Macro Update: Consumer Sentiment, Treasuries and Housing
Our last Macro newsletter focused on COVID-19 and the U.S. vaccine rollout. This week’s newsletter discusses consumer sentiment, rising treasury yields and new residential construction.
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Consumer Sentiment:
Source: University of Michigan, chart created by The Macro Mail
Consumer sentiment is an important leading macroeconomic indicator which tends to lead the consumption of consumer discretionary goods, ultimately driving earnings for companies throughout the economy. As such, the University of Michigan Consumer Sentiment Index is a useful leading indicator of corporate performance.
Source: University of Michigan, table created by The Macro Mail
Consumer sentiment notched downwards in February with the decline largely concentrated in the future expectations index and particularly amongst households with incomes lower than $75,000. A rising dichotomy could be seen between those with household earnings in the top third reporting improving finances, and those in the bottom third reporting significant setbacks. A new round of stimulus will likely improve things, but it’s important to note that despite stimulus news, consumers viewed future prospects less favorably.
U.S. Treasuries:
Treasuries are hot in the news this week, with yields finally on the rise and expected to climb higher as vaccines and stimulus checks are set to be rolled out. The 10-Year treasury yield, which hit a low of just 0.4% at the peak of the pandemic, now trades at 1.37%. Netting out the impact of inflation, real yields are on the rise too, with those on long bonds turning positive for the first time since June. This creates a potential problem for risk-assets like equities, with the cost of capital and thereby discount rates climbing, thus putting pressure on equity valuations. This could also put particular pressure on the housing sector, which has benefited greatly from record-low interest rates, with the homebuilder ETF $XHB up over 150% since the March lows.
Source: Yahoo Finance, chart created by The Macro Mail
The key driver of rising yields is likely increasing inflation expectations, with the ten-year breakeven rate hitting the highest level since 2014 this month. The Fed has previously said that they’re willing to let inflation run hot and and don’t plan to raise rates anytime soon, and as such, investors are piling into commodities, with the Bloomberg Commodity Spot Index hitting its highest level since March 2013 and copper rising above $9,000 for the first time in nine years.
Building Permits
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly release seasonally adjusted housing statistics every month. These statistics are important because the housing market is a good indicator of overall economic health.
Authorized building permits, which tend to lead overall housebuilding, were up 10.4% from the revised December rate and 22.5% above the January 2020 rate. Housing starts dropped by 6% for the first time in five months as record-high house prices likely hindered affordability for housing across the U.S. Housing completions also dropped by 2.3% from the revised December estimate but were 2.4% above the January 2020 rate.
Although housebuilders remain confident about demand conditions, the key risks for housing going forward will likely be a mix of rising long-term interest rates, with fixed 30-year mortgages averaging a yield of 2.98% for the week ending February 12th, and affordability, with December house prices nationwide growing by 12.4% YoY.
Source: United States Census Bureau, chart created by The Macro Mail
Things We’re Reading:
“Mortgage vendor IPO woes reflect U.S. housing market peak” - Reuters
“The Treasury Yield Stress Point” - Lyn Alden Investment Strategy
“Easing of restrictions for England to take place in 4 stages with Sunak to extend economic aid” - Financial Times
“Lower-income households dim U.S. consumer sentiment” - Reuters
“Dow Jones Futures Fall, Tech Futures Dive As Bitcoin Tumbles; ZoomInfo Leads Earnings Movers” - Investor’s Business Daily