The Market Today

Markets Reflect Optimism with Stocks Higher and Treasury Yields Breaking Above Recent Ranges

by Craig Dismuke, Dudley Carter


Home Prices Amidst Run of Weaker Housing Data: Today’s economic calendar brings the May FHFA Home Price Index at 8:00 a.m. CT, which is expected to show a 0.3% MoM increase. The Index has shown the weakest back-to-back month of price gains (+0.2% and +0.1%) since 2011.  However, that whose reports were preceded by two unusually strong months.  Going forward, given weaker sales data recently, it will be important to watch the price action.  Highlighting the recent weakness in housing are comments from the WSJ this morning, “U.S. home sales are slumping, a potentially worrying trend for a key sector of the economy. Housing contributes about 15% to 18% of gross domestic product and drives home-improvement spending, construction and mortgage lending. For now, the housing slowdown is a blip in an otherwise booming stretch for GDP. … Longer term, a hot economy could compound problems: in this case with rising interest rates and spiraling construction costs. More entry-level buyers will end up priced out of the market.”


PMIs Expected to Show Slight Pullback from Strong Spring: At 8:45 a.m., the Markit manufacturing, services, and composite indices for July are expected to show a slight pullback after two very strong months.  Globally, manufacturing PMIs were on quite an upswing coming into 2018 but have since cooled in most regions (see Chart of the Day).


Continued Strength in Capex Plans?:  At 9:00 a.m., the Richmond Fed Manufacturing Activity index is also expected to pullback from a strong May report.  As one indicator of future capex plans, the index has helped boost expectations for business investment in coming quarters.



Yesterday – Long Yields Broke Higher: Bond yields broke higher to start the week as several price-bearish factors weighed on U.S. Treasury yields. The long end of the curve led the sell-off as the 30-year yield added 6.5 bps to 3.09%, its highest yield since June 12. The 10-year yield jumped 6.1 bps to 2.95%. Adding in last Friday’s increase, the 10-year yield has added 11.7 bps marking the most in two consecutive days since February 6-7. Overnight reports about the BoJ discussing tweaks to its yield curve control policy had earlier pushed Japanese yields up by the most since August 2016. Reports of a benchmark senior issuance from Berkshire Hathaway was cited by traders as adding to the upward pressure on yields. In addition, momentum may have played a part considering how tight of a range yields had been in. Over the last four weeks (since June 25), the 10-year yield had traded within a 9 basis point range. With the 2-year yield up more modestly, the combined curve steepening over the last two days was the second largest of 2018. The 2s10s spread closed at 32.1 bps, the most since June 29. Higher rates and a steeper curve pushed financials to the top of the major equity indices. The S&P 500’s financial sector gained 1.3% as the broader index managed a more modest 0.2% gain. The index’s tech sector closed in a distant second, but the 0.5% daily gain was enough for a new all-time high.


Overnight – Risk-on as China Moves to Bolster Growth, German Data Shows Manufacturing Rebound: Chinese officials announced that the government will increase spending on infrastructure projects, among others things, boosting Chinese stocks 1.6% (CSI 300) and lifting the risk appetite globally.  Adding to the optimism, Markit’s PMI report on German manufacturing jumped from 55.9 to 57.3 lifting the composite index (a broad indicator of economic activity) to a 5-month high.  The positive news comes as investors feared the recent slowdown in activity in the region, and that perhaps the trade uncertainty was weighing on Eurozone growth.  Eurozone stocks are up 1.0% coming into the U.S. trading day led by the German DAX which is up 1.5%.  S&P futures are up 0.6%.  The risk-on trade has helped push sovereign yields higher.  Germany’s 10-year bund is up 3 more bps to 0.41% while the 10-year Treasury is up another 1.1 bps to 2.97%.  



Existing Home Sales Dropped Unexpectedly as Supply/Demand Tensions Persisted: Existing home sales fell 0.6% in June, the third monthly decline and disappointing expectations for a modest 0.2% uptick. The 5.38MM-unit pace matched the 2018 low and was near the bottom of the range over the last two years. The current three-month losing streak, in which sales are down 3.9%, marks the longest stretch since a six-month run that ended in January 2014. That period, plagued by mortgage rates surging in the wake of the infamous taper tantrum, saw total sales drop 9.7%. The details of the current report showed mixed activity across the four major regions. Sales in the Northeast (smallest by volume) were up 5.9% and activity in the Midwest (second by volume) inched 0.8% higher. On the softer side, contract closings dropped 2.6% in the West (third by volume) and 2.2% in the South (largest by volume). Sales in the South were down for a fourth month in a row, the longest downtrend since the 16-month drop that wrapped up in April 2008. The disappointment seems to remain supply driven. The median days a home was listed for sale, reflective of buyer interest, was a brisk 26 days for a third month. That kept pressure on prices with both the median ($276.9k) and average ($314.9k) sales price reaching new record highs. However, there was a silver lining for supply. Inventories grew on a YoY basis for the first time since May 2015 which pushed months’ supply up to 4.3 months, matching the highest since September 2016.

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