Foreigners were back buying US notes and bonds with net purchases of $46.4b in May. The buyer makeup though was bifurcated as central banks were sellers again while private participants were big buyers. Specifically with notes and bonds, Asian countries were net sellers while Europe and the Caribbean (aka, hedge funds) were buyers. For the 3rd straight month China was a seller of notes and bonds of $9.2b but offset that with purchases of t-bills which brought their net purchases to $10b. Hong Kong, a possible conduit for mainland selling, sold $8.7b of notes and bonds. Japan sold $3.3b of notes and bonds but offset that with t-bill purchases. Participants in the Cayman Islands, a hedge fund conduit, were buyers of $34.8b of notes and bonds and thus dominated the buying out of that region.
Bottom line, private buyers overwhelmed the selling from central banks of US notes and bonds helped by hedge funds and European buyers. The net purchases brought year to date buying to $27.6b after the selling of $326b in 2016 and $20b in 2015. Just maybe we’ve seen a stabilization in net foreign buying as we get closer to Federal Reserve QT and their switch to buying less paper. On the other hand, we need to watch to see if the weakening dollar begins to have an impact. In the month of May the US dollar index fell from 99 to just below 97 (now at 94.66) which is a 2% decline, basically wiping out a year of interest income for those foreign buyers (if they didn’t hedge) even though that didn’t affect activity in May because of hedge fund buying. The May thru July 18th dollar decline is now 4.4%, basically wiping out two years of interest income for those buying 10 yr paper. I say this because dollar weakness (or strength) has broader implications than just the earnings translation for multinationals. We also import more than we export so the net result of a weaker US dollar is a cost. As for the Treasury market, the release of this flow data is never market moving. US Treasuries from here will continue to be in the vortex of Fed QT/ECB, BoJ tapering on one side dragging yields up and the reality of a 1 handle US economic GDP growth rate and modest inflation stats on the other pulling them down.
Housing starts in June totaled 1.215mm, 55k more than expected and May was revised up by 30k to 1.122mm. The peak this year was back in February when it reached 1.288mm. Both single family and multi family starts contributed to the m/o/m gain. Single family starts totaled 849k, up 50k. The peak in this cycle was back in February when it reached 877k. The 2006 peak was 1.82mm and the 25 year average is 1.027mm so put today’s number in that context. Multi family starts were 366k, up 43k. It touched 460k back in December but these levels are more in line with long term averages and we of course know the strength of multi family over the past few years.
Permits also surprised to the upside as they came in at 1.254mm in June, 53k more than expected. Single family permits rose 32k m/o/m to 811 and multi family was higher by 54k to 443k.
Bottom line, smoothing out the last 3 months puts the single family start average at 824k vs the 6 month average of 800k and 12 month average of 814k and thus pretty steady but still running about 20% below long term trends. Multi family starts as we know continues to be more in line with long term averages as the homeownership rate sits just off the lowest level in 50 years. As stated earlier, the Spring housing season was pretty good but it’s clear the area of the market that needs more homes the most are those priced below $250k in order to better compete against renting.
SINGLE FAMILY HOUSING STARTS going back 25 years
There was a sharp shift upward in bullishness in the weekly II data in response to last week’s Yellen driven rally. Bulls jumped to 57.8 from 50 which is a two month high while Bears fell to 16.7, the lowest since March 1st when it touched 16.5 which was the lowest since July 2015 (that day in March the Bulls hit the highest level since 1987 at 63.1) vs 18.6 last week. To use a phrase my friend Helene Meisler, “There is nothing like price to change sentiment.” The Bull/Bear spread at 41.1 is the widest since May 10th. Yellen also triggered a sharp reversal in the CNN Fear/Greed index which jumped to 62 from 41 over the past week. Performance wise, the NDX closed yesterday up 8 straight days. Bottom line, since that March 1st extreme in the Bull/Bear spread when it reached 46.6, the S&P 500 is up 2.6% not including dividends with more than half that gain over the past week. With bullishness now extreme again, expect some consolidation and a breather here in stocks strictly from a contrarian sentiment standpoint.
After falling by 13% last week, refi applications rebounded by 13% w/o/w as mortgage rates held steady at 4.22%. Refi’s are still down 52% y/o/y. Purchase applications were up 1.1% after dropping by 2.5% last week and are up 6.7% y/o/y. The Spring transaction season has been pretty good in a stair step fashion and we’ll see June housing starts today at 8:30am. I still believe though that we’ve reached pricing levels that are causing some buyers to flinch which could limit sales. The lack of inventories certainly has been a major factor in the rise in prices but there are early signs that inventory of homes is beginning to increase which would be a relief to many.
MBA US PURCHASE APPLICATION INDEX over the past 2 years
The Chinese small cap ChiNext index and the Shenzhen index both bounced for a 2nd day after Monday’s messiness. The Shanghai comp was up by 1.4%. Money market rates though continue higher on another round of crackdown’s on excessive leverage. Overnight Shibor was higher by another 2 bps and is up 10 bps over the past 3 days to 2.72%, matching the highest in a month. The 7 day repo rate is up by 55 bps over the past 3 days to 3.6%, a 3 week high. The yo yo of wanting credit driven 6.5-7% growth on one hand and less leverage on the other continues.
Gear up for the BoJ meeting tonight and the ECB tomorrow. We’ll hear nothing new from the BoJ but the pressure is growing on them to get off their ridiculous obsession with 2% inflation, a rate they haven’t reached at the core level since 1998 not including the VAT spike in 2014. Too many central bankers just don’t get that inflation or deflation is just a symptom of underlying economic fundamentals. There is good inflation and bad inflation. There is good deflation and bad deflation.
The ECB is scared straight about upsetting the markets and will thus tip toe into the likely September news of a tapering game plan. They will most likely stop saying tomorrow that more QE would be needed if necessary as laying the groundwork for the inevitable reduction in monthly purchases. After 4 days of selling, the dollar index is up slightly.