The Market Today
Multi-Family Boosts Starts and Permits, Fed Kicks Off Two-Day Meeting
by Craig Dismuke, Dudley Carter
Strong Headline Starts and Permits Hide Another Disappointment for Single Family Activity: At the headline, November’s housing starts and building permits looked much stronger than expected. Housing starts were expected to be flat from October but rose 3.2% while permits rose 5% and easily beat the modest 0.4% decline economists had penciled in. However, negative revisions to starts in October and big swings in multi-family accounted for the stronger-than-expected results. Multi-family starts were up 22.4%, the best month since January, while single family starts dropped 4.6% to their slowest annual pace in 22 months. Big declines in three of the four regions overshadowed a solid 6.8% recovery in the South. On a year-over-year basis, total housing starts are down 2%; single family starts are off 12.7% from a year ago to offset a 23.3% gain for multi-family activity.
The story was similar for data one step earlier in the new housing construction process. A 14.8% increase in multi-family permits, the largest gain since March, made up for essentially no change in single family activity. Single family permits were up just 0.1% as, again, losses in three of the four regions drowned out a modest 3% increase in activity in the South. Total building permits are 2.9% higher than in November 2017.
Also on Tuesday, the Fed will kick-off its two-day meeting that markets expect to culminate with the fourth rate increase of 2018. Recent market volatility and concerns about slower economic growth around the globe have caused investors to significantly pare their expectations for the Fed in 2019. However, Fed Funds futures are still pricing in a roughly 70% chance the Fed will announce a 25 bp (2.25% to 2.50%) on Wednesday afternoon. President Trump remains opposed to any additional tightening and offered the Fed some final thoughts ahead of their meeting. The president tweeted Tuesday morning, “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”
Yesterday – Stock Sell-Off Intensified as S&P 500 Fell to Lowest Level Since October 2017: Monday was a milestone day for U.S. equities, the kind of milestones most investors would care to forget. The Dow dropped more than 500 points, or 2.1%, to end at its lowest level since March 23 and its second lowest level of 2018. The S&P 500 settled down 2.1% from Friday’s close to eclipse its previous year-to-date low from early February. Added to Friday’s loss, the last two sessions were the worst in two months. The index is now down more than 13% since it’s last all-time high from early September and at its lowest level since October 2017. After Monday’s loss, the S&P 500 is on pace to post its worst December since the Great Depression (1931.) All eleven sectors declined with those deemed the safest leading the selling. While it catches fewer headlines, the Russell 2000 index, which is considered a better barometer of mainstream, small cap American companies, tipped into a bear market. The index closed 20.8% below its last peak on the final day of August. Equities partially recovered from an opening drop but reversed those gains just before lunch. The turnabout lined up closely with remarks from prominent financier Jeffrey Gundlach that “I’m pretty sure this is a bear market” even though the majors aren’t down by the “arbitrary” 20% threshold. He added “We’ve had pretty much all of the [qualitative] variables which characterize it.” The downward thrust in equities also weighed on crude prices, with U.S. WTI falling nearly 4% and to its lowest level since August 2017. As risk markets crumbled, Treasury yields gradually moved lower. The 2-year yield settled back 4.1 bps at 2.692%, the lowest since early September, as investors continued to chip away at expectations for Fed policy. The chance of a hike on Wednesday dipped to 69% while the implied cycle peak rate was repriced down to 2.56%. The 10-year yield dropped 3.2 bps to 2.86%.
Overnight – Treasury Yields Tick Down Again as Equities and Oil Remain Weak: Both U.S. equity futures and Treasurys strengthened throughout another mixed global session on Tuesday. Futures on the S&P 500 rose as high as 0.8% around 7:00 a.m. CT as European equities made a sharp upside reversal that significantly trimmed their intraday losses. The Stoxx Europe 600 had initially declined by as much as 0.8% following a poor showing by Asia’s major exchanges. Most indices in Asia suffered greather-than-1% losses in the aftermath of Monday’s wobbly session on Wall Street and in response to President Xi’s speech at an annual economic forum. The Chinese president said, “no one is in the position to dictate to the Chinese people what should and should not be done,” and made no other comments to shore up investors’ concerns about slower growth or the trade war with the U.S. Core sovereign bond yields were lower on the day with Treasurys registering some of the larger moves amongst the majors. Germany’s 10-year yield was down 2 bps earlier to 0.23%, within 1 bp of its lowest level since April 2017. Germany’s IFO Business Climate survey, a popular confidence index, dropped more than expected to its lowest level since 2016. Oil prices are off their overnight lows but U.S. WTI was still down more than 2% and at a new low since August of last year. General volatility and concerns slower global growth could result in oversupply have weighed on the commodity.
Home Builders Pile On to Housing’s Heap of Disappointing Data Releases: The National Association of Home Builders Housing Market Index fell unexpectedly to close out 2018, with the four-point drop taking the headline index to 56, its lowest level since May 2015. Combined with November’s eight-point pullback, the two month-decline is the second largest (2001) since the survey started in 1985. The index tracking present sales dropped six points to its worst reading since May 2015 while expectations for sales six months from now matched the weakest since March 2015. There were fewer prospective buyers out looking for a new home, which nudged the index for prospective buyer traffic to the lowest since February 2016. The NAHB’s Chairman said in an accompanying statement, “We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs, …However, recent declines in mortgage interest rates should help move the market forward in early 2019.”
December Vining Sparks Forecast and Bloomberg Survey of Economists: Economists revised their 2019 growth forecasts slightly lower and expect interest rates to remain more rangebound than previously expected in the December Bloomberg Survey of Economists. Slowing housing activity and recent market volatility appear to be the primary catalysts for these revisions. Click here to view the survey.