10yr TSY/ China Continued/ Housing Affordability/ Brown Shoots
10yr TSY
Today, Friday February 28th, there was a fair amount of Economic news released, including the Federal reserve’s preferred inflation metric, PCE. There were some surprises both good and bad: personal Income better, spending disappointing both in real and inflation adjusted terms. The PCE metrics were all basically in line with expectations.
The reason we mention it is because the true measuring stick is usually the response of the 10yr TSY. At the time of this writing, the 10yr is basically flat on a yield basis. It just so happens to be hovering right around 4.25% yield. Funny enough, we saw a chart earlier in the week that suggested the 4.25% level is rather attractive.
China continued
We would like to revisit a chart from last week that we are still trying to fully understand.
This one:
M1 Money supply for China. Quite the chart!
We noticed a few headlines this week regarding Chinese economic policy on Bloomberg as well.
Monday: China’s local governments are set to issue an unprecedented $233 billion of bonds in the first two months of the year, exacerbating a cash squeeze in the financial system.
Tuesday: China is increasing scrutiny of outbound investments by domestic companies as well as their use of proceeds from Hong Kong share sales, people familiar said.
Wednesday: China plans to inject at least $55 billion into three of its biggest banks, people familiar said. The plan may be completed as soon as June and follows through on a broad stimulus package unveiled in 2024.
The question becomes why is China going through these motions now? The top 6 banks have capital levels that far exceed national capital requirements. Is there something the Chinese Officials see that nobody else does?
What metrics could we look to for evidence that mark to market could be an issue? First thought is home prices.
The Home Price Index suggests prices have been in a negative trajectory since early 2017.
Looking at all property developer and home building names in HSI and CSI indices, we see that despite both broad indexes either being at 52-week highs or within 7% of 52-week highs, the property developer and home builder names in the two indices are on average 22% off their 52-week high. They are underperforming the broader market.
Maybe the market senses something as well considering the differential in performance?
China increases the M1, top chart, adding liquidity to the economy. Announces Monday they will sell $233B in bonds to soak some of that liquidity back up, but then also announce they will “increase scrutiny of outbound investments by domestic companies” to keep everything onshore. More importantly, why now?
As the reader you can draw your own conclusion here on what this data means.
Housing Affordability
Housing affordability is getting strained fast. Annual U.S. household income needed to purchase a typical US home.
Jan. 2020 -> $51,646
Jan. 2021 -> $51,740
Jan. 2022 -> $62,669
Jan. 2023 -> $86,184
Jan. 2024 -> $92,006
Jan. 2025 -> $92,538
5-year shift +79%!
The result of the above.
Existing home sales making 20+ year lows.
Brown Shoots
Are we starting to see a more consistent flow of data points that suggest the economy is slowing? It sure seemed that way this past week.
Let’s start with Consumer Confidence:
Consumer Confidence Expectations
Initial Jobless Claims
Retail Sentiment
The AAII survey of the US retail investor has just collapsed to -41.2, the 8th lowest reading since the survey started in 1987.
Finally, US Average Weekly Hours Worked could be suggesting pain ahead as well.
Recently, each time the US Average Weekly Hours has dipped below 34.2 hours, a recession has occurred. Granted the 2nd time we were in the midst of a pandemic. GDP is stealthily moving lower, along with the Average Weekly Hours Index already below 34.2, it’s a cross-section of economic data to keep an eye on.
Most recent GDP Now estimate from Atlanta Fed.
Yup, we hate to leave you with that, but that green line is now in negative territory!
Have a great long weekend!
Best,
Meraki Trading Team
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