The Market Today

Optimism Reigns as USMCA Passes Senate, U.S. Economic Data Improve, Chinese Data Improve


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Housing Starts Jump 17% on Best Single Family Activity Since 2007 and Best Multi-Family Activity Since 1986: Homebuilders were not incorrect in December when their confidence jumped to its highest level since 1999.  Housing starts in December also jumped 16.9%, well above the expected 1.1% increase.  Single family starts increased 11.2% to their highest level since the housing crisis.  The volatile multi-family starts figure jumped 29.8%, up to its highest level since 1986.  2019 was a good year for housing with almost every metric making a v-shaped rebound from the weakness that defined 2018.  Housing starts rose more than 40% from December 2018 to December 2019 on surprisingly strong gains across both the single family and multi-family sectors. While a warmer December than normal likely boosted the latest data, the broader story remains in place.  Residential investment will should help offset weakness in business investment for several quarters based on the current level of activity.

Building Permits Pull Back but Continue to Show Strong Results for 2019: Building permits, the precursor to new starts, did not fare as well in December.  After jumping in October and November, new permits fell 3.9% in December.  Nonetheless, the permits data tell the same story as new starts: reinvigoration in 2019 as mortgage rates dropped from a 2018 peak of 4.94% (November) to a 2019 nadir of 3.49% (September). Total permits ended the year up 11.1% including a 16.9% gain for single family and a 8.7% increase for multi-family.

Manufacturing, Consumer Confidence, and Job Openings: December’s Industrial Production report is scheduled for 8:15 a.m. CT which will give us another look at manufacturing output.  At 9:00 a.m., the University of Michigan will release its preliminary report on consumer confidence and the BLS will release its November job openings data.


YESTERDAY’S TRADING

Economic Optimism Turned Up in 24 Hours: U.S. stocks rallied sharply Thursday while Treasury yields posted more modest increases a day after the U.S. and China inked the phase one trade agreement. Compounding hopes the trade deal could stoke slowing economic activity, a host of economic reports released early in the morning offered a solid daily snapshot of the U.S. economy.

Daily Data Painted Mostly Upbeat Picture: While consumer activity in the fourth quarter appears weaker than expected after December’s solid core retail sales were offset by negative prior revisions, sales have improved in each of the last three months heading into 2020. The jobless claims data were also stronger than estimated and signal the early-December scare caused by an unexpected spike was the result of statistical noise, not an abrupt slowdown. Additionally, the Philadelphia Fed’s Business outlook index surged past expectations to an eight-month high and the housing outlook remains bright after better-than-expected builder confidence (more below).

Interest Rates Remained Calm as Stocks Climbed to New Records: Without much of a market impact but worthy of a note, the Senate passed the updated USMCA shortly after the run of economic data. The new North American trade agreement will now be sent to President Trump to be signed. By the close, the S&P 500 had gained 0.8%, the Dow had risen 0.9%, and the Nasdaq had rallied 1.1%, with each index setting a new all-time high. As has been the case in recent weeks, the movement in interest rates was more subdued. The 2-year yield ended the day just 1.2 bps higher at 1.57% as the 10-year yield added a slightly larger 2.4 bps to 1.81%.


OVERNIGHT TRADING

Chinese Growth Figures Add to Weekly Economic Optimism: Global equities were trending toward a record close Friday following a week of developments which fueled investors’ hopes that the global economy will pick up in 2020. Data overnight confirmed that 2019 was the weakest year in decades for the Chinese economy  in the face of elevated trade tensions with the U.S. The 6.1% YoY rate of growth for the full year, however, was in line with expectations and the 6.0% pace in the final quarter of the year was consistent with the third quarter’s rate, evidence of some stability. Those results were released alongside stronger-than-expected releases for December and follow data on Monday that showed China’s trade flows accelerated more than expected in December. The country also signed the highly-anticipated trade agreement with the U.S. on Wednesday.

Yields Unyielding to Stocks’ Jump to Records: Chinese stocks rose 0.1% Friday, actually trailing stronger gains elsewhere in Asia that drove a broader regional index up 0.4%. The Chinese yuan also continued its recent ascent to touch a six-month high against the Dollar. Friday’s stock rally has continued across Europe and pushed the Stoxx 600 up nearly 1% to a new all-time high. The overnight strength was also built partly on yesterday’s record day on Wall Street sparked by an upbeat run of U.S. economic reports. Futures indicate the major U.S. indexes will break those records at the open with contracts on the S&P 500 up 0.2% around 7 a.m. CT. While Treasury yields had remained unyielding to the overnight strength in equities, yields quickly turned higher and steeper at the open of U.S. trading. The 2-year yield erased an overnight decline and was unchanged while the 10-year jumped to up 3.0 bps on the day at 1.84%.


NOTEWORTHY NEWS
Home Builder Confidence Inched Lower to Second-Best Level in More Than Two Decades:
The outlook for housing remains upbeat after the NAHB’s Housing Market Index fell less than expected to a still-impressive level in January. The headline index dropped 1 point to 75, marginally better than the 74 economists had expected, but held at its second best level since the late 1990s. Expectations for sales in six months were unchanged at their best level since early 2018 while the current sales assessment cooled from December’s level, the strongest since 1999, to the second-strongest reading over that period. Adding to the encouraging message from the sales outlook, the number of potential buyers walking through homes listed for sale rose to match its best level since 1998, an impressive turnaround from December 2018’s reading of 43, near a three-year low.


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