Stocks soar on US growth crash

The S&P500 soared to a new record close last at 1920 points after the US GDP confirmed a first quarter growth crash:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 1.0 percent in the first quarter according to the “second” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.6 percent.

…The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, real GDP was estimated to have increased 0.1 percent.

…The second estimate of the first-quarter percent change in real GDP was revised down 1.1 percentage points, or $43.7 billion, from the advance estimate issued last month, primarily reflecting a downward revision to private inventory investment and an upward revision to imports that were partly offset by an upward revision to exports.

Backward looking, yes. And growth is definitely improving now. But it still looks likely to fall short of expectations of 3% or more. The major headwind is housing and it’s still slowing. The other major release was Pending Home Sales:

Pending home sales improved for the second straight month in April, according to the National Association of Realtors®. Gains in the Midwest and Northeast offset declines in the West and South.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 0.4 percent to 97.8 in April from 97.4 in March, but is 9.2 percent below April 2013 when it was 107.7.

Lawrence Yun, NAR chief economist, expects a gradual uptrend in home sales. “Higher inventory levels are giving buyers more choices, and a slight decline in mortgage interest rates this spring is raising prospective home buyers’ confidence,” he said. “An uptrend in closed sales is expected, although some months will encounter a modest setback.”

Yun projects the 30-year fixed-rate mortgage to trend up and average 5.5 percent next year. “The extent to which higher mortgage interest rates will impact housing affordability and sales depends on income growth, ongoing improvement in the labor market and any change to mortgage underwriting conditions.”

That doesn’t pass the laugh test. The last time US mortgage rates were at 5.5% was during the GFC:

4.5% was enough to seriously dent the housing recovery. To reach 5.5% the 30 year bond yield will need to rise to 4.75% and it currently tumbling to 3.3%.

But, according to BofAML, bond yields are set to do a u-turn:

I remain skeptical. US growth is recovering but under-performing expectations by some distance. Inflation is still weak. China and Europe are making it weaker. The building El Nino might be a risk to food prices but a more likely scenario is the end of QE adds to deflationary pressures.