US home sales dip

• Sales of new US single-family homes fell 6.6% m/m to a seasonally adjusted annual rate of 676,000 units last month, the lowest level in 14 months. The data suggests that higher building materials costs and the resulting rise in property prices were restraining the housing market. The data released by the Commerce Department also revised down May's sales pace to 724,000 units from the previously reported 769,000 units, making June the third straight month of sales drops. The data comes on the back of news last week that building permits fell to a nine-month low in June, while sales of previously owned homes rebounded only moderately. Supply continues to lag demand, with the backlog of single-family homes approved for construction but yet to be started surging in June to the highest level since October 2006. Sales declined 19.4% y/y in June, the first annual decrease since the pandemic. The median new house price increased 6.1% y/y from a year earlier to USD 361,800 in June. Sales were concentrated in the USD 200,000-USD 749,000 price range. Sales below the USD 200,000 price range accounted for only 2% of transactions last month. There were 353,000 new homes on the market, up from 330,000 in May. At last month’s sales pace it would take 6.3 months to clear the supply of houses on the market, up from 5.5 months in May. Almost 77% of homes sold last month were either under construction or yet to be built.
• The German Ifo business climate index fell to 100.8 in July from a revised figure of 101.7 in June, the first decline since January, on supply chain worries amid rising coronavirus infections. Companies in Europe’s largest economy gave a slightly better assessment of their current situation but optimism for the coming months faded, with the expectations index falling to 101.2 from 103.7 in June, while the current conditions index rose to 100.4 from 99.7. Almost 64% of industrial firms complained about bottlenecks in supply chains, while 60% of wholesalers and 42.5% of retailers also reported shortages, according to the Ifo Institute. The Covid-19 pandemic aside, natural disasters in China and Northern Europe and cyber attacks are driving global supply chains to the edge, as the flow of raw materials and parts becomes more challenging.
• The Flash Japan Manufacturing PMI slipped to a seasonally adjusted 52.2 in July from a final 52.4 in the previous month, the slowest pace in five months as Japan struggles in its recovery from the Covid-19 pandemic. The survey compiled by IHS Markit for Jibun Bank showed output and new orders growth softened to six-month lows as Covid-19 infections rise and the supply of raw materials became constrained. The survey also showed the services sector continued to face challenging conditions, with activity contracting at the fastest pace in five months, also marking the 18th straight month of declines. The flash services PMI index dropped to a seasonally adjusted 46.4 from the June’s final reading of 48.0, while the flash composite PMI fell to 47.7 from June's final of 48.9.

Today’s Economic Data and Events

16:30 US Core Durable Goods Orders (MoM) (Jun) Forecast 0.80%    

18:00 US CB Consumer Confidence (Jul) Forecast 124.1          

Fixed Income

• US Treasuries showed some two-way action overnight ahead of the start of the FOMC meeting this week. After rising early in the day Treasuries faded their gains with yields rising across the curve during the US session. All told, yields closed the day relatively unchanged with the longer end of the curve rising slightly.
• The Fed will set the overall tone for fixed income markets this week and we’d expect bond markets to be relatively quiet in the lead up to the event. Some disappointing data on regional manufacturing in the US—the Dallas Fed survey came in weaker month/month—and a slowdown in German investor sentiment did little to substantially affect markets.
• Emerging market bonds showed more action though. Yields on 10yr Turkish government yields moved higher at the start of the trading week (up 26bps) while Indian and South African yields slipped by 5bps and almost 11bps respectively.
• Fitch affirmed their ratings on the Bank of Bahrain and Kuwait at ‘B+’ with a stable outlook, Ahli United Bank at ‘BB+’ with a stable outlook and Gulf International Bank at ‘BBB+’ with a stable outlook.

FX

• The dollar is on the back foot ahead of the Fed meeting this week with the DXY index falling by 0.28% to 92.649. The greenback could be set up for some wide moves based on the outcome of the Fed this week with any dovish disappointment likely to prompt a move lower while a pull back on MBS purchases could embolden hawks and move the dollar higher.
• The Euro and sterling were the primary gainers at the dollar’s expense overnight with EURUSD closing up 0.27% at 1.1803 while sterling managed to gain 0.5% at 1.3818. While Covid-19 cases in the UK remain high, they do appear to have peaked and have turned lower for several days in a row.
• Commodity currencies were also bid higher with USDCAD slipping 0.1% to 1.2551, AUD up 0.26% at 0.7385 and NZD moving back up above the 0.70 level, gaining 0.4% overnight.

Equities

• US equity markets started the week on the front foot, with all three major benchmark indices hitting new record closes yesterday. Strong earnings from a number of large firms, including those in the tech space, bolstered optimism. The NASDAQ was almost flat, up just 0.03%, but the Dow Jones and the S&P 500 both added 0.2%.
• This was a change of pace from earlier in the day, when developments in China seemed to be setting the tone. The Shanghai Composite fell -2.3% yesterday as Chinese regulators turned their sights on the private tutoring sector. The index is trading up 0.1% in morning trading today.
• European equities took their tone from China, with the STOXX 600 dropping -0.1% yesterday. Germany’s DAX was the major loser, falling -0.3% as the Ifo survey dipped.

Commodities

• Oil prices were mixed overnight with Brent futures rising 0.5% to USD 74.50/b and WTI slipping by 0.2% to USD 71.91/b. There have been no major catalysts in the market to push prices one way or the other with commodities likely to respond as all other asset classes to the Fed later this week.
• Gold prices dipped below USD 1,800/troy oz overnight even as US real yields dipped to new all time lows—10yr TIPS yield moved to below -1.1%. Despite an uptick in inflation and persistent anxiety over the spread of the delta variant of Covid-19, gold is finding little support in the current market.

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