Morning Report: The yield curve continues to flatten

Vital Statistics:

			Last	Change
S&P futures			2727.25	-1.25
Eurostoxx index			379.19	1.85
Oil (WTI)			71.15	0.62
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.57%

Stocks are lower despite a moderation in trade rhetoric out of the administration. Bonds and MBS are up. 

The yield curve continues to flatten, with the 2s-10s spread at 32 basis points. The media is going to try and make this a narrative about an upcoming recession. 

Mortgage applications fell 5% last week as purchases fell 6% and refis fell 4%. Rates increased slightly. So far, we aren't seeing much evidence that lower rates are helping the business. 

Durable Goods orders fell 0.6% in May, which was well below expectations, although the prior month was revised upward. Transportation and defense drove the decline. Core capital goods fell 0.2%, which indicates business capital expenditures took a step back. It is probably too early to say definitively whether tariffs are playing a role here, but it is something to watch. Tariffs are a "cut off your nose to spite your face" sort of policy which can often win votes within a narrow constituency, but hurt everyone else and are a net negative for the economy. 

Retail inventories increased 0.4% and wholesale inventories increased 0.5%.

Pending Home Sales fell for the fifth consecutive month, according to NAR. Lawrence Yun, NAR chief economist, says this year’s spring buying season will go down as one of unmet expectations. “Pending home sales underperformed once again in May, declining for the second straight month and coming in at the second lowest level over the past year,” he said. “Realtors® in most of the country continue to describe their markets as highly competitive and fast moving, but without enough new and existing inventory for sale, activity has essentially stalled. With the cost of buying a home getting more expensive, it’s clear the summer months will be a true test for the housing market. One encouraging sign has been the increase in new home construction to a 10-year high,” added Yun. “Several would-be buyers this spring were kept out of the market because of supply and affordability constraints. The healthy economy and job market should keep many of them actively looking to buy, and any rise in inventory would certainly help them find a home.”

While there may be a shortage of single family homes for sale, the market for rentals is getting saturated, at least in major cities. Rents on average rose 2.3% in the second quarter, the weakest increase since 2010. Rents were more or less flat in Seattle, where home price appreciation is in double digits. That is a shocking statistic. In response to the drop in demand for single family houses in the aftermath of the bubble, developers went all-in on apartment construction, particularly in urban areas. Now there is a glut, and landlords are offering incentives to take out a lease. According to REIS, the rental vacancy rate ticked up to 4.8% in the second quarter from 4.3%.  Meanwhile, Millennials are getting married, having kids, and looking for single family homes. Perhaps the Great Millennial Migration to the Suburbs is finally upon us. 

Lennar reported a big jump in earnings, however this was the first quarter with CalAtlantic, so results aren't really comparable on a YOY basis. During the quarter, the company used $1.1 billion in cash to redeem some high interest CalAtlantic debt. ASPs rose 11%, however some of that is probably due to CalAtlantic, which is located in higher cost MSAs. Despite rising rates, CEO Stuart Miller reported that demand was strong, and the company still has pricing power to support margins.