The Market Today

Mixed September News Includes a Surprise Record for Goods Trade Deficit Amid Export Slump


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Weekly Mortgage Applications: The Mortgage Bankers Association’s 30-year mortgage rate rose for a fifth week last week from 3.23% to 3.30%, the highest since the first of April. Not surprisingly, refinancing activity eased for a fifth week to the lowest level since January 2020. The 1.6% drop last week increased the decline over those five weeks to 18.4% and left the index 42% below a late-January peak. Nonetheless, overall mortgage applications inched up 0.3% as purchase applications recovered 3.5% following a 4.9% decline. Purchase applications are down less than 3.0% over the five-week period in which rates rose from 3.03% to 3.30% and are down 20.7% from a January peak. Like most housing data, purchase applications are below stronger levels from earlier in the pandemic but remain above pre-pandemic readings (see Chart of the Day).

Mixed News in Several September Reports with Mixed Implications for 3Q GDP: The Advance Goods Trade Balance showed the goods deficit rose from -$88.2b to -$96.3b, well past the -$88.3b expected to the widest level ever recorded. While a stimulus-backed surge in imports has been primarily responsible for widening deficits since early 2020, a sharp decline in exports drove September’s results. Imports rose another 0.5% to $238.4b, but exports tumbled 4.7% to $142.2b, the sharpest decline for exports since April 2020. Consumer goods exports improved but weakness was widespread across other categories, with industrial supplies and capital goods seeing the sharpest declines. The small gain for overall imports was the net effect of mixed changes, including higher capital goods purchases and lower auto-related inflows. The $25.9b of auto-related imports was the smallest since June 2020, highlighting the persistence of the supply challenges plaguing the sector.

September’s inventory data was mixed. Wholesale inventories rose 1.1%, slightly better than the 1.0% gain expected, while retail inventories declined 0.2%, missing expectations for a modest 0.2% gain. Auto-related inventories fell 2.4%, an eighth decline in the last nine months, to $147.9b, the lowest level since May 2012.

The durable goods orders report was more encouraging. Total durable goods orders slipped 0.4% in the preliminary estimate, less than the 1.1% decline expected. Orders of private aircrafts and parts declined 28% while orders of motor vehicles and parts fell 2.9%. Stripping out those drags, core durable goods orders rose 0.4% as expected. Focusing in on categories that comprise business equipment investment, an area of strength throughout the recovery, activity topped expectations even with slight negative revisions to August. Core capital goods orders rose 0.8% while shipments jumped 1.4%, both exceeding 0.5% expected gains.


OTHER ECONOMIC NEWS

New Home Sales Confirm Housing Transactions Picked Up in September: New home sales surged 14.0% in September to an annualized pace of 800k units, beating expectations for 756k in unit sales (+2.2%) with the best month for activity since March. On both a seasonally-adjusted and unadjusted basis, the monthly increase was the strongest for the month of September since 1986. Aiding the size of the increase, cumulative sales over the prior three months were revised down 57k. Although sales remained depressed relative to stronger levels throughout most of the pandemic, September’s pace towered over January 2020’s pace of 756k which had been the best month since 2007. Regionally, sales in the Midwest softened for a third month while activity climbed sharply across the other three regions. While absolute inventory levels were flat from August, the stronger pace tightened the months’ supply metric to 5.7 months. The median price rose from $401.5k to $408.8k but the annual rate of increase cooled from 23.3%, the brisket pace since 1987, to a still rapid 18.7%. After a period of slowing activity, the latest data show both new and existing home sales perked up at the end of the third quarter.

Consumer Confidence Recovers in October Despite Expectations for Higher Inflation and Interest Rates: The Conference Board’s consumer confidence index rose 4.0 points to 113.8, defying expectations for a fourth monthly decline to 108. Even with the increase, confidence unwound only a portion of the 19.1-pt decline from June to September and remains at its second weakest level since February. Nonetheless, the surprise improvement was supported by a gain in both the current assessment and future expectations. The present situation index recovered as assessments of business conditions and employment normalized; the decline in pessimism was larger than the decline in optimism. The recovery for expectations was driven by improved outlooks for hiring and income growth which led to an increase in plans to make major purchases. Notably, however, near-term inflation expectations also rose, hitting their highest level since 2008, and the share of consumers expecting rates to be higher a year from now was the largest since January 2019.

Another Fed Report Signals Tension Between Supply and Demand: The Richmond Fed’s Manufacturing Index recovered more than expected in October, halving a 30-point drop from July to September. The headline index jumped from -3, the lowest level since May 2020, to 12, the second weakest reading since July 2020. Many of the details were reminiscent of Monday’s report from the Dallas Fed indicating demand remained solid but supply remained constrained, leading to rising prices and wages. New orders rose but shipments declined as more supplier deliveries were delayed, leading to an increase in orders backlogs and dropping raw materials inventories back near record-low levels. Employment remained strong and wage increases remained prevalent despite a second monthly pullback. While forward-looking labor market indicators remained solid, other details offered little evidence of expectations for supply constraints to ease in the near term. Notably, current and future inflation indicators held at historically high levels.


TRADING ACTIVITY

Stocks Hover at Records Amid Earnings; Yield Curve Flattens: U.S. equities didn’t venture far from opening levels once all was said and done Tuesday while an overnight flattening of the Treasury curve persisted for the duration. The Dow inched up just 0.04% while the S&P 500 rose 0.2%, both closing near session lows but able to cling to positive territory for another pair of records. Most sectors closed higher amid an influx of earnings. Energy led and industrials lagged, with tech shares sticking near the middle of the pack ahead of post-close earnings announcements from Alphabet, Twitter, and Microsoft. The Nasdaq drifted back from an earlier peak to close less than 0.1% higher. Oil prices rose back near multi-year highs and market-based inflation expectations extended their recent climb. Five-year inflation expectations rose 3.6 bps to 2.98%, a high in data since 2002, while 10-year inflation expectations added 2.6 bps to 2.69%, a high since May 2006. Five-year Treasury yields rose 0.3 bps to 1.18% while 10-year Treasury yields dipped 2.3 bps to 1.61%, meaning real yields fell even further. The 2-year yield rose 0.4 bps to 0.44% despite a strong $60 billion auction, solidifying conviction around the current higher range.

The Treasury curve continued to flatten overnight as longer yields declined alongside oil prices and equities checked up amid earnings. The loss of momentum for global stock indexes comes with U.S. equities at record levels and many other major world indexes at multi-month highs. Nasdaq futures fluctuated around unchanged on the day in spite of solid tech earnings after the bell on Tuesday that lifted shares of Alphabet, Microsoft, and Twitter in pre-market trading. The S&P 500 and Dow were little changed but did bounce from session lows after Coca-Cola and McDonald’s posted solid results that beat expectations. At 6:50 a.m. CT, U.S. WTI was down 1.2% around $83.60 per barrel and the 10-year Treasury yield had declined 1.9 bps to 1.59%, an eight-day low. The 2-year yield, however, was 1.8 bps higher to 0.49%, a new high since March 2020. The spread between the 2-year and 10-year notes tightened to below 110 bps, the lowest since September 22.


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