The Market Today

Markets Unnerved by Escalation of Trade Spat Between U.S. and China

by Craig Dismuke, Dudley Carter


New Construction Activity So Far Unfazed by Higher Mortgage Rates: Housing starts rose more than expected in May, up 5.0% (exp. +1.9%), as activity in the Midwest skyrocketed.  New home starts rose 62% MoM in the Midwest while they fell in the South (-0.9%), the West (-4.1%), and the Northeast (-15.0%).  Back at the national level, starts rose at a 1.35 million annualized rate, the best pace since the housing correction began.  Single family starts rose 3.9% and multi-family rose 7.5%.  However, new permits filed for construction fell for a second month, down 4.6% after a 0.9% drop in April.  The drop in new permits was primarily the result of weakness in the South and the West while new permits in the Northeast jumped 42.1% and 7.2% in the Midwest.  Despite the May weakness for building permits, they remain up 8.3% YoY while new starts are up a stellar 17.8% YoY – despite a 60+ bps increase in mortgage rates over the past year.



Yesterday – Oil Gains Limited Stocks’ Losses, Treasury Curve Held Steady: After tumbling at the open, U.S. stocks recovered steadily throughout Monday’s session to close mixed for the day. The Dow ended down 0.4% after falling more than 1% out of the gate. The S&P 500 slipped 0.2% while the Nasdaq made it back to even; both were down more than 0.8% in the first fifteen minutes of trading. Despite persistent drags from telecommunication and consumer staples companies, the intraday recovery was supported by positive reversals in several other sectors. Energy companies led the S&P 500 with an outsized gain of 1.1% on the back of a bounce in oil prices. Crude prices had slumped overnight Sunday to add to Friday’s sharp declines but turned higher to close near their daily peaks. U.S. WTI finished up more than 1% following reports OPEC was considering a smaller supply increase than was previously floated by several major OPEC players. Treasury yields, which had moved lower overnight, moved back up and the entire curve was less than 1 bp changed at the end of trading.


Overnight – China Says U.S. Initiated Trade War after U.S. Considers Additional Tariffs: Rhetoric around trade was ratcheted up Monday after U.S. markets closed and has investors on edge in Tuesday’s global trading. The U.S. Senate passed a bill blocking the White House from removing restrictions on China’s ZTE, the White House said it was looking at 10% tariffs on $200 billion of additional Chinese imports, and China responded by saying it would fight back to protect its interests. China’s CSI 300 plunged 3.5%, its biggest loss since February 9 and second steepest since February 2016. Europe’s Stoxx 600 was down 1.0% and U.S. futures had sold off. Earlier, Dow futures were leading losses with its 370-pt drop (1.5%) as the S&P 500 (-1.0%) and Nasdaq (-1.4%) traded close behind. Sovereign debts found favor with investors, as yields around the globe ticked lower (prices higher). Looking at 10-year note yields, Germany’s was down 3.8 bps to 0.36% while the U.K.’s fell 4.9 bps to 1.27%. The 10-year U.S. Treasury dropped 4.8 bps to 2.87%, its lowest since May. With the 2-year yield down just 3.5 bps, the spread between the two tightened to a new cycle-low of 35.3 bps. Currencies were also caught up in the flight to quality, with the Japanese Yen and U.S. Dollar well bid. Against the offshore Chinese Yuan, the Dollar was stronger by 0.5%.



First Round of FedSpeak Proved Uneventful: Monday’s potentially potent Fed speeches came and went without shedding much new light on monetary policy. Nothing from outgoing NY Fed President Bill Dudley made the news wires and his successor only briefly praised the economy at a conference on bank culture. In his first day as head of the NY Fed, John Williams echoed comments from Chair Powell’s press conference, saying the U.S. economy is in “great shape”. He added, “As a policy maker, solid growth, a strong labor market, and inflation near our target are all exactly what I want to see.” In a separate appearance, Bostic from the Atlanta Fed cautioned against getting too excited about what is set to be a stellar 2Q for the economy, saying he expects some driving forces are likely transitory. However, he is still okay with the Fed moving closer to neutral (2.25% to 3%, according to his analysis) and said he hasn’t changed his support for just one more rate increase this year. Assuming no significant changes in his outlook, that puts him in the pool of potential dissenters later this year should the Fed attempt to match its updated median projection for four total hikes in 2018. And he continued to focus on a flattening yield curve, saying it “is not something we can afford to be too cavalier with and think this time is different.”


Home Builders Less Confident as Costs of Construction Remain High: The NAHB’s home builder confidence index cooled unexpectedly in June, slipping back to 68 to match its lowest level of 2018. While disappointing, the index has oscillated around 70 for the last several months which continues to be one of the strongest levels of the cycle. Each of the here key metrics saw a 1-pt moderation; current single family sales (75), single family sales over the next six months (76, lowest since September), and prospective buyer traffic (50, lowest since October). Pricing headwinds from higher rates, low housing supply, and new construction input costs have yet to subside. Officials from the NAHB said “Builders are optimistic about housing market conditions as consumer demand continues to grow, …Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead.” But, “builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017. …builders do need access to lumber and other construction materials at reasonable costs in order to provide homes at competitive price points, particularly for the entry-level market where inventory is most needed.”


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