May 24, 2018

Stocks sank at the open this morning after President Trump canceled the nuclear summit with North Korea. The Dow is down 190 pts and the SPX is down .47%. Wow, the stock market is doing a terrible job of ignoring day-to-day political rhetoric. It fell head-over-heels for Mnuchin’s overly optimistic messaging on the China trade negotiations, and now it feigns total surprise that the North Korean summit may not happen. There are a few groups trading higher today. Utilities are up for the second consecutive day, and telecoms are trying to rebound from a 3-month slide. Industrials are also up modestly because the dollar is a bit weaker. Commodities are mixed in early trading. Gold is up 1%, not surprisingly. WTI crude oil is down 1% to $71.10/barrel. Bonds are trading up today—and over the last week—as yields dip. The 5-year and 10-year Treasury yields are back down to 2.80% and 2.96%, respectively. 

The president took another jab at trading partners yesterday when he ordered the Department of Commerce to consider new trade tariffs on imported automobiles and auto parts. Specifically, he ordered an investigation into whether these imports harm US national security. According to Bloomberg, this is probably just a “tactic” to pressure Canada and Mexico into renegotiating NAFTA. 

Turkey’s emerging currency crisis is in the news. The exchange rate fell yesterday to a record low 3 Lira per US dollar. Of course, the dollar is up about 2% this year, and for us that’s no big deal. But in emerging markets like Turkey, a stronger dollar is usually trouble. At the moment, the dollar is compounding weakness in the Lira brought on by its government. Normally, when a country’s currency weakens substantially, the central bank steps in to raise interest rates and thereby stabilize the currency. But Turkey’s President Tayyip Erdogan seems dead-set against using monetary policy to support the Lira, so that could be a real problem if he is re-elected next month. I think he actually characterized monetary tightening as “the mother of all evil.” As a result, traders around the world have been scared out of the Lira. Anyway, late yesterday, the Turkish central bank held an emergency meeting and pushed up its policy interest rate by 3 percentage points to 16.5%. I guess irresponsible political rhetoric is making its way around the world. 

Existing home sales, which account for about 90% of the US housing market, declined slightly in April to an annualized rate of 5.46 million transactions. That’s a pretty high level historically, but we’ve been hovering around there for two years now. Yes, the demand for housing is strong; yes, unemployment is low; yes, household formation is rising. But the critical limit is that fact that the supply of homes for sale is very low. That’s the bottleneck. Supply just can’t catch up with demand and this will continue pushing home prices higher. 

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