3/24/2015
By Jennifer Coombs

Domestically, the biggest news of Tuesday, March 24 was the February reading on the U.S. consumer price index (CPI), which came in roughly in-line with economist expectations. Overall, CPI inflation has marginally firmed with energy starting to move out of what the Fed has been calling a “transition phase.” Still, inflation remains extremely low and should clearly point to no change in Fed policy come April.

The Federal Housing Finance Agency (FHFA) reported January results for its purchase focused house price index. On a monthly basis, prices increased by 0.3%, this is quite below the December reading of 0.8% growth and the consensus estimate for +0.5%. On an annual basis, growth also slowed, coming in at +5.1% compared to a prior reading of 5.4%.

Although we prefer to use the Institute for Supply Management (ISM) data on the purchasing managers index (PMI), Markit provides a decent direction as to how the month should pan out for the manufacturing sector. So far, the year has gotten off to a slow start, but that is apparently changing in March as the flash manufacturing PMI reading came in at 55.3 versus the 55.1 final reading in February. Most notably, new orders are at a 5-month high since rising domestic sales are offsetting declining export sales and weak sales in the oil sector due to the stronger US dollar. Output is at a 6-month high, while employment is at a 4-month high, while input costs have declined for the third month in a row and output costs are at their slowest in 3.5 years. Last week, the Federal Reserve Open Market Committee (FOMC) pointed to weak exports as a major factor holding down growth. We note though that in general, this report has been marginally better than the hard data from the government (which has been roughly flat). As a result, we see the manufacturing sector as really being closer to the 50-level.

Lastly, and most impressive of all, was the massively better-than-expected jolt from the housing sector. New homes sales for the month of February lifted the annual pace to 539,000 units, and adding to this news was a big upward revision from January to 500,000 from 481,000. We note that these are the first two readings above 500,000 since April and May of 2008. As a result, the gain in new homes drew down the already thin supply on the market to 4.7 months’ worth of inventory at the current rate compared to 5.1 and 5.3 months in the prior two reports. This inventory level is the lowest since June 2013 and should no doubt result in builders expanding construction in the near-term to make up the difference. However, the lack of supply failed to lift prices where the median home price fell by a sharp 4.8% to $275,500. It seems that home sellers are giving price concessions as the year-over-year price is only up 2.6%.

On a regional basis, the sales in the South are astonishing at multi-year highs. The South makes up a whopping 59% of all new home sales and the selling levels are now back to where they were in February 2008. There was also a big surge in sales in the Northeast where sales are comparatively low to the rest of the country. However, sales in the Midwest, which is also a small region for new home sales, declined sharply in the month as they did in the West, which accounts for nearly 23% of all new home sales.

The winter months are usually pretty bumpy for housing data, due to weather adjustments across much of the nation. However, today’s report is very encouraging since it stands in contrast to what has recently been dreary data for the housing sector. More than anything, it confirms the recent outlooks of homebuilders Lennar (LEN) and KB Home (KBH) – the critical spring selling season is off to a great start in 2015.

Jennifer Coombs
Wall Street Strategies

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