September 19, 2018

Stocks opened higher this morning (Dow +203 pts; SPX +.17%; Nasdaq flat). Banks, basic materials producers and emerging markets stocks are up over 1% in early trading. On the other hand, utilities and FAANG stocks are trading lower. European markets are poised to close up about .5% and Asia was up over 1% last night. The dollar is flat against a basket of foreign currencies today and commodities are mostly higher. WTI crude oil is up around $70.70/barrel. After falling more than 20% this year, copper prices have retraced about 3% this month. Bonds are selling off as yields head higher. The 5-year Treasury yield is back up to 2.96%, a level it hasn’t seen in 10 years. The 10-year Treasury yield is up around 3.08%, toward the high end of its 7-year range. Bond traders are clearly anticipating two more interest rate hikes by the Fed this year, but according to Bloomberg, traders are starting to price in a Fed pause in mid-2019. That’s because eventually, Fed tightening can choke off economic growth by making lending too restrictive.

For the second straight session, the yield curve has steepened. That means longer-term interest rates are rising faster than short-term rates. For some perspective, the historical average spread between the 2-year and 10-year Treasury yields is about 1.0% percent. In recent days that gap has shrunk to just .19% (or 19 basis points), causing investors to fret that the bond market is predicting an economic downturn. So it is with some relief that we see the spread rising back toward 27 basis points today. This move is also allowing the bank stocks to move higher since their profitability increases with a steeper curve.

Housing starts jumped 9% in August from prior month levels to 1.28 million units nationwide. Ground-breaking on new home construction projects declined over the summer but could be rebounding. Of course, Hurricane Florence will distort the figures so we can’t read too much into this report. There is a shortage of single-family homes in the US, and yet construction activity has not accelerated over the last year. On the other hand, the multi-family market is pretty saturated but construction activity within this segment is rising.

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