Homebuilder Sentiment, Capital Flow, FOMC and more…

Builder confidence jumped 6 pts in September to 65 which matches the best level since October 2005 (this, as other diffusion indexes do, measures the direction of change, not the degree as obviously activity today is not what it was in 2005).  Present conditions also rose 6 pts to 71 and the Future outlook also printed 71, up 5 pts from August. Prospective Buyers Traffic was higher by 4 pts at 48 but still has not gotten above 50 in this recovery. The NAHB said “As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers…With the inventory of new and existing homes remaining tight, builders are confident that if they can build more homes they can sell them.” Here was the key caveat, “Though solid job creation and low interest rates are also fueling demand, builders continue to be hampered by supply side constraints that include shortages of labor and lots.”

Bottom line, with home building well below the long term average with an even higher population, there is much catch up to be made. Today’s data certainly acknowledges that with inventories low but the key link in order to sustain this continues to be the behavior of that first time household. Will they continue to prefer renting (50 yr low in the homeownership rate) for whatever reason (financial or something else) and/or will they continue to be put off from persistent annual 5-6% price increases. The area of the market that is most in need of new homes are those priced below $250k to better compete against renting but margin issues (high costs of lots, labor and permitting) are the greatest there. The ITB is deservingly rallying by 2% on the news after weakness seen over the two prior weeks on higher interest rate worries.

In case you didn’t see, on Friday at 4pm the Treasury International Capital flow data for July was released and it continues to be a big focus of mine. For a 4^th straight month foreigners were net sellers of US notes and bonds. They sold a net $13.1b in July which brings the year to date level of selling to $156b which compares to net selling of $20b in 2015, net buying of $165b in 2014, $41b in 2013 and $400b in both 2011 and 2012. This level of selling is unprecedented going back to when data collection started on this in 1977. The recent selling has been from foreign central banks while foreign private buying has been positive. Our largest holder, China, was a net seller of $21b of notes and bonds after selling $28b worth in June. They of course are slowly bleeding reserves. Japan, our 2^nd largest holder was a net buyer of $3.6b after selling $13.2b in June.

Bottom line, a major crutch for the US Treasury market over the past decade of foreign central bank reserve accumulation has gone away for now. As for foreign private buying of US Treasuries, the cost of hedging out dollar exposure vs the yen and euro in particular has completely offset any yield grab and thus we’ll see how much longer we see net private inflows into US notes and bonds. This overall reduction in flow comes at a fragile time for sovereign bonds globally as investors finally begin to realize the logistical limits of central bank policy and the potential for outright reversal from the BoJ. Add on expectations of some sort of fiscal juice from whoever our next President is (and deficits that follow even without it) and we most likely have reached a major inflection point in Treasuries, aka, we’ve seen the bottom in long term interest rates and the 35 yr bull market in bonds is mostly likely over. I know you’ve heard that before over the years from many (and probably laughed when you read it) but this call has the most amount of evidence behind it I believe.

Less than a month after Janet Yellen said the case for a rate hike has “strengthened” we look forward to hearing as to why she no longer thinks so. The recent economic data has been nothing but weak. On the other hand, one rate hike in 10 years is pathetic.

As the Fed should be a non event, the BoJ has center stage for not only its own yield curve but for everyone else’s that is tightly correlated. This may be one of those week’s that we look back on with significance if the BoJ confirms ‘no mas’ (or however you say it in Japanese) to the multi year central bank policy of crushing the yield curve. With Japan closed for a holiday overnight, most yields in Europe and in the US are little changed.

Reflecting the large jump in Chinese lending to households to buy property in August, home prices for both new and existing apartments rose both m/o/m and y/o/y. The home price gains in the large cities continue to be extraordinary and scary. Prices in Beijing rose 23.5% y/o/y, 31.2% in Shanghai and 37% in Shenzhen. The Shanghai property stock index was up .7% in response.