Economic Notes – November 26, 2012

November
26

Written by: Jon McGraw

It was a relatively short week for economic data due to Thanksgiving, causing many to end the week on Wednesday afternoon, but some interesting housing numbers were worthy of mention.

Existing home sales rose in October by +2.1%, which was a surprise relative to the expected lower by -0.1% result. The gain was the result of gains in both single-family and condo sales. Housing starts in October also gained, in line with other housing numbers—up +3.6% which countered expectations of a -3.7% decline. Multi-family housing continued to be the big winner on the month, while single-family starts were generally flat. Whether there was an impact from Hurricane Sandy on the results isn’t yet clear in the preliminary data, but any adjustments should become more apparent in coming months. Housing permits, on the other hand, fell -2.7%, which was a few tenths of a percent better than forecast.

The NAHB index of homebuilder sentiment rose to 46 for November, which represented a gain from October and higher resulted than the 41 level forecast. The levels of current sales and expected future sales both rose, which led to the bullish result. As a leading indicator of activity, this is certainly a plus.

We’re continuing to see better results in the housing world. These have been focused on multi-family generally, as seen in the housing starts number from last month, although we’ve seen single-family increases as well. Why is this? Part of the answer is intuitive from the aftermath of the housing bubble. Instead of keeping a steady, conservative approach throughout, lenders were, for the most part, very lenient with lending standards for many years and were seriously burned when the bubble burst. So, they went to the opposite extreme and tightened credit severely. While conditions have become less restrictive, they remain tight and many potential homeowners find themselves unable to qualify for a loan or come up with the now-larger required down payment. Rental units like apartments have provided the stopgap.

The Conference Board’s release of leading economic indicators for October rose +0.2% for the month, which was one tick higher than expected. An improvement in credit conditions (and a steeper yield curve) was the primary catalyst for the change this month. For the last six months, improvements in residential construction have also helped, which has offset weaker manufacturing orders and employment components.

On the sentiment side, the Univ. of Michigan consumer sentiment indicator for November came in at 82.7, which was a shade below the expected 84.5 figure. In the underlying survey, consumer opinions of present conditions declined slightly, while expectations for future conditions fell about three points. The weaker investment market may have accounted for some of this, as it tends to be fairly correlated to the survey—as well as a self-fulfilling prophecy of sorts. Anticipated inflation remained within the long-term range of the upper 2’s to near 3%. This hasn’t changed much overall, despite periodic inflation fears and quantitative easing activity.

In the employment results, initial jobless claims fell for the Nov. 17 ending week to 410k—right in line with the expected number. However, claims remain higher than they probably should, due to the effects of Hurricane Sandy on both job losses (temporary and permanent) and reporting of data from affected areas. New Jersey and New York results already show a relatively large surge in claims. This may well continue for weeks and/or months during rebuilding efforts. Continuing claims for the Nov. 10 ending week were 3,337k, which was a bit lower than the 3,345k forecast.

The elephant in the room is the ‘fiscal cliff’ debate. The biggest point of contention between parties appears to be the concept and/or threshold on upper-income tax rates. The final agreement might depend on the definition of ‘upper-income’ (whether it be $250k, $500k, or $1 mil. in income), but could also include changes to ‘tax preference’ items such as certain itemized deductions for corporations and/or individuals. The good news is that we appear to be getting closer to a deal—in concept. Of course, in terms of timing, we know Congress’ track record.

Market Notes

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2011

0.02

0.25

0.83

1.89

2.89

11/16/2012

0.06

0.24

0.62

1.58

2.73

11/23/2012

0.10

0.29

0.70

1.70

2.83

 

In the abbreviated week, stocks gained, led by a flurry on Monday to due optimistic thoughts about the President and Congress becoming more amicable to a ‘fiscal cliff’ deal. In the S&P, materials and consumer discretionary outperformed, while defensive utilities and health care underperformed on the week. Some preliminary ‘Black Friday’ sales figures have come out, and the results are good so far (online Friday sales allegedly topped $1 Billion—a new record, and 20% higher than 2011), which could bode well for consumer stocks if the trend continues.

Small-caps outgained large-caps, while developed market foreign stocks ended up having the best week of any equity group. France, Italy and Germany were among the best performing countries on the week, while Japan and emerging markets such as India and Brazil generally lagged.

With interest rates rising, government bonds (especially on the longer end) lost ground, while high yield corporates, floating rate and foreign bonds ended positively.

REITs were all up on the week, with U.S. industrial and retail REITs outperforming, while European, Asian and domestic residential lagging.

In the commodity asset class, all groups were higher as well. Markets were led by precious metals and industrial metals, with energy not far behind—up just over 2%.