Five Things You Need to Know to Start Your Day: Americas

Good morning. Markets drift before data revisions that could wipe away a million US jobs, while the bond market bets big on Fed rate cuts. Here’s what traders are talking about. — David Goodman

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Stocks drifted as on Wednesday as traders readied for a busy end to a week that culminates in Fed Chair Jerome Powell’s Jackson Hole speech. Europe’s Stoxx 600 edged higher and US equity futures posted small moves. The yield on 10-year Treasuries was flat, while a gauge of dollar strength paused a three-day run of declines.

The big released of the day in the US is a set of revisions to jobs figures in the year through March that could see up to a million positions vanish. Goldman Sachs and Wells Fargo & Co. economists expect preliminary benchmark revisions to show payrolls growth in the year through March was at least 600,000 weaker than currently estimated — about 50,000 a month, with the former indicating it could be as large as a million. The report has the potential to shape the tone of Powell’s speech at Jackson Hole.

A few hours later, traders will also have to contend with the release of minutes of the Fed’s July meeting. That saw officials hold rates but signal moves could be coming soon. As well as seeking clues on the outlook for rates, traders will also look for signs of what will happen once the Fed completes its current course of quantitative tightening.

In the bond market,speculation a Fed cut is coming soon has seen traders take on a record amount of risk as they bet big on a Treasury market rally. The number of leveraged positions in Treasury futures has risen to an all-time high. The jump coincides with a ramp-up in bullish wagers over the past couple of weeks that call for aggressive rate cuts over this year and 2025.

Finally, fallen angel investing, which was hit hard during the pandemic, could be set for a comeback. The strategy relies on picking up bonds at cheaper prices after companies lose their investment-grade status and investors are forced to sell. While opportunities were slim as balance sheets improved after Covid, the outlook for the trade is picking up — Bloomberg Intelligence estimates that the value of bonds from US companies at risk of such downgrades has risen to $93 billion, from $19 billion in January.

This is what’s caught our eye over the past 24 hours.

Housing policy has made its way to the Presidential race, with Vice President Harris recently calling for a combination of downpayment assistance for first-time homebuyers, as well as efforts to expand housing supply.

According to various surveys, inflation/prices/cost of living are among the top concerns for voters this year, and since shelter is such a big component of overall consumption, it makes sense that this would be a national issue.

In the meantime, actual production of housing is expanding, although excluding the Covid plunge, new housing starts are currently around their lowest level in 5 years.

Other measures of production, such as permits for new multi-family buildings, look even worse.

One of the things that we talked about a lot in 2021 and 2022 was that growth in housing production had gotten impaired due to long, deep cyclical trends. The housing collapse that started in 2006 took a lot of supply side capacity. Various players and workers left the industry (understandably), so that when financial and demand conditions got going again, the sector was beset by various supply chain constraints preventing even faster growth.

Then, of course, the Fed got into inflation-fighting mode, mortgage rates exploded higher, and the wind was taken out of the industry's sails yet again.

This of course speaks to one of the paradoxes of inflation-fighting policy. Yes, in the short-term, higher rates may be the solution to unacceptably high CPI. But, in the long-term, the measures used to bring down inflation may create further supply-side constraints, accentuating the supply/demand imbalance.

Anyway, with housing production falling, we've seen this enormous collapse in the price of lumber, which is something we talked about on the podcast earlier this summer with Stinson Dean. And now this week brings the news that thanks to that, a major sawmill company is "indefinitely" curtailing operations at two of its operations in Georgia and South Carolina (seen via Dustin Jalbert).

And so the hole gets even deeper. The next time demand picks up (maybe because rates come down, or any other factors), there will be less sawmill capacity ready to go, and the supply-chain constraints will kick right back in. You can liberalize zoning. You can cut red tape. And you can subsidize demand, and so forth. And some of that might help. But at least in the here and now, market conditions are serving to aggravate any future efforts to just expand supply.

Joe Weisenthal is the co-host of Bloomberg’s Odd Lots podcast. Follow him on X @TheStalwart

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