Fixed Income Weekly — 10/18/23
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
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Chart of the Day – Best Stocks on Q3 Earnings
Housing Starts Muted Relative to Expectations
Following Monday’s weaker-than-expected report on homebuilder sentiment, actual data on residential construction data in the form of Building Permits and Housing Starts came in mixed relative to expectations. While Housing Starts missed expectations by 25K (1.358 million versus 1.383 million), Building Permits topped forecasts by 20K (1.473 million versus 1.453 million).
The table below breaks down both reports by the size of units and on a regional basis. In last month’s report, the big miss in Housing Starts was due to a sharp decline in multi-family units, but they drove the 7.0% m/m increase in September with a gain of 17.6%. On a y/y basis, though, multi-family units are still down 31.4%. On the multi-family front, Building Permits picked up where Housing Starts left off last month with a 14.3% decline on a m/m basis and a 29.7% y/y decline. On a regional basis, the Northeast experienced the largest m/m decline in terms of both Building Permits and Housing Starts.
Taking a longer-term look at Housing Starts on a 12-month average basis, they continued to roll over in September. At an average monthly rate of 1.4 million, Housing Starts are well off the post-COVID peak from mid-2022 but are still above pre-COVID levels just below 1.3 million. So, on that measure and coupled with the spike in rates, one could make a valid argument that the level of Housing Starts has further to fall in the short term.
Looking at the 12-month average of Housing Starts and Building Permits from a shorter-term perspective shows that both indicators remain weak. While Housing Starts briefly stabilized this summer, they’ve resumed their downward trend in the last couple of months. Building Permits have been in a more pronounced downtrend where the 12-month average reading has declined for 14 straight months- the longest streak of declines since the Financial Crisis. Like Housing Starts, though, the current level of Building Permits is still above its pre-Covid peak.
Bespoke’s Morning Lineup – 10/18/23
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“There are no rules here — we’re trying to accomplish something.” – Thomas Edison
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Oil is trading higher this morning after President Biden’s planned meeting with Arab leaders was scrapped after the bombing of a hospital in Gaza which each side is blaming on the other. At the margin, the trip’s cancellation raises risks of an escalation of the conflict, hence the rise in oil prices and lower equity prices. Normally, you’d expect to see treasuries rally in a situation like this, but they’re so out of favor these days, that they’ve only managed a modest rally.
Earnings season is finally kicking into gear, and after the close, we’ll get reports from Netflix (NFLX) and Tesla (TSLA), but this morning we’ve already seen notable reports which include Morgan Stanley (MS), Procter & Gamble (PG), and Travelers (TRV). Overall, results relative to expectations have been uninspiring as just over two-thirds of companies reporting this morning have exceeded EPS forecasts while less than half topped revenue estimates.
On the economic calendar, the only reports of note this morning were Building Permits and Housing Starts. Both reports came in close to expectations with Housing Starts slightly missing forecasts while Building Permits slightly beat.
Just when you think that European stocks are going to reverse their long-term underperformance relative to the US, US stocks start outperforming again. The last six months have been a perfect example. The chart below compares the rolling six-month performance between the S&P 500 and the STOXX 600 on a dollar-adjusted basis. While the two indices performed in line with each other in the spring, once Memorial Day arrived, US stocks started to pull away, and through yesterday’s close, the S&P 500 was up over 5% in the last six months while European stocks were down over 6%.
From a longer-term perspective, this trend is nothing new. The chart below shows the rolling six-month performance spread between the S&P 500 and the STOXX 600 ($-adjusted). Over the last 20+ years, especially since the Financial Crisis, there have been multiple six-month periods where the US outperformed Europe by an even wider margin (and far fewer periods where Europe outperformed the US by a wide margin). One major exception, though, was in the six months coming out of last October’s lows though April of this year. During that six-month period, Europe outperformed the US by more than 20 percentage points, which was the widest margin of outperformance on the part of Europe relative to the US since the Financial Crisis. It didn’t last long, though, and that period was more the exception than the rule.
The above quote from Thomas Edison is something to think about when you look at the trend of US outperformance relative to Europe. Sometimes, the more ‘rules’ you have the harder it is to accomplish things, and on the issue of regulation, Europe has a much higher burden than the US.
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The Closer – Rates’ New Highs, Transports Earnings, Job Postings – 10/17/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look into the House Speaker voting and new highs for rates (page 1). We then dive into the latest earnings from a couple transportation stocks (page 2). We follow up with reviews of the latest industrial production (page 3) and job postings data (pages 4 and 5).
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Daily Sector Snapshot — 10/17/23
Bespoke Stock Scores — 10/17/23
Chart of the Day – Strong Breadth in Retail Sales
Rates Hit Homebuilders
Among industrial production and retail sales, the other major economic release this morning was homebuilder sentiment from the NAHB. As shown below, the October report showed sentiment slid down to a new multi-month low of 40. That was a four point decline month over month on top of the September reading being revised one point lower to 44. That marks the third MoM decline in a row since sentiment peaked at 56 in July. That leaves the index 9 points above the post-pandemic low of 31 from last December.
The drop in the headline index was due to broad-based weakness throughout the report. As shown below, every component of the headline number was lower month over month and is now in the bottom quartile of historical readings. Those month-over-month declines in October were also historically large, each one with the exception of future sales ranking in the bottom decile of all month-over-month moves. That would imply the nation’s homebuilders have seen significant deterioration in their businesses which the NAHB noted was on account of higher rates.
As for a regional look at homebuilder sentiment, each area also saw a lower reading month over month, however, there is a degree of variability in these readings. For starters, homebuilder sentiment in the Northeast is by far the healthiest with the October reading registering in the 58th percentile of all months since 2005. That compares to the next highest, the Midwest, which is only in the 38th percentile. Like the Northeast, the Midwest only fell by a single index point month over month, and that was dwarfed by the 7-point decline in the West and a 5-point decline in the South.
In addition to today’s homebuilder sentiment data, one week ago the NAHB also published its quarterly survey on the remodeling market. Here too there has been a significant deterioration in conditions on account of higher interest rates. While the headline index remains bolstered and sits above the pre-pandemic range, it has pulled back significantly and is at the lowest levels since Q1 2020. Future market conditions, however, are back in line with pre-pandemic readings. Remodelers are also reporting new post-pandemic lows of smaller backlogs and fewer appointments for proposals. This trend was also reflected somewhat in the September Retail Sales report where housing-related sectors have seen some of the largest year-year declines in sales.
In addition to homebuilder sentiment having taken a hit, homebuilder stocks have also pulled back. Since the high at the start of August, the iShares Home Construction ETF (ITB) has fallen 13.9% having recently found support at its 200-DMA. While the group has found support, the past couple of months’ downtrend remains firmly in place.
