The Market Today
U.S. and China Plan Low-Level Trade Meetings
by Craig Dismuke, Dudley Carter
Housing Starts Disappoint but Permits Offer Hope: July’s housing starts data disappointed expectations, rising just 0.9% after falling 12.9% in June. Economists expected new starts to rebound 7.4%. Starts in the West declined 19.6% and were down 4.0% in the Northeast. On the flip side, new construction increased 11.6% in the Midwest and 10.4% in the South. On a year-over-year basis, starts are now down 1.7% on a 3.0% increase in single family but a 13.3% drop in multi-family. The pace of new housing starts has been choppy, as it always is, but the trends point to a weaker pace of gains led, particularly, by weaker multi-family activity. On a positive note, building permits actually rose 1.5% in July while June’s 2.2% decline was revised up to -0.7%. The only region that saw a month-over-month decline in permits was the South, where they fell 0.3% on a decline in multi-family permits. On a year-over-year basis, permits for new construction are now up 10.8% as single family permits are 12.1% higher, offsetting a 23.9% decline in multi-family.
Philly Fed Index Offsets Solid New York Fed Report: The Philadelphia Fed’s report on regional manufacturing activity disappointed expectations, falling from 25.7 to 11.9. Shipments, unfilled orders, and delivery times all pulled back in the August data; but, the biggest decline was seen in the new orders index. New orders dropped from 31.4 to 9.9, its weakest level since September 2016. The index tracking the number of employees pulled back, as did the average employee workweek. After a surprisingly strong New York Fed index earlier in the week, the Philadelphia Fed results now points to the ISM Manufacturing index dropping from 58.1 to 56.5 in August.
Labor Data Keeps on Trucking: Initial jobless claims for the week ending August 11 fell from 214k to 212k, only 4k above the lowest reading of the cycle (July 13). Initial claims for unemployment benefits remain at the lowest levels since 1973, continuing to point to a tightening labor market.
Yesterday – Bad Day for Stocks, But It Could Have Been Much Worse: Wednesday’s overnight rout in global risk assets deepened during early U.S. trading, as losses in Europe strengthened and a steep drop at the U.S. open heightened an already strong flight to quality. Tech stocks led the early decline for U.S. equities in what turned out to be the worst day for stocks in more than six weeks. The Nasdaq fell 1.2%, the worst performance from a major index. In addition to the downdraft from tech, the S&P 500 saw even heavier selling in energy, materials, and consumer discretionary companies. Energy companies led losses after sinking more than 3.5%. Commodity prices were already under pressure following weaker data from China and the Dollar holding near a 14-month high. And while precious metals remained the biggest drag, energy commodities added to losses after the EIA reported an unexpectedly large increase in U.S. crude-related inventories. U.S. WTI dropped 3.2% to under $65 per barrel, its cheapest close in almost two months. On the day, the S&P 500 closed down 0.8% after falling as much 1.3% around 10 a.m. CT. As equities sank and commodities sold off, the bid for Treasurys strengthened. For the day, the 2-year yield dropped 2.9 bps but had been down as much as 4.9 bps. The 10-year yield closed 3.6 bps lower after sliding as much as 6.3 bps in early trading. After touching a new 11-year low below 24 bps, the spread between the 2-year and 10-year yields recovered some to settle at 25 bps.
Overnight – Global Sentiment Gets a Lift as U.S.-China Plan to Talk, Lira Adds to Gains: Positive developments on the U.S.-China trade front and another day of gains for the Lira have combined to prop up global equities and ease the downward pressure on sovereign bond yields. The Turkish Lira tacked on another 2% gain overnight to push its three-day rally to more than 18%. The currency remains down over 4% from where it traded before last Friday’s collapse. While that added to the better tone for markets on Thursday, intraday charts show that reports of the U.S. and China resuming trade talks later this month have had a bigger impact. The talks will involve lower level trade officials and, therefore, are unlikely to result in a major trade package. However, the meeting has lifted sentiment Thursday as it represents the first sign of diplomacy on the issue since both put in place tariffs on $50B of imports. After selling off early, Asian equity markets moved quickly higher on the headlines but were still lower at the close. European equities rose and U.S. futures turned positive and have pushed to near their highs of the day. Contracts on the S&P 500 are 0.5% higher while the Dow is leading at +0.8%. The blue-chip index’s outperformance is tied to shares of Walmart rallying 10% pre-market after a surprisingly strong earnings report. Treasury yields had pulled back from overnight highs and were roughly 0.5 bps higher across the curve.
Homebuilder Confidence Hit an 11-Month Low in August: As expected, the National Association of Homebuilders reported a 1-point decline in its housing market index for the month of August. The headline index moved down to 67 which marked its sixth monthly decline in 2018 and its lowest level in 11 months (64 in September 2017). Residential investment declined in the initial GDP release for 2Q and has dropped in four of the last five quarters. The recent trends in the housing data have drawn attention back to continued strains on affordability from too little supply and higher mortgage rates. The details of Wednesday’s homebuilder report should do little to assuage the concerns that the housing data will remain weak in the coming months. The indexes tracking current sales and those expected six months from now both slipped 1-point. The current sales index fell to an 11-month low while the future sales index edged down to a 21-month low (November 2016). Foot traffic from potential buyers also cooled, with the related index at its lowest level in 10 months.
Industrial Production Rose Less Than Expected Despite Second Month of Stronger Manufacturing Output: Industrial production rose a softer-than-expected 0.1% in July and a mix of revisions left the overall trend a bit weaker than previously estimated; June’s initial 0.6% gain was revised up to an even stronger 1.0% but May’s 0.5% declined was revised to an even worse 0.8% pullback. In the current month’s details, manufacturing output rose a smaller 0.3% (+0.8% in June) but saw back-to-back monthly gains for the first time since 2017. Mining and utilities output both contracted. Mining fell 0.3% after an unusually strong month in June and a modest gain for natural gas output was offset by a second month of lower electricity usage.