The Market Today

Volatile Housing Starts Report Yet Another Disappointing Read on Housing Activity: Housing starts disastrously disappointed expectations in December, falling 11.2% MoM along with a 2.8%-lower adjustment to the November data.  All told, new housing starts were almost 14% lower by the end of December than expected.  This data series is prone to large revisions and can be volatile on a month-over-month basis, particularly multi-family activity.  December’s weakness was in both single family (-6.7% MoM, -11.1% YoY) and multi-family (-20.4% MoM, -14.0% YoY) starts.  At a regional level, the only bright spots were a 30% increase in multi-family in the Northeast and a 2% increase in single family in the South.  Apart from those, every metric showed double digit declines.  One silver lining to the data, new building permits did rise 0.3% MoM, primarily driven by a 45.5% MoM increase in multi-family permits in the West.

 

Housing continues to suffer from higher financing costs (higher mortgage rates), still-low levels of inventory, rising sales prices, and rising construction costs.  The recent pullback in mortgage rates should provide some relief in future housing activity, but the disappointing results remain for now.

 

Home Price Gains Expected to Continue Moderating: At 8:00 a.m. CT, the FHFA and S&P CoreLogic home price indices are expected to show a still-declining pace of price gains.  Already, the FHFA index has dropped from a YoY rate of 7.7% (Feb. 2018) to 5.7%.  The S&P CoreLogic price index has shown price gains slows from 6.7% YoY to 4.7%.

 

Consumer Confidence Expected to Find Footing: The February Conference Board report on consumer confidence, 9:00 a.m. CT, is expected to show confidence a partial, 4-point rebound in confidence after sliding over 17 points from November through January.

 

Powell Goes to the Hill: Fed Chair Powell begins his two-day testimony before Congress today, speaking at the Senate Banking Panel at 8:45 a.m. CT.  Expectations are that he continues to sound the dovish drum after the Fed has made a complete turn on policy in recent months.  Given the volume of communications lately, it is unlikely that anything new is revealed.

 

TRADING ACTIVITY

Tariff Delay Sent Chinese Stocks Skyward with More Modest Impact Evident Across U.S. Assets: U.S. stocks and Treasury yields closed up to start the week, but all ended well off highs set early in the session. After gaining as much as 0.7% around 10 a.m. CT, the S&P 500 gradually pared its opening jump to end near its session low and just 0.1% higher for the day. The 10-year Treasury yield ended up 1.1 bps at 2.66% but had climbed above 2.68% earlier. Chinese stocks rallied 6% overnight after President Trump tweeted Sunday that he would delay the March 1 tariff increase due to “substantial progress” on trade negotiations in recent weeks. Just before U.S. markets closed, the President tweeted again that “China Trade Deal (and more) in advanced stages.” The optimism around trade, though less evident in markets across Europe and the U.S., kept sectors sensitive to global cooperation near the top of the indices. President Trump’s twitter feed caused some volatility in other markets too. Crude prices crumbled more than 3% from Friday’s three-month highs after President Trump tweeted, “Oil prices getting too high. OPEC, please relax and take it easy.” In addition to the increased optimism about global trade, Treasury yields endured a busy day of government auctions. Treasury auctioned approximately $168B on Tuesday in a mix of 3- and 6-month bills and 2- and 5-year notes. The 2-year yield rose 1.3 bps to 2.51% and the 5-year yield added 0.5 bps to 2.48%.

 

Overnight – Trade Optimism Eases Tuesday Before First Half of Powell’s Congressional Testimony: The global trade-related optimism that lifted sentiment to start the week has tapered off overnight, leaving U.S. futures (S&P 500 -0.3%) and Treasury yields (10-year -2.2 bps) lower before Fed Chair Powell’s mid-morning testimony before a Senate panel. China’s CSI 300 slipped 1.2% on Tuesday, cutting into Monday’s impressive 6% surge. The rest of Asia was also generally weaker leading the MSCI Asia Pacific Index to its first negative day in the last seven sessions. Most shifts in European equities were subdued while swings in UK assets stood out. The Stoxx Europe 600 dipped 0.1% while the UK’s currency-sensitive FTSE 100 tumbled more than 1%. UK stocks were under pressure as the Pound was pushed higher by the latest Brexit developments. British PM May was reported to be considering an extension of the March 29 Article 50 deadline, just a day after a leader from her opposition acquiesced to calls for backing a potential second referendum on Brexit. The combination of events was seen reducing the odds of the UK crashing out of the EU in a Hard Brexit. However, the PM later countered those reports, commenting that she does not want to extend Article 50, but did commit to a Parliament vote on a short extension should the next vote (March 12) on a Brexit plan fail. “A short extension, not beyond the end of June, would almost certainly have to be a one-off,” May said. The Pound gave up some of its earlier gains.

 

NOTEWORTHY NEWS

December Inventory Data Shows Upside Surprise, Dallas Fed Manufacturing Activity Perks Up: Two reports at 9 a.m. CT were net positives for the U.S. growth outlook. Data on wholesale inventories was better than expected in December and should give a modest lift to estimates for 4Q GDP. At the same time, the Dallas Fed’s Manufacturing Index for February rose more than expected, offering hope that activity will pick back up in the months ahead if the recent uncertainties continue to abate. While the details were mixed, the better-than-expected bounce in the current conditions index was accompanied by an improvement in the outlook for activity over the next six months.

 

Kaplan and Clarida See Muted Inflation Making Room for More Workers: In a joint appearance at a community event in Dallas, Fed Vice Chair Clarida and Dallas Fed President Kaplan signaled that a lack of inflation pressures could give the Fed room to allow further recovery in the U.S. jobs market. “I think inflation is not running away from us,” Kaplan said, adding “we might have the luxury of trying to do more to get more people into this workforce on a sustainable basis.” Clarida noted, “The participation rates, those folks who are entering the labor market, have been going up recently and a lot of folks several years ago thought that process had come to an end. Part of it — I don’t know how much — is because there is some success in matching workers to jobs.”