Today’s U.S. economic data were mixed. Markit PMI data were strong, but housing data was disappointing.
July Markit U.S. Manufacturing PMI printed at 53.2, up from, a prior print of 52.0 and higher than the Street consensus estimate of 52.3. July Markit U.S. Services PMI printed at 54.2, unchanged from the June print and in line with the Street consensus forecast. Markit Composite PMI, for July, printed at 54.2. This was up from a prior revised 53.9 (up from 53.0). Prints above 50 equal expansion.
The underlying PMI data were encouraging. According to Markit LLC:
“Higher levels of business activity were supported by a robust and accelerated upturn in new work during July. Measured overall, the latest increase in new orders received by private sector companies was the strongest for six months. Private sector payroll numbers expanded at a solid pace in July, with the rate of job creation the fastest so far in 2017.”
So the economy is shifting into a higher gear entering the third-quarter, right? Maybe, maybe not. Q3 is often a strong quarter for the U.S. economy as businesses gear up for the back to school and holiday shopping seasons. However, the Markit PMI data
(like most PMI data) is seasonally-adjusted. In the past, it was normal to have factories slow down or shut down for retooling and maintenance over the summer. Thus, the seasonal adjustments to manufacturing data factor that in and add to
the NSA numbers. Although the seasonality formulae have been updated, they appear to juice SA manufacturing data a bit too much. Consider that fact that Services PMI was unchanged and was expected to remain unchanged. In the service sector, the seasonality paradigm has not changed as much as it has in the manufacturing sector. Still, today’s PMI data was solid and appear consistent with a low-2.0% GDP economy.
June Existing Home Sales declined 1.8%, in. This was down from a 1.1% gain, in May and a Street consensus estimate of -0.9%. On an annual basis, Existing Home Sales fell to an annual pace of 5.52 million, down from 5.62 million, in May. The Street consensus estimate called for 5.57 million annual Existing Home Sales.
Lower home sales were the result of fewer affordably-priced homes on the market. Fewer homes on the market and more home sales occurring at the upper end of the market are behind surging prices in the major metro areas. Demographics have resulted in fewer mid-priced homes being sold as homeowners have too little equity to move into another home. A scarcity of construction workers has driven wages higher. Raw materials and land prices have also surged higher. This combination has made the business of constructing mid-priced homes unattractive for many builders. Financial regulations, which require a solid credit score and documented credit history, down payments, etc. have limited how large a mortgage for which prospective homebuyers will be approved. Will financial regulation reform change the situation? Maybe, but the unintended consequences could prove undesirable.
Calm before a Squall?
At, the time of this writing, the price of the 10-year UST note
was little changed to yield 2.246%. With few indications of rising inflation in the economic data and the FOMC rate decision looming on Wednesday, I doubt we will see much volatility in UST yields, until then. Also, there seems to be an increase in buying pressure on the long end of the curve. Could this be foreign central banks buying the long end? We may have to wait for the TIC Flows data to determine that. However, we are seeing good support for the USD, this morning, as the DXY Index is back over 94, after touching printing below 94 last Friday and in early overnight trading.
I don’t expect the FOMC to do anything at this week’s meeting. However, the FOMC could provide an indication that balance sheet reduction will be announced in September. When that announcement comes, I expect it to indicate only a very modest reduction in portfolio reinvestment. The result should be a modest rise of UST yields on the belly of the curve. However, I believe much of that has already been built into UST yield conditions. We could see a short-lived rise of long-term rates as, the mantra throughout much of the wealth management industry has been that Fed balance sheet reduction should push up long-term yields. There may be buying opportunities, if there is strong selling by retail investors. Stay tuned.
About Thomas Byrne
Thomas Byrne has achieved a 26-year career in financial services, 23 of which have been spent in the fixed income market sector. In his role as Director of Fixed Income for Wealth Strategies & Management LLC., Byrne is responsible for providing strategic analysis and portfolio management to private clients and institutions, in addition to offering strategic advisory services to other financial services organizations. Byrne's areas of expertise include trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt, and convertible bonds. Additionally, Byrne provides analysis, strategy, and commentary within the fixed income market. Prior to joining WS&M, Byrne worked as Director in the Taxable Fixed Income Department of Citigroup, Inc., in addition to predecessor companies in New York, NY.
E-mail: [email protected]