The Market Today

Today’s Calendar – Tax Reform and Housing Data:  Housing starts rose 3.3% in November, beating expectations of a 3.1% decline.  Taking into account October’s revision lower from +13.7% to +8.4%, total starts were just fractionally better-than-expected in November.  Single family activity lead the way rising 5.2% while multi-family starts fell 1.6%.  On a year-over-year basis, single and multi-family starts are now both up 13%.  Building permits also beat expectations by falling just 1.4%.  October’s data were also revised higher helping bring permits back to positive on a YoY basis.  Permits are now up 3% YoY.  This morning’s data confirms December’s jump in homebuilder confidence to 74 – now up to a stronger level than at any point during the housing boom of the 2000s.  Despite lumber prices being up 41% YoY and consumers increasingly thinking it’s a bad time to purchase a home, homebuilders remain exuberant and new construction continues to chug along at a decent clip. Existing home sales will be released tomorrow and new home sales on Friday, rounding out the week of housing reports.  So far, so good.

 

As has been the case for the past few weeks, the housing data could have been disastrous this morning but investors would likely have missed it as they remain dialed in to the developments on tax reform.  The House is still scheduled to vote today on the newly reconciled tax bill.  There are some political bombshells in the new bill including a permanent reduction to the corporate rate to 21% and temporary breaks for individuals.  In fact, according to the newest analysis, individuals would pay more beginning in 2027 than under current law but corporations will continue to enjoy the lowered rate.  While there are economic justifications for this type of plan, the optics will be a challenge.

 

Overnight Activity – 10-Year Yield Hits 8-Week High as Tax Vote Approaches: The cheerfulness that sent global equities shooting higher Monday has calmed overnight resulting in more mixed and modest moves on Tuesday. Indices in Asia closed pointing in different directions and the Stoxx Europe 600 is essentially flat on a mix of small gains and losses in the individual national markets. The momentum may pause in today’s U.S. trading as well although futures contracts for all three major indices remained slightly positive for most of the overnight trading. European yields moved mostly higher overnight but reached their peak within the last half hour. The French 10-year note has added 3.3 bps and the German 10-year note rose 3.6 bps. Those yields doubled their overnight gains after Treasury yields jumped sharply after the 10-year yield cross over 2.40%. With 2.40% seen as a key level for the 10-year note, a slow creep higher could have created some technical selling once that mark was breached. The 10-year yield was up more than 2 bps at 2.42%, its highest level since October 26. The rest of the curve inside of ten years was up a similar amount. The Dollar extended Monday’s losses overnight and continues to avoid improvement from the tax reform progress. Markets will likely spend much of Tuesday’s session tracking developments in the ongoing process for tax reform leading up to the possible lunchtime vote in the House.

 

Yesterday’s Trading Activity – All This Tax Talk Keeps Markets Turned Up To Start the Week: Sunday’s overnight momentum didn’t stop in Europe as U.S. stocks leveraged the stronger global sentiment to reach new record highs for a second consecutive session. The opening jump was sharp with the S&P moving up more than 0.7% in the first ten minutes. By the close, the index had modestly trimmed that initial gain to a still respectable 0.54% improvement. The sector shifts continued to show a rotation reflective of an optimism that Republicans will be able to pass the reconciled tax plan through both chambers of Congress and ultimately to the President’s desk. The Dow gained a similar 0.57% while the Nasdaq outperformed with a 0.84% push higher. Stronger stocks and the recent developments on the tax reform front were finally able to jolt the long-end of the curve just a bit. The 10-year and 30-year yields saw their biggest single-day increases of December. The 10-year yield rose just over 4 bps to 2.39% while the 30-year yield added 5.3 bps to 2.74%, with both finishing near their highs of the day. The 2-year yield actually declined 0.8 bps and closed near its daily low. The net effect was the spread between 2s and 10s widening by the most in a day since July. In currencies, however, the U.S. Dollar was the laggard, weakening in almost every major pairing.

 

Kashkari Says Concerns on Inflation, Inversion Drove His Most Recent Dissent: As has been his practice this year, Minneapolis Fed President Neel Kashkari explained in a Monday essay why he dissented to last week’s Fed hike. While he spends several pages explaining his thought process in detail, the main themes can be capture in just several sentences. First, he believes raising rates with inflation well below its target is a mistake. He wrote, “Continuing to raise rates in the absence of increasing inflation could needlessly hold down wage growth while potentially increasing the chance of a recession.” The other main reason underlying his decision is the potential for the Fed to force an inversion of the curve if it keeps pushing the short-end higher while the long-end remains anchored. Kashkari noted, “While the yield curve has not yet inverted, the bond market is telling us that the odds of a recession are increasing. …In response to our rate hikes, the yield curve has flattened significantly, potentially signaling an increasing risk of a recession. …Together, these factors make a compelling case that the FOMC should not increase rates further until we are much more confident that inflation is returning to our target.”