The Sandbox Daily (8.16.2022)
U.S. housing market, credit spreads, Ethereum (ahead of the Merge), and supply chain management
Welcome, Sandbox friends.
Today’s Daily discusses the cooling U.S. housing market, tightening credit spreads, Ethereum’s relative strength ahead of the Merge, and corporate America prioritizing their supply chains.
Let’s dig in.
EQUITIES: Dow +0.71% | S&P 500 +0.19% | Russell 2000 -0.04% | Nasdaq 100 -0.23%
FIXED INCOME: Barclays Agg Bond -0.14% | High Yield -0.47% | 2yr UST 3.268% | 10yr UST 2.813%
COMMODITIES: Brent Crude -2.68% to $92.55/barrel. Gold -0.45% to $1,790.0/oz.
BITCOIN: -0.26% to $23,965
US DOLLAR INDEX: -0.07% to 106.467
VIX: -1.30% to 19.69
CBOE EQUITY PUT/CALL RATIO: 0.57
Housing construction decline deepens
The once-booming US housing market is sputtering. Residential housing starts fell 9.6% in July to a 1.446 million unit annual rate, the lowest level since February 2021, and well below the consensus of a 1.50 million unit rate. Starts have dropped 19.9% from their cyclical peak in April, adding to concerns of a "housing recession" after yesterday’s worse-than-expected builder confidence data. It highlights a downside risk to the broader economy, although the trend decline has not yet generated a contraction signal.
The decline last month was led by a 10.1% slide in single-family starts to a 916,000 unit annual rate, the lowest level in more than two years; this market segment contracted for the fifth consecutive month. Elsewhere, multifamily starts dropped by 10.0% to a 514,000 unit annual rate, while building permits (a proxy for future construction) fell 1.3% last month to a 1.674 million unit annual rate, the lowest level since last September. After a pandemic-related housing boom forced builders to scramble to make enough homes to satisfy demand, the market has materially shifted as higher mortgage rates, four-decade high inflation, and a slowing economy are now tempering sales.
Source: Ned Davis Research
Checking in on credit markets
Investors are pouring back into the U.S. high-yield market, a signal that they're dialing back recession jitters — for now. Earlier this year, borrowing costs for U.S. companies with lower credit ratings shot up to levels suggesting possible recession concerns or that a sharp rise in defaults could be in the offing. Spreads had surged to 6 percentage points, where some view the 5 percentage point mark – which high-yield spreads breached in June – as something of a red line between a market that’s healthy and one that’s not. But over the last month, high-yield bond spreads over Treasuries — a measure of how much more high yield-rated companies pay to borrow compared to the U.S. government — have tightened massively. They're now actually a little tighter than the median stretching back to 2011. What happened? Earnings season came in better than many had expected, the Fed started providing wiggle room about potentially slowing down its pace of rate hikes, and inflation data (CPI and PPI) have shown signs of moderating.
Source: Axios, FRED
Ethereum showing strength ahead of the Merge
Ethereum’s significant outperformance since news of its Merge date (which is now slated for September 15-16, depending on block times), has led to year-to-date highs in its relative strength against Bitcoin. Crypto-specific narratives are now in-play, with ether’s outperformance very much tied to the upcoming Merge. Ether is more cyclical in nature, and as a result, often outperforms on the upside, while underperforming on the downside. The Merge for the Ethereum network is a significant development for the entire space and is paving an ideological divide in the community from proponents of proof-of-work (PoW) to that of proof-of-stake (PoS). What’s more, another week of renewed risk appetite has led to now four straight weeks of positive equity performance, six straight weeks of positive ether performance, and four of six weeks of positive bitcoin performance. While the perils of being bearish for too long have been illustrated over the last two months, opportunities remain for long-term investors with bitcoin and ether 64.1% and 59.6% off their all-time highs and both assets down -47% year-to-date.
Source: Eaglebrook Advisors
Corporate America focuses the lens on supply chains
According to Bloomberg transcripts of U.S. companies’ earnings calls and presentations, onshoring/reshoring/nearshoring buzzwords are being thrown around more often than ever this year, exceeding levels witnessed in the early days of the COVID-19 pandemic. Given the macro developments over the two years shining a light on supply chains and currency management, C-Suites are evaluating their businesses and product lines to better protect themselves from future exogenous shocks.
Source: Liz Ann Sonders
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.