Existing Home Sales, 5 Yr Auction, Inflation, Commodities and more…

Existing home sales in October totaled 5.6mm, 160k more than expected and up from 5.49mm in September. It’s the most since February ’07 and likely reflects contract signings in July thru September. Most of the sales improvement took place in the Midwest and South but also grew in the Northeast and West m/o/m. Months’ supply fell 1 tick to 4.3, the lowest since January. First time buyers after jumping by 3 percentage points in September fell one tenth to 33% in October which is still up from 31% one year ago.

The NAR spoke positively in light of the upside. “October’s strong sales gain was widespread throughout the country and can be attributed to the release of the unrealized pent up demand that held back many would be buyers over the summer because of tight supply…Buyers are having more success lately despite low inventory and prices that continue to swiftly rise above incomes.”

This said, the data is somewhat old news in terms of the different mortgage rate environment when these contracts were signed. Assume mortgage locks took place between August and October, the average 30 yr mortgage rate according to Bankrate during this time for a 30 yr fixed was 3.43% vs 3.95% as of last night. On one hand that of course alters the funding equation for a buyer but on the other hand maybe the persistent 5%+ home price increases can moderate in response to offset that. ITB and XHB are up modestly in response to the upside even though it is old news.

At just off the highest yield in 11 months and after the soft 2 yr auction yesterday, the 5 yr auction was an improvement but still very uneventful. The yield of 1.76% was just a hair above the when issued. The bid to cover of 2.44 was a touch above the one year average of 2.42. Direct and indirect bidders took about 64% of the auction vs the previous 12 month average of 67% leaving dealers with the balance.

Bottom line, not much to say here. On the non event auction, Treasuries are about where they were just prior to the release of the auction details. The Treasury market over the past 3 days has been digesting the violent move higher which of course begs the question of whether it’s just a short term pause before the next leg up or a short term top. Looking towards 2017 and 2018, I expect the 10 yr yield to shift closer to where nominal GDP is (3-4% before any implementation of fiscal policy) and that means a continued move higher in yields. The economic slowdown this would inevitable create would then in turn slow and/or reverse the rise in yields.

With the new on the run 2 yr note, the yield stands at the highest level since April 2010 at 1.09-1.10% as the reality of a rate hike in 3 weeks fully sinks in. This is flattening the curve for a 2nd day by another 4 bps as the 10 yr yield is down 2.5 bps. The all time highs reached yesterday in a variety of stock indexes was impressive considering every major market move over the past 7 yrs was predicated on QE and no rate hikes from the Fed. I had to go back to 20 years the last time the Russell 2000 was up 13 days in a row which it’s on track for today. The streak touched 15 back then.

With respect to rising inflation expectations, it’s not just a US thing.  The 5 yr 5 yr euro inflation swap that Draghi claims to watch is trading at its highest level since January. If oil prices continue rising, there is a lot of room to the upside here. See chart. With the rise in commodities where the CRB raw industrials index is at the highest level since January 2015, the seeds for this have been sown over the past year with the dramatic cut in mining investment. Oil too. Trump’s victory just added a bit of gasoline to the rally. I’ll repeat again my bullishness on commodities. Agricultural has been the only laggard as the CRB food index sits at the lowest level since November ’09 so that is where the new commodity opportunity is:

The Japanese 10 yr inflation breakeven is just off its highest level also since January at .53%:

The only data point of note overseas was the UK CBI November industrial orders figure where it went from -17 to -3 and that was better than the estimate of -8. The CBI said “It’s good to see manufacturers’ overall order books at healthy levels and the outlook for output growth remaining robust as we head into Christmas.” Here’s the rub though, thanks to the weaker pound, inflation is jumping. The price index rose to 19, the most since January 2014 from 8 last month. The CBI said the price gains were mostly seen in the “food and drink sector.” The pound is lower and not responding to the headline beat while gilt yields are lower and not responding to the price rise as sovereign bonds across the region are bouncing as no one believes Draghi will take his foot off the QE pedal in March after comments from some ECB members yesterday.