Monday Morning Cup of Coffee takes a look at news coming across HousingWire's weekend desk, with more coverage to come on bigger issues.
Get it while it’s hot because there won’t be as much coming later. That roughly sums up what Goldman Sachs is telling clients. In a client note, their analysts say they have been disappointed in recent months, and the outlook further down the road is even grimmer.
“Our Q1 GDP tracking estimate stands at just 1.2%, and while our Current Activity Indicator averaged 2.5% in Q1, this too is a substantial slowdown from the late-2014 pace,” analysts say.
They cite the usual excuse of seasonal weather, but that doesn’t really carry too much weight – it’s always cold in winter, and there’s always a spring bounce.
So turning to their reason number two, it gets worrisome – the rapid decline of energy prices. That’s not going away with the seasonal change.
As for number three?
“Third, the stronger dollar has started to act as a drag on the economy, and the manufacturing sector in particular,” they say. “This week, we reassess the growth outlook to ask whether our expectation for a return to a strong growth environment still makes sense.”
Their conclusion? Strength – or at least a dead-cat bounce – in the near-term, and a negative drag in the longer term.
“In particular, the model points to strong growth of consumer spending and homebuilding, especially in the near-term, fueled by the recent pick-ups in disposable income growth and household formation, respectively. However, continued appreciation of the US dollar points to a more sizeable and persistent drag from net exports than previously accounted for,” they say. “The overall effect is likely to be negative on net, and we therefore reduce our GDP forecast by 0.25 percentage point (pp) in 2016 and 2017H1 and by 0.5pp in 2017H2. As a result, we raise our projection for the unemployment rate by 0.1pp to 4.8% in 2017Q4 and reduce our end-2017 projection of the funds rate by 25bp.”
The cue – that is to say the timing – of a Federal Reserve cut on interest rate s is weighing on analysts at Bank of America/Merrill Lynch. Investment in mortgage-backed securities and what to expect from those investments turn on it.
“Fed tightening in June would result in much more trouble for markets and the economy than waiting until at least September,” writes Chris Flanagan at BAML. “Recognition of this from the market and the Fed should boost risk assets and depress volatility in Q2. Stay overweight the agency MBS basis and down-in-credit in securitized products to position for a strong Q2 risk-on rally.”
As for non-agency MBS, it’s a different.
“We expect strong issuance and risk-on move happening in Q2. Legacy non-agency excess returns remain relatively attractive,” write BAML analysts in a client note. “We expect non-agency returns to focus more on carry and less on price/spread movements.”
So when do their analysts think the Fed is going to move?
“The Fed has a choice coming its way, probably sooner rather than later. Does it back down on its desire to raise rates as a result of the disinflationary pressures arising from the strong dollar? Or does it stay on its course of tightening in the months ahead? Consistent with the BofAML economics view, who think the risk of liftoff starting beyond September has increased, we think the choice will be more prolonged accommodation,” Flanagan says.
Builder confidence is always an early, if not always perfect, indicator of the housing economy. This week on Wednesday we’ll find out what homebuilders are thinking with the National Association of Home Builders index.
The NAHB housing market index showed the lack of first-time buyers as an increasing negative for the new home market, evident in the housing market index for March where growth slowed 2 points to an 8-month low of 53. The traffic component of the index again showed particular weakness, down 2 points to 37 which was a 9-month low and that directly reflected the lack of first-time buyers. The other 2 components of the report remained well over 50, at 58 for current sales, which however was down 3 points from February for a 5-month low, and at 59 for future sales which was unchanged.
For reference sake, NAHB produces a housing market index based on a survey in which respondents from this organization are asked to rate the general economy and housing market conditions. The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes.
On Wednesday it’s also time for the same joke in the office we tell at least once a month – “The new Beige Book is here! The new Beige Book is here! I’m somebody!”
We’ll find out in the new version what the Fed is reporting is happening in the 12 districts and if we should all invest in gold.
We get a chance to see if homebuilder confidence matches reality on Thursday, with the Census Bureau putting out its report on housing starts.
Housing starts collapsed in February. Starts fell a devastating 17% on a monthly basis, following no change in January. The 0.897 million unit pace was down 3.3% on a year-ago basis. This was the lowest starts level since January 2014 with a 0.897 million unit annualized pace.
Most worrisome in the report, single-family units dipped 14.9% in February.
No banks were closed the week ending April 10, according to the FDIC.
