The Market Today
Trump Nominates Potential Dove for Important Fed Vice-Chair Position
by Craig Dismuke, Dudley Carter
Housing Starts and Permits Rise on Multi-Family Strength: Housing starts rose 1.9% in March (along with positive revisions to February’s disappointing figures) bringing the YoY rate of starts up to +10.9%. Multi-family activity drove the MoM and YoY gains, up 14.4% MoM and 23.8% YoY. Meanwhile, single family starts were down 3.7% MoM and up just 5.2% YoY. Looking at the monthly data by region, starts fell in the West (-1.5%) and South (-0.6%). However, they rose in the Northeast (+0.8%); but, the real strength was in the 22.4% gain in the Midwest. Ironically, the Midwest was the only region where single family activity (+37.7% MoM) outpace multi-family starts (-17.1%). Also released this morning, building permits rose 2.5% in March on a 19.0% increase in multi-family and a 5.5% contraction in single family. On a YoY basis, multi-family permits are up 60.5% while single family are down 3.0%. All told, single family activity continues to run at a positive YoY rate, albeit a weak and unsteady rate, while multi-family activity continues to be very volatile but the driving force behind most of the new construction activity. The next few months will be important to track given the recent uptick in mortgage rates.
At 8:15 a.m. CT, the March Industrial Production and Capacity Utilization data is scheduled for released. Manufacturing output is expected to rise 0.1% MoM.
Yesterday – Stocks More than Recouped Friday’s Losses as Syria Tensions Remained Quiet: Stocks gained Monday as the day’s news headlines on Syria included nothing new to portend a potential escalation of the limited Friday strikes by the U.S., Great Britain, and France. The three major U.S. indexes gained more than 0.7% to start the week and all 11 sectors of the S&P finished higher. Telecommunication companies and materials led while more rate-sensitive real estate and financial companies lagged. But the rebound in risk asset classes didn’t dissuade investors from keeping longer U.S. Treasurys bid throughout the day. The 10-year yield had added over 3 bps before U.S. equity markets opened but slowly drifted lower, finishing essentially flat with Friday’s close. The 2-year yield also trimmed its overnight rise but was still 2.1 bps higher at the close and at a new cycle-high of 2.38%. The spread between the two continued its precipitous decline since early February, reaching a new cycle low of 44.9 bps.
Overnight – U.S. Equities Headed for More Gains, Yields Keep Inching Higher: U.S. futures rose steadily overnight and the Treasury curve was imperceptibly steeper as yields inched up (2-year +0.4 bps, 10-year +0.9 bps). With tensions around geopolitics and global trade sidelined to start the week, investors have shifted focus to corporate earnings results. Yesterday’s releases included better-than-expected bottom line results from Bank of America and Netflix. This morning, Goldman Sachs’s earnings, driven by strong trading revenue, also topped expectations and the company announced a $0.05 increase in its quarterly dividend. The Stoxx Europe 600 was trading 0.3% higher despite more disappointing survey results. The ZEW expectations index for both Germany (lowest since 2012) and the Eurozone (lowest since July 2016) dipped for a third consecutive month. The recent trade tensions were blamed as a big contributor to the current month’s weakness. Earlier, Chinese equities led losses in a mixed Asian session after the country posted its third consecutive quarter (1Q18) of 6.8% growth but mixed March activity (better-than-expected retail sales, weaker-than-expected industrial production and investment data).
President Trump Picks Two More Fed Governors: The President announced Monday two more nominees for positions on the Federal Board Reserve of Governors. As was largely expected, Richard Clarida, Columbia University economist and managing director at PIMCO, was selected as the Fed Vice Chair nominee, a position that became available after Stanley Fischer announced his retirement last September. Clarida held a role at the Treasury Department during the Bush administration and on the Council of Economic Advisers during the Reagan administration. He has been heavily involved in research around the neutral policy rate and, like John Williams (who has been tapped to replace retiring NY Bank President Dudley) and others at the Fed, believes the neutral rate to be lower than previously thought. Importantly, this move would place two officials who believe the neutral rate will prove to be lower in very influential positions at the Fed. Last December he said his base case was for two to three hikes in 2018, adding “It’d be tough to see four hikes, but under a booming economy with rising inflation, that could happen. …We could get four hikes if the growth in the economy is stronger because of the tax cuts, but importantly we also need some indication that inflation is moving up.” Also on Tuesday, the President named Michelle Bowman, current Kansas Bank Commissioner, as a Fed Governor nominee. Bowman is an attorney, a former community banker, and previously served in several Federal Government positions, including roles at FEMA and Homeland Security under the last Bush administration. Bowman’s views on monetary policy aren’t widely known.