Tuesday, April 18, 2023

Morning Note: The Conundrum -- And -- How Not to Behave

Let's, for a change, consider a little good economic news this morning.

Yesterday's release of the Empire (New York) State Manufacturing Index totally blew away expectations, logging a +10.8 headline score, vs consensus expectations of -18.3.

Bloomberg macro analyst Cameron Crise, as usual, offers up a thoughtful, balanced assessment:

"Whoa! While the H.8 release suggested a mitigation of banking-sector stress, the always volatile Empire Survey has put a bit of an exclamation point on that theory, surging to 10.8 from -24.6, way above the consensus forecast of -18. Not only is that the highest level since last July, it’s also the third-largest monthly rise in the history of the survey.

In fairness, prices paid did drop further to 33 from 41.9, so there is a somewhat dovish tilt to the data. The employment component only rose to -8 from -10.1, adding to the sense that the headline exaggerates the hawkish messaging from the survey. But new orders rose to 25.1 from -21.7, the highest in a year. The Empire is always volatile, so it makes little sense to draw sweeping conclusions from a single report. But at the very least it adds to the sense that the economy is not tanking in a straight line and that the H2 rate-cut pricing may come under further challenge if more data emerges to support that notion."

Also out yesterday was the National Association of Homebuilders latest sentiment survey (an input to our PWA Index), which caught its fourth consecutive monthly notch higher, although, per the graph below, still historically uninspiring... What stood out was what amounts to a dearth in supply... While we'll take it, per the following from Bloomberg's Felice Maranz, it's a very mixed picture out there:

"Earlier, NAHB figures showed US homebuilder sentiment rose for a fourth month in April, boosted by limited supply. That’s good news for people who sell new homes — but not for those looking for housing in an environment where affordability has been increasingly strained. Expensive housing costs can strain consumers and worry Fed officials eying sticky inflation, which can weigh on the broader economy and risk assets.

It’s telling that new construction accounts for one-third of current housing inventory, well above historical norms of a little more than 10%, according to the NAHB’s chief economist. New homes are akin to a luxury good, with prices running significantly higher than existing homes. The median price of an existing home in February (reported in March) was $363,000, while the median price of a new home was $438,200.

Demand for housing has picked up a bit recently. Watch for more data with March housing starts and building permits due out Tuesday and existing home sales due Thursday."

Homebuilder Sentiment:  

Now, alas, I gotta say, that last line in Crise’s take on the Empire survey -- (“…it adds to the sense that the economy is not tanking in a straight line and that the H2 rate-cut pricing may come under further challenge if more data emerges to support that notion") -- speaks to what has to be the conundrum for equity traders:

I.e., anything that would challenge the pricing in of the Fed loosening later this year conflicts with the notion that this year’s disinflation-fueled rally (in tech stocks in particular) is legit... Or, let’s say, conflicts with the notion that it's not your classic bear market rally (read bull trap).

And that would be your conundrum, as, and I can’t emphasize this enough, an environment that would justify the latter-year softening that Fed fund futures are presently pricing in (read a recessionary environment) is anything but bullish for equities (even, if not in particular [at these levels], for tech).

This morning's headline quotes emphasize my point:
"I still see adequately restrictive policy rate at 5.50%-5.75% range. Bias to hold for longer until inflation contained." -- Fed Governor William Bullard
"Net 63% expect weaker global growth, reversing 4 months of improvement; net 84% say CPI is heading lower." BofA FMS

Stay tuned...


Asian stocks were mostly red overnight, with 11 of the 16 markets we track closing lower.

Europe's mostly green so far this morning, with 16 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow down 124 points (0.36%), SP500 up 0.09%, SP500 Equal Weight up 0.01%, Nasdaq 100 up 0.27%, Nasdaq Comp up 0.21%, Russell 2000 down 0.26%.

The VIX sits at 16.99 up 0.24%.

Oil futures are down 0.92%, gold's up 0.70
%, silver's up 0.99%, copper futures are up 0.38% and the ag complex (DBA) is down 0.28%.

The 10-year treasury is up (yield down) and the dollar is down 0.33%.

Among our 37 core positions (excluding options hedges, cash and money market funds), 21 -- led by EZA (South African equities [new position]), ITA (defense stocks), DBB (base metals futures), AMD and XLI (industrial stocks) -- are in the green so far this morning... The losers are being led lower by MP Materials, JNJ, EWZ (Brazil equities), OIH (oil services stocks) and XLE (energy stocks).

“When nothing is for sure we remain alert, perennially on our toes. It is more exciting not to know which bush the rabbit is hiding behind than to behave as though we know everything.” --Don Juan Matus

Or, when it comes to investing; it is far more intelligent -- and honest, and safe -- not to behave as though we know everything! 

Have a great day!

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