Existing home sales in May totaled 5.43mm annualized, about 100k less than expected and down slightly from April’s level of 5.45mm. This is the lowest level since January and the 2^nd weakest print since September and likely reflects contracts signed in the February thru April time frame. As it does seasonally in the spring selling season, the number of homes for sale has risen to the most since the fall. Relative to home sales, this brings the inventory to sales ratio to 4.1 months, the most since September. The median home price rose 4.9% y/o/y with single family up by 5.2% and we now have the highest median home price in the US on record at $264,800. That is now 15% above the 2006 peak.

The first time home buyer made up 31% of sales, down from 33% last month and vs 30% the month prior with record high prices and rising rates a major issue.

The NAR had a good bottom line to the report, “Incredibly low supply continues to be the primary impediment to more sales, but there’s no question the combination of higher prices and mortgage rates are pinching the budgets of prospective buyers, and ultimately keeping some from reaching the market.” For those looking to sell, chances are the new home they buy will carry a higher mortgage rate then the home they will sell.

My bottom line is something I’ve been saying for months. The transaction pace in housing has flat lined due to the standoff of a strong labor market and better wage prospects on one hand and home prices levels that are finally being met with resistance at the same time mortgage rates are at 7 year highs. The rate of closings in May is the same pace we saw in July 2015.

EXISTING HOME SALES

Keep Calm and Carry On was the message from the PBOC overnight to the Chinese people. “We’ll be forward looking, prepare relevant policies, and comprehensively use all kinds of monetary policy tools…China has room to face all sorts of trade friction.” After trading down all morning, the Shanghai comp did rebound a touch in the afternoon with a full day .3% gain. The H share index was up a more modest .1% while the Hang Seng rallied .8%. The yuan was also higher on a stronger fixing also meant to calm nerves.

To highlight the bifurcation in the global stock markets between the US and everyone else, the Vanguard All World ex US ETF yesterday closed at the lowest level since October.

VANGUARD ALL WORLD ex US ETF

While mortgage rates were unchanged w/o/w at 4.83% on average, mortgage applications did rebound from last week. Purchases grew by 4.3% w/o/w and are up 3.2% y/o/y. Refi’s were up by 6.1% w/o/w but remain lower by 31% y/o/y. We see existing home sales today and new home sales next week to gauge the push and pull in the industry where high prices and mortgage rates face off against a strong labor market and better wage growth.

Germany reported a hotter than expected PPI for May. The y/o/y gain was 2.7% vs 2% in April and above the forecast of 2.5%. The matches the quickest rate of gain since September. A 5.5% rise in energy prices was certainly a main factor as PPI ex energy was higher by 1.7%. German inflation breakevens are within 5 bps of its recent peak which was a 4 year high.

Yesterday the IFO Institute in Germany cut its 2018 growth estimate for the country to 1.8% from 2.6% previously. They said “The economy has developed far more poorly than anticipated in the first few months of 2018…Dark storm clouds are currently gathering over the German economy…We nevertheless believe that the upturn in Germany will continue but not at the same pace as in 2017.” The same can be said for the whole region. We should still see about 2% growth this year, good for Europe but just not as strong as last year.

There was improvement in UK industrial orders in June. The CBI’s index rose to 13 from -3 and that was well better than the estimate of +2. CBI said the rebound was “broad based, with output growing in 14 out of 17 sub sectors, with growth mostly driven by ‘Food, Drink and Tobacco’ and ‘Mechanical Engineering.’ On the other hand, “Respondents anticipate that output growth will slow slightly over the next three months.” On the inflation side, after a pretty robust run of pressure, they eased in June to the least since last summer. Bottom line, what is needed to sustain growth in the UK is clarity on the path to exiting the EU, stating the obvious. At the same time, Brexit has caused Mark Carney to be a deer in the headlights of monetary policy as inflation continues to run well above the BoE benchmark rate. We hear from them on Thursday. The data point did not help the pound as it is falling to the lowest level since November and that in turn is helping to lift the FTSE 100.

Housing starts in May totaled 1.35mm, about 40k more than expected and up from 1.29mm in April. We saw a lift in both single family and multi family starts with the former at the highest level since November. The breakdown here though was very concentrated as it was almost all in the Midwest. Single family starts in the Northeast were up a touch and fell slightly down South and out West.

Permits came in below the forecast at 1.3mm vs the estimate of 1.35mm. That is down from 1.36mm in April (revised up by 12k). Of note, permits to build single family homes fell to the lowest level since September as they fell in 3 out of the 4 regions. Multi family permits fell too but are very volatile month to month.

Bottom line, multi family construction is all over the place month to month but remains at good levels because of the strong demand for renting and amidst high annual rent increases. The figure of 414k for multi family starts compares with the 25 year average of 304k. Single family starts surprised to the upside but was offset by the drop in forward looking permits to an 8 month low. At 936k in May, that compares with the 25 year average of 1.02mm. As stated here many times before, the area of the market that is in most need of supply are those homes priced below $300k but that is the most margin constrained category from the perspective of the builders (rising lumber and other materials prices, tight labor, expensive lots). The demand to own is there but has become more expensive to do so because of record high prices and rising rates.

SINGLE FAMILY STARTS

MULTI FAMILY STARTS

The strategy now seems a trade war of attrition defined on Google as “a prolonged war or period of conflict during which each side seeks to gradually wear out the other by a series of small scale actions.” I repeat that I get what the end goal is but the means to that end is now going off the rails if this is the current strategy (how else to explain that US semiconductor companies are going to be paying the cost themselves for the semi tariffs on China). Slower growth and higher inflation is the only result of the current path.

The market response in China was ugly with a 3.8% drop in the Shanghai comp (down 12% ytd), a 5.8% plunge in the Shenzhen index (down 16% ytd) and a 3.2% fall in the H share index (down 1.9% ytd). If China wasn’t the 2nd biggest economy in the world and a major driver of global growth I guess this wouldn’t be that big of a deal. The Nikkei fell 1.8% (down 2.1% ytd), the Kospi lower by 1.5% (down 5.2% ytd) to name a few others in Asia.

Days after the ECB meeting last week, Mario Draghi spoke today and said “We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter.” He’s had rates below zero now for four years and reiterates his patience. The word Patience is now defined as continuing to do something that doesn’t work but you can’t admit or understand that it doesn’t so just give it more time.

Draghi will take his economy into the next downturn (whenever that might be) with rates still below zero and barely out of QE. He’s now repeated every single monetary mistake of the BoJ because he’s obsessed with 2% inflation. The euro STOXX 50 is down by 1.1% and by 2.1% ytd. The euro STOXX bank index is lower by 1% too and trading just a hair above the weakest level since December 2016.

Interestingly an ex BoJ official said last night on the policy of the BoJ and its own attempt at achieving 2% inflation, “The last five years have confirmed that the policy hasn’t had any effect. At some point you have to give up.” He thinks they should just accept a goal of zero inflation. Ironically, that is the real definition of price stability.

The NAHB home builder index in June fell 2 pts m/o/m to 68. The estimate was for no change. Each component, Present Conditions, Future Expectations and Prospective Buyers Traffic fell 1 pt from May. The NAR is citing worries about lumber tariffs as a key reason for the decline from last month. “Builders are optimistic about housing market conditions as consumer demand continues to grow.” I’ll add that demand is particularly strong for lower priced homes. “However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record high lumber prices have added nearly $9,000 to the price of a new single family home since January 2017.” What was not mentioned but is now an issue is the rise in mortgage rates. The hope of course is that a strong labor market and rising wage growth will be enough to offset the record high home prices and higher funding costs. For now though, it’s a standstill and why transaction volumes have been flat lining recently.

NAHB builder sentiment

The weakness in global stock markets that started in Asia overnight is for obvious reasons. People are losing some patience with “It’s just a negotiating tactic” reason for the tariffs because instead of leading to a formal negotiation, it is leading to an escalation. I’ll use this quick comment as a segue into foreign holdings of US Treasuries.

For the 2nd straight month in April, foreigners were net sellers of notes and bonds. The total was $4.8b, about the same as the net sales in March. The complexion of the activity was very bifurcated however as central banks sold a total of $48.3b, more than offsetting private foreign buying of $44.6b (International agencies make up the difference).

Most notable was the behavior of the Russians. They basically sold half of their US Treasury holdings, liquidating $47.4b worth in April alone, leaving holdings at $48.7b. It was April 6th that the US government put sanctions on some very well known Russian oligarchs and others and it upset the Russian government enough for them to sell a large chunk of their US Treasury bonds.

China was a net seller as was Japan. Japan now holds the least amount of US Treasuries since 2011. Hedge funds were the biggest buyer as the ‘Cayman Islands’ category saw an net increase of buying of $15.2b.

Bottom line, ever since 2013 foreigners have been net sellers of US Treasuries on the order of $83b after buying more than $400b in each of 2011 and 2012. For the market, it really didn’t matter because the Fed was a voracious buyer via its QE programs. Now of course that is in reverse at the same time foreigners are still shunning our paper. What is left is mostly domestic demand for US Treasuries, via pension funds, insurance companies and other funds. QT started in Q4 and the pace of foreign selling picked up the pace in October. Since then the 10 yr yield is up by 60 bps while inflation expectations are up by 30 bps.

Start watching this data, even though it is somewhat dated when reported. We need all the help we can get in the search for buyers of US Treasuries due to the enormous supply coming our way in the next few years. Our stance on trade with our trading partners could very well play into this in coming months and quarters, especially with China, the largest owner of US Treasuries.

In light of what is now a back and forth of trade taxes, the global trade data should also be at the top of the list of things to look at. At least in May, the Japanese trade figures were better than expected. Exports were higher by 8.1% y/o/y, a bit better than the estimate of up 7.5% and helped in part to the recent yen weakness. Imports jumped by 14%, well more than the forecast of up 8%. Much of that however is higher energy costs which Japan mostly imports. The yen is modestly higher and the Nikkei fell back into the red year to date with a .75% decline.