April 23, 2018

Stocks opened mixed this morning (Dow flat; SPX +.15%). Most major market sectors are up slightly, led by consumer discretionary, healthcare and telecoms. The materials sector is sagging a bit as commodities pull back. The dollar is moving higher on commodity weakness and higher interest rates. Following a very strong two-week run, WTI crude oil is falling back toward $68/barrel. Aluminum prices fell sharply after the US Treasury softened sanctions against a specific Russian aluminum producer. Bonds are selling off today. The 5-year Treasury yield shot up to 2.82%, an 8 ½-year high. The 10-year Treasury yield ticked up to 2.98%, a four-year high. Bond traders are bothered by the Federal Reserve’s apparent staunch commitment to raising rates despite the recent 10% stock market correction coupled with tame inflation readings. 

Rick Rieder at Blackrock says the 10-year Treasury will likely go to 3.25% this year. But it will not rise much further, and probably not enough to chock off economic growth in the foreseeable future. He cited some factors that will keep rates from exploding higher: demographics; investors’ need for income; regular bond buying by pension funds & insurance companies; further bond buying by the European Central Bank and Bank of Japan. In addition, he said inflation is “just not that scary.”  Separately, he said the “real story” in bonds is this: the front end of the yield curve is now a real alternative for income investors. He’s right. For example, Vanguard’s Short-Term Corporate Bond ETF (VCSH) is now yielding 2.8% with very little expected volatility. Vanguard’s Utilities ETF (VPU), on the other hand, yields only 3% with significantly higher risk. 

Existing home sales climbed in March to an annualized rate of 5.6 million units. That rate represents a four-month high and is slightly better than economists were expecting. The median home price rose 5.8% y/y primarily because for-sale inventory sank more than 7%. Something has to give. During the 2009 – 2016 period we under-built housing relative to population growth and now are dealing with a supply deficit. Even now, new home construction is only matching population growth. As for single-family homes, new construction is way below the 30-year average rate and not even half of the peak level back in 2005. Everyone wants to know if housing is back in a bubble state, but it’s hard to see prices falling when supply/demand are so out of balance.  

Former Mexican President Vicente Fox was interviewed on CNBC this morning regarding President Trump’s positions on NAFTA and the planned border wall. He believes Mr. Trump is using inflammatory rhetoric in order to impress his political base. He stressed that international trade in general—and NAFTA specifically—is not zero-sum game, but benefits all parties. Switching gears and clearly exasperated, he said, “The building of a wall is a stupidity out of the mind of Trump.” The idea was conceived “out of ignorance.” Finally, he said, “American will be great forever…it doesn’t need Trump.” 

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