Summary
For the second report in a row, the Beige Book indicates a weaker economy.
Housing sector stocks have rebounded recently due to lower rates and a more dovish Fed.
The markets continue to make forward progress...
Economic activity increased in most of the U.S., with eight of twelve Federal Reserve Districts reporting modest to moderate growth. Nonauto retail sales grew modestly, as several Districts reported more holiday traffic compared with last year. Auto sales were flat on balance. The majority of Districts indicated that manufacturing expanded, but that growth had slowed, particularly in the auto and energy sectors. New home construction and existing home sales were little changed, with several Districts reporting that sales were limited by rising prices and low inventory. Commercial real estate activity was also little changed on balance. Most Districts reported modest to moderate growth in activity in the nonfinancial services sector, though a few Districts noted that growth there had slowed. The energy sector expanded at a slower pace, and lower energy prices contributed to a pullback in the industry's capital spending expectations. The agriculture sector struggled as prices generally remained low despite recent increases. Overall, lending volumes grew modestly, though a few Districts noted that growth had slowed. Outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.
For the second report in a row, the general tone of the summary paragraph was modestly bearish. Consider these phrases:
sales were flat on balance
sales were limited by ...
growth had slowed ...
lower prices contributed to a pullback ...
growth had slowed
contacts are less optimistic
My assumption is that the Fed presidents are hearing the same types of comments across the country, which is why they've moved to a more dovish stance.
The NY Fed's recession probability is a little over 20%:
This is based entirely on the yield curve, which itself contains a great deal of relevant economic information. The flattening curve is a key reason I've got a recession probability of 25%.
The National Association of Home Builders sentiment index was up marginally:
A look at the 10 largest homebuilding stocks by market cap reveals an interesting development:
(charts from Finviz.com)
There's been a modest uptick. Pulte has had the strongest move, rising from $20 to $27.3. But with the exception of TRI Point, all have consolidated losses and risen through recent resistance levels. Zack's explains the fundamentals (emphasis added):
U.S. 30-year mortgage rates have dipped over the past two months as Fed officials have signaled that the central bank is likely to slow down or even halt rate hikes, given the signs of tightening financial conditions. For the week ended Jan 4, mortgage rates averaged 4.74% — marking their lowest level since April 2018. These helped applications for home mortgages jump at a more than three years pace(for the week ended Jan 4) (read: Dovish Fed Minutes Should Boost These ETFs).
The fall in mortgage rates also led to a surge in refinance activity, particularly for borrowers of larger loan size. The average loan size on refinance applications rose to the highest in the survey ($339,800) conducted by the Mortgage Bankers Association. The spike in refinance activity also pushed the refinance index to its highest level since July 2018.
As I noted last week, the Fed is now clearly in a wait and see mode, which should help to keep rates lower.
Let's turn to today's performance table:
Another day higher, with the higher risk indexes leading the way. Even the larger caps did well. As I noted yesterday, we're in the middle of a nice gradual rally, which is far preferable to the up 3%, down 5% days we had at the end of last year.
All the industries were also higher. Basic materials led the way thanks to a rumor that the US would remove tariffs on Chinese goods, which is also why industrials were higher. Defensive sectors -- while up -- were the "worst performers."
After opening lower, the market continued to move higher, crossing yesterday's close around 11AM. Prices consolidated until 1 when there was a modest rally and selloff. Then we have the big spike for the China tariff rumor, which gave the market plenty of spark until the close.
There are several uptrends on the 5-day chart. Notice the give-and-take throughout the chart; rallies are followed by a consolidation or a modest selloff. The overall rally itself is gradual. This is what a solid trend looks like.
The two week chart shows the nice gradual nature of the rally.
Today, the market printed a solid bar as prices convincingly moved through the 50-day EMA on rising momentum.
There are solid bullish developments on multiple charts in multiple time frames. This is the kind of response you'd want after the massive selloff at the beginning of the year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.