Wednesday, July 17, 2019

Markets are cautious after Trump's cheerless outlook on trade

Dow declined 21, decliners over advancers 3-2 & NAZ fell 6.  The MLP index slid back to the 256s & the REIT index was off a tad to the 389s.  Junk bond funds were even & Treasuries rose in price.  Oil climbed higher in the 57s & gold gained 4 to 1416.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil57.96
+0.34 +0.6%

GC=FGold   1,413.30
+2.10 +0.2%

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Commerce Secretary Wilbur Ross said that US-China trade talks are “not a 10-minute process.”  “This is a long, involved process,” Ross said.  “The fundamental process now though, is will they go back to the point where we were before they changed their mind and backtracked on some of the understandings that had been reached.”  Ross's comments come on the heels of Pres Trump saying yesterday that trade talks still “have a long way to go.”  He also threatened to impose tariffs on another $325B of Chinese goods.  Ross said some of the “big-ticket items” in the talks will include structural reforms, theft of intellectual property, the unlevel playing field in procurement, & subsidies.  He also believes another “real” key to negotiations is enforcement.  “In some ways [there’s an] even bigger issue,” he said, “and that is what is the U.S. enforcement capability in the event that they violate the agreement.”

US-China trade deal 'not a 10-minute process:' Wilbur Ross

US homebuilding fell for a 2nd straight month in Jun & permits dropped to a 2-year low, suggesting the housing market continued to struggle despite lower mortgage rates.  Housing starts decreased 0.9% to a seasonally adjusted annual rate of 1.253M units last month as a rebound in the construction of single-family housing units was offset by a plunge in multi-family homebuilding, the Commerce Dept said.  Data for May was revised slightly down to show homebuilding falling to a pace of 1.265M units, instead of slipping to a rate of 1.269M units as previously reported.  The forecast called for housing starts dipping to a pace of 1.261M.  Single-family homebuilding, which accounts for the largest share of the housing market, increased 3.5% to a rate of 847K units in Jun, partially recouping some of May's sharp drop.   Single-family housing starts fell in the Northeast, but rose in the Midwest, West & South.  Building permits tumbled 6.1% to a rate of 1.220M units in Jun, the lowest level since May 2017.  Permits have been weak this year, with much of the decline concentrated in the single-family housing segment.  The housing market hit a soft patch last year & has been a drag on economic growth for 5 straight qtrs & is likely to subtract from GDP in Q2.  The sector is being hamstrung by land & labor shortages, which are making it difficult for builders to fully take advantage of lower borrowing costs & construct more affordable housing units.  As a result, the housing market continues to struggle with tight inventory, leading to sluggish sales growth.  The 30-year fixed mortgage rate has dropped to about 3.75% from a peak of 4.94% in Nov.  Further declines are likely as the Federal Reserve has signaled it would cut interest rates this month for the first time in a decade.  A survey yesterday showed confidence among homebuilders increased in Jul.  Builders, however, complained "they continue to grapple with labor shortages, a dearth of buildable lots and rising construction costs that are making it increasingly challenging to build homes at affordable price points relative to buyer incomes."  Permits to build single-family homes rose 0.4% to a rate of 813K units in Jun.  Despite the increase last month, permits continue to lag housing starts, which suggests single-family homebuilding could remain sluggish.  Starts for the volatile multi-family housing segment dropped 9.2% to a rate of 406K units last month.  Permits for the construction of multi-family homes plunged 16.8% to a pace of 407K units.

US housing starts fall; permits hit two-year low

Challenging conditions in the US housing market, along with tighter currency controls by the Chinese gov, caused a stunning drop in foreign demand for American homes.  The $ volume of homes purchased by foreign buyers from Apr 2018 thru Mar 2019 dropped 36% from the previous year, according to the National Association of Realtors.  The decline was due to a drop in the number & average price of purchases.  Foreigners bought 183K properties with a total value of about $77.9B, down from 266K valued at $121B in the previous period.  They paid a median price of $280K, which is higher than the median for all existing homebuyers ($259K), but it was down from $290K the previous year.  “A confluence of many factors — slower economic growth abroad, tighter capital controls in China, a stronger U.S. dollar and a low inventory of homes for sale — contributed to the pullback of foreign buyers,” said Lawrence Yun, NAR's chief economist.  “However, the magnitude of the decline is quite striking, implying less confidence in owning a property in the U.S.”  The Chinese were the leading buyers for the 7th consecutive year, purchasing an estimated $13.4B worth of residential property.  Yet that was a 56% decline from the previous 12 months & comparatively the biggest percentage drop of all foreign buyers.  Chinese economic growth slowed to 6.3% in 2019 compared with 6.9% in 2017, when the previous buyer survey began.  The Chinese gov also tightened its grip on the outflow of cash to purchase foreign property.  The Chinese may also be souring on US real estate due to the current political climate.  Anecdotally, real estate agents in California have seen a pullback in Chinese buyer demand.  Southern California had been particularly popular with Chinese parents hoping to send their children to American colleges.  In Q1, Chinese buyer inquiries for US properties on, a Chinese real estate site, were down 27.5% from a year ago.  Inquiries have been down in 4 of the last 5 qtrs.

Foreign purchases of American homes plunge 36% as Chinese buyers flee the market

Stocks are treading water with little exciting news to inspire buying.  Economic news is drab & the outlook for trade negotiations is not encouraging.  But the popular stock averages continue to hover near record levels, at least so far.

Dow Jones Industrials

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