HIGHLIGHTS OF THE WEEK
- Equity market volatility persisted this week as the main indexes were dragged down by tech and energy stocks. The latter resumed their slide as oil prices fell to their lowest levels in more than a year.
- Housing data was mildly positive, but continued to drive in the point that the sector remains a sore spot. Both existing home sales and housing starts rose around 1.5% month on month in October. But, sales are still down some 5% year on year, weighing on builder confidence.
- Presidents Trump and Xi will meet at the G20 summit next week in Buenos Aires. Any conciliation would be a plus for financial markets. Here’s hoping that the atmosphere and outcome are as pleasant as the host city’s name.
Despite Sour Week, There Is Still Plenty to Be Thankful for
What a difference a year makes. Investors had much to be thankful for at last year’s Thanksgiving, with equity indexes experiencing double-digit gains from the start of the year. This year, the atmosphere is a lot less bubbly. The S&P has given back all of this year’s gains and some (Chart 1). Volatility persisted this week as the main indices were dragged down by tech and energy stocks. The latter resumed their slide as oil prices fell to their lowest levels in more than a year. Shifting headlines on Brexit and a softening of manufacturing PMIs in Europe did little to help broad market sentiment. Investors tilted funds toward safer assets such as Treasuries, contributing to a slight pullback in yields.
Despite the carnage in equity markets, there is still plenty to be thankful for. The U.S. economy remains the growth-leader among the G7 and appears likely to retain its lead over the next year. Its labor market echoes this strength, with more job openings than there are unemployed Americans. This backdrop has allowed the Fed to raise interest rates at a faster pace than its peers and also gives it the flexibility to respond to any future hiccups in growth.
The rise in rates, however, has had an impact on typically interest-rate sensitive sectors of the economy, most notably housing. Despite some improvement in housing data this week, the sector remains a sore spot. Both existing home sales and housing starts rose around 1.5% month on month in October, propped up by the volatile multifamily segment. The uptick in resales was encouraging, since it marked the first gain in six months. But, sales are still down some 5% from a year ago (Chart 2). Current conditions are providing little comfort for builders, whose confidence took a plunge this month.
With interest rates rising, resale activity is likely to remain soft. Still, a strong labor market and a more gradual increase in mortgage rates going forward should limit the downside. Median home price growth has moderated to 3.8% year on year, which alongside rising wage growth, will limit the hit to affordability as mortgage rates rise. An improvement in the number of homes for sale in recent months also marks a positive step. Still, inventory levels are historically low and this imbalance should ultimately help housing starts retain their mild upward trajectory over the medium term.
Aside from the housing market, developments on the trade front bear close watching. Next week’s G20 summit appears an ideal setting for President Trump to announce a deal with his Chinese counterpart. Without progress, tariff rates are likely to increase in January, which could further undermine market confidence. As Trump and Xi tango in Buenos Aires next week, here’s hoping that the atmosphere and outcome are as pleasant as the host city’s name. Should trade tensions continue to fester, and confidence take a further hit, the Fed’s preferred path of rate hikes will come into question.
Admir Kolaj, Economist | 416-944-6318
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