The Market Today

Treasury Yields Continue to Climb


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Housing Starts and Building Permits Jump on Continued Multi-Family Strength: Housing starts and building permits beat expectations in December on strong gains in multi-family in both the Midwest And Northeast. New permits jumped 9.1% MoM on a 21.9% gain in multi-family and a 2.0% gain in single family.  Multi-family permits are now at their highest level since 1990 pointing to strong construction activity in 2022.  Housing starts also beat expectations rising 1.4% MoM, following an 8.1% gain in November and a positive revision to the October tally.  The December strength came from a 10.6% increase in multi-family starts; single family starts declined 2.3%. This trend has been evident for most of the year.  Multi-family starts are now up 55.3% YoY while single family are down 9.7%.  On a regional basis, starts and permits were both strongest in the Midwest and Northeast regions in December with both regions showing growth in both categories.  Both categories declined in both the South and West regions.

Mortgage Rates Continue to Climb: Mortgage applications for the week ending January 14 rose 2.3% as purchase apps jumped 7.9% but refi apps declined 3.1%.  The average 30-year mortgage rate continued to climb, up 12 bps to 3.64% and now up 31 bps in two weeks.


OTHER ECONOMIC NEWS

Home Builder Confidence Inches Down: Home builder confidence remained historically high in January, despite a modest and unexpected decline to start the new year. The NAHB’s headline index dipped 1 point from 84 to 83 as indices tracking future sales and prospective buyer traffic edged lower; the current sales index was unchanged. Similar to the headline measure, the three underlying metrics remain above almost every reading from the pre-pandemic period. The NAHB said, “While lean existing home inventory and solid buyer demand are supporting the need for new construction, the combination of ongoing increases for building materials, worsening skilled labor shortages and higher mortgage rates point to declines for housing affordability in 2022.”


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TRADING ACTVITY

Stock Slump Deepened as Treasury Yields Extended 2022 Climb to New Cycle Highs: Stocks slumped in their return from a holiday as this year’s surge in Treasury yields gathered steam to push the curve up to its highest level in two years. The Dow sank 1.5% Tuesday with Goldman Sachs accounting for roughly 30% of the index’s 543-point decline. Disappointment with the megabank’s weaker-than-expected trading revenue was compounded by a larger-than-expected increase in operating expenses, including higher wage costs. Technology, however, remained a severe weak spot and losses piled up more broadly amid concerns about rising rates’ impact on valuations and the economy. The Nasdaq sank 2.6%, closing at a three-month low and below its 200-day moving average for the first time since April 2020. The S&P 500 fell 1.8% and around 90% of the underlying companies moved lower on the day. Energy was the only sector to rise as oil prices jumped to their highest levels since 2014. Although it provided no solace for financials, the penultimate underperformers, Treasury yields spiked to new cycle highs. The moves extended a year-to-date surge precipitated by expectations the Fed could tighten policy more aggressively in 2022 to snuff out decades-fast inflation, potentially at the expense of the economic recovery. The 2-year yield rose 7.6 bps to 1.04%, its first close above 1% since February 2020, as money markets continued to price in a higher forward path for fed funds. The 5-year yield jumped 10 bps to 1.66% and the 10-year yield added 8.9 bps to 1.87%, both new highs back to January 2020. Aggravating the market’s concerns, the New York Fed’s Empire Manufacturing Index tumbled in January after data last week showed a slump in retail sales and weaker consumer confidence.

10-Year Treasury Yield Hits 1.90% before Pulling Back: Following a bit of weakness in Asia, equity markets have stabilized despite Treasury yields continuing to test higher levels. Europe’s Stoxx 600 rose 0.5% and U.S. index futures added between 0.3% and 0.7% to session highs at 7 a.m. CT after a volatile overnight session. Bank of America rose in pre-market trading while Morgan Stanley wavered around unchanged, both reporting better-than-expected earnings for the fourth quarter. Energy companies may continue to keep a soft floor under stock indices as oil prices added to yesterday’s seven-year highs Wednesday while higher rates could cap the risk recovery. Treasury yields rose and peaked early in the European session as transatlantic yield curves moved higher, but had pulled back and were at session lows at 7:30 a.m. CT. The 10-year Treasury yield broke above 1.90% overnight for the first time since January 2, 2020 before falling back to 1.86%, 1.4 bps below Tuesday’s close. Germany’s 10-year yield briefly moved into positive territory for the first time since May 2019. U.K. yields jumped more than others after data showed annual core inflation accelerated more than expected to 4.2% in December, its fastest rate in thirty years.


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