The focus this week shifts to the US housing market, where we’ll get new data on homebuilder sentiment, housing starts, building permits, mortgage applications, and existing home sales.
“One area of the U.S. economy that has remained relatively resilient through the recent turmoil in the global financial markets and slower growth overseas has been the housing market,” Wells Fargo’s Sam Bullard said. “Indeed, last week’s Federal Reserve Beige Book characterised residential real estate activity as ‘generally improved since the last report, with almost all Districts reporting rising prices and sales volumes.'”
Not only is housing an important indicator of the economic activity and jobs, it’s a reflection of long-term consumer confidence.
“Requiring even more confidence than buying a car is buying a home,” Morningstar’s Robert Johnson explained. “With average new home prices of about $US360,000, a home purchase is 10 times bigger than a car and totally dwarfs a $US100 restaurant meal.”
“Consumers do not commit on these types of purchases if the jobs landscape is all of a sudden crumbling beneath their feet,” RBC’s Tom Porcelli wrote following the disappointing September payrolls report.
The world will be watching these reports closely, especially in the wake of last week’s retail sales report flop.
Here’s your Monday Scouting Report:
Is the US consumer cracking? The resilience of the US consumer has been one of the most bullish themes in the global economy. So it was discouraging to to get two disappointing updates on that force this past week. First was the NY Fed’s Survey of Consumer Expectations, which revealed the median household sees its spending growing just 3.18%, the lowest level in the survey’s two year history. Second was retail sales, which registered no growth in September when adjusted for auto and gas sales. “While some of the softness can be attributed to continued disinflation, there remain signs that consumer spending ended the quarter on a soft note,” Wells Fargo’s John Silvia said.
Credit Suisse’s Jay Feldman, however, hasn’t lost faith. “One month’s worth of below-expectation retail sales does not alter our view that the household sector faces rapidly improving conditions and the broader trends in consumer spending remain unequivocally strong,” he said. “We think the gloomy response to the September retail figures, while understandable at first blush, was an overreaction.” He noted that discretionary sales (excluding food, gas and health care) jumped 0.6%, and real sales (accounting for the full effect of gas prices) was up 0.6%. “Not only is this not ‘weak’ — it’s near the top of the historic range.”
- The housing-market-bulls could have the story wrong. One of the more interesting research reports of the month came last week from Barclays’ equity analyst Stephen Kim, who actually think the housing market recovery has been less exciting than what his Wall Street peers play it up to be. “At this point, it has become hard to overlook housing’s dismally slow pace of recovery,” Kim wrote, highlighting the the depressed level of single-family housing starts. “And yet, over the past several months, we have become increasingly concerned about the way many analysts are portraying the industry’s current weakness as a strength. To us, this seems perilously Pollyannish and a risky oversimplification.” Kim warns that the market may not get the expected boost from pent-up demand. Further, he warns that the housing cycle may be past its early stages and is vulnerable to the ongoing economic slowdown.
- NAHB Housing Market Index (Mon): Economists estimate this index of homebuilder sentiment was unchanged at 62 in October. Here’s Bank of America Merrill Lynch: “We expect the index to hold at this level in October amid low interest rates and further improvement in the labour market. There is some concern that the index slips if builders became concerned about some of the regulatory changes for the mortgage market.”
- Housing Starts (Tues): Economists estimate the pace of starts climbed 1.9% to 1.147 million units in September as permits fell 0.4% to 1.165 million units. Here’s Credit Suisse: “We expect total housing starts to remain roughly unchanged in September. Leading indicators such as building permits point to solid performance in both single-family and multifamily housing. Notably, multifamily construction has been driving the growth in housing starts in this cycle, with its share almost doubled compared to the pre-crisis trend. Multifamily construction is largely fuelled by rental demand and the strength is expected to persist.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims climbed to 265,000 from 255,000 a week ago. Here’s HSBC: “Last week’s initial jobless claims reading fell to 255,000 from 262,000 the previous week. The 4-week average fell to 265,000, close to its lowest level in several decades. The slow pace of layoffs suggests that businesses remain relatively confident about the economic outlook.”
- Existing Home Sales (Thurs): Economists estimate the pace of sales climbed 1.1% to 5.37 million units in September. Here’s Nomura: “Housing market data appear to have gathered more momentum this year, as improving consumer fundamentals are feeding through to the housing market. The pending home sales index, which usually leads existing home sales by a couple of months, has slowed from Q2, suggesting that home sales may improve at a slower pace in the near term. Thus, we expect existing home sales to increase by only 0.6% to an annualized 5344k in September. In the medium term, possible headwinds to existing home sales are the tight supply of homes available for sale and higher mortgage rates when the Fed normalizes policy.”
- Kansas City Fed Manufacturing Activity (Thurs): Economists estimate this regional activity index slipped to -9 in October from -8 in September.
- Markit US Manufacturing PMI (Fri): Economists estimate this manufacturing index fell to 52.9 in October from 53.1 in September.
With the S&P 500 just 4.9% below its May all-time high of 2,134, it may seem counterintuitive to argue that investors are being overly cautious or bearish. But that’s exactly what some of Wall Street’s smart market gurus are arguing today.
“Panic persists despite some respectable developments,” Citi’s Tobias Levkovich wrote on Wednesday.
“In early 2008, credit had imploded and investors were giddy but in late 2015, investors are fearful and credit has yet to collapse,” he continued. “It is fascinating to witness the anxiety levels currently (probably as a result of two equity market collapses in the past 15 years) versus a still reasonable credit backdrop which is in stark contrast to the equity investor euphoria in late 2007/early 2008 after sub-prime lending problems had clobbered corporate financing terms. In many respects, the Street was mistaken eight years ago and appears intent to get it wrong again.”
Here’s Richard Bernstein on fund flows: “For the past year or more, many investors suggested that fundamentals were improving, but that the equity market was overvalued at current levels and investors should use pullbacks in the market as entry points to invest. Investors have gotten their pullback, but it doesn’t look as though they are using the opportunity to buy equities. Rather, it appears that investors were too scared to invest as the stock market rose and are too scared to invest as the stock market corrects.
“Whether one looks at ETF flows, mutual fund flows, Wall Street strategist recommended asset allocations, institutional portfolio allocations, or hedge fund positioning, the simple fact remains that investors are generally scared of equities. “
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