Markets are calm as the weekend before Christmas arrives and thoughts begin turning to family and friends and away from rates and prices. Before the holiday festivities really get started we have one last shopping spree of data today to stuff stockings before the big day. One bit of early news was the third revision to third quarter GDP. The estimate of 2.1% met expectations and was unchanged from the prior print. Personal consumption, however, surprised to the upside printing a 3.2% which also beat the prior quarter’s 2.9% increase. Never bet against the American consumer! The offset to the consumer was a reduction in business investment and inventory that kept GDP at 2.1%. GDP expectations for this quarter are for a more pedestrian 1.6% pace as consumer consumption slows to 2.1% (but maybe that get’s revised higher at some point too?). Looking ahead to 2020, estimates of first quarter GDP aren’t much better at 1.7% with consumer spending at 2.0%. The Boeing Max problems and delays may begin to weigh on results as well. It’s those modest growth prospects that have us looking at the current yield back-ups as eventual buying opportunities once the growth and inflation prospects are realized. Later this morning, November personal income and spending numbers will be the most consequential report for the week. Income and spending gains are expected to exceed October but the core PCE reading should dip to 1.5% YoY versus October’s1.6%. That type of docile inflation read should keep the Fed firmly on the sidelines well into 2020.
- We talked somewhat glowingly on Wednesday about the most recent stats from the housing market but yesterday’s existing home sales numbers were a bit disappointing. The seeds of that disappointment, however, were probably sown by the lack of inventory which some of the earlier reports suggest is about to ease.
- Sales of previously owned homes in November declined to a 5.35 million annual rate which is a five-month low and weaker than the pre-release estimate of 5.44 million. The median sales price, however, rose 5.4% from a year earlier to $271,300.
- The mediocre existing home sales figures contrast with readings earlier this week that had housing starts, permits and home builder confidence at or near cycle highs. The issue with the existing home sales, per the National Association of Realtors, is that lean inventories are limiting sales and no doubt aiding the YoY price gains.
- The number of available homes in November fell 7.3% from a year earlier to 1.64 million, a record low for the month. At the current pace of sales it would take 3.7 months to sell all the inventory on the market, the shortest since February. Realtors consider anything below five months of supply as a sign of a tight market.
- The positive news on the housing starts and permits, not to mention home builder confidence, indicates more inventory is on the way and that should ease some of the constraints as the year passes. Thus, we continue to view the housing outlook in a positive light with activity picking up as inventories increase for move-up buyers to bite on.
Much of this year was spent obsessing over the flattening trend of the 2yr-10yr Treasury curve. In fact, the curve inverted during the last half of August, and all that that implies about signaling a recession was the main topic of conversation. Once the Fed convinced investors that its initial rate cut in July would be followed by more, the front-end rallied with yields dropping and that was it for the inverted curve story.
The long-end of the curve didn’t stand still either. Again, after the Fed signaled that more cuts were coming the 10yr yield moved up from its August 2019 low of 1.46% as the easing Fed helped soothe investor concerns over recession. And as economic numbers stabilized, and geo-political concerns ebbed, the yield increase continued along with inflation breakeven expectations via the TIPs market.
After nominal yields bottomed in August, 10yr TIPs breakeven inflation rates bottomed in October at 1.47%. Breakeven rates have risen since to 1.78% as the Fed’s three rate cuts and intent to stand down for the foreseeable future have rekindled thoughts of budding inflation.
Thus, the move in nominal yields has closely tracked the increase in inflation breakeven rates and that upward move has led to further steepening of the 2yr-10yr curve to a yearly high of 30bps. If that level breaks it could lead to higher 10yr yields, but one that we think stays contained given the modest GDP and inflation expectations. For now, watch that 30bps level between 2yr and 10yr yields. Yesterday, it was tested and held but it bears watching for future sessions.
Copper/Gold Ratio and 10yr Treasury Yields
Some of the more bullish equity analysts have been pointing to the increasing Copper/Gold ratio as another sign that global economic conditions are turning for the better. The idea behind the ratio is that copper is such a widely used commodity that when its price increases it signals greater demand from manufacturers and builders. Gold, on the other hand, is a safe-haven asset for when risk-on opportunities are scarce and/or diminishing. Thus, as the ratio increases it points to increased economic activity and less fear. The graph overlays this ratio with 10yr Treasury yields and the correlation between the two is readily apparent. The track record is pretty impressive so keep an eye on it as the calendar turns to 2020.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||1.56%||+0.01%||1 Mo LIBOR||1.76%||+0.02%||FF Target Rate||1.50%-1.75%||3 Year||1.699%|
|6 Month||1.56%||+0.01%||3 Mo LIBOR||1.91%||+0.02%||Prime Rate||4.75%||5 Year||1.740%|
|2 Year||1.64%||+0.02%||6 Mo LIBOR||1.90%||+0.01%||IOER||1.55%||10 Year||1.888%|
|10 Year||1.93%||+0.06%||12 MO LIBOR||1.97%||+0.03%||SOFR||1.53%|