For the last three weeks, we’ve seen new record highs in stock indices and Treasury bonds go nowhere.
If the bond market believes stocks are likely to continue their trajectory higher, you wouldn’t know it. If they did, interest rates would move up with the stock market. Instead, volatility has declined over the last few weeks and rates remain stuck in a narrow range. It may be that the Treasury bond market is flashing a danger sign, so look out!
Thanks to Dent Research, provided here is our weekly information roundup ending the week of February 24, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Existing Home Sales up 3.3% in January… Buyers jumped into the market at the start of 2017, pushing existing home sales to their highest level since 2007.
What it means – Annual sales increased 3.8%, which is a lot like the monthly number, reflecting the fact that existing home sales were essentially flat last year. It could be that existing home buyers found their mojo last month and will push the market up dramatically this year. Or, it could be that prospective buyers are jumping in before rates climb.
Mortgage applications fell the last two weeks, implying that future sales won’t be as rosy. And refinancing applications dropped to 46.2% of the total, the lowest level since November 2008, another sign that higher rates, or at least the threat of them, are affecting consumers.
Still, prices jumped 7.1% since last year, so sellers are still in control… for the moment.
New Home Sales Rose 3.7% Last Month… Sales for the last three months were revised lower, and January sales increased half as much as expected.
What it means – New home sales flattened out last year, much like existing home sales, which has everyone wondering what comes next. But unlike existing home sales, new home sales are still less than half of their peak in the mid-2000s.
Home builders remain cautiously optimistic, building only what they know they can sell. With possibly higher rates in the near future (see below) and modest wage growth, that’s a pretty good strategy.
Minutes of Last Fed Meeting Calls for Raising Rates in Near Future… The Fed governors discussed higher short-term rates this year, but put off talks about reducing the Fed’s balance sheet.
What it means – If this sounds like a repeat from last week, it sort of is. The minutes of the last Fed meeting echo the sentiments that Chair Yellen and other Fed officials have laid out recently in various speeches. But they still talk about being “data dependent,” meaning that if they get bad economic news between now and the next meeting, then all bets are off. Which leaves us back where we started… parsing ever speech, hanging on every word, and shaking our heads at the lack of clear direction.
Investors aren’t buying the higher rate hike. Fed funds futures show a 22% chance of a rate hike in March.
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U.K. Fourth-Quarter GDP up 0.7%, 2.2% for 2016... Led by exports, British GDP rebounded sharply from the third quarter.
What it means – Anyone who claims exchange-rate swings don’t matter very much should spend time looking through British GDP.
After the Brexit vote, the British pound fell from roughly $1.48 to $1.20, and dropped a similar amount against the euro and the yen. Every note of foreign currency that English companies received for exports was suddenly worth a lot more when converted to pounds. Voila! GDP instantly shot higher! Of course, there is a downside.
Every Brit that wants to buy imported stuff suddenly has to pay more, which also shows up as higher spending, but really means inflation. As the full effect of the cheaper pound works through the economy, GDP growth should ease.
European Commission Expects Britain to Pay Before Leaving the EU… EU commissioners noted that Britain must make good on funding obligations before the country can sever ties with the economic bloc.
What it means – This is a boring topic, but it has teeth. Leaving the EU will save Brits from complying with the bloc’s regulations, but the country must pay to get out of the trap. The EU demands payment for unfunded pensions and already committed-but-unfunded spending programs, like infrastructure in lagging member countries. The tab could be anywhere from $20 billion to $70 billion.
EU regulators have leverage because they can withhold favored trading status unless the Brits cough up the dough. However, Britain has a bit of leverage, since it can simply refuse to pay. Expect a lot of public announcements about “mutual benefits,” and then for the deal to be concluded at the eleventh hour.
The entire episode is a bit humorous, and reminds me of the situation in California. The EU is demanding full payment from Britain for things that the EU hasn’t funded at all, much like when cities and other entities leave the California Public Employee Retirement System, or CalPERS. The hypocrisy is mind-numbing.
Swedes Overpay Their Taxes to Earn Interest… The Swedish government reports taxpayers purposely overpay their tax bill, which by law must earn 0.56% interest until it is refunded.
What it means – People aren’t dumb. When the interest rate on Swedish bank deposits dropped below zero, savers get charged for holding cash. So, they went looking for better options. Since the government must pay interest, then overpaying taxes presented a great option. Kudos to the Swedes for figuring it out.
Yield on German 2-Year Government Bond Falls to Negative 0.95%... The yield on the Schatz, as it’s called, fell to a historic low this week.
What it means – This is where the obvious meets destiny. The ECB bond-buying program requires the central bank to purchase bonds from each country in the Eurozone in a set percentage. Germany doesn’t sell many bonds, but is the biggest economy in the economic bloc, so the ECB must buy a big piece of a static pie. This creates more demand than supply, driving up the price of government bonds as yields fall. At the same time, nationalist movements and default risks across the Eurozone are growing. Investors looking to stash cash are turning to Germany.
At some point the ECB will stop buying bonds, but the euro is still doomed. Look out for tough times ahead!
Next Week – The last week of February includes reports on durable goods and the CoreLogic Case-Shiller Home Price Index. Instead of the usual first Friday of the month, the Bureau of Labor Statistics won’t release employment figures for February until the following Friday, March 10.
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