September housing starts totaled 1.047mm, well below the estimate of 1.175k and down from 1.15mm in August (revised up by 8k). That is the slowest pace of starts since March 2015 BUT the mix was hugely divergent. For reasons I can’t explain, multi family starts plunged by 162k, from 426k to 264k. Single family starts actually improved to a 783k annualized run rate up from 724k in August. That’s the quickest pace February. With respect to the future, nothing to fear with multi family construction as September was probably an anomaly because multi family permits rose 70k to 486k, the most since November 2015. Single family permits were little changed, rising by 3k m/o/m to 739k.
Bottom line, the bizarre plunge in multi family starts is inexplicable but the rise in permits says it was an outlier. Single family starts saw a good increase but the permit side saw no future acceleration of note. For perspective, the 783k single family start figure compares with the 25 yr average of 1.032mm so the industry is obviously still challenged but also points to the amount of catch up that should occur in coming years.
Purchase applications to buy a home rebounded by 3% w/o/w after falling by 2.6% last week. The y/o/y gain was 13%. This comes as the average 30 yr mortgage rate jumped by 5 bps on the week and 11 bps over the past two weeks to the highest level since June. Fence sitters getting off or buying that would have happened anyway? At 3.73% it’s still obviously low so I’ll say the latter but it’s the biggest two rise since March. Due to the jump in rates, refi applications fell .8% to the lowest level since late June and are down for the 4th week in the past 5. They still remain though 22.4% above last year’s level when mortgage rates where just below 4%.
US stock market sentiment got less bullish w/o/w. Bulls fell to 42.9, the lowest since late June, from 46.1 last week. Bears rose by .7 pts to 23.8, the most in a month. Those expecting a correction made up the balance and are at the highest since late June as well. You can still drive a truck between the bulls and bears but it’s clear that the daily churning in the market, where its basically made no progress over the past 3 months and for the past 17 months if we want to stretch to the 2130ish level of last May, has tempered some of the market enthusiasm.
Net foreign selling of US Treasuries continued in August with another $24.8b of notes and bonds shed. This is now the 5th straight month and brings the year to date total of net selling to $180b, an unprecedented pace with foreign governments doing all of the selling as private foreign buying remains positive. China sold another $19.2b and has liquidated almost $70b worth over the past 3 months. Japan was a seller of $9.3b of notes and bonds. Saudi Arabia continued their selling as well (they are now going hat in hand internationally for the very first time and are about to raise $17.5b of bonds).
Bottom line, we know the pressure on China to control the yuan weakness is forcing their selling. Saudi Arabia is also obvious and the Japanese have lost all benefits of buying US Treasuries due to the spike in the cost of hedging out the dollar/yen risk. We can now again look at all the factors moving US long rates higher over the past few months. Combine this foreign selling with the rise in rates in Japan and Europe in response to central bank limits there clearly being reached, the rise in US inflation rates, and expectations that the US budget deficit is about to head much higher in coming years both organically and juiced by fiscal stimulus whichever form it eventually takes.
China continued to roll out more economic data overnight. They said their economy magically grew by 6.7% y/o/y in Q3, right in line with expectations and which was the same pace of growth in Q2 and in Q1. While it is highly unlikely they are actually growing at that speed, it still is the slowest rate since Q1 2009. The services side of the economy, known in China as the tertiary industry, grew by 7.6% while mining, manufacturing, construction and utilities grew by 6.1% predominantly triggered mostly by state spending.
Also out was industrial production for September which grew by 6.1% y/o/y, three tenths less than expected and it hovers at the slowest pace of growth since December 2008. Retail sales and fixed asset investment grew as expected. Quantifying how out of control their property market has become, BN news is reporting that the “value of China’s new home sales rose 61% in September from a year earlier.” That is up from a 33% rise in August y/o/y.
Bottom line, much of the growth in China as we know has been fueled by excessive credit expansion and state sponsored spending. Thus, what is organic and what is juiced isn’t exactly clear but we know the latter is not sustainable. The market response was mixed to this so called ‘steady data’ as the Shanghai comp was unchanged but the H share index in Hong Kong was lower by .8%. The yuan rallied.
For the 3 months ended August (thus capturing two months post Brexit), the UK economy created 106k jobs, 30k more than expected while the unemployment rate remained steady at 4.9%, the lowest since 2005. Earnings were also pretty steady as they grew by 2.3% y/o/y ex bonus’ as expected but is down a touch from the 2.4% rise in July. The wage data becomes ever more important now as the UK citizenry is about to face higher inflation. There is this assumption in the halls of central banking and stated yesterday by Stanley Fischer that a rise in inflation will come with an equal amount of wage increases. Let’s hope so but even if it does, people are no better off on a real basis if inflation and wages go up by the same amount. Anyway, looking at September jobless claims saw a gain of .7k which was below the estimate of a 3.2k gain but that was more than offset by an upward revision of 4.7k in August.
Bottom line, the UK economy has held up pretty well post UK vote but with another plunge in the pound in October as unknown’s grow with how Theresa May is going to engineer the Leave, all this data could be considered old news. The pound is unch on the labor market news and the 10 yr gilt yield is lower by a bp.