Monday Update: Housing Does Well, But Fed Surprises Markets

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 25, 2019 1:29:29 PM

and tagged In the News

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Monday updateThe big economic news last week was the inversion of the yield curve (i.e., when the yield on 10-year U.S. Treasuries dropped below the yields on shorter-term notes). This warrants—and will get, tomorrow—a more detailed discussion, but the short version of the story is that inversions can indeed signal trouble in the next six to eighteen months, but not right away. This is one more sign of weakness, and something to watch, but not a sign of imminent doom.

Other than that, last week was a slow one for economic news, consisting of housing reports and the regular meeting of the Federal Reserve. Things will pick up this week, with looks at housing, trade, confidence, and consumer income and spending.

Last week’s news

On Monday, the National Association of Home Builders released its industry survey, which stayed steady at 62, reflecting continued moderate confidence in the homebuilding market. With interest rates declining, affordability has improved, which makes such continued confidence reasonable. On Friday, the existing home sales report showed an even bigger improvement for the housing market, with an increase from 4.93 million to 5.51 million sales on an annualized basis, well above the expected 5.1 million. Such an improvement suggests the housing market is stabilizing after a slowdown, which again is consistent with the rise in affordability and would be a positive economic indicator.

On Wednesday, the regular meeting of the Federal Open Market Committee concluded with the release of the policy announcement and a press conference with the chair, Jerome Powell. As expected, the Fed held steady on interest rates, but the real surprise was in how dovish the statement and accompanying economic projections were. The Fed announced that the quantitative tightening shrinkage of its balance sheet would end later this year and that further rate increases were on hold. The weak inflation data from last week combined with apparent slowing economic growth in the first quarter clearly led the Fed to dial both back. Market reaction was mixed, with the positive effects of lower rates offset by fears about slowing growth. Overall, the news led to a drop in interest rates, which led to the yield curve inversion on Friday.

What to look forward to

The data flow starts on Tuesday, with the release of the housing starts report. Starts are expected to drop back slightly, from 1.23 million annualized in January to 1.21 million in February. This would still be a very good result, as the January number was a nine-month high. There is likely to be some downside risk, however, as single-family building permits dropped back last month, and multifamily starts are likely to remain steady. If the numbers come in even close to expectations, it would be a positive signal for the industry and economy.

Also on Tuesday, the Conference Board will release its consumer confidence survey. It is expected to tick up a bit, from 131.4 in February to 132 in March. This result would continue the index’s rebound after a recent decline, leaving it at a relatively high level historically. With gas prices and the stock market rising during the month, there may be some upside risk here.

On Wednesday, the international trade report will be released. It is expected to show an easing in the trade deficit, from $59.8 billion in December—which was a 10-year high—to $57.3 billion in January. The improvement should come from a rise in Chinese soybean purchases and a drop in imports, rather than a rise in exports. Overall, trade is likely to be a drag on growth in the first quarter if the numbers come in close to expectations.

Finally, on Friday, the personal income and spending report is expected to show renewed growth, with personal income up from a drop of 0.1 percent in January to a gain of 0.3 percent for February. Last month’s drop was technical rather than fundamental—a timing issue related to dividend payments—so continued growth would be a positive sign. Personal spending is expected to rebound even more, from a 0.5-percent drop in December to a 0.3-percent gain in January. The difference in timing between the reports here is due to the ongoing catchup from the government shutdown. Again, the rebound would be consistent with renewed confidence and would be a positive sign.

Thanks for reading and have a great week!

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