The Market Today
Solid Day of Economic Data Pushes Yields Higher
by Craig Dismuke, Dudley Carter
Today’s Calendar – Weak Construction Data and FOMC Minutes: After yesterday’s strong batch of economic data (more below), today’s data started a bit slower. New construction activity continued its choppy run with an unexpected 4.8% drop in new home starts. Adding to the disappointment, June’s starts data were revised lower as well. Continuing the recent trend, multi-family activity was the primary driver of the weakness, falling 15.3% MoM and 33.7% YoY. Breaking with recent trend, new starts actually fell as well, down 0.5% MoM bringing the YoY rate to +10.9%. Building permits, the precursor to the starts data, also fell more than expected, down 4.1% MoM. However, positive revisions to June’s data made the miss more bearable. Multi-family permits dropped 11.2% MoM while single family permits were unchanged for the month.
Mortgage applications for the week ending August 11 rose 0.1% as purchase apps fell 1.5% and refi apps rose 1.6%. Purchase applications have weakened over the past month with the 4-week moving average dropping 6.3% since peaking in the June 23 report. However, the same 4-week moving average is up 3.0% for the year reflecting slow-but-growing housing sales.
The FOMC will release its July 26 meeting Minutes at 1:00 p.m. CT. There has been almost unanimity in the call from Fed officials to announce the commencement of their balance sheet reduction plans at their September 20 FOMC meeting. Barring any surprises in the balance sheet conversation, analysts’ focus will be on the debate regarding weaker inflation and its impact on policy decisions going forward.
Overnight Activity – European Stocks Lead a Day of Gains as Growth Remains Solid in 2Q: Global equities moved mostly higher overnight with European shares the clear outperformers. Shifts in sovereign yields quieted although the general bias remains in the direction of higher yields. Excluding gold, commodity prices across the various categories recovered after a bout of weakness Tuesday. Gold slid for a third session as the disruptions in the geopolitical waters from last week’s flare up continued to calm. In the oil space, prices rose only modestly despite an industry report yesterday indicating the EIA’s mid-morning report may show the largest drawdown of U.S. inventories since October. The Dollar is higher and holding gains against both the Euro and British Pound. The gains against the European currencies unfolded despite solid economic data in the region. Eurozone growth in 2Q was an as expected 0.6% QoQ (2.2% YoY), a slight acceleration from 1Q’s 0.5% QoQ (1.9% YoY) pace. In Great Britain, the unemployment rate fell unexpectedly to 4.4% in June, the lowest level since June 1975. Treasury yields gave up overnight gains after the weaker-than-expected housing data but equity futures are up by 0.2%.
Yesterday’s Trading Activity – Stocks Stand Still as Yields Rise on Strong Economic Data: U.S. stocks closed mixed and hardly changed Tuesday after multiple intraday swings in and out of positive territory. The stronger-than-expected retail sales report Tuesday morning pushed Treasury yields to their highs of the day but failed to lift share values of U.S. retailers. The retailing sector (within the Consumer Discretionary sector) was the worst performer within the S&P after falling 1.5% Tuesday on weaker earnings data from multiple industry players. For the day, the Dow added a meager 5 points while the S&P lost just 1; both representing less than a 0.1% change. The other economic reports released after markets opened (more below) were also supportive of higher yields. The 2-year Treasury yield rose 2.8 bps to 1.35% by the close while the 5-year (1.83%) , 7-year (2.09%), and 10-year (2.27%) notes added roughly 5.5 bps. The Dollar clung to daily gains but almost completely pared the big jump following the retail sales report.
No Let Up in the Later Data: It was an all-around good day for the economic data on Tuesday. Following the surprisingly strong retail sales and Empire State Manufacturing reports, the NAHB’s latest home builder index and the Census Bureau’s business inventories data were both stronger than expected. The home builder index rose unexpectedly in August on improvement in all three major subcomponents. The index improved from 64 in July (an eight-month low) to 68 (a three-month high) in August. The real strength of the report was in the metrics tracking current sales and future sales expectations; both of which were the best since May (expectations matched their highest since June 2005). In the inventory series, business inventory growth of 0.5% MoM outpaced estimates and was the strongest monthly result since November.
FedTalk – Bostic Balks at Preemptive Policy Tightening; Williams Cites 2.5% Neutral Rate: Atlanta Fed President Bostic, a 2018 FOMC voter, said Wednesday morning that “The jobs market, the labor market, is performing extremely strongly.” He credits this for the recent strength in personal consumption and gave a nod to yesterday’s solid retail sales report. Even so, he lands in the wait-and-see camp when it comes to inflation because these forces have “not translated into the sustained level of inflation that all of our economic models say should exist.” Bostic advised, “I actually am worried about the inflation number…if we don’t see that kind of inflation, my view is that we should try to be somewhat more hesitant in moving stridently in any direction. Let’s wait and see.” San Francisco Fed Bank President Williams also spoke in a CNN interview that was covered by the WSJ. According to the WSJ’s summary, Williams said he believes the longer-run neutral rate may be 2.50% meaning the FOMC is halfway through their rate hikes. After Bullard cited a 2.0% neutral rate last week, Williams is the second FOMC official to cite a sub-3.0% neutral rate.