The Market Today

New Records for Stocks; Hard Brexit Fear Back on Table


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Housing Starts and Building Permits Continue Hot Streak, Permits Highest Since 2007: Yesterday’s blowout report on homebuilder confidence makes even more sense after this morning’s November report on housing starts and building permits. New home starts jumped another 3.2% to hit their second-strongest level since 2007, only surpassed by August’s tally. Single family starts rose 2.4% while multi-family gained 4.9%. On a year-over-year basis, housing starts are now up 13.5% after being down almost 11% early in 2019. Likewise, building permits unexpectedly rose 1.4% in November, notching a new high going back to 2007. Single family permits saw their seventh consecutive monthly increase, now up 4.1% year-over-year, while multi-family gained another 2.5%.  Multi-family permits are now up 32.5% year-over-year, pointing to another wave of multi-family construction projects.

Manufacturing Output and Job Openings to Show If Momentum Is Changing in Either Sector: At 9:00 a.m. CT, the November Industrial Production and Capacity Utilization will give us another look at how much manufacturing output has been affected by the trade war.  Thus far, manufacturing output has contracted in seven of the year’s ten monthly reports and is on pace for its second-worst quarter of the year. Also at 9:00 a.m., the October JOLTs report is expected to show job openings pull back once again.  Openings peaked last November at 7.6 million and have since declined to 7.0 million.


YESTERDAY’S TRADING

Last Week’s Trade-Deal Momentum Lifted Global Markets Monday: Treasury yields rose Monday and the S&P 500 set another record following last Friday’s announcement that the U.S. and China had reached the first phase of a trade agreement, averting new tariffs that had been scheduled to take effect on Sunday. While the details of the agreement have been largely withheld while under final review, both sides confirmed last week that, in addition to the suspension of any new tariffs, the U.S. would also cut tariffs on $120B of U.S. goods in half, from 15% to 7.5%, and China would increase the amount of American-made goods it purchases. Alongside the cooling of tensions, data Monday showed China’s industrial and retail activity was stronger than expected last month.

Treasury Yields Rose as Stocks Notched New Records: Hopes the easing trade frictions will fuel further healing of the global economy, the S&P 500 closed up 0.7% at a new all-time high while the Treasury yields steepened on higher yields. After equities strengthened across Asia and Europe’s Stoxx 600 finished at a record of its own, 11 of the S&P 500’s 12 sectors improved with industrials lagging behind as the sole decliner. Boeing was a drag on industrials after it was reported production of the troubled 737 MAX will be halted temporarily in January, while a drop in shares of FedEx also weighed on the sector. Amazon removed the freight company as a ground-delivery option for third-party products sold on its platform. Even after edging down from their highs once the equity markets closed, the 2-year yield added 2.3 bps to 1.63% while the 10-year closed up 4.9 bps at 1.87%.


OVERNIGHT TRADING

Risk Rally Pauses in Europe on Return of Brexit Uncertainty: After Asian markets added to prior days’ gains, the recent rally in global equities paused during the European session and global equities drifted down. Europe’s Stoxx 600 pulled back 0.6% from Monday’s all-time high before 7 a.m. CT and U.S. futures were essentially flat following choppy trading overnight. Treasury yields were also holding near the prior day’s final levels, although longer yields had ticked lower alongside their European counterparts. While the lower bias was widespread across the region, most moves outside of the U.K. were modest. The U.K.’s Gilt curve, however, dropped between 4 and 5 bps and the pound weakened to completely wipeout its election-related rally against the U.S. dollar.

PM Johnson Re-introduces Hard Brexit Risk after Solidifying Majority Support in Elections: The strong majority solidified by U.K. Conservatives in last week’s election had initially strengthened British assets on hopes the broken parliamentary gridlock would allow Brexit to move forward in a more orderly fashion to a comparatively-improved outcome. However, concerns about a hard Brexit have returned within the last 24 hours as PM Johnson has firmed his unconditional stance about leaving the EU by the end of 2020. Reports indicate he plans to draw up legislation that would remove the possibility of extending the Brexit transition period past the end of next year, reintroducing the risk of a possible no-deal Brexit. The EU has since said the PM’s stance requires preparations for a possible “cliff-edge situation.”


NOTEWORTHY NEWS

Home Builder Confidence Posted Surprise Improvement to One of the Best Readings on Record: In Monday’s most surprising economic data point, the National Association of Home Builders market index rose much more than expected in November to one of its best levels on record. Thanks largely to stronger current sales, overall sentiment surged 5 points to 76, a 20-year high. The current sales index jumped 7 points to 84, prospective buyer traffic rose 4 points to 58, and sales expectations for six months from now inched up 1 point to 79. Sentiment in the South edged up to its best reading since 2005 but it was a snapback in confidence across the Midwest that stood out. The Midwest index soared 15 points to a two-year high. While housing data on the whole has improved as mortgage rates have declined, home builder confidence has been a standout performer. The index declined only once in 2019 and ended the year 20 points higher than last December’s three-and-a-half-year low.


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