“Do you really want to buy House? It’s sort of like having a baby … and it’s a headache”
-Robert Shiller
Macro profiteering is predicated on forecasting and front-running 2nd derivative inflections in growth and inflation – as well as the causal factor that is Policy which, in turn, carries consequences for the currency which, in turn, has flow through effects on Growth/Inflation.
It’s all very #incestuous!
Anyway, the point is that the appropriate framework for contextualizing macro data is not good/bad, it’s better/worse - and successfully slope surfing those marginal changes through the capsized absolutist debris to the rarified shores of (repeatable) alpha remains the sport of macro kings.
There are, of course, undercurrents of additional complexity.
Divining what’s already discounted by the market and reflected in prices is a ubiquitous challenge.
Equally challenging is the reality that everything is relative. Not only are the current and forward prospects - & thus investibility - for a given security/sector/economy contextualized relative to their historical selves but relative to the prevailing dynamics and prospects for every other asset class.
Less abstractly, suppose domestic growth goes from Great to Good. In the conceptual, rate-of-change framework just described, that is Bad.
But what if developed market growth across the rest of the globe see’s a double decrement – going directly from Great to Bad. Does that re-elevate the read-though on the domestic economy/markets from Bad to Good given the positive relative change?
The daily macro dance is difficult and delicate, but certainly not boring …..
Back to the Domestic Macro Grind…
Keeping with the rate-of-change theme – and continuing the Early Look chronicling of our evolving view on Housing - we titled our 3Q15 Housing Themes Presentation back on 7/9, IS GOOD, GOOD ENOUGH?
The title alludes to the fact that after showing significant improvement and putting up the best growth figures in all of global macro in 1H, reported growth across the preponderance of housing demand data should transition from great-to-good in 3Q.
Our themes deck (ping if you’d like to see it) is over 120 slides of data intensive analysis but the overarching theme can be sufficiently captured conceptually:
The Housing data in 3Q will be “good” but the large-scale positive reversal we’ve seen over the last ~9-months is now rearview, the comps get tougher after the reported June data and we don’t have any discrete catalysts in the nearer-term. Further, performance seasonality in the stocks is recurrent and pervasive and 3Q has historically been the soft-patch period.
From a longer-term perspective, the mean reversion upside to average and peak levels of activity remains both conspicuous and compelling. However, the leverage to our expectation for a positive inflection in both fundamentals and investor attitudes following our reversal to bullish back in November of last-year has, in large part, played out.
Again, in absolute terms, we think the data will remain “good”. Indeed, with Purchase Application demand flat sequentially in 3Q (but holding near 2Y highs) and New Home Sales declining in the latest month (but still above the TTM ave) “good” is proving an apt characterization.
Sure, if we get dealt decelerating global growth, global deflation and transient US decoupling on the Flop with continued employment gains on the Turn and sub-2% rates on the River, the investibility of Housings’ transit from Great to Good is probably still good relative to the seven-high hands held by high beta, inflation leverage exposures. When growth gets scarce, whatever growth does exists gets bid (see yesterday’s Early Look).
But, as it stands, we think the prospect for aggregate homebuilder outperformance in the near-term carries a diminished probability. Indeed, the modest builder underperformance QTD (ITB down -1.31% vs. the SPX +0.22) is largely in-line with our expectation for the group.
If you need to maintain some housing related exposure, the Title Insurers and Mortgage Insurers – where seasonality is more muted - offer some tactical cover while moving upstream towards larger cap/lower beta/liquidity/quality style factors make sense in terms of direct builder exposure.
So, summarily, that’s our tactical view of the quarter. What else do you need to know across Housing/Macro for the balance of this week:
- Today: Case-Shiller HPI will probably show further re-acceleration in Home prices. It’s important to remember that while investors still anchor on the Case-Shiller release it is, in fact, the most lagging of the home price series. It’s calculated as a three month moving average, released on an almost 2-month lag with today’s release for May representing average price data across the March, April and May period. In contrast, we’ve had the CoreLogic price data for June for almost a month already.
- Wednesday: Pending Home Sales for June – which is the lead indicator for Existing Sales (90% of the housing market) - should be strong from a rate-of-change perspective given the recent trend and easy comp. Consensus is expecting +11% year-over-year growth and another new post-crisis high in activity. We’d view that expectation as ballpark correct.
- Wednesday: FOMC Announcement: No Presser, No Dots – expect no hard-line commentary from the Fed ahead of 2Q GDP on Thursday. The Fed messaging team has done their best to keep Sept/Dec lift-off optionality on the table. They’ll keep their head (or mouths) in the sand as long as they can before acknowledging the non-transience in the data and explicitly shifting expectations around the path for policy normalization.
- Thursday: GDP – This one could be good. Not only will we get the advance estimate for 2Q but we will get the annual revision to the GDP data which will cover the 2012-1Q15 period. This year’s revision will also include statistical changes designed to reduce the much talked-about residual seasonality in the data (i.e. the marked & recurrent 1stquarter softness). A significant, positive revision to 1Q15 data would, to some degree, come at the expense of reported growth for 2Q. Further, the BEA will launch the reporting of 2 new series: Gross Domestic Income (GDI) and Final Sales to Private Domestic Purchasers.
- GDI: GDI takes an income approach to measuring economic activity and should be the same as GDP but due to data source and measurement differences the two series differ in practice. GDI has shown less residual seasonality and has offered a more stable and sanguine view of growth over the last few years. The BEA will begin releasing a composite GDP/GDI, representing a 50/50 mix of the two series, alongside the 2Q release on Thursday.
- Final Sales to Private Domestic Purchases: This measure represents the sum of Consumer Spending + Private Fixed Investment and excludes changes in inventories, net exports, and government spending. The reading excludes the most volatile components of GDP and provides perhaps the cleanest read on aggregate private sector demand. Economists already calculate this measure independently and the BEA already reports a slightly different measure which includes Government Purchases but for a modern, consumption economy like the United States, private domestic demand (ie. total demand for both domestic and foreign produced goods) is a telling and relevant metric.
There are compelling and justifiable reasons for updating the measurement and calculation methodologies. Still, I can’t help but feel that the latest attempts at “refinement” will primarily serve to further muddle Janet’s mosaic reading of her “data dashboard” while affording policy makers further runway to baffle with quantitative B.S.. After all, if you have enough “indicators”, one will always comport with the prevailing (or fabricated) narrative.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.22-2.33% (bearish)
SPX 2047-2096 (bearish)
VIX 12.88-16.22
USD 96.11-98.30
Oil (WTI) 46.69-49.89
Gold 1063-1112
Best of luck out there today,
Christian B. Drake
