If you don’t know where you’re going, you might wind up someplace else.
The Yogi Berra quote on my Bloomberg terminal this morning seemed perfect ahead of the BoJ and Fed meetings this week. Who knows if he ever actually said it but it seems to highlight well the state of monetary policy that is based on nothing we can figure out. It certainly begs for central bankers getting out of the business of price fixing the cost of money but that won’t happen anytime soon of course. With respect to the Fed, if they were truly data dependent on the current flow of news they would definitely not be raising rates. If they believe ‘mission accomplished’ and that their two mandates have essentially been met or are close to it, they can argue they are WAY behind the curve and let’s hike. If they are worried about asset price excess as Eric Rosengren is about commercial real estate, then hike… but Mr. Rosengren, you don’t wait until cap rates get to 4% before you notice a problem because it’s already too late. Whatever the Fed chooses to do, 3 month LIBOR has already tightened for them as it is up 54 bps y/o/y vs the 25 bp rate hike last December. Rate hike odds ahead of tomorrow are at 24% and at 54% in December.
Ahead of the BoJ tonight, longer end JGB’s are rallying with the 10 yr yield down 2.5 bps to -.06% and the 40 yr yield down by 5 bps to -.59% (this was at 7 bps just two months ago). European and US Treasuries are following in the rally, evidence again that we are all in this bond bubble together. Whatever the BoJ chooses to do all eyes are on the reaction of the bank stocks in what will be most likely an attempt to steepen the yield curve. It took a 50% decline in the Topix bank stock index from the June 2015 high to the July 2016 low that alarmed many that as much as a central banker wants 2% inflation, destroying your banking system in order to get there is a really stupid idea. I think Mario Draghi is waking up to the same reality.
With just a few weeks to go before the yuan gets officially included in the IMF’s special drawing rights FX regime, the overnight HIBOR rates are truly crazy to watch as the PBOC battles to keep control of the yuan weakness and their outflows. Overnight HIBOR (borrowing cost of yuan in Hong Kong) was 1.80% two weeks ago. It was 8% as of last week’s close, jumped 1500 bps yesterday to 23.7% and then fell 1100 bps last night. This behavior also reminds me of the Yogi Berra quote.
The British pound is back below $1.30 vs the dollar the pound is testing the lows vs the euro as people realize the hard part of negotiating a Leave is now reality. This action thus gives back the rally after seeing better than expected data in August. Tomas Prouza, Czech State Secretary for EU Affairs who is negotiating with the Brits on their exit said today “There is no way whatsoever for the UK to have the cake and eat it at the same time.”
And as far as domestic data. August housing starts totaled 1.142mm annualized, 48k less than expected and compares with 1.212mm in July. Single family is where there was particular weakness as starts there fell to 722k from 768k in July and it’s the lowest since October 2015 due to a sharp slowdown in the South. Multi family starts fell 24k m/o/m but at 420k is still at a good level as we know the demand for renting is robust. Looking forward, permits for single family construction rose by 26k m/o/m but only after falling by 27k in the month prior. At 737k, it’s about in line with the average year to date of 730k. This is near the highs of this recovery but still remains 25% below the 25 year average. Permits for multi family building fell by 31k m/o/m but is still above 400k for the 4th straight month.
Bottom line, the cross currents in the housing data are stark. We got all excited after yesterday’s 6 point jump in the home builder survey thanks to a rise from builders out West. Today’s starts number is just ordinary and single family permits out West were barely up. The South saw most of the weakness. Either way, single family home building is still in a relatively depressed state in that the pace of activity is well below the 25 year average even though we have a bigger population. Obviously this squares with a homeownership rate that is at 50 year lows. Multi family construction remains strong as the rental vacancy rate as of Q2 hit its lowest level since 1985 at 6.7%. We are seeing in NY and San Francisco that apartment supply is beginning to overwhelm demand and rents are softening in those markets and we’ll be watching other cities for something similar. As for growth, homebuilding itself (not including all the peripheral impacts) is back to being a small portion of economic activity.