Morning Report: Retail sales come in strong 8/15/17

Vital Statistics:

Last Change
S&P Futures 2469.0 5.5
Eurostoxx Index 376.7 0.6
Oil (WTI) 47.2 -0.4
US dollar index 86.6 0.3
10 Year Govt Bond Yield 2.25%
Current Coupon Fannie Mae TBA 103.09
Current Coupon Ginnie Mae TBA 103.97
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning on no real news. Bonds and MBS are down.

Retail Sales came in stronger than expected, with the headline number increasing 0.6% and the control group increasing the same amount. The Street was looking for a 0.3% increase. On a year-over-year basis, sales rose 4.2%. The Atlanta Fed is predicting a big uptick in growth from Q2 to Q3, and retail sales will be a big driver. We are entering the back-to-school shopping season, which is second only to the holiday season in importance for the retail sector. Consumption is about 70% of GDP, so as retail sales go, so goes the economy.

The Empire State Manufacturing Survey shot ahead again last month, hitting the highest level in 2 years. Meanwhile, inflation remains under control as import prices rose 0.1% last month and are up 1.5% YOY. Business inventories also rose .05%.

The NAHB Housing Market Index rebounded in August to 68, which is getting close to its highs. The NAHB says that labor shortages are worse in July than they were a year ago. In some trades, 3/4 of all builders surveyed report either “serious” or “some sort” of shortage of labor. The last time we saw these sorts of levels was in late 2000, just as the real estate market was heating up. This will limit building and keep home prices well-supported.

The Despot reported better than expected earnings as homeowners continue to invest in their appreciating homes. They are looking for comparable store sales to increase 5.5% and took up earnings guidance. Note that contractors are using Amazon more and more, so be careful with the stock.

Down payments are at the lowest levels in 7 years, with the growth mainly occurring in the high single digits are, not at the 3.5% area. It looks like the growth is coming from Fannie and Fred’s low downpayment programs, which are wresting share from FHA. Performance on these loans will probably be determined by the continued price appreciation in the US housing markets. While general riskiness is higher than it was 5 years ago, it is nowhere near the risk we had during the go-go years.

The Trump Administration is trying to pivot to tax reform after the debt ceiling is handled. Both NAR and NAHB have come out against any sort of plan to eliminate the mortgage interest deduction. Trump’s plan is to eliminate the deductions for state / local taxes as well as the mortgage interest deduction in exchange for doubling the standard deduction. NAR is warning that this will hit housing prices, however with inventory so tight, I cannot see that happening. FWIW, if you were ever going to eliminate the mortgage interest deduction, now would be the time to do it, since rates are so low. Mortgage interest is around 70% of the first year’s mortgage payment today. 30 – 35 years ago, it was above 90%. NAR sees about half the people currently taking a deduction to stop. Of course their tax bill isn’t necessarily going up – they will find that taking the standard deduction will be more advantageous than indexing.

Home sales and prices are slipping in Canada, which has a real estate bubble bigger than the one we had in 2006. Fallout from the Canadian bubble bursting will probably affect pricing in places like Seattle, which has been red-hot for the past couple of years.

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