US building permits, residential construction, and imports prices have all posted robust increases in January, lifting inflation and GDP growth expectations for this quarter, but many private-sector investors are still unimpressed, and are looking forward to a further expansion of fiscal stimulus.
Kristian Rouz — US homebuilding permit issuance advances to its highest since 2007 in January, whilst residential construction gained momentum last month as well. This as the still-affordable mortgage and solid labour market are driving demand expectations.
Meanwhile, US inflation is widely expected to increase closer to the Federal Reserve’s 2-percent target soon, stirring concerns that it might overshooting the target and trigger yet another central bank interest rate hike.
These developments point to a sustainable pace of economic expansion in the Trump administration’s second year. The President’s fiscal stimulus policies are indeed driving the expansion in the Main Street economy, but financial markets are concerned with the still-flattening yield curve, as bond investors remain cautious, allocating capital into longer-term debt securities.
This means the threat of a cyclical recession is still omnipresent across the multiple sectors of the economy — and investors are looking forward to Congress enacting President Trump’s $1.5-trillion infrastructure plan.
This might be a game-changer for the bond market later this year, but there’s still a lot of uncertainty, and financials are still predominantly in the wait-and-see mode.
Solid homebuilding is, however, poised to add percentage points to the 1Q18 GDP.
“The economy is back on a winning path for stronger growth even if it is not firing on all cylinders with all sectors participating,” Chris Rupkey of New York-based MUFG said.
US homebuilding posted its one-year high last month, with solid gains in both the single- and multi-family property construction. This is driving the demand for construction and raw materials, as well as creating a favourable environment in the credit products market.
Groundbreaking activity — or housing starts — increased 9.7 percent to 1.326 mln units seasonally-adjusted, according to a report from the Commerce Department released Friday. This is the highest since October 2016 — the month before President Trump was elected into office — and is a result of an upward revision from 1.209 mln units sold just ahead of the most recent reporting period.
“Builders have ramped up construction of single-family homes and completions should rise going into the spring selling season,” Mark Vitner of Wells Fargo Securities in Charlotte, N. C. said.
Solid demand drives market expansion, and US building permit issuance rose 7.4 percent in January to 1.396 mln — its highest since the pre-mortgage meltdown June 2007.
“There is still large room for improvement given the fact overall housing inventory is currently near historic lows,” Lawrence Yun of the National Association of Realtors (NAR) said.
US unemployment, meanwhile, stood at 4.1 percent — close to or at ‘full employment’ — with some estimates putting the jobless rate at as low as 3.7 percent. Year-on-year wage increase fell short of 3 percent last month but are poised to overshoot the 3-percent threshold in the coming months as more American workers are getting raises amidst the decline in corporate tax rates and the lingering shortage of skilled workers.
Even the 30-year fixed-mortgage rate increased — albeit it’s still quite low —to 4.38 percent on the average across most major lenders this outgoing week. This might be an indication the Federal Reserve’s policy tightening is finally getting passed on to the economy, as banks have to tighten their underwriting standards as well to stave off the increase in non-performing loans (NPLs).
US inflation is poised to gain momentum as well — mainly, due to the dollar’s short-term weakness against its major peers, and in accordance with Treasury Secretary Steven Mnuchin’s policies.
Import prices rose 3.6 percent year-on-year in January. This, given most consumer goods in the US market are imported, is poised to drive inflation above the Fed’s 2-percent target, allowing the Fed to further raise the rates, and increase banking sector and consumer and mortgage lending profitability.
“Going forward, we expect higher import prices to feed through to firming producer and consumer prices domestically,” Gregory Daco of Oxford Economics in New York said.
Prices on goods originating from Mainland China, however, were unchanged second straight month, as the complications in mutual trade relations have triggered a mild devaluation of the renminbi.
President Trump’s measures have contributed to the improvement of consumer and business sentiment, thus lifting overall economic expectations. However, there’s still a lot of action expected from the White House in regard to further deregulation and fiscal stimulus — which might eventually push GDP growth closer to the President’s 5-percent pace of annualised economic expansion.