Services PMI, New Home Sales, Purchase Apps, My Bearish Case for Bonds…

After seeing an upside surprise in Markit’s October manufacturing PMI index a few days ago, their services PMI index saw a nice gain as well. The index rose to 54.8 from 52.3 in September. It’s the best level since November ’15. Markit said “Business activity and incoming new work both expanded at the fastest pace for 11 months. The latest survey also revealed an upturn in confidence towards the year ahead business outlook, with service providers reporting the strongest optimism since August 2015.” Prices paid rebounded off the 19 month low last month. Employment “picked up only slightly from the 3 ½ yr low recorded in September…While some firms sought to boost their payroll numbers in response to rising workloads, there were also reports that efforts to reduce costs had led to the non replacement of voluntary leavers.”

Bottom line, based on their manufacturing and service indices for October it does “suggest that the economy is growing at an annualized rate of around 2%” in Q4 according to Markit. We see Q3 GDP on Friday and assuming the estimate of 2.5% comes to fruition and Q4 is about 2%, the average growth rate of 2016 would still be just 1.7%. Remember, these diffusion indexes only measure the direction of change, not the degree. I’m sure many business people are getting psyched to see the end of this election campaign regardless of who wins.

New home sales in September totaled 593k annualized, just shy of the estimate of 600k but August was revised down by 34k, July was revised lower by 30k and June down by 21k. As the number of homes for sale fell by 1k, months’ supply ticked down to 4.8 from 4.9 and still remains well below the longer term average of around 6 months. The median home price rose 1.9% y/o/y to $313,500, not far from the record high of $321,600 seen in June. In terms of price breakdown, sales fell for those priced below $300k and rose for those priced above, particularly for those priced at more than $500k. This is key because the market needs more inventory in the lower price levels in order to entice those first time households that want to own but can’t afford.

Bottom line, new home sales continue higher (3 month average is 599k vs 6 month average of 582k and 12 month average of 550k) but at a modest pace and we still have a ways to go just to catch up to the 25 year average of 715k. Said for the umpteenth time, the return of the first time household is key for the housing market to have it return to its longer term averages. Builders need to build more homes priced below $250k but because of the rising costs of lots and labor, the margin story is just not as good.

The MBA said purchase applications to buy a home fell 6.9% w/o/w to the lowest level since January. This is a bit disappointing just as I was hoping the first time household was about to jump back in but persistent home price increases of 5-6% are something to deal with. On a seasonally adjusted basis, the Case/Shiller home price index is approaching its ’07 peak. Low rates for now are helping to cushion this and purchases are still up by 9% y/o/y. Refi applications fell by 2.3% w/o/w, down for a 3rd straight week.

Yes, markets globally traded lower after the Apple numbers but we are also seeing another rise in interest rates, especially in Europe. It’s another day of both bonds and stocks trading lower which makes perfect sense as its contra to the last 7 years where bonds and stocks rallied together (and the same trend from 1981 to 2000). We can continue to analyze earnings and the economic fundamentals every which way to try to figure out where stocks go but let’s be honest, it’s all about where rates go in the monetary world we live in. The German 10 yr bund is up 5 bps to .08% which would be a closing 4 month high. The 10 yr Gilt yield is breaking out by 6 bps to 1.15%, the highest since the day of the UK vote. The French 10 yr yield is up by 5 bps and the Italian 10 yr yield is higher by 6 bps to also a 4 month high. I can’t blame bond weakness in Asia as yields there were little changed. The US 10 yr is getting dragged up to 1.77-1.78%, testing yesterday’s intraday high. The US 2 yr yield is up by 1.5 bps to .87%, the highest since early June on the heels of the weak 2 yr note auction yesterday.

I’ll reiterate the factors in our bearish case for bonds:

1. In a bond world dominated by central banks, damaged bank profitability in Japan and Europe has the BoJ and ECB acknowledging their monetary limits with NIRP and curve flattening.
2. The BoJ and ECB are also running out of bonds to buy.
3. Starving pension funds, savers and insurance companies of yield is gaining fodder for political pushback against central bankers, especially from politicians in Europe including in the UK.
4. Mark Carney and Janet Yellen admit that they’re willing to tolerate higher inflation at the same time inflation stats are moving higher.
5. With core inflation sticky due to gains in services, commodity prices ending their 5 yr bear market (I believe) will continue to shift headline inflation higher in coming months and quarters. CRB raw industrials index is just shy of a 16 month high and energy prices are all up y/o/y.
6. Atlanta Fed wage growth tracker is at its highest level since January ’09.
7. Foreigners are aggressive net sellers of US notes and bonds, $180b year to date.
8. Even without fiscal stimulus, the US budget deficit is expected to gap higher in coming years.