LSA Connect

It was an especially busy week of the month for housing-related data.

(-) Existing home sales rose +0.8% for the month of February, which was a bit light compared to the +1.6% gain expected (however, a revision upward for the prior month partially tempered the disappointment).  Single-family sales were down -0.2%, while condo sales gained +8.8%.  However, this group is much smaller and quite volatile month-to-month—as is all housing data in the short-term, at least to some extent.  The ‘months supply’ of homes on the market rose a bit, by +0.4 months to 4.7 months, although this remains dramatically below levels of recent years.

(0) Housing starts were a bit disappointing for February, with a gain of +0.8% versus an expected +2.8%.  However, the lighter Feb. numbers were offset by a Jan. revision upward—so net-net, everything was in line with expectations.  Single-family starts were up +0.5%, while multi-family gained +1.4%.  The Jan. revision for multi-family was largely a change from a very negative to a less negative number, which gives a sense of the breakdown where building is continuing to occur, albeit choppy from month-to-month.  Over the trailing year, however, total housing starts are up +27.7%, with single-family up +31.5%—both of which are very strong annual results and reflect the continued improvement in the housing space.

(+) Building permits for February are also significantly higher, up +4.6% versus a consensus gain of +2.3%.  Single-family and multi-family rose +2.7% and +8.1%, respectively.  Again, this is in keeping with the recovery trend. Continue reading →

The Fed Open Market Committee completed their March two-day meeting with no significant changes to their policy or communication to the outside world. However, they did acknowledge an improvement in the nation’s growth prospects (to ‘moderate’), as noted by economic data and survey results in the first few months of this year. (Although not noted in their announcement specifically, the Federal Reserve’s prediction for GDP growth is a central tendency of 2.3-2.8% in 2013, 2.9-3.4% in 2014, and 2.9-3.7% in 2015, as well as unemployment levels in those same years of 7.3-7.5%, 6.7-7.0% and 6.0-6.5%, respectively.)

Nevertheless, the FOMC voted for economic easing to continue for the foreseeable future—which has taken the form of Treasury and mortgage bond purchases in upwards of $85 billion/month. Accordingly, they have continued to reference their policy threshold of a 6.5% unemployment rate, coupled with 1-2 year forward-looking inflation of no greater than 2.5% and ‘well-anchored’ longer-term inflation expectations, as a guideline for a possible exit point.

Esther George, the Kansas City Fed President, was the lone dissenting vote on the grounds that such continued accommodation has the potential for increasing ‘financial imbalances’ including higher inflation expectations. The longer this policy continues, we see more and more debate surrounding potential inflation. While there are market strategists and economists that are convinced that ongoing monetary stimulus has no other outcome than high inflation, as this excess money makes its way downward into the economy and into consumer prices and wages; other academics argue that the ‘hole’ created during the Great Recession was so deep and wide that we are still essentially digging ourselves back to level ground—and banks aren’t helping by keeping lending low (so the money ‘multiplier’ effect isn’t as strong as it normally is). We often think that the biggest threats are those not on the front page of the paper, so perhaps inflation will become a greater concern when it is off the front page and forgotten about yet again.

The big news of the week from an economic front was arguably the government sequester that took hold as promised on March 1. Interestingly, this strategy has traditionally been considered as an option so unpalatable to politicians that it would force policymakers towards a better way. That ‘better way’ was never agreed upon, so we’re left with an aftermath of cuts. Cuts are incremental in nature, peaking in later 2013 and 2014, and are enough to shave our GDP by ½ a percentage point this year. This wouldn’t be the end of the world in most cases, but with our growth so low anyway, ½ percent is significant. But it’s not too late. Seeing Congress postponing this retroactively wouldn’t be out of the question, and would be entirely within their trend of recent behavior.

Abroad, the Italians made their voices known in a protest vote that led to more gridlock. The success of a populist, anti-establishment/anti-austerity former comedian did not help the situation. Until this gets unraveled, it means several things to the investment world (no surprises here): markets fall—both equities and bonds, as we see yields rise relative to their European counterparts and ‘risk-free’ options like German debt. Now, if the parties can agree to come together to form a functional government (it is unlikely not to happen, at least at some point), markets may respond more favorable when better ‘certainty’ is available. Continue reading →

0) The CPI inflation number for January was flat, which was a bit less than the slight increase of +0.1% expected. However, the core inflation number—which excludes more volatile food and energy prices—gained +0.3% as opposed to an expected +0.2%. The difference was mainly due to an energy price decline in the headline figure, as well as marginal gains in apparel, tuition/child care and tobacco in the core number. Year-over-year, the headline inflation number was up +1.6% and core +1.9%. Similarly, the Producer Price Index for January rose +0.2% which was a tick below the expected +0.3% increase (and a year-over-year result of +1.4%). The core number rose by an identical amount, in line with expectations.

Overall, inflation results remain well-contained, if the CPI and PPI are used as one’s primary measures. Of course, if one uses one of the many ‘underground’ metrics available, such as one of several historical methodologies or lifestyle-based calculations, you might find a different number—but these are based on different rules and product mixes (one must also account for the technological differences implied in these assumptions). For example, our food might be cheaper, but many of us might argue cable TV, tuition and health care certainly aren’t. It’s hard to find a perfect measure here. But the differences do become important for retirees and future retirees if/when cost of living adjustments for Social Security benefits are tweaked and CPI starts to mean something. Then, those getting the benefits will begin to care about the calculation a lot. In that situation, retirees will naturally benefit from the highest (‘most realistic’) inflation number possible, while it will behoove the government (for program sustainability reasons) to keep these increases as low as possible, which may or may not track the actual inflation many of us experience on a day-to-day basis. Continue reading →