September existing home sales, where contracts were likely signed in the June thru August time frame, totaled 5.47mm, above the estimate of 5.35 while August was revised down by 30k to 5.3mm. This puts the 6 month average to 5.44mm and the year to date average of 5.4mm. Months’ supply ticked down to 4.5 from 4.6 and remaining below the long term average of around 6 months. The median home price rose 5.6%, continuing the trend of 5-6% increases. The most positive component within the data was the 3 pt increase in the percentage of sales going to first time households. They bought 34% of homes sold vs 31% in August and up from 29% one year ago. Are the Millennials getting ready to dominate home sales where the average age is now 33 (h/t BH)? Are many of them getting turned off by ever rising rents? We’ll see but we’re going to need more homes priced between $200-250k and sales below that level are still lagging. Most of the sales in September took place in the $250-750k range.
Bottom line, the NAR took a stab at explaining the increase in buying from 1st time households: “Most families and move up buyers look to close before the new school year starts. Their diminishing presence from the market towards the end of summer created more opportunities for aspiring first time homeowners to buy last month.” Maybe, maybe not. As to the issues still challenging the market, “Inventory has been extremely tight all year and is unlikely to improve now that the seasonal decline in listings is about to kick in. Unfortunately, there won’t be much relief from new home construction, which continues to be grossly inadequate in relation to demand.” This last point is most important in that the demand for homes should continue to increase, especially as Millennials become a larger part of the population who do eventually want to own their own homes but unless the supply steps up, especially for lower priced homes, the overall market will remain somewhat stunted and renting will remain an attractive option. The high costs of lots and labor have trimmed the margins on homes priced below $250k.
XHB, the home related etf, is down on the day as the builders are down 1% after PHM #’s but at 32.60 it’s higher than its early morning lows.
Initial jobless claims totaled 260k, up 13k on the week off the lowest level since 1973 and 10k more than expected. The 4 week average rose to 252k from 250k and vs 253k in the week prior. Continuing claims, delayed by a week, rose by 7k off the lowest level since 2000. Bottom line, with Hurricane Matthew and potential seasonal adjustment issues around Columbus Day could have been some influences on the upward rise. It could also be we’ve seen the lows in claims in this cycle because the US economy keeps slowing. On that point, it’s certainly too early to say of course. Either way, the pace of firings remain modest for reasons I state every single week.
After contraction was seen in the NY manufacturing survey, the Philly index remained positive at 9.7. That was down from 12.8 in September but almost double the estimate of 5. The internals reflected a lot of volatility month to month. New orders fell 19 pts in August, rose 8.6 pts in September and gained another 14.9 pts in October to the best level since November 2014. Backlogs remained negative but barely so at -.3 vs -9.3 in September. Backward looking shipments jumped by 24 pts. Employment was negative for the 10th straight month but the 6 month outlook has improved. Inventory plans were negative for the 16th straight month. Prices paid and received both dropped in contrast to the gains seen in the NY data. As for the future, confidence in the 6 month outlook fell 5 pts to a 4 month low but cap ex plans rose 12.6 pts after falling by 10.6 pts in August.
Bottom line, the Philly regional index after the weak NY figure points to the uneven pace of manufacturing activity. We know this area of the US economy has been a drag and we have more regional survey’s to see that will most likely prove that it remains the case. The Philly area though is doing ok.
Mario Draghi seems to want to wait until December in order to decide whether to take QE past the March expiration date. They said there was no discussion at today’s meeting on extending it but also they did not talk about tapering either. I’m sure they are talking about all of this behind the scenes but nothing formal yet. He said even when QE ends, it will most likely be in a tapering form whenever that might take place. He did say at 7:45am in the statement that they will extend QE if needed, something he’s said in the past. He also said “extraordinary policy support won’t exist forever” and acknowledged that inflation will rise in coming months in part due to the base effects of energy prices. On core inflation he said there are “no signs of a convincing upward trend” but I say it still has been very stable for the past year and a half. He continues with his contradiction that he wants higher inflation but at the same time today said “low oil prices provide support for consumers.” On NIRP, Draghi thinks they have worked. Thus, he still believes that taxing capital works in stimulating lending and growth. The euro rallied in response to the lack of any color on what happens next with QE and European stocks and bonds are sold off from their earlier highs.
In a speech last night NY Fed President Bill Dudley said “I do expect to see an interest rate rise later this year…If we raise the federal funds rate a quarter of a point, that’s not really that big of a deal. This idea that it’s this incredible fork in the road, I think people are exaggerating the significance.” This is coming from someone that has voted ONCE for a 25 bps rate hike over 8 years of this economic expansion. Rate hike odds are about 50/50 by year end. Bottom line, it can’t be more obvious that the Fed wants to hike rates. It’s also obvious that they won’t do it in November because Fed President Harker admitted that if Trump wins, they have no idea what they are going to get. They seem to know what they will get with Clinton and she reminded us last night where she is going, “We’re going where the money is” and then she will “invest” the proceeds. As for December there is still a bunch of economic news to see, including two payroll numbers and the Fed of course needs to see where the S&P 500 is when they step into that meeting. Thus, the 50/50 odds. Either way, the market has already tightened for them as seen in 3 month LIBOR (notice it hasn’t fallen after Friday’s money market implementation) and the 10 yr yield.
After the final debate, the Mexican peso is rallied for a 4th day to the highest level since September 7th. I wonder why…?
With easing inflation rates, Brazil cut rates last night by 25 bps to 14% off the highest level since 2006. I’ve been bullish on Brazil ever since prosecutors started going after Petrobras with its corruption crackdown believing change was afoot and I remain bullish with Michel Temer now in charge. Notwithstanding the rate cut, the Real is rallying for a 4th day. Indonesia also trimmed its base rate by the same amount. Both still have rates above the rate of inflation. The Rupiah is unchanged and the Jakarta stock market was as well even though this move was unexpected.
UK retail sales in September were unchanged ex fuel oil which was two tenths worse than expected but that was offset by a two tenths upward revision to August and is thus a push. The y/o/y gain of 4% is still pretty good but with inflation about to spike in coming months and quarters we’ll see to what extent wages catch up and thus what retail sales will do. I thus consider this data point old news.
Australia reported a September jobs miss relative to expectations due to a sharp drop in full time employment. Payrolls fell by 9.8k people instead of rising by 15k that was expected. August was also revised lower. A drop in the participation rate kept the unemployment rate in check at 5.6%. On the miss, the Aussie$ is lower but the ASX was unchanged. The Australian economy as we know was a huge beneficiary of the Chinese miracle over the past 30 years and at least over the past few they’ve had to transition its growth away from the challenged commodity space. It’s been 25 years since they last had an expansion and the RBA also believes in positive real interest rates.