Housing Starts, US Treasuries, French Elections, UK Elections! and more…

Multi family construction is still where it’s at

Housing starts in March totaled 1.215mm annualized, 35k less than expected while February was revised up by 15k to 1.303mm which was the highest since October. Let’s assume February was goosed by the mild winter and thus let’s average February and March and then compare. Single family starts averaged 848k vs 813k in January and vs 868k seen in October before the election. As I always like to provide perspective, the 848k compares with the 25 year average of 1.03mm. Multi family starts, the bastion of strength within housing, averaged 411k vs 428k in January and vs 452k back in October. This compares favorably with the 25 yr average of 294k in response to 4-5% annual gains in rents.

On the permit side, they were slightly ahead of forecasts at 1.26mm, 10k more than expected and up from 1.215mm in February. It was all multi family as permits here bounced by 53k to 437k although is very volatile month to month as it fell by 102k in February. Single family starts fell 9k to 823 and is very volatile too. It printed 780k in November, 830k in December, 807k in January and 832k in February to make the point.

Bottom line, coincident with the lift in the NAHB builder confidence survey since the election, we have seen a pickup in single family starts over the past 6 months. Including October which was right before the election and which included a print of 868k, the 6 month average in single family starts is 835k vs 768k in the first 9 months of last year and vs 713k in 2015. Thus, some improvement is being seen but as stated above, we have a long way to go just to get back to average which is not adjusted for the increase in population. I’ve said a million times that the market needs more homes priced below $250,000 but its costly to do so from the builder perspective in terms of margins and profits because of the high costs of lots, labor and permits. Multi family construction continues to be where it’s at with the homeownership rate not far above the lowest level since 1965 and 150 bps below the average since then. Rents gains are already softening in some big city markets like NYC and SF in response to the growing supply.

Politics on the mind but mixed market responses

Ah the French. They can’t stop being tempted by fringe politics and crackpot, socialist economics. The utopian dream is alive and free market capitalism remains something to loathe. I really thought this election was an Emmanuel Macron layup but talking about pulling defeat from the jaws of victory if he doesn’t win. Marine Le Pen is certainly the real problem because she believes in fundamentally altering the state of the euro. Jean-Luc Melenchon would be a socialist/communist disaster for the French economy but what else is new? He is just a bit more economically extreme than Hollande. I mean it was Hollande that instituted the 75% income tax on income above 1mm euros (and later admitted it was ‘too much and too heavy’) and Melenchon says why not raise it to 100% for those making more than 400k euros. Either way the end result is a brick wall. It was Macron by the way that referred to the Hollande tax as helping to create “Cuba without the sun.” The CAC is trading at a 4 week low ahead of this weekend’s first round vote. The euro though trades great at $1.07 while the French 10 yr yield is down by 2 bps to just .895%. Quite a mixed market response.

Then around 5:30am est time Theresa May says she wanted to make a statement (Sky News thought she wanted to resign due to health reasons) that came about a half hour later saying that she wants to be an elected official in order to move forward rather than appointed by default after David Cameron quit. So on June 8^th, the Brits will go to the polls, almost one year to the day of the Brexit vote last year. Her reasoning for calling for a snap election is she wants a more clearer mandate on negotiating the UK leave from the EU in response to the Parliamentary pushback from certain areas she seems to be getting. She said “There should be unity here in Westminster but instead there is division.” Considering the Conservative Party is well ahead of Labour in the polls by more than 20 points, I don’t see a problem for her and maybe the response in the pound agrees with that. It’s ripping higher by a $1 to north of $1.265, a 4 month high. I remain bullish on the pound and I say Theresa May’s move is smart as she’ll most likely win. The 10 yr Gilt yield is lower by 1.5 bps to just above 1% at 1.03% but the FTSE 100 is down about 1.5% on that pound strength. The FTSE 250 which is much less sensitive to pound moves is down by about .9%.

The bubble that won’t pop and keeps getting inflated every time some air leaks out is in China and we saw property price data last night. Of 70 cities surveyed in March, 68 saw price gains for new apartments vs last year and there were 62 cities that reported gains for existing apartments. Both are the most in a while. From February, more cities saw price gains for both new and existing apartments, 62 for the former and 64 for the latter. The data is not a surprise considering the household loan data we’ve seen and the fixed asset investment news over the past few months. I counted 24 cities that saw double digit y/o/y price gains led by the city of Hefei where home prices rose 34.5 y/o/y. Price gains slowed to 17% in Shanghai and 19% in Beijing. Many in China have no faith in stocks, don’t like the low yields in savings and bonds and are thus left with property and wealth management products. The amount of WMP’s outstanding in China is $3.9T and are essentially ‘leap of faith’ products with implicit government backing. This size compares with nominal GDP in China at about $13T. The Shanghai property stock index was little changed but the Shanghai comp itself was lower by .8% and is now quietly trading at a 10 week low.

For all the worries about North Korea, the South Korean Kospi is at the highest level in more than a week and higher by 6% ytd. I’m still bullish on it due to cheap valuations and change likely coming to the entire chaebol structure but I of course assume no bombs.

Back here in the US, foreigners still don’t like our Treasury paper. For the 10^th month in the past 11 up until February, foreigners have been net sellers of US notes and bonds. In February they sold another $13.5b. Since 2014, foreigners have sold $367b worth on a net basis of notes and bonds. In February, both private owners and central banks were sellers. China added $8.6b of Treasuries but almost all of that was in bills. They bought a net $1.55b in notes and bonds but Hong Kong was a net seller of $5.6b and that could have been a conduit for mainland selling . Japan again was a seller of notes and bonds but more than offset that by buying bills. We also saw the impact of likely hedge fund liquidation in February as $18.9b of selling came from the Cayman Islands.

Bottom line, the persistent selling of US Treasuries over the past two years has of course not had any noticeable impact on the level of US rates thanks to the persistent buying by the Fed and from other buyers. The question though from here is what happens if the foreign selling continues at the same time shrinkage occurs with the Fed’s balance sheet. We just might soon see. Also, if a weaker dollar is now upon us with the blessing of the President, foreigners may even pick up the pace of selling at the same time import prices rise.