Inflation and geopolitical fears continue to dominate market action.
In the midst of a veritable “tsunami of hawkishness”, our latest opinion piece is a reminder that US inflation and labor market dynamics are in a very different place than they were a year ago. Don’t give up on the idea of rate cuts just yet.
The recent back-up mortgage rates—the 30-year fixed mortgage rate crossed back above 7.0% in the week of April 15—has caused the US housing market rebound to stall. The NAHB (National Association of Homebuilders) index was unchanged at 51 in April, the first month without any improvement since November. Buyer traffic and current sales improved incrementally, but they were offset by deteriorating expectations about future sales.
In fact, all housing market indicators released this week showed weakness. Housing starts missed expectations quite badly, down 14.7% m/m to the lowest level since August. Admittedly, there has been a lot of volatility in the series in Q1 with bad weather weighing on January starts, then a big improvement in February and now another correction lower in March. The retreat was broad-based, with the single- family segment accounting for the bulk of declines. Still, this needs to be put in perspective as single-family starts remained 21.2% higher than in March 2023. The weakness extended to permits as well, which plunged 4.3% m/m to the lowest level since July. Notably, single-family permits declined for the first time in fifteen months.
Industrial indicators were mixed. Industrial production gained 0.4% m/m in March, following a similar increase in February. The combination marked the first back-to- back improvement in almost a year, adding to evidence that activity in the sector is bottoming out. Still, output was merely flat y/y and down 0.3% y/y for the first quarter as a whole. A bottoming out process is afoot, but true revival is some way off.
The regional Fed manufacturing surveys released this week were mixed but leaning favorable. The Empire Fed missed expectations but still improved modestly from March. The Philly Fed, which we trust most for a signal, not only bested expectations, but reached its highest level in two years. Still, the details were mixed rather than universally positive for both measures. In fact, there were enough contradictions in those details that we prefer to wait for some more data to decide whether the magnitude of the improvement can truly be trusted. Price metrics rose across the two surveys, but employment indicators were soft. The latter may respond with a delay to what appears to be a pick-up in orders and a build-up of backlogs, but it remains to be seen whether the order revival is sustained.
Last month, our commentary on retail sales began like this: “Retails sales have softened of late…although one needs to be cautious about making such trend statements in this world of pervasive revisions.” Well, that caution was certainly warranted as the better-than-expected March data put that softening trend into question. Nominal retail sales rose 0.7% m/m in March and the February gain was revised up three tenths to 0.9%. Performance was mixed across categories and not nearly as strong as the 1.1% jump in control sales (excluding food services, building materials, autos dealers and gas stations) would otherwise suggest. That gain was largely driven by a surprising 2.7% m/m surge at non-store retailers. This is rarely seen strength and it is not readily explained. Meanwhile, there were declines in motor vehicles and parts, furniture, electronics, clothes, and sporting goods. Given these figures are in nominal terms, the implied real retail sales for both March and the first quarter as a whole do not look nearly as impressive. In fact, we see the potential for some disappointment on the consumer spending front in the Q1 GDP update.