Construction Spending for November rose .8% to an all-time high of 1.257 trillion following a downwardly revised October print of plus .9%. Market expectations were for a call of plus .6%. Spending on residential construction rose 1.0% with single family homes up 1.9%. Year on year shows the strength in single family construction which is up 8.9% while multifamily units decline 1.7%. Home Improvements (Reno) jumped 9.8% year on year.
Minutes of the December 12th - 13th meeting revealed that the committee discussed how fiscal stimulus could boost output too much and require a steeper path of rate hikes. Risks include the possibility of inflation pressures building unduly if output expands beyond maximum sustainable levels. The minutes also show some firms are concerned about expanding capital spending in response to the tax cuts, resulting in a safer means to deploy the cash (mergers and stock buybacks). There is also mention of a “few” on the committee concerned about raising rates too fast and causing the yield curve to invert (2-year notes yield more than 10-year notes) and that inflation has not risen to levels that cause concern. You may remember that at the meeting, two Fed Governors dissented. A “few” tells me that more than two have concerns and want to keep rates low but didn’t vote that way. Interesting way for the new Fed Chief (Powell) to step in. He will be in charge at the March meeting.
The Dow hit 25,000 Thursday morning for the first time in history. Even more amazing is that we went from 24K to 25K in a matter of less than 3 months. Tax cuts in the books, infrastructure spending on the table, and low inflation coupled with an expanding economy is fueling the machine. Money, especially from overseas, continues to pour in. Where it ends nobody knows.
The results of the December Employment report on Friday were softer than expected, as headline payrolls only increased 148k vs forecasts of a larger bump of 191k. As expected, the Unemployment Rate remained steady at 4.1% and the Labor Participation Rate was also unchanged at 62.7%. On a positive note, the prior month’s payroll level was revised higher to 252k from 228k and manufacturing payrolls increased 25k, which was above forecasts of 15k. While the overall report was probably disappointing to most, the Fed expects a much lower rate of hiring over the longer-term. The Fed was likely less disappointed in the December numbers, as their focus is more on the unemployment rate and hourly earnings, both of which were right on point with expectations.
10-year yields continue to trade within the recent range of ~2.38-2.48%, while we keep a closer eye on the “psychological” support level around 2.50%. Any trade and closing mark above that level will signal the Bears have taken a stronger hold and we are headed for higher interest rates in the short-term. Any close back below the 2.30% handle is needed to flip the current trend back in favor of lower rates. For now, we remain in limbo until a larger move occurs. Best bet is to stay covered and keep locking in those loans.
Oscar Busch
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