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Investors are coming to the realization that the Fed’s journey down the monetary policy stairs may not bolster the ailing real estate sector, with long-end yields remaining elevated despite the central bank’s jumbo rate reduction last week. Against this backdrop, the Treasury curve is steepening sharply as bond vigilantes smell an inflation problem down the road and remain unwilling to lock in the coupons of the day. Today’s economic calendar provided further evidence of costly duration, with the pace of new home sales declining and inventories increasing as builders relied on discounts to support transactions.
Sales of New Builds Slip
The pace of new home sales slipped last month on weakness across most of the country, as elevated prices and towering mortgage rates continued to hamper affordability. Transactions for fresh builds fell to 716,000 seasonally adjusted annualized units, a 4.7% month over month (m/m) slip from July. However, August’s figure did beat the median estimate of 700,000. Volumes were weakest in the Northeast, West and Midwest with the m/m stride of closings decreasing 27.3%, 17.8% and 5.8% while the South provided a modest offset, increasing 2.7% during the period. Inventories grew last month, indicated by the amount of supply relative to the rate of current monthly sales, which rose to 7.8 from 7.3 in July. Finally, the median and average sales prices dropped to $420,600 and $492,700 from $429,000 and $508,200, respectively.
Nvidia Has Supported Equities
Markets are mixed with traders giving Beijing's stimulus a second thought and focusing on whether the measures point to economic desperation and or outcomes that will bolster global markets. In stocks, areas that are presumed to benefit the most from aggressive rate cuts are actually selling off, with yesterday’s recovery and today’s flat action dominated almost exclusively by semiconductor juggernaut Nvidia, with the company’s CEO Jensen Huang done selling shares for now. Ladies and gentlemen, the firm’s shares have gained almost 10% in two days, and it is essentially holding up the benchmarks. Sectoral breadth is awful with just the technology industry gaining; it’s up 0.5%. Meanwhile, healthcare, energy and financials are piloting the laggards; they’re down 0.8%, 0.8% and 0.7%. All major stateside indices are lower though, with the Russell 2000, Dow Jones Industrial, S&P 500 and Nasdaq Composite travelling south by 1%, 0.5%, 0.2% and 0.1%.
Bullish Catalysts Fail to Boost Crude
In fixed-income, currency and commodity land, materials, metals and liquids are giving back much of the gains stemming from yesterday’s Beijing exuberance. Lumber, crude oil, silver, copper and gold are down by 1.3%, 1.2%, 0.7%, 0.5% and 0.1%. WTI crude is trading at $70.60, despite rising hostilities in the Middle and Far East, stimulus from Beijing and this morning’s US Department of Energy report printing inventory draws. Yeah, all of those bullish developments are failing to lift the essential liquid, that’s how bad the demand outlook is out of Beijing. Lumber, meanwhile, is suffering from real estate weakness as the long-end of the yield curve is offering no sympathy to the Federal Reserve, prospective home buyers or potential purchasers of capital-intensive manufactured goods.
Vigilantes Protest Fed’s 50
In fixed-income, we’re seeing bear steepening action across the yield curve with rates on the 2- and 10-year Treasury maturities rising 1 and 5 basis points (bps). Indeed, since the Fed’s decision on September 18, the spread has widened roughly 15 bps, with the 2-year’s coupon declining while its 10-year counterpart increases. Economic buoyancy stateside on a relative basis alongside loftier costs of capital are lifting the greenback, with its gauge up 38 bps as the US currency appreciates versus all of its major counterparts including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian dollars.
US Consumers Are the Strongest
As central banks unveil stimulus packages to support economic momentum, today’s commodity price action is especially concerning. While fighting the Fed has proven to be a terrible idea for stock investors, the warning signs of global consumers are definitely alarming, despite US shoppers hanging in there. Folks, Europe is teetering on the edge of recession once again following fading momentum from the Paris Olympics, and China is in dire straits as high costs of borrowing and the shift from globalization to regionalization fundamentally counters the export-driven success the nation has benefited from in the past.
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