U.S. New-Home Sales Fell Sharply in January Sales of newly built U.S. homes declined last month, a sign the housing market’s recovery remains uneven.
Purchases of new single-family homes decreased by 9.2% to a seasonally adjusted annual rate of 494,000 in January, the Commerce Department said Wednesday. It was the slowest pace for sales since October.
The reading came in well below expectation of economists surveyed by The Wall Street Journal for a January sales pace of 525,000. From a year earlier, sales were down 5.2% in January. (…)
There were 238,000 new homes for sale at the end of January. That was the largest inventory since October 2009. The median sales price of new homes was $278,800 last month, down from $292,000 a year earlier. Price data isn’t seasonally adjusted. (…)
Sales last month plunged 32.1% in the West and declined 5.9% in the Midwest. Sales grew modestly in the Northeast and the South.
So the weather was not really a factor.
Yesterday’s Markit Flash Services PMI report for February is worrisome, even though few media have even mentioned it and those which have tend to dismiss the weakness on the weather. Weather or not, the flash Services PMI sank from 53.2 in January to 49.8, into contraction territory, and has joined the downtrend in the manufacturing PMI as this Zerohedge chart illustrates. Speaking of the weather, note that both the manufacturing and the services PMIs are below their Sandy low in 2012.
Services are a lot more significant for the U.S. economy than manufacturing, prompting Markit to comment:
The PMI survey data show a significant risk of the US economy falling into contraction in the first quarter. The flash PMI for February shows business activity stagnating as growth slowed for a third successive month. Slumping business confidence and an increased downturn in order book backlogs suggest there’s worse to come. (…)
But the weather can only explain part of the slowdown. It’s clear that business confidence has faltered significantly, reaching the lowest since August 2010 in the service sector in February. (…)
Add the 9.2% MoM (-5.2% YoY) collapse in January new home sales against expectations of a 4.4% drop, the biggest January drop since 2009 (chart from Zerohedge)…
…and the continuing downward pressure on oil prices…
Which brings me back to last week’s Conference Board LEI (chart from Doug Short): the 6-m rate of change has declined from +3.0% to +0.8%. It has been there before but one might say we have run out of QEs…
FYI, here are the 10 components of the CB LEI:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM® Index of New Orders
- Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions
Some encouragement for 2016 outlook
NBF keeps the hopes alive:
It’s becoming clearer why the world economy grew last year at the slowest pace since the 2009 global recession. The uninspiring near-3% global GDP growth was due to a sharp deceleration in industrial output in both advanced and emerging economies. But there’s a silver lining to last year’s disappointing industrial performance. As today’s Hot Chartsshow, with industrial output growing at a slower pace than trade volumes in the second half last year, inventories fell sharply. That bodes well for production in early 2016 and should help offset some of the headwinds currently blowing over the world economy.
(…) The central bank is keeping a wary eye on record borrowing – much of it concentrated in the hands of a relatively small group of younger heavily indebted borrowers in Ontario, British Columbia and Alberta – deputy governor Lawrence Schembri said Wednesday. (…)
But Mr. Schembri insisted the country’s financial system, including the Big Six banks that hold 70 per cent of outstanding mortgages, is “very resilient” and can withstand anything the economy throws its way, including a severe recession.
And he said the bank has no plans to use monetary policy as a way to stifle Canadians’ appetite for debt. Raising rates, he said, is “a very blunt instrument” that could derail the economy.
“We believe that there are other measures, including public policies and private remedial actions, better suited to targeting and reducing these vulnerabilities than monetary policy, which affects the entire economy,” he said.
In particular, Mr. Schembri said the bank has been warning borrowers and lenders to “exercise appropriate caution.”
“In particular, borrowers and lenders should take into account the impact of higher borrowing rates in the future on the cost of servicing mortgages and other loans,” he explained. (…)
The central bank says the biggest threat to Canada’s financial system would be a severe recession that leads to a spike in unemployment and causes many homeowners to default on their mortgages. If that happens, Mr. Schembri said, the share of borrowers behind on loan payments would more than quadruple to 1.8 per cent from 0.4 per cent now.
Mr. Schembri also pointed out that excessive borrowing has become increasingly concentrated in a clutch of households with extremely high debt-to-income ratios. As the Bank of Canada pointed out in its most recent Financial System Review, there are roughly 720,000 Canadian households with debts equal to more than 3 1/2 times what they earn every year. They hold about a fifth of all household debt, or $400-billion.
The share of these highly indebted households has jumped to 8 per cent from 4 per cent before the financial crisis.
The bank said these borrowers are at the greatest risk of defaulting on their loans because they tend to be younger, earn less money and live in the provinces where house prices have climbed the most in recent years: Ontario, B.C. and Alberta.
Chinese stocks plunge
The Shanghai Composite Index plunged 6.4 percent overnight as money-market rates surged, leading to concerns about liquidity. The selloff was broad based, with 70 stocks falling for every one that rose. The ChiNext index of small-cap shares slumped 7.7 percent. (Bloomberg)
Why Bad Loans Aren’t a Problem If You’re a Bank in China: Gadfly
Banks in China, like their embattled counterparts in Europe, may soon have to tap the market for capital as bad loans rise at an alarming rate. New advances
soared to a record 2.51 trillion yuan ($384 billion) in January and the specter of soured debt is looming large:
While at first glance Chinese banks’ capital buffers may seem strong — the Tier 1 capital ratio of the nation’s biggest bank, ICBC, is 12.7 percent, more than the 9.5 percent minimum requirement for large state-owned financial institutions – it’s not as simple as all that.
The increase in lending comes at a time economic growth is stagnating. Authorities also lowered interest rates five times last year, squeezing banks’ net interest margins as hundreds of new, non-bank lenders, such as peer-to-peer online operators, were vying for a slice of the pie.
Teamed with a commodities rout that’s hurt steel and coal companies’ ability to pay back their debts, bad loans are spiking on even the numbers China reports. Official data as of Sept. 30 put nonperforming loans at 1.59 percent compared with1.25 percent at the end of 2014.
There are many who say the real level of soured debt in China’s banking system is much higher. BNP Paribas puts the figure at about 8.4 percent, at the upper end. If true, that would rival the early years of last decade, before China cleaned up its banks so they could sell shares publicly in Hong Kong and created asset management companies like Cinda and Huarong to deal with the mess.
So if you accept that Chinese banks need to at least start thinking seriously about raising more capital, the question then becomes, how exactly?
One option would be subordinated perpetuals. These securities count toward Tier 1 capital and in Europe, go by the more infamous moniker contingent convertible notes, or CoCos. Chinese banks have been selling a truckload of them, including a record $91.5 billion in 2014, according to data compiled by Bloomberg.
But as the world’s biggest issuers of CoCos, lenders may find investor appetite for any more relatively muted. Chinese bank issuance of preferred shares to date $171.2 billion
That leaves plain vanilla equity. Yet here again — on the surface at least — there’s a stumbling block. Outside of a few smaller financial institutions, the
majority of China’s banks are trading at an average of about 0.7 times book value, roughly in line with much-battered European banks. Rules in China, however, state that banks can’t sell stock below one times book value.
Investors shouldn’t worry too much. When China Citic Bank announced it was raising $2 billion last year to bolster its capital, another state-owned enterprise — China National Tobacco — stepped up to the plate, subscribing for 2.46 billion shares in a private placement. Citic’s shares were trading at around 0.8 times book value at the time.
What that episode shows is that whether nonperforming loans are high or low, it’s a safe bet that the government will find solutions akin to a cigarette monopoly to keep its banks afloat.(Bloomberg)