Equities rebounded yesterday without much of a fundamental explanation other than when things drop they sometimes bounce, and that probably explains why Treasuries maintained the bulk of their recent gains. In fact, on balance, the economic releases yesterday were a bit troubling with consumer confidence taking another dip, leading to the idea that the consumer continues to exhibit a little more uncertainty about future expectations and that’s impacting their spending plans today. In any event, while most observers think Treasuries are due for a pullback, the back-ups are proving to be grudging. One could reasonably expect that given the speed and magnitude to which the yields have dropped since last Wednesday’s FOMC meeting, some backing and filling could be in order today and tomorrow as the Treasury auctions 5yr and 7yr debt. That being said, the 2yr auction results yesterday revealed strong demand despite the lowest yields on offer in nearly a year. With demand remaining solid despite yearly lows in yields, any dips could be brief and/or shallow.
Despite the rebound in equities yesterday, fixed income kept the lion-share of recent gains and it’s interesting to note the stock gains came despite some not-so-stellar economic releases. It’s also interesting to note that fed fund futures still have a 65%-70% chance of a rate cut by year-end. Those odds, however, get a little squarely when you consider that rate cuts are often done in increments larger than 25bps. So, a 70% chance speaks to a 25bps cut while it would be 35% for a 50bps cut. Such is the treacherous landscape in trying to divine future odds of rate cuts versus rate hikes. Suffice it to say markets are definitely pricing in a rate cut taking place (of indeterminate amount) before year-end.
One of the less-than-stellar reports from yesterday was the March Conference Board’s Consumer Confidence reading. The headline consumer confidence index for March came in below expectations at 124.1 versus a 132.5 consensus and 131.4 prior. The decline in the headline index was primarily a result of a drop in the present situation component (160.6 from 172.8) but the future expectations metric also inched lower to 99.8 from 103.8 in February. While month-to-month variations are typical as consumers react to news and market headlines, the 3-month average has been declining since November when equity volatility accelerated. In the details, the labor differential (jobs plentiful – jobs hard to get) fell to the lowest since July 2018, while the month-over-month decline was the largest since early 2009. Whether that’s a canary-in-a-coalmine or a one-off will be something to watch. Another recession indicator (Expectations—Present Situations) remained negative at –60.8, and while that’s an improvement over last month’s –69.0, anything under 0 for a protracted time becomes a recessionary warning.
In summary, while the report doesn’t show a collapse in sentiment, the downward trend since November is concerning and indicates domestic households retain a cautious outlook despite the equity rebound in January and February. That caution is having a clear impact on big-ticket discretionary spending (see chart below on RV shipments). While we’ve noted the excellent financial-obligations-to-disposable-income position for the average consumer, part of that is a consequence of not only improving wages but a hesitance to spend like in prior expansions. It seems the scars of the Great Recession live on.
A couple of housing reports released yesterday painted a picture of a sector that will likely have an uneven rebound, even with lower mortgage rates. After last Friday’s strong February Existing Home Sales Report, the hope was the housing releases this week might build on that momentum, but that was not to be. February Housing Starts dipped –8.7% from January with the single-family category dropping by –17.0%. To be fair, the January numbers were strong so a bit of reversion to the mean was not unexpected as a warmer January gave way to more typical February winter weather. Building permits, which aren’t subject to the vagaries of weather, were weaker than expected, with January revised lower so question marks definitely remain around the housing sector.
Meanwhile, the S&P CoreLogic CS 20-City Home Price Index for January continued to point to slowing in annual home price appreciation. The year-over-year gain was 3.58% versus 3.80% expected and 4.14% in December. The latest year-over-year pace was the lowest since October 2012. While existing homeowners may not like the slowing in home prices it certainly improves the affordability equation for new buyers when you combine that with increasing wages and lower mortgage rates.
Thus, while both reports disappointed against pre-release expectations the results may be laying the seeds for a rebound for the traditional spring and summer selling season. The results do speak, however, to the realization that any recovery in housing will likely be gradual and uneven. That plays into the Fed’s patient posture and signals that any growth rebound coming off the expected 1-handle first quarter GDP will be modest at best.
RV Shipments Show Sharp Decline
One of the anecdotal pieces of information we look at for a tell on discretionary consumer spending trends is RV shipments. The data series only goes back to 2013 so we can’t compare numbers during the run-up to the recession, and assumed dramatic fall thereafter, but recent data shows a definite decline in shipments since the high print of more than 51k units a year ago. RV’s are in the “nice-to-have” category but when personal economic outlooks become more uncertain you can imagine traffic in RV showrooms slows. Last week we highlighted that consumers have low debt-service-to-income ratios indicating ample firepower to spend. Today’s chart, however, indicates that higher incomes are only half the answer, as there seems a hesitance to spend on large, discretionary items.
Agency Indications — FNMA / FHLMC Callable Rates
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