- U.S./China phase-one trade review goes smoothly
- August U.S. consumer confidence expected to show only a small recovery as pandemic continues
- U.S. new home sales expected to rise to new 13-year high
- June U.S. home prices expected to show strength after May’s weakness
- 2-year T-note auction to yield near 0.155%
U.S./China phase-one trade review goes smoothly — The U.S. and China on Monday night quietly held their 6-month review of the phase-one trade deal that President Trump previously canceled. The U.S. Trade Representative’s office released a statement last night giving a very brief read-out of the meeting. USTR Lighthizer and Treasury Secretary Mnuchin were on the call with Chinese Vice Premier Liu. The USTR’s statement said there is more progress to be made, but said, “Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.”
August U.S. consumer confidence expected to show only a small recovery as pandemic continues — Today’s Conference Board U.S. Aug consumer confidence index is expected to show a small +0.4 point increase to 93.0, recovering a small portion of July’s -5.7 point decline to 92.6. Expectations for a small increase in today’s Conference Board report are supported by the fact that the University of Michigan has already reported that its consumer sentiment index in August rose by +0.3 points to 72.8.
The Conference Board’s consumer confidence index rose by +12.4 points in June, but the second Covid wave began in the middle of that month, thus causing confidence to drop by -5.7 in July when the second Covid wave peaked. The second Covid wave seen since June has made clear that the pandemic in the U.S. is not going away until a safe and effective vaccine becomes widely available, probably sometime early or in the middle of next year.
The reality is that U.S. consumer confidence remains severely depressed and has not shown much of a recovery from April’s 6-year low of 85.7. U.S. consumer confidence remains hobbled by the continued shutdowns of major sectors of the U.S. economy and by the severe weakness in the U.S. labor market. July’s unemployment rate of 10.2% was 0.1 point worse than the peak of 10.1% seen during the Great Recession. Meanwhile, U.S. payroll jobs are still down by a net 13 million jobs from February’s record high.
U.S. new home sales expected to rise to new 13-year high — The consensus is for today’s July U.S. new home sales report to show an increase of +1.8% to 790,000, adding to June’s +13.8% increase to a 13-year high of 776,000.
Expectations for a further increase in new home sales are supported by the fact that existing home sales in July rose sharply by +24.7%, adding to June’s +20.2% gain.
The fact that new home sales have surged to a 13-year high during the worst recession in post-war history is easily explained by the fact that many people are moving due to the pandemic. There are people who are moving to larger homes so they can work from home. There many other people who are leaving the cities and multi-family homes to move to houses in the suburbs or even resort areas since they can now work from home.
New home sales would probably be even stronger if there were more homes available for sale. The supply of new homes on the market fell to a 4-year low of 4.7 months in July and was well below the 5-year average of 5.6 months.
The strength of new home sales has prompted U.S. homebuilder confidence to soar. The NAHB housing market index in August rose by +6 points to 78, thus matching the record high for the series that was originally set in 1999 (data since 1985). U.S. homebuilder stocks remain on a tear with the SPDR S&P U.S. homebuilder ETF (XHB) rising to a new record high yesterday and showing a +19.3% year-to-date gain. That is more than three times the +6.2% year-to-date gain in the S&P 500 index.
June U.S. home prices expected to show strength after May’s weakness — The weakness in home prices in May is expected to give way to resumed strength in June due to the strong demand for houses, combined with the tight supply of homes on the market. The consensus is for today’s June FHFA house price index to show a +0.3% m/m increase, reversing May’s -0.3% m/m decline. Meanwhile, the June S&P CoreLogic composite-20 home price index is expected to show a small increase of +0.10%, adding to May’s barely-positive increase of +0.04%.
Home prices are likely to keep rising over the short-term as the pandemic trends continue of strong home demand and tight supplies. However, home prices are likely to suffer starting in a few months when foreclosures start piling up after the current mortgage forbearance and foreclosure protection laws expire for federally-backed mortgages.
2-year T-note auction to yield near 0.155% — The Treasury today will sell $50 billion of 2-year T-notes. The $50 billion size of today’s 2-year auction is up by $2 billion from July’s auction size of $48 billion and is now up by a total of $10 billion (+25%) from the $40 billion size that prevailed in 2019 before the Treasury was hit by pandemic expenses.
Today’s 2-year T-note issue was trading at 0.155% in when-issued trading late yesterday afternoon. The 2-year T-note yield is trading near the middle of the very narrow range of 0.11% to 0.23% seen since May. The 2-year T-note yield has been trading sideways because the market is not fully expecting any change in the Fed’s funds rate target for at least the next two years. The 12-auction averages for the 2-year are: 2.58 bid cover ratio, $152 mln in non-competitive bids, 3.3 bp tail to the median yield, 31.2 bp tail to the low yield, and 44% taken at the high yield. The 2-year is the second least popular security among foreign investors and central banks behind the 3-year T-note. Indirect bidders, a proxy for foreign buyers, have taken an average of only 50.9% of the last twelve 2-year T-note auctions, which is far below the median of 62.5% for all recent Treasury coupon auctions.
