- U.S. July consumer sentiment expected to eke out a gain despite surging pandemic
- U.S. housing starts expected to rebound sharply as homebuilder confidence returns
- EU leaders begin summit to wrangle over 750 billion euro Recovery Fund
U.S. July consumer sentiment expected to eke out a gain despite surging pandemic — The market consensus is for today’s preliminary-July University of Michigan U.S. consumer sentiment index to show a small +0.9 increase to 79.0, adding to June’s solid gain of +5.8 to 78.1.
The consumer sentiment index plunged by a total of -29.2 points during the worst of the pandemic shutdowns in March-April and posted an 8-1/2 year low of 71.8 in April. The index has since rebounded higher by a total of +6.3 in May-June, representing a recovery of less than one-quarter of the March-April plunge.
U.S. consumer sentiment is seeing a boost as many businesses reopen and bring back their employees. However, the resurgence of the pandemic seen in the past four weeks has caused many consumers to remain conservative about their spending and less willing to venture out to shop.
The number of new Covid infections in the U.S. yesterday reached a new record high of 71,229, according to the Covid Tracking Project, due in large part to a continued sharp increase in infections in Florida and Texas. A recent study by two University of Chicago economists found that fear of the virus and self-quarantines are a bigger driver of weak economic activity that state-enforced shutdowns. On that basis, the recent surge in Covid infections to record highs, and the increase in the number of deaths, will undoubtedly hurt consumer sentiment going into the second half of July.
Also, new layoffs are occurring as some states impose new shutdowns on bars, restaurants, cinemas, and other public gathering places. Those new layoffs will also hurt consumer confidence and spending.
There was some good news on retail spending yesterday with the report that U.S. retail sales in June rose by+7.5% m/m, adding to May’s surge of +18.2%. Retail sales need to rise by only another +1.0% to match January’s record high.
Retail sales are clearly getting a big boost from pent-up demand following the lockdowns seen in April-May. However, it seems likely that retail sales will soon slow down since pent-up demand has largely been met and since consumers may turn more cautious with the worsening pandemic.
U.S. housing starts expected to rebound sharply as homebuilder confidence returns — The consensus is for today’s June U.S. housing starts report to spike higher by +21.2% to 1.180 million, adding to May’s modest recovery of +4.3% to 974,000. Housing starts have so far only shown a small +4.3% recovery in May after the -42% plunge in Jan-April.
However, the weakness in housing starts has been concentrated in multi-family dwellings. Single-family home sales are actually in very good shape, having fallen by -14.9% in March but then recovering by a net +12.4% in April-May. The May single-family housing starts level of 989,000 is only 6% below last December’s 13-year high of 1.047 million units.
Homebuilders are back to building single-family homes now that construction and manufacturing businesses have been allowed to reopen across the country. Moreover, home sales have been surprisingly strong because people are looking to move into bigger homes or are fleeing multi-family dwellings in cities. May new home sales rose by +16.6%, recovering part of the overall 25% drop seen during Feb-April.
U.S. homebuilder confidence has also been bolstered by the drop in mortgage rates, which makes homes more affordable. The 30-year mortgage rate is currently at a record low of 2.98% and has plunged by an overall -76 bp from 3.74% at the end of 2019.
The market is bullish on homebuilder stocks due to the firm demand for new homes and low mortgage rates. The SPDR S&P Homebuilder on Thursday rallied to a 5-month high and has now recovered almost all of its March pandemic plunge.
EU leaders begin summit to wrangle over 750 billion euro Recovery Fund — EU leaders will hold a summit today and tomorrow, with the main agenda item being the 750 billion euro EU Recovery Fund. German Chancellor Merkel is pushing hard to get the Fund approved, but there are several fiscally-conservative EU countries that remain unconvinced about allowing rescue grants to go to troubled countries with few strings attached.
EU leaders have at least agreed on how to fund the rescue package. The proposal is for the European Commission to issue bonds backed by the EU as a whole. That means that individual countries will not be individually on the hook for the bonds, although they will be obligated to cover the debt payments via the regular EU budget process. Ms. Merkel can therefore argue that since Germany is not named as a guarantor of the bond, the bond issues do not represent the mutualization of debt that is an anathema to many German voters.
ECB President Lagarde yesterday said the ECB’s assumption “given what we read, what we know, and what we discuss with colleagues” is that the EU Recovery Fund “will come about.” She didn’t give an estimate, however, of when it might be approved.
The peripheral Eurozone bond markets are relatively relaxed and confident that rescue funds will be coming through. The spread of the Italian 10-year government bond yield over bunds is currently at only 165 bp, near a 4-month low.
