Morning Report: Yield curve continues to flatten

Vital Statistics:

Last Change
S&P futures 2727.25 -1.25
Eurostoxx index 379.19 1.85
Oil (WTI) 71.15 0.62
10 Year Government Bond Yield 2.86%
30 Year fixed rate mortgage 4.57%

Stocks are lower despite a moderation in trade rhetoric out of the administration. Bonds and MBS are up.

The yield curve continues to flatten, with the 2s-10s spread at 32 basis points. The media is going to try and make this a narrative about an upcoming recession.

Mortgage applications fell 5% last week as purchases fell 6% and refis fell 4%. Rates increased slightly. So far, we aren’t seeing much evidence that lower rates are helping the business.

Durable Goods orders fell 0.6% in May, which was well below expectations, although the prior month was revised upward. Transportation and defense drove the decline. Core capital goods fell 0.2%, which indicates business capital expenditures took a step back. It is probably too early to say definitively whether tariffs are playing a role here, but it is something to watch. Tariffs are a “cut off your nose to spite your face” sort of policy which can often win votes within a narrow constituency, but hurt everyone else and are a net negative for the economy.

Retail inventories increased 0.4% and wholesale inventories increased 0.5%.

Pending Home Sales fell for the fifth consecutive month, according to NARLawrence Yun, NAR chief economist, says this year’s spring buying season will go down as one of unmet expectations. “Pending home sales underperformed once again in May, declining for the second straight month and coming in at the second lowest level over the past year,” he said. “Realtors® in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled. With the cost of buying a home getting more expensive, it’s clear the summer months will be a true test for the housing market. One encouraging sign has been the increase in new home construction to a 10-year high,” added Yun. “Several would-be buyers this spring were kept out of the market because of supply and affordability constraints. The healthy economy and job market should keep many of them actively looking to buy, and any rise in inventory would certainly help them find a home.”

While there may be a shortage of single family homes for sale, the market for rentals is getting saturated, at least in major cities. Rents on average rose 2.3% in the second quarter, the weakest increase since 2010. Rents were more or less flat in Seattle, where home price appreciation is in double digits. That is a shocking statistic. In response to the drop in demand for single family houses in the aftermath of the bubble, developers went all-in on apartment construction, particularly in urban areas. Now there is a glut, and landlords are offering incentives to take out a lease. According to REIS, the rental vacancy rate ticked up to 4.8% in the second quarter from 4.3%.  Meanwhile, Millennials are getting married, having kids, and looking for single family homes. Perhaps the Great Millennial Migration to the Suburbs is finally upon us.

Lennar reported a big jump in earnings, however this was the first quarter with CalAtlantic, so results aren’t really comparable on a YOY basis. During the quarter, the company used $1.1 billion in cash to redeem some high interest CalAtlantic debt. ASPs rose 11%, however some of that is probably due to CalAtlantic, which is located in higher cost MSAs. Despite rising rates, CEO Stuart Miller reported that demand was strong, and the company still has pricing power to support margins.

24 Responses

  1. Kos Kids not reacting well to the Janus decision.

    Liked by 1 person

    • Surprise, surprise. That being said, the best thing to come out of the Trump presidency so far is, IMO, Goresuch and recent decisions.

      While I didn’t like how the Republicans prevented Obama from getting a replacement on the court (I get it, it’s politics, but still) I’m ultimately glad they did.


      • This was a good take on McConnell & Gorsuch. I didn’t care for the tactics either, but the whole “unprecedented act of treason” reaction from the left has pretty much made me dismiss their arguments against him.

        “The truth was simpler: McConnell wanted a conservative Supreme Court, and he had the power to protect that preference. McConnell could stop Garland because Democrats sat out the 2014 election, letting Republicans amass the votes needed to block Obama’s appointees.

        I remember covering the 2014 election, and the narrative was that it just didn’t matter. Barack Obama had won reelection in 2012 and gotten filibustered on virtually everything he tried. Government was gridlocked, and no matter what happened, it was likely to stay gridlocked. Democrats were disappointed and disaffected. What was the point?

        Turns out the Supreme Court was the point.”

        Liked by 1 person

    • I think Ezra Klein is still correct on this:

      “If unions are to not just survive, but to actually flourish again, they need to create an identity beyond being a protection service for people who aren’t very good at their jobs. For too long they’ve been defending individuals at the expense of the collective. Every time an incompetent teacher or overly aggressive cop hides behind a union, unions in general become a bit less attractive to everyone else.”

      As well as:

      “[Unions] seem like a legacy institution and not an institution of the future. And legacies get shed. The question is does anything replace them?”


      • Contractors need a union. Old school. They should make it impossible for big companies to get contract labor unless they hire a union member, and those contractors would likely be willing (many of them, anyway) to pay to be in a union . . . because companies often like to do contractors the way big companies did laborers back in the early 20th century. They need to focus on the folks who don’t already have decent benefits and job security.


  2. Of course, the places where it’s worst (i.e., all the good jobs in various sectors are contract jobs) are in the big blue cities where unions have made offering full-time employment untenable.


  3. Who would be a libertarian replacement for Kennedy? Is there some sort of Libertarian legal society?


    • The Volokh group are libertarian leaning and proudly so. Jerome Smith on the 5th is a staunch Libertarian and a good lawyer/judge. Reason hosts The Volokh Conspiracy. I have linked them here in articles and on the side of the title page under “Sites to Visit in Moderation”.

      Liked by 1 person

    • I’m available

      Liked by 1 person

  4. I guess the replacement will come from Trump’s previous list of 25 candidates


    • I want him to nominate a woman of color. Failing that, Diane Sykes would be good. Or Amy Coney Barrett, she’s hot. And She’s only 46 so she’d probably be on the court for the next 40 years.


  5. Reading SCOTUS Blog, this stood out:

    … Harry Pregerson, who kept issuing last-minute stays of execution (contrary to Supreme Court rulings) in order to block the execution of convicted murderer Robert Alton Harris until the Supreme Court took the extraordinary step of barring the 9th Circuit from further jurisdiction over the matter. Let’s hope that the rule of law fares better on remand this go-around.

    I wonder if SCOTUS is going to end up doing that if this case comes back around to them.


  6. And here’s what’s being a loyal old school liberal on the court gets you when you decided it’s time for you to retire at age 81(!):


  7. It’s interesting how quickly progressive consensus seesaws between “demographics is destiny”, “coalition of the ascendant”, etc, and “we are all doomed because of one SCOTUS vacancy to live in Gilead”.


    • you know, i held my nose and voted for Clinton, knowing full well that she would not pursue policies that I agree with and would likely set back causes that i value for a long time. I did not think it was the end of the republic. have some perspective, people.


      • I still find it telling how few progressives have actually left the country to escape from Hitler Part Deux.

        They are more concerned about he keeps trying to keep foreign nationals out.


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