The Market Today
Oil Prices Hit 16-Month Highs; U.S. Earnings Reports Encouraging
by Craig Dismuke, Dudley Carter
New Home Sales, Home Prices, and a Regional Fed Report: The FHFA Home Price Index for February is scheduled for release at 8:00 a.m. CT, with the pace of home price gains expected to rise 0.5% MoM. If correct, the year-over-year rate of gain would slow to 4.9%, the slowest pace of gain since 2014 and down from a peak of 7.7% in early 2018. Home-price traction continues to slow as the housing market has struggled with declining affordability. While the sales data appears set for a bit of a renaissance (more below in existing home sales report), prices are a lagging indicator and are likely to continue to show more tempered gains. Perhaps more importantly as a more timely indicator, the March New Home Sales report is expected to show a 2.7% drop at 9:00 a.m. CT following February’s 4.9% jump. Also at 9:00 a.m., the Richmond Fed Manufacturing Index is expected to hold at a reading of 10, a modest figure for the index.
Corporate Earnings and Oil Prices in Focus: Also for the radar today, Texas Instruments will reports 1Q earnings as a bellwether for the computer chip industry. And all eyes remain on rising oil prices. While prices have risen sharply, the impact on consumers should be modest at this point, particularly given how much lower prices were to start 2019 than at the beginning of 2018 (see Chart of the Day).
Yesterday’s Trading – Oil Prices Rise Uncomfortably Higher Weighing on Stocks, Treasury Yields Slip Higher: Secretary of State Mike Pompeo announced yesterday morning that waivers allowing China, Greece, India, Italy, Japan, South Korea, Taiwan, and Turkey to buy Iranian oil without facing U.S. sanctions will not be renewed when they expire on May 2. The waivers were originally granted in November when sanctions were reinstituted against Iranian exports, enabling oil prices to remain depressed. Offsetting the potential loss of 1.1 million barrels per day of supply, the White House is expected to announce an increase in exports from Saudi Arabia and the UAE. Despite the offset, oil prices ran up coming into yesterday’s trading, Brent crude rose 2.9% to a six-month high before U.S. trading began and bounced around $74.00 per barrel all day. Higher oil prices kept a lid on stock prices, with the exception of the energy sector. The 10-year Treasury yield rose 3.0 basis points to 2.591%. Also worth noting, President Trump said yesterday that he would not nominate Herman Cain for a spot on the Federal Reserve Board, a potential nomination that was being interpreted by some as overly political.
Overnight Trading – Oil Moves Higher and U.S. Earnings Boost Spirits Coming into Tuesday’s Trading: Trading activity has been muted overnight with small moves in all of the major stock indices and slightly higher sovereign yields in the Eurozone. Japan’s Nikkei is up 0.2% overnight while the Euro Stoxx 50 is down 0.2%. U.S. stock futures, however, have moved higher after early morning earnings reports have lifted investors’ spirits. Whirlpool beat earnings expectations by 9%, credited partly to trade tariffs which were delayed in 1Q. Twitter’s revenues rose 18% while its daily active users grew from 126 million to 134 million (we’re not sure how many of those are bots). Additionally, reports from Coca-Cola, Proctor & Gamble, Verizon, and United Technologies all beat expectations. Investors are anxiously awaiting the earnings announcement from Texas Instruments later today, a key indicator for the computer chip industry and the broader tech sector. Energy companies have been the standout performers over the last 36 hours as oil prices have continued to climb. Crude hit $74.70 per barrel overnight, the highest since late-2018, after the White House’s announcement on Iranian sanctions waivers yesterday.
Existing Home Sales Retrace February Jump, Down 4.9% in March: Existing home sales fell 4.9% in March, retracing almost half their 11.2% jump in February. Every region saw a decline in sales. Existing home sales remain down 7.6% from their November 2017 peak but the February jump and recent resurgence in new purchase applications has improved the outlook for the sector. Lower mortgage rates have been the primary catalyst for the recent improvement. After averaging 4.87% in November, 30-year mortgage rates have fallen in each subsequent month, down to an average of 4.27% in March. Not only have lower rates helped push transactions and applications off their lows, they have also spurred prices higher with the median sales price rising from $250,100 to $259,400, the highest median sales price since last summer. Investors made up a larger percentage of activity, up from 13% of all transactions in December to 18% in the March report. So long as mortgage rates remain in the low-4.00% range, residential investment has the potential to be accretive to economic growth in 2019. For the first quarter, existing home sales were up a fractional 1.2% versus 4Q18 sales, the first quarterly increase since 2017. Moreover, new home sales, through the February data, are on pace for an even better quarterly increase.