The April fed funds futures contract which fully captures the March meeting is now pricing in a 44% chance (using the midpoint between .50-.75% instead of the current effective rate of .66%) of an interest rate HIKE at that get together. That level was seen on February 15th the day after Yellen’s testimony and June 2016 before that. Rate hike odds were 24% three weeks ago. In the Fed’s desire not to surprise markets as Loretta Mester repeated last week, hike odds anywhere close to 50% would give them cover to go. We think they do.
Pending home sales in January fell 2.8% m/o/m, well worse than the estimate of up .6%. Also, it was from a lower than expected base as December was revised down by 8 tenths. This takes the seasonally adjusted level of contract signings to the lowest since January 2016. The m/o/m decline was most pronounced out West with a 10% drop. The NAR said “The significant shortage of listings last month along with deteriorating affordability as the result of higher home prices and mortgage rates kept many would be buyers at bay.” The NAR believes that the demand for homes is there but pricing is the main impediment. Maybe this is the case as rents have gone up substantially and therefore it’s not a surprise that people are looking to buy. Also, with the homeownership rate near the lowest level in 50 years at 63.7%, the pendulum has certainly swung the other way after the mid 2000’s peak so not a surprise that maybe we’ve pushed it too far.
Bottom line, the persistent rise in home prices well above the rate of inflation on top of a higher cost of funding have combined to moderate home sales. This comes as the homeownership rate at 63.7% is already near 50 year lows. Stated for the millionth time, the behavior of the first time home buyer is the main constituent that has not fully embraced buying a home post recession as opposed to renting. Part of this is the millennial demographic that is creating families later in life but a lot of it is a large legacy of student debt, moderate wage gains at the same time home affordability has been less attractive relative to renting.
The stock market reaction in the homebuilders and home related stocks was opposite to the headline miss as they are rallying. I’m looking at ITB and XHB.
After upside seen in December (and revised up by 4 tenths to up 1.1%), January non defense durable goods orders ex aircraft disappointed with a .4% m/o/m drop, below the estimate of up .5% (from the pre revised December figure). Orders for computers/electronics, electrical equipment and primary metals led the decline. Orders for vehicles/parts eked out a .2% gain and are up 5.1% y/o/y. Machinery orders improved by .5% and 4.3% y/o/y as mining and rigs come back on line. Core shipments fell .6% m/o/m, 8 tenths weaker than expected but mostly offset by a 6 tenths upward revision to December. We thus might see a modest trim to Q1 GDP forecasts but an upside to tomorrow’s Q4 figure.
Bottom line, core capital spending in January was up 2.6% y/o/y which remains in the punk range we’ve seen in this expansion. On an absolute dollar level, spending in January 2017 was no different than what was seen in August 2000. Here is a chart. The importance of getting tax reform done quickly is apparent as investment decisions may be put further on hold until we get it. What will the final tax rate be compared to what companies current effective rate is? Will there be immediate expensing of depreciation which won’t impact cash flow but will of course earnings? Will there be border taxes? Will companies no longer be able to deduct interest expense? Will there be trade battles? Etc…
The February Dallas manufacturing index, the 2nd to last regional manufacturing survey before the ISM in a few days, rose to 24.5 from 22.1. That was above the estimate of 19.4 and marks the 5th month in a row of positive prints which followed a long string of energy induced negative ones. The internals were more mixed as new orders, orders growth rate, backlogs, and shipment volumes fell while production, capacity utilization, and inventories were higher. Employment was up but the workweek was down. Capital spending plans fell but after jumping last month. Both prices paid and received were up slightly. As for the future outlook for business activity, it fell to 37 from 43.7 but was just 5.6 back in October before the election. Also of note were the mixed comments with some very positive post election and other comments expressing some uncertainties. Here are a few:
- Primary Metal Manufacturing: “We have seen an improvement since the election.”
- Fabricated Metal Product Manufacturing: “The global economies and US economy are very weak and uncertain.”
- Another, “During the 40 years in business, I have never seen such a positive result from an election as I have experienced since the November election.”
- Machinery Manufacturing: “One of our manufacturing facilities is in Mexico. There is some uncertainty around potential impacts to NAFTA and other policy changes from the Trump administration.”
- Transportation Equipment Manufacturing: “This is a more negative view than we typically see. One caveat to this response is that we are not necessarily confident in some sales forecast assumptions we are getting in our data. If the data are correct, our company outlook will be negative for the next 6-8 weeks and possibly longer.”
- Printing and Related Support Activities: “Maybe it’s because we have hit the January doldrums that can occur for us this time of year, but it seems way slower with much less activity both in order entering and in quoting. It’s as if our customers are still out on vacation or taking a wait and see to the new president.”
- Paper Manufacturing: “Although slight, the overall outlook has improved, supported by actual increase in orders and activity. We have been looking for additional employees (skilled) who have been hard to find.”
- “We expect President Trump’s policies towards NAFTA and Mexico will have a negative impact in the borderland in the next 6 months.”
- Misc Manufacturing: “We are expecting President Trump to have a very positive impact on the business environment. We need less regulation, less red tape, better trade deals and lower taxes.”
Markets never respond to this index and are now focused on the ISM this Wednesday. The estimate is for no change from January.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.