The weak housing data is getting concerning. We haven’t seen figures this weak since early 2011, and that was not a fun year. Things are certainly different now, but the recent slowdown in consumption (retail sales YoY in orange below) is looking less and less like a weather driven anomaly:
Base effects mean that even if pending home sales rebounds here, the YoY figure (in white above) will continue declining until June.
Given where we are in the cycle, this is most pertinent for the rates market. The consensus expectation of a 3% growth year looks likely to be challenged. It’s not clear how the Fed will react, but a likely possibility is a delay in the Fed tightening cycle. In addition, trend growth estimates are likely to come down further, supporting the long end.
At the risk of being pegged as a perma-bull, I think this is actually bullish for stocks, at least for year end returns. The last time the pending home sales data weakened like this was in 2006 – a year where the S&P rallied 13.6%. And this does not seem to be an anomaly limited to the housing related excesses of that time. Though the pending home sales data does not go back to the mid 90’s, it essentially tracks the 10y yield with a lag. And as we know, the Fed tightened aggressively mid-cycle from late 1993 – 1994. The returns in 1995 and 1996 were 34% and 20%, respectively.
I’m not saying that we are going to get a repeat of those figures. But the point is that if the discount rate for financial assets are lowered even further, then the current earnings yield of 6.5% on US equities will look increasingly attractive.
- UK Retail Sales jumped 1.8% MoM vs 0.3% exp and -1.5% prev
- US Jobless Claims declined to 311k vs 323k exp and 320k prev.
- US Pending Home Sales declined 0.8% MoM in Feb vs +0.2% exp
- NZ Trade Balance improved to 818M in Feb vs 600M exp. The previous print was revised from 306M to 286M
- Thu: Japan Unemployment, CPI, Retail Sales, UK Consumer Confidence
- Fri: New ZealandBuilding Permits, Japan PMI, Housing Starts
- Mon: Month End, EU CPI, Canada GDP, Chicago Fed, AU PMI, China PMI, China HSBC PMI
- Tue: Japanese VAT hike hits, UK PMI, Italy PMI, US ISM, Australia Building Approvals
- Wed: UK House Prices, EU PPI, US ADP, Australia Retail Sales, Trade Balance, China PMI