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DEMAND, MEET SUPPLY: NEW HOME SALES, MARKIT PMI (1105 EDT/1505 GMT)
Data released on Friday sang a common theme: as more Americans are inoculated and re-engaging in economic activity, a demand boom is running up against a supply drought.
Sales of newly constructed U.S. homes USHNS=ECI jumped in March by 20.7% last month to 1.021 million units on a seasonally adjusted annualized basis, the highest level since the 2006 apex of the housing bubble, according to the Commerce Department. number blew past the 12% increase analysts expected and represented a robust bounce-back from February's 16.2% drop, driven in part by brutal winter weather.
The sales spike drove the months supply of new homes on the market down to 3.6, flirting with recent all-time lows.
The housing market has benefited from spiking demand for low population density and home office space, with historically low mortgage rates acting as an accelerant.
That demand surge has pushed inventories to record lows, and sent the price of new homes - and the materials used to construct them - skyrocketing.
"Despite strong demand, we don't expect the March pace of sales to be sustained as high home prices take a toll on affordability," writes Nancy Vanden Houten, lead economist at Oxford Economics. "We look for new home sales to decline to a saar of about 825,000 by the fourth quarter."
In a separate report, the expansion of business activity is accelerating this month.
Global financial data firm IHS Markit's advance "flash" purchasing managers indexes (PMI) for manufacturing USMPMP=ECI and services USMPSP=ECI , posted readings of 60.6 and 63.1, respectively, coming in above consensus. PMI number above 50 signifies increased activity over the previous month.
While both sectors notched the highest levels in the series' 12+ year history, survey participants are struggling to source raw materials as booming demand butts heads with constrained supply as producers race to regain capacity lost in the initial shutdowns.
“The US economy is enjoying a strong start to the second quarter, firing on all cylinders as loosening virus restrictions, an impressive vaccine roll-out, a brighter outlook and stimulus measures all helped boost demand," says Chris Williamson, chief business economist at IHS Markit.
"But with record supply chain delays driving a rise in backlogs of uncompleted work of a magnitude not surpassed for over seven years, firms appear to be struggling to boost operating capacity in the near-term," Williamson added.
Investors appeared set to head into the weekend in a buying mood. All three major U.S. stock indexes were solidly in positive territory, with economically sensitive small caps .RUT , chips .SOX and transports .DJT outperforming.
But the major indexes remain on track for weekly declines, snapping their respective winning streaks.
WITH EARNINGS SEASON COMES BUYBACK ANNOUNCEMENTS (1020 EDT/1420 GMT)
As the pace of companies reporting earnings has picked up, so have the buyback announcements, with more than $40 billion in buybacks announced over the past week, according to TrimTabs Investment Research, part of Informa Financial Intelligence.
Analyst Winston Chua notes that corporate buying in the form of new cash takeovers and stock buybacks has jumped in the past week to the largest volume in 11 weeks, with new buybacks at $8.1 billion daily and new cash takeovers at $3.2 billion daily.
Chua points out that while U.S. companies are net buyers of shares, "a handful of companies have accounted for most of the buying."
Buybacks totaled $40.3 billion, with the $25 share repurchase plan announced by Bank of America (NYSE: BAC ) BAC.N on April 15 accounting for more than half of the total.
Cash takeovers totaled more than $15 billion for a second straight week, according to Chua, thanks to Canadian National Railway's CNR.TO offer for Kansas City Southern (NYSE: KSU ) KSU.N worth more than $10 billion in cash and Thermo Fisher's TMO.N bid for PPD PPD.O adding another $5.5 billion.
Chua said that since the start of April, corporate buying of $80.8 billion and new share offerings of $22.8 billion has resulted in a buy/sell ratio of 3.5-to-1. Excluding Bank of America's repurchase plan, the ratio drops to 2.4-to-1 but remains well above the 1.4-to-1 ratio over the past 12 months.
PICK YOUR NARRATIVE! (1004 EDT/1404 GMT)
Looking at what kind of a decade the 2020s could look like, UBS WM CIO Mark Haefele sees three possible scenarios or narratives going forward.
1) 'Lower for longer'
Well longer does mean longer doesn't it?
That scenario is based on an extension of last decade's paradigm of super-low interest rates coupled with anemic inflation and limited economic growth.
One negative consequence of such an environment is that it very likely exacerbates inequality.
'Lower for longer' means rich individuals can borrow money at very low cost to invest in rising assets while the modest economic growth deprives low incomes from a substantial rise in living standards.
Anyhow, for UBS GW, it's safe to assume that the FAANGs and growth stocks would likely remain in big demand.
2) 'Roaring 20s'
It's undeniable there is a real hype surrounding that expression at the moment among financial punters, probably due to expectations of a robust post-COVID 19 recovery.
In a nutshell, that's high economic growth, high interest rates and high inflation.
Central banks like the Fed allow prices to rise above 2% and governments are not so concerned about fiscal orthodoxy but willing to pay the big bucks to fight climate change notably.
Main consequence for investors? Good for equities, bad for bonds.
3) 'Stagflation lite'
This one will probably sound familiar for those who grew up in the 80s.
Let's imagine that the mountain of stimulus fails to kickstart growth and that we just get a big pile of debt with some inflation creeping in the system. The Fed has to raise rates which weighs on growth.
That's a negative for both fixed income and equities but for that asset class, "inflation would likely hurt growth stocks more than value", Haefele writes.
That's not part of UBS GW scenarios but a quite funny take from the twitter account of Sven Henrich at Northman traders commenting on the exuberance of markets last week:
DOW TRANSPORTS: TRYING TO DELIVER A RECORD RUN (0900 EDT/1300 GMT)
The Dow Jones Transportation Average .DJT is attempting to rise for a 12th-straight week. Using Refinitiv data back to early 1988, the DJT has never risen more than 11-straight weeks.
As stands, the DJT is virtually flat for the week. It finished at 14,920.95 on Thursday, which is just a 1.4 point, or 0.01%, gain from last Friday's close of 14,919.55. It came down to the wire last week as well, with the DJT closing up just 1.22 points.
Since closing down for the week ending January 29 of this year, the DJT has gained around 24%. The S&P 500 .SPX and Dow Industrials .DJI have risen around 12%-13% over this period. any event, given the win streak, the DJT appears stretched to the upside. Aside from the current streak, it last rose 11-straight weeks from late-November, 1988, to early-February, 1989:
Momentum also appears overheated. The weekly RSI ended Thursday at 83.775, or its most overbought since an 84.799 print for the week ending January 12, 2018. Of note, back then, from the following week's intraday high, the DJT collapsed around 14% into early February.
Meanwhile, Avis CAR.O is the best performing stock in the DJT by far in 2021 with a gain of more than 112%. However, Kansas City Southern (NYSE: SO ) KSU.N has provided the biggest positive impact on the index. KSU is responsible for almost a quarter of the DJT's more than 2400 point year-to-date rise. Just this week, Canadian National Railway Co CNR.TO made a $33.7 billion bid for KSU in a cash-and-stock deal. Gabriel)
FOR FRIDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE: DJT04232021
https://tmsnrt.rs/3vexPjX New home sales
https://tmsnrt.rs/3ngUwRW Markit PMI
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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