crawl comparatively, just a couple of North Korean missiles fired into the East Sea and President Trump saying the EU treats the U.S. worse than China, market headlines have run the gamut this week. In addition to a key portion of the U.S. Treasury curve inverting Wednesday for the first time since 2007, investors have been forced to digest news on geopolitical turmoil, global growth concerns, emerging market worries, trade uncertainty, ECB stimulus hopes, Fed caution, and some solid U.S. economic data. The curve inversion and incessant influx of meaningful headlines has created pain for equities and pushed U.S. yields to multi-year, if not all-time lows. The U.S. 30-year bond, however, rose 2.5 bps overnight from its all-time record low, but continued to hover just under 2.00%. The 10-year added 1.3 bps to 1.54%, pushing off its lowest level in three years. Stocks closed mostly higher across Asia and activity firmed up even more in Europe, lifting the Stoxx 600 1.0% off a six-month low. U.S. equity futures were around 1.0% stronger just after 7 a.m. CT. In other markets, the euro touched its weakest level against the Dollar in more than two years and gold eased back from a six-year high.
Manufacturing Outlook Remains Weak as Home Builders Report Stronger Confidence: Lost in Thursday’s market volatility, July’s industrial production report showed continued stress on U.S. manufacturing, while the NAHB signaled home builder confidence edged higher in August as mortgage rates declined. Data from the Fed showed industrial production slipped 0.2% last month as manufacturing output contracted 0.4%. Mining output also declined while utilities rose on stronger electricity, typically reflective of weather-related changes in usage. The worse-than-expected results were at least partially driven by positive revisions to the prior month’s data, although manufacturing momentum continues to look weak overall with July’s disappointment shared across a significant number of underlying product categories. Elsewhere, the NAHB’s housing market index rose 1 point to 66 on an improvement in current sales indications and better prospective buyer traffic. Sales expectations over the next six months cooled. The NAHB’s chief economist said, “While 30-year mortgage rates have dropped from 4.1% down to 3.6% during the past four months, we have not seen an equivalent higher pace of building activity because the rate declines occurred due to economic uncertainty stemming largely from growing trade concerns.”
Bullard’s Not Buying Calls from Some for Inter-Meeting Action: St. Louis Fed President Bullard addressed this week’s curve inversion that reinvigorated worries about a possible recession and sparked a bout of sharp volatility across U.S. markets. Bullard said “Any inversion that is going to send a bearish signal for the U.S. economy would have to be sustained over a period of time, so we are going to have to wait and see on that.” On the sell-off that has rocked equities this week, “It’s a big selloff, but come on, the market’s way up this year and, you know, even if nothing else was going on, you might have expected some repricing there.” The U.S. economic fundamentals are still pretty good but “We are in the middle of a global slowdown. We are just going to have to assess how this will affect the U.S. economy,” Bullard noted. Further dismissing the need for inter-meeting action, Bullard believes “the timing is never critical on these things. A couple of weeks one way or another probably doesn’t matter. What matters is that you are in the right zone for interest rates and that you are reacting appropriately to incoming data.” Separately, another dovish official, Kashkari from the Minneapolis Fed said, “I’m leaning towards the camp of yes, we need to give more stimulus to the economy, more support.”