Morning Report: Weak ISM pushes down bond yields

Posted on June 4, 2024 by Brent Nyitray

Vital Statisics:

Stocks are lower this morning on no real news. Bonds and MBS are up.

Bond yields got pushed down on the softer-than-expected ISM survey yesterday. The market narrative seems to be shifting from persistent inflation to a slowdown.

The manufacturing economy deteriorated in May, according to the ISM report.  “U.S. manufacturing activity continued in contraction after growing in March, the first expansion for the sector since September 2022. Demand was soft again, output was stable, and inputs stayed accommodative. Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions. These investments include supplier order commitments, inventory building and capital expenditures. Production execution continued to expand but was essentially flat compared to the previous month. Suppliers continue to have capacity, with lead times improving and shortages not as severe. Fifty-five percent of manufacturing gross domestic product (GDP) contracted in May, up from 34 percent in April.

The prices measure improved from April, but is still above February and March.

Construction spending fell 0.1% MOM and rose 10% YOY. Residential construction rose 8.1% on a year over year basis. There is a massive bifurcation in the resi market, with single-family construction up 20.4% YOY and multi-family up 2.3%.

We are seeing signs that multi-family has reached saturation and projects that penciled out in the 0% free-money era of COVID no longer make sense. “We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders. “Deals and financing have dried up.”

The boom in multi-family building was the biggest since the early 1970s.

The inventory issue is most acute in the markets which boomed during the pandemic years – Boise, Phoenix, Austin, etc.

For-sale inventory is becoming more aligned with demand, according to the ICE Mortgage Monitor. “With 30-year rates easing and affordability improving entering the year, unadjusted monthly price gains had been running above their same-month 25-year average since the start of 2024,” said Walden. “However, softening price growth in April has dropped us below that long-run average. We’ve seen the rate of appreciation slow on an adjusted level as well, with April’s +0.28% increase in home prices a marked downshift from +0.45% in March.

Filed under: Economy | 76 Comments »