Hurricane Harvey causes some big market moves
U. S. consumer confidence remains strong
U.S. metropolitan home prices expected to edge higher
7-year T-note auction to yield near 1.98%
Shanghai Composite extends sharp upside breakout to new 1-1/2 year high
Hurricane Harvey causes some big market moves — Hurricane Harvey is causing major business disruptions and losses for homeowners in Texas, but is not expected to have a major macroeconomic effect on the overall U.S. economy. The U.S. stock market on Monday closed with a small +0.05% gain.
Hurricane Harvey is having a major impact on the U.S. petroleum markets since Houston is a major refining area and hub for U.S. crude oil shipments. Oct gasoline prices on Monday rallied by 1.98% due to the closure of about 10% of U.S. refinery capacity, a figure that could rise as high as 30% depending on the future course of the storm. Meanwhile, Oct crude oil prices fell sharply by -2.72% due to slack demand from Texas refineries and due to some oil pipeline closures, which could cause a backup of inventories at Cushing, where WTI crude oil futures are priced. The storm has shut down about one-quarter of oil and gas production in the Gulf of Mexico, which is an offsetting bullish factor for oil and gas prices. Oct natural gas prices on Monday closed unchanged.
Dec cotton prices rallied sharply by +2.47% on Monday due to expectations for flooding damage to Texas cotton crops and damage to some cotton storage facilities. Oct cattle prices closed +1.36% higher as some Texas pastures flooded and left cattle stranded.
Stock prices for some U.S. home builders took a hit on Monday since Texas is a key area for building new homes. The SPDR S&P Homebuilders ETF (XHB) on Monday ended the day unchanged, but particular homebuilders with heavy exposure to Texas took a hit. Hovnanian Enterprises (HOV), for example, plunged by -6.19% and LGI Homes (LGIH) fell by -4.54%.
U. S. consumer confidence remains strong — U.S. consumer confidence remains in strong shape, although down from the post-election euphoria levels. Specifically, the July Conference Board U.S. consumer confidence index level of 121.1 was just -3.8 points below the 16-1/2 year high of 124.9 posted in March. The consensus is for today’s report to show a -0.7 point decline to 120.4, giving back a little of July’s +3.8 point increase to 121.1.
U.S. consumer confidence continues to see strength due to (1) the firm U.S. economy and labor market, (2) rising household wealth with the recent record high in the stock market and with housing prices still rising, (3) continued low interest rates and mortgage rates, (4) low gasoline prices, and (5) hopes for a personal tax rate cut.
However, U.S. consumer confidence has settled back from post-election levels mainly because of the slow Republican growth agenda. Other negative factors for U.S. consumer confidence include (1) geopolitical tensions with North Korea, (2) White House political uncertainty, and (3) the prospects for steadily higher interest rates over the next few years as the Fed raises its funds rate target.
U.S. metropolitan home prices expected to edge higher — The market consensus is for today’s June S&P CoreLogic Composite-20 house price index to show a small +0.1% m/m gain, matching May’s increase. On a year-on-year basis, the index is expected to edge slightly lower to +5.6% y/y from June’s +5.7%. The index showed very strong gains from autumn 2016 through spring 2017 but the index has stalled in the last two reporting months of April (-0.2%) and May (+0.1%). The June FHFA index has already been reported for June and showed a paltry increase of +0.1%.
The Composite 20 index in the past 5-1/2 years has soared by a total of +45% from the housing-bust trough seen in January 2012. U.S. home prices have been supported in recent months by the combination of strong demand and tight U.S. supplies. On the demand side, the June U.S. existing home sales level of 5.52 million units was only -3.2% below the 10-year high of 5.70 million units post in March. Meanwhile on the supply side, the supply of existing homes available on the market was at 4.3 months in June, much tighter than the long-term average of 7.0 months and the 7-8 month level that the National Association of Realtors says is consistent with steady home prices.
7-year T-note auction to yield near 1.98% — The Treasury today will sell $28 billion of 7-year T-notes, concluding this week’s $88 billion T-note package. In when-issued trading late Monday afternoon, today’s 7-year T-note issue was trading at 1.98%. That translates to an inflation-adjusted yield of 0.23% against the current 7-year breakeven inflation expectations rate of 1.75%.
The 12-auction averages for the 7-year are as follows: 2.53 bid cover ratio, $12 million in non-competitive bids, 4.6 bp tail to the median yield, 19.4 bp tail to the low yield, and 39% taken at the high yield. The 7-year is the second most popular security among foreign investors and central banks with indirect bidders taking 66.6% of the last twelve 7-year T-note auctions, well above the average of 60.9% for all recent Treasury coupon auctions.
Shanghai Composite extends sharp upside breakout to new 1-1/2 year high — The Shanghai Composite index on Monday extended last Friday’s sharp upside breakout and posted a new 1-1/2 year high. Chinese stocks rallied on (1) reduced worries about the Chinese government’s deleveraging campaign ahead of this autumn’s key Communist Party congress, (2) indications that state-owned enterprises may boost their dividend payouts, (3) the recent improvement in the Chinese economic data, and (4) Monday’s 14-month high in the Chinese yuan, which reduces concern about capital flight.