U.S. stocks ended flat on Wednesday as comments from Federal Reserve Bank of Atlanta President Dennis Lockhart, warning of a “fragile” recovery, offset housing data that was far better than expected. A durable goods report, while the headline reading was good, also weighed on the market just a bit as the business spending proxy within the report failed to post an increase.
Trading was perfectly divided as five of the S&P 500 major sectors rose, while five declined. Telecom, energy, consumer (both discretionary and staple) and tech shares managed to gain ground. Industrial and basic material shares led the losers.
The market, after catching a bid on the heels of the housing data, which we’ll touch on below, came under pressure after Fed official Lockhart spoke to the likelihood that the FOMC will keep the fed funds rate low for an extended period.
While this is certainly no great revelation, it does put pressure on stocks simply from the standpoint of the economic outlook, something we touched on yesterday with regard to the last leg of this rally in stocks. Lockhart stated his forecast envisions a return to positive GDP growth over the medium term, but weighed down by significant adjustments to our economy – by which he means tighter credit conditions and lower levels of consumer activity.
Market Activity for August 26, 2009
Five-Year Auction
Another Treasury auction goes well as $39 billion in 5-yr notes were sold at a yield of 2.49%, very close to expected, with a bid-to-cover of 2.51 (indication of demand) vs. the avg. of 2.21. Indirect bids (central banks and governments) were strong at 56.4% of the auction vs. 34.6% avg. No problems thus far.
We’ll have another auction of $28 billion in 7-yrs today.
Mortgage Applications
The Mortgage Bankers Association reported that its mortgage apps index rose 7.5% in the week ended August 21, which follows the nice move of 5.6% in the previous week. Purchases rose 1% in the week and refinancing activity jumped 12.7% after a 6.9% pick up in the week prior.
The August purchases are rebounding after this reading showed a July decline of 2.1%. So, we may see a pullback in the actual August home sales figures (what occurs in this apps index generally flows through to the next month’s worth of official sales) followed by one final push in home sales as result of the refundable tax credit just before it expires.
I’ve heard people talk about how the tax credit-driven sales have run their course as people generally move prior to the school season beginning, but I doubt most first-time homebuyers (must be a first-timer to be eligible for the credit) have children. There has been speculation over the past few days that the credit will be extended to other purchases, or even through 2010. We’ll see. In any event, based on what is currently known, the demand induction from the credit will soon run its course.
The 30-year fixed mortgage rate rose last week to 5.24% from 5.15%.
Durable Goods Orders (July)
The Commerce Department reported that durable goods orders rose 4.9% in July after a 1.3% decline in June (a number that was revised up from the initial estimate of a 2.5% decline). The gauge was fueled by a huge move in commercial aircraft orders (the most volatile component of this data), which jumped 107.2% for the month.
The ex-transportation reading rose 0.8% last month, which followed a 2.5% increase for June (an upward revision from the 1.1% rise estimated last month). This figure has increased for three straight months, up 16% at an annual rate.
Other nice gains came from electrical equipment (up 5.3%), primary metals (up 2.6%) and computers & electronics (up1.6%). Auto & parts also picked up a bit, but less than I was expecting, up just 0.9%. This segment will likely show a nice move when the August durables number is released as the CARS program has driven auto inventories low.
The unfortunate aspect of the report, and the likely reason the equity markets didn’t catch a bid on the higher reading, was the business spending figure. Non-defense capital goods ex-aircraft (the business spending proxy) fell 0.3% in July. This followed two months of gain after the drilling the segment took in the months prior.
The year-over-year decline in this business spending segment is still down 20.4% on a year-over-year basis, but an improvement from the 27.3% cycle low hit in April.
Over the past three months non-defense capital goods ex-aircraft are up 30.9% at an annual rate off of that cycle low hit in April. That was a big time low, with business spending off by 35% at an annual rate over the six months that preceded that low mark. (Go back a full year and this business spending reading was off by 52% as of that April low, but it was a totally different world pre-September 2008, so I don’t find it worthwhile to match the current state of things relative to pre-Lehman/financial collapse data – I bring it up just to offer some clarity).
Manufacturers’ inventories of durable goods do remain elevated at 1.81 months worth – the long-term average is 1.56 months. This figure has me questioning the timeline of the GDP boost via inventory rebuilding. It may take a bit longer to occur than I currently expect.
The shipments of durable goods (and again, these are goods meant to last at least three years) jumped 2.0%, marking the second month of gain as the June figure rose 0.7%. Recall that last month we explained that shipments would rise due to the 2.5% increase in ex-transportation durables orders from June. This gets the third-quarter growth figure off to a good start – durable goods shipments is what flows to the GDP report.
The current quarter will end the year-long contraction in GDP. The inventory dynamic will take over (again the timing of this is in question) as the catalyst and should propel GDP for the next two quarters. After that, we will need final demand to come back to keep the ball rolling; the replenishment of stockpiles, after two quarters of record reductions, cannot catalyze GDP by itself in a sustained manner.
New Home Sales
New homes sales leapt in July, up 9.6% (a rise of just 1.6% was expected), to 433,000 units. The level of sales remains depressed, off of the 27-year low but still well-below the 40-year average of 724K units. So we’ve left the cycle low behind, but it may be a very slow turnaround period back to levels that approach the average. It will be very interesting to watch how sales react when the first-time credit comes off and we move past the best period for home sales.
By region, sales surged 32% in the Northeast (although this is a low level market for new homes, making up just 10% of the total); purchases jumped 16% in the South (the largest new home market, making up 51% of the total); sales ticked up 1% in the West and fell 7.6% in the Midwest.
The median price of a new home was virtually flat for the month, down just 0.14% -- median price is down 12% from the year-ago level, $210,100 vs. $237,300 in July 2008.
The supply figures are really looking good, much better than for existing homes. The number of new home available for sale is down 35% from the year-ago period at 271,000 units – the lowest level since March 1993.
The inventory-to-sales figure (months worth of supply at current sales pace) has declined to 7.5.
Have a great day!
Brent Vondera, Senior Analyst
Trading was perfectly divided as five of the S&P 500 major sectors rose, while five declined. Telecom, energy, consumer (both discretionary and staple) and tech shares managed to gain ground. Industrial and basic material shares led the losers.
The market, after catching a bid on the heels of the housing data, which we’ll touch on below, came under pressure after Fed official Lockhart spoke to the likelihood that the FOMC will keep the fed funds rate low for an extended period.
While this is certainly no great revelation, it does put pressure on stocks simply from the standpoint of the economic outlook, something we touched on yesterday with regard to the last leg of this rally in stocks. Lockhart stated his forecast envisions a return to positive GDP growth over the medium term, but weighed down by significant adjustments to our economy – by which he means tighter credit conditions and lower levels of consumer activity.
Market Activity for August 26, 2009
Five-Year AuctionAnother Treasury auction goes well as $39 billion in 5-yr notes were sold at a yield of 2.49%, very close to expected, with a bid-to-cover of 2.51 (indication of demand) vs. the avg. of 2.21. Indirect bids (central banks and governments) were strong at 56.4% of the auction vs. 34.6% avg. No problems thus far.
We’ll have another auction of $28 billion in 7-yrs today.
Mortgage Applications
The Mortgage Bankers Association reported that its mortgage apps index rose 7.5% in the week ended August 21, which follows the nice move of 5.6% in the previous week. Purchases rose 1% in the week and refinancing activity jumped 12.7% after a 6.9% pick up in the week prior.
The August purchases are rebounding after this reading showed a July decline of 2.1%. So, we may see a pullback in the actual August home sales figures (what occurs in this apps index generally flows through to the next month’s worth of official sales) followed by one final push in home sales as result of the refundable tax credit just before it expires.
I’ve heard people talk about how the tax credit-driven sales have run their course as people generally move prior to the school season beginning, but I doubt most first-time homebuyers (must be a first-timer to be eligible for the credit) have children. There has been speculation over the past few days that the credit will be extended to other purchases, or even through 2010. We’ll see. In any event, based on what is currently known, the demand induction from the credit will soon run its course.
The 30-year fixed mortgage rate rose last week to 5.24% from 5.15%.
Durable Goods Orders (July)
The Commerce Department reported that durable goods orders rose 4.9% in July after a 1.3% decline in June (a number that was revised up from the initial estimate of a 2.5% decline). The gauge was fueled by a huge move in commercial aircraft orders (the most volatile component of this data), which jumped 107.2% for the month.
The ex-transportation reading rose 0.8% last month, which followed a 2.5% increase for June (an upward revision from the 1.1% rise estimated last month). This figure has increased for three straight months, up 16% at an annual rate.
Other nice gains came from electrical equipment (up 5.3%), primary metals (up 2.6%) and computers & electronics (up1.6%). Auto & parts also picked up a bit, but less than I was expecting, up just 0.9%. This segment will likely show a nice move when the August durables number is released as the CARS program has driven auto inventories low.
The unfortunate aspect of the report, and the likely reason the equity markets didn’t catch a bid on the higher reading, was the business spending figure. Non-defense capital goods ex-aircraft (the business spending proxy) fell 0.3% in July. This followed two months of gain after the drilling the segment took in the months prior.
The year-over-year decline in this business spending segment is still down 20.4% on a year-over-year basis, but an improvement from the 27.3% cycle low hit in April.
Over the past three months non-defense capital goods ex-aircraft are up 30.9% at an annual rate off of that cycle low hit in April. That was a big time low, with business spending off by 35% at an annual rate over the six months that preceded that low mark. (Go back a full year and this business spending reading was off by 52% as of that April low, but it was a totally different world pre-September 2008, so I don’t find it worthwhile to match the current state of things relative to pre-Lehman/financial collapse data – I bring it up just to offer some clarity).Manufacturers’ inventories of durable goods do remain elevated at 1.81 months worth – the long-term average is 1.56 months. This figure has me questioning the timeline of the GDP boost via inventory rebuilding. It may take a bit longer to occur than I currently expect.
The shipments of durable goods (and again, these are goods meant to last at least three years) jumped 2.0%, marking the second month of gain as the June figure rose 0.7%. Recall that last month we explained that shipments would rise due to the 2.5% increase in ex-transportation durables orders from June. This gets the third-quarter growth figure off to a good start – durable goods shipments is what flows to the GDP report.
The current quarter will end the year-long contraction in GDP. The inventory dynamic will take over (again the timing of this is in question) as the catalyst and should propel GDP for the next two quarters. After that, we will need final demand to come back to keep the ball rolling; the replenishment of stockpiles, after two quarters of record reductions, cannot catalyze GDP by itself in a sustained manner.
New Home Sales
New homes sales leapt in July, up 9.6% (a rise of just 1.6% was expected), to 433,000 units. The level of sales remains depressed, off of the 27-year low but still well-below the 40-year average of 724K units. So we’ve left the cycle low behind, but it may be a very slow turnaround period back to levels that approach the average. It will be very interesting to watch how sales react when the first-time credit comes off and we move past the best period for home sales.
By region, sales surged 32% in the Northeast (although this is a low level market for new homes, making up just 10% of the total); purchases jumped 16% in the South (the largest new home market, making up 51% of the total); sales ticked up 1% in the West and fell 7.6% in the Midwest.The median price of a new home was virtually flat for the month, down just 0.14% -- median price is down 12% from the year-ago level, $210,100 vs. $237,300 in July 2008.
The supply figures are really looking good, much better than for existing homes. The number of new home available for sale is down 35% from the year-ago period at 271,000 units – the lowest level since March 1993.The inventory-to-sales figure (months worth of supply at current sales pace) has declined to 7.5.Have a great day!
Brent Vondera, Senior Analyst
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