Longest Economic Expansion Officially Over : New one begins

09 June 2020

WHAT’S NEW - Yesterday, the National Bureau of Economic Research (NBER) officially declared that the longest US economic expansion (128 months) ended in February 2020. A new business cycle begins, and today we look into a key driver, the housing market. The US housing market has been under the radar recently, but we think it could be a bright spot as purchase application data in recent weeks have been supportive, with the latest print showing an 18% rise year-over-year, a sign that demand is holding up. As the US economy moves from despair to repair, the support from a robust housing market is welcome.

OUR TAKE - The US housing market was thriving when Covid-19 hit and, as the economy reopens, there is a good chance that this trend will resume. Why? One of the key drivers of US housing demand is mortgage rates, which remain low at around 3.5% for 30-year rates, well below the 2018 highs of around 5%. Another driver for housing demand is demographics, a notable tailwind for the sector as a large cohort aged between 26 and 32 is going to reach the median first-time homebuyer age of 33 between 2020 and 2024. Last but not least, inventory levels remained low going into the current recession at 5.5 months (versus 8 months pre-2008). Put simply, we just witnessed the longest expansion ever in the US, without the building frenzy of the mid 2000s. There were no major imbalances built into the cycle that just ended, meaning there should be fewer brakes to the subsequent economic rebound. 

WHAT’S NEXT - We will monitor whether rising purchase applications translate into a recovery in home sales. Secondly, in a recession, you can usually expect an increase in foreclosures, which is worth monitoring, but should be more of a 2021 story as the US government's mortgage forbearance programme included in the CARES Act should serve as a cushion until late 2020. Mortgage rates are worth keeping an eye on, but are unlikely to go up much in the short term given the dynamics mentioned above.

 

MARKET REVIEW

EUROPE - European markets closed mostly lower Monday, after last week's big gains. Macroeconomic data included German industrial production falling by 17.9% in March, with Danish industrial production down 4.5% in the same month. The Eurozone Sentix economic index showed improvement in June. On the corporate front, Ericsson warned that second-quarter margins in China are expected to be negative, due to high initial costs for new products. However, it maintained its financial targets for 2020 and 2022. PGS said it will implement further cost reductions and surged. In the UK, BP's CEO confirmed media reports that the company will cut 10,000 jobs, about 15% of its current 70,100 workforce. The press reported that despite a preliminary approach in May, AstraZeneca is no longer interested in Gilead Sciences. Elsewhere, Volkswagen is reported to be considering more cost cuts to cope with the downturn.

USA - US equities closed higher in fairly quiet Monday trading, with the Nasdaq Composite even hitting a fresh all-time high. Treasuries were mostly stronger, with a bit of curve flattening. The dollar was weaker on the major crosses, particularly vs the yen. Gold finished up 1.3%. Oil was lower, with WTI settling down 3.4% despite the weekend OPEC agreement to extend steep production cuts. A White House official said the odds of another Covid-19 stimulus package were near 100%. Latest polls continue to show Trump slipping vs Biden. George Floyd protests continue around the country, but have remained largely peaceful. The Boeing Company was helped by some positive analyst commentary and the ongoing aerospace rally. International Flavors & Fragrances Inc. reported weaker trends. The press said that Grubhub, Inc. wants concessions from Uber Technologies Inc. that would protect the company during the antitrust review. Tiffany & Co. remains adamant about not renegotiating its acquisition by LVMH.

ASIA - Asian equities were mixed in quiet Tuesday trade. The Hang Seng led China market gains, while Japan and Korea were weaker. Geopolitics is in focus, with President Trump reportedly planning to sign a Uighur bill to pressure China. North Korea will reportedly shut down a shared liaison office with South Korea amid rising tensions.

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