Greetings,

Let's start with the US housing market where new home sales beat forecasts by a significant margin.

At the same time, new home supply has tightened.

Moreover, US median new home price rose above $320k. Once again, the post-recession new housing market has been dominated by larger, "higher-end" homes. These buyers usually don't have a problem obtaining a mortgage and homebuilders run less of a risk building such homes.

As expected, the biggest increase in new home sales was in the $300k-$400k range.

There has also been a sharp increase in "pre-sold" homes, which contributed to the overall increase in sales. Some banks are providing bridge financing that families need to put a down-payment on a new home (which is yet to be built) before they sell their current home.

The news on new home sales sent homebuilders' shares sharply higher.

Source: Ycharts.com

As an aside, new home sales have been growing at a rate that is significantly below existing home sales since the recession. Some suggest that this gap is due to distressed sales pushing up existing home transaction numbers. While that was true in the first two years after the recession, it is no longer the case. As discussed above, homebuilders mainly focused on the more expensive homes to make sure they don't get stuck with unsold inventory (if the buyers of smaller homes are unable to obtain financing). Also, many of the smaller homebuilders that existed before the crisis are not around anymore. Therefore, new home construction continued to lag family formation.

Source:  ‏@GregDaco

The mortgage market tightness remains a concern as banks and regulators fight the "last war". Hopefully, the non-bank market will help fill some of this void. As the next two charts show, while the overall mortgage market growth has improved, it is dominated by higher-credit-score borrowers.

Source: @business

Source: @business

Let's continue with the latest developments in the US.

1. According to the Fed minutes from the discount rate meeting (different from the FOMC minutes), four of the Fed banks called for a hike in the discount rate. It's the emergency rate at which banks could borrow directly from the Fed's discount window - currently at 1%. This disclosure suggests that the Fed is becoming increasingly hawkish.

2. The robust housing data and the news on the discount rate increased rate hike expectations for 2016.

Source: @SoberLook

3. The 2-year treasury note futures and Fed Funds futures continued to decline (short-term rates are rising again).

 

4. US bank shares have outperformed over the past 3 months on higher rates (which in theory should boost interest margins). Bank shares led the overall market higher.

Source: Stockcharts.com

5. The US dollar recovery continues as a result of higher short-term rates.

6. With the dollar rising, gold came under pressure.

7. The recent US Capex weakness is apparently not limited to energy. Slow investment is likely to put a drag on growth and productivity.

Source: Goldman Sachs 

8. The Johnson Redbook index of the same-store retail sales shows that US merchants continue to struggle. In fact the index growth is the slowest since the recession.

9. There is some evidence that the service sector is doing better. The Philly Fed Non-manufacturing Business Survey shows new orders improving.

10. The final chart on the US shows the updated publicly held federal debt as a percentage of the GDP.

1. Next, we turn to China, where the PBoC fixed the renminbi trading band to the weakest level since 2011. Will the markets be spooked again by a further yuan depreciation against the dollar?

Source: @fastFT

2. China's economy gets another injection for its fixed asset investment (FAI) addiction. The private sector is no longer providing the "drug", so Beijing is happy to oblige. 

Source: Barclays

3. Traders are realizing that China's rapidly growing scrap metal business could compete with iron ore, potentially resulting in an oversupply. Iron ore prices continued to fall.

Source: @barchart

4. China's real estate credit continues to expand, fueling the appreciation in housing prices.

Source: Barclays, @joshdigga 

1. Let's shift to other emerging markets, starting with Nigeria. The nation's central bank unexpectedly held rates steady at 12%. A hike was widely expected as the country faces a rapidly rising inflation.

 

2. Russia' government sold $1.75bn of Eurobonds for the first time since the sanctions. The bonds were placed by a domestic investment bank, selling about half the amount intended. The demand was poor as portfolio managers became concerned about compliance and settlement issues. For the same reason, Barclays did not include the bonds in its sovereign bond indices.

Source: CNBC

3. Turkey's assets rallied as the central bank cut rates. The markets also cheered the government's appointment of Mehmet Şimşek as Deputy Prime Minister. Şimşek is an economist with a strong grasp of finance and markets. He has been quite active on Twitter where he has a massive following - both in Turkey and abroad.

The Turkish lira jumped and the stock market shot up 3.5%.

 

4. Hungary cut its benchmark rate again to record low and signaled that this is likely the end of rate decreases.

1. Switching to the Eurozone, Greece apparently met all of the Eurogroup requirements to unlock the latest bailout payment.

Source: The Guardian

2. There has been significant divergence between German economic sentiment and current conditions. Germans are uneasy about the future.

As an aside, it's interesting that the same divergence also shows up in the US Gallup Economic Confidence Index. This pervasive feeling of unease cuts across several major economies - in spite of stable current conditions.

Source: @GallupNews

3. German services sector employment sentiment has strengthened significantly in recent months.

Source: Morgan Stanley, @joshdigga

4. As discussed before, German households hold significant amounts of deposits and bonds (relative to other developed economies). Negative rates, therefore, create a serious problem. The life insurance holdings will also become an issue over time as insurance firms cut rates to match their assets. 

Source: Morgan Stanley, @joshdigga

5. By the way, with respect to economic growth, Germany is no longer outperforming the rest of the Eurozone.

Source: Morgan Stanley, @joshdigga

6. The ECB is warning that populism is boosting political risk across the euro area.

Source:  @Schuldensuehner

While the concept of "helicopter money" to boost growth/inflation has been mostly a theoretical discussion, Switzerland is actually considering implementing it.

Source: CNN

Next, we look at several developments in credit and equity markets.

1. Credit markets have been quite robust recently, driven primarily by improving energy markets. Energy HY bond yields continue to decline, and HY bonds overall are outperforming stocks (YTD).

Source: @fastFT

Source:Ycharts.com

2. Monsanto rejected the $62bn Bayer proposal but the company seems open to being bought. The shares are up in spite of walking away from the bid. Are the markets expecting another bidder to show up? It's hard to see Bayer raising the price.

Source: ‏Google

3. US equity investor sentiment remains subdued - it's hard to find bullish investors these days.

Finally, we look at the energy markets.

1. Here is the global crude cost curve (updated), showing the cash cost of production with and without the required payouts to the government.

Source: Morgan Stanley, ‏ @joshdigga

2. The API weekly storage report showed a bigger than expected draw on US crude inventories. Oil traded above $49/bbl.

 

Source: @barchart

3. The Brent-WTI spread has disappeared.

4. We've had quite a few unplanned oil production outages recently (Nigeria, Canada, etc.).

Source: JPMorgan, ‏ @joshdigga

5. This is a great chart from the Wall Street Journal showing auto and mortgage delinquencies climbing in the communities that are dependent on energy production.

Source:  ‏@WSJecon

Turning to Food for Thought, we have 4 items this morning:

1. How strongly do different nationalities feel about religion?

Source: ‏@JmBadalamenti, @wef

2. The survey asked: "What would Trump or Clinton be better at?"

Source:  @NBCNews @washingtonpost, @paul1kirby

3. Young adults without a college education are more likely to live with their parent(s).

Source:  ‏@r_fry1

Moreover, for the first time since 1940, young men are more likely to live with their parents than with a spouse/partner. That's not (yet) the case for young women.

Source:  @RuthIgielnik 

4. Millenials around the world were asked if they "expect to keep working until the day they die." Here are the percentages that answered "yes."

Source: ‏ ‏@wef