Quiet Week Offers Little New Guidance
The summer doldrums gave way to another week of mixed performance for risk assets. The Dow Jones Industrial Average lost 0.5%, while the S&P 500 rose 0.5%. Yields on benchmark government debt were flat over the week with some strong intra-week gyrations.
Top of mind last week was the Federal Reserve, particularly as the debate on a September taper receives strong media attention. Minutes from the late July FOMC meeting offered little in the way of new insight to the Fed’s predicament. According to the minutes, “if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year.” The FOMC continues to want an economy moving towards 7% unemployment and 2% inflation, which is very slowly occurring.
Sell side strategists are becoming less certain when the slowdown will occur, with many looking for a September taper, but an equal number expecting the Fed to wait until October or later. The biggest culprit for a delay is federal budget negotiations and any potential damage that may do to the economy between now and year-end.
Source: Sober Look
From an economic standpoint, the news last week was fairly underwhelming. Existing home sales spiked to 5.39 million annualized, but some pointed to a rise in mortgage rates as driving buyers into the market sooner than they might otherwise be inclined. That sentiment was reflected in a new home sales figure that fell 13.4% in July and reached a 394,000 annualized rate.
Additional slowing is likely in the housing markets based on weekly data from the Mortgage Bankers Association. Applications to purchase or refinance a home are both declining quickly as rates on a 15-year mortgage have risen by nearly 1%.
Source: Haver Analytics
On the positive side, manufacturing data offered a rosier picture on the health of the economy. The Markit PMI flash survey index jumped to 53.9 in August with a steady gain in new orders suggestive of forward demand. Additionally, the Kansas City manufacturing index posted its second consecutive month of growth, with strength across new orders, production and employment.
Source: Econoday
Overall, there was little to sway one’s opinion on the likelihood of taper occurring in September or later. Economic data was once again split and comments from Fed officials were resoundingly vague. Market participants will simply sit and wait until summer is over and September makes its “taper-ific” return.
Will Rate Rise Derail Housing Recovery?
As the Federal Reserve grapples with when and how to unwind quantitative easing, interest rates climbed more than a point since the end of 2012. This caused mortgage rates to increase to their highest levels in two years last week, with the average conforming 30-year loan jumping to 4.58% from 4.40% the week prior. Rising financing costs is presenting a headwind for one of the biggest bright spots in the US economy over the past 12 months.
Last week brought a raft of important housing data, with the results confirming that the recent backup in rates is filtering through to national data.
On Wednesday, the National Association of Realtors (NAR) released data for existing home sales in July. Despite a sharp jump in the pace of sales – which far surpassed expectations with an estimate of 5.39 million – there is concern that the recent rate increase is pulling forward consumption. NAR Chief Economist Lawrence Yun noted, “The initial rise in interest rates provided strong incentive for closing deals. However, further rate increases will diminish the pool of eligible buyers.”
On the positive side, prices continue to rise, with July’s median sales price 13.7% higher from the year prior. Tight supply is contributing to that phenomenon; July inventory stood at just 5.1 months, unchanged from the previous month and 5% below July 2012. With home prices now just 7.3% below their peak and mortgage rates increasing, however, housing affordability for lower income buyers is certainly dissipating. One indication of that trend is in first-time buyers, which declined as a proportion of transactions from 34% in July 2012 to 29% in July 2013.
Far more disturbing news arrived Friday via the Census Bureau’s new home sales data. The pace of transactions plummeted in July from an originally reported 497,000 to 394,000. Worse yet, the prior two months were revised downward by an aggregate 62,000 sales. Following a recovery-period high in January, new home sales now exhibit a clear stagnation over the past six months.
The result of this softness is a very different effect on inventory as compared to the existing home segment. New home supply jumped from 4.3 months in June to 5.2 months in July. While still somewhat tight from an absolute perspective, the trend higher is not encouraging for home construction.
Indeed, as we saw last week in housing starts, that series is also slowing. Since touching a pace of just over 1m starts in March, the series has trended down in choppy fashion.
Those concerns are certainly being priced into the performance of homebuilder stocks. The SPDR S&P Homebuilders ETF (XHB), which moved sharply higher in late 2011 in anticipation of the housing rebound, has recently peaked. Through May 15, the index-product was outperforming the S&P 500 by approximately 6% (22% vs. 16%,respectively). Since that date, however, the homebuilder ETF has lost 10% compared to the S&P’s 1% gain.
If the equity markets are a leading indicator, then the housing market may be in for a tougher stretch moving forward. Much of the low hanging fruit – in the form of historically low interest rates and housing prices – has been harvested. Unfortunately, the onus is now on the health of the labor markets for housing to sustain any momentum. Given the muddled jobs picture, that may be asking a bit too much.
The Week Ahead
In line with the recent summer quiet, this week will have a few economic releases of note. Particular ones worth watching are personal income and outlays, consumer sentiment, pending home sales and the Chicago PMI.
A small number of central bankers will gather, including those in countries under some pressure right now, including the likes of Brazil, Hungary and Israel.
Internationally, keep an eye on retail sales across Germany, Italy and Japan, as well as unemployment in the European Union.
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