Purchases of new, single-family homes—a narrow slice of all U.S. home sales—rose 2.9% to a seasonally adjusted annual rate of 610,000 in May, the Commerce Department said Friday. From a year earlier, new-home sales rose 8.9% in May and so far this year have climbed 12.2%, indicating the market for new homes appears to be picking up.
The median sale price for a new home sold in May was $345,800, the highest recorded for data dating back to 1963. The average sale price also came in the highest on record at $406,400. (…)
We are about half way within the historical range ex-bubble but supply is clearly lagging.
New home prices have advanced much faster than wages of potential buyers. The gap is 28%, the same as in 2007. Good thing mortgage rates are about half what they were in 2007, but for how long?
Fed Officials Split on Inflation’s Path Barely a week after raising short-term interest rates for the second time this year, Federal Reserve officials are increasingly divided on the timing of their next move, with some saying they won’t support another increase until they see a pickup in inflation.
IHS Markit Flash U.S. PMI: Private sector output growth slows in June, but new orders rise at strongest pace for five months
- Flash U.S. Composite Output Index at 53.0 (53.6 in May). 3-month low.
- Flash U.S. Services Business Activity Index at 53.0 (53.6 in May). 3-month low.
- Flash U.S. Manufacturing PMI at 52.1 (52.7 in May). 9-month low.
- Flash U.S. Manufacturing Output Index at 52.9 (53.7 in May), 9-month low.
(…) There were more positive developments in terms of client spending, with private sector companies recording the sharpest rise in new work since January. Greater sales volumes contributed to a rebound in business optimism to its strongest level since the start of 2017, with service providers particularly confident about their growth prospects for the next 12 months.
Staff recruitment also picked up in June, with payroll numbers expanding at the strongest pace for four months. Meanwhile, input cost inflation remained softer than the 22-month peak seen in April. However, average prices charged by private sector firms increased at the fastest pace so far this year. A number of survey respondents cited efforts to alleviate squeezed margins in June. (…)
Historical comparisons of the PMI against GDP indicates that the PMI is running at a level broadly consistent with the economy growing at a 0.4% quarterly rate (1.5% annualized) in the second quarter, or just over 2% once allowance is made for residual seasonality in the official GDP data.
The average expansion seen in the second quarter is down on that seen in the first three months of the year, indicating a slowing in the underlying pace of economic growth. The average PMI reading in the three months to June was 53.3, down from 54.3 in the three months to March.
There are signs, however, that growth could pick up again: new orders showed the largest monthly rise since January, business optimism about the year ahead perked up and hiring remained encouragingly resilient. The survey is indicative of non-farm payroll growth of approximately 170,000.
Average prices charged for goods and services meanwhile showed one of the largest rises in the past two years, pointing to improved pricing power amid healthy demand.
The recovery in global growth is strengthening and is expected to pick up to 2.9% this year and peak at 3.1% in 2018, the highest rate since 2010. Faster growth this year reflects a synchronized improvement across both advanced and emerging market economies. Macro policies and tightening labor markets are supporting demand growth in advanced countries, while the turnaround in China’s housing market since 2015 and the recovery in commodity prices from early 2016 has fueled a rebound in emerging market demand. (…)
The biggest positive forecast revision since Fitch’s March GEO is to the eurozone. Here, stronger incoming data, improving external demand and greater confidence that ECB QE is gaining traction on activity have resulted in an upward revision of 0.3pps to the 2017 eurozone growth forecast, taking it to 2%. The recent pick-up in world trade growth has also been striking.
However, this improving global picture implies an evolving monetary policy outlook. China has recently seen a tightening in credit conditions, which will start to have an impact on growth later this year and the Fed looks set to pursue a normalisation course at a rate of three or four hikes per year through 2019. Low core inflation allows the ECB to carry on with QE for the time being, but the reduction in deflation risks will see the programme phased out by mid-2018. (…)
US Leveraged Loan Default Rate Back to 2%; Retail Post-Default Prices Lag Defaults from Gymboree, Ignite Restaurant Group and a missed payment by Ascent Resources-Marcellus registered nearly $2 billion, marking the fourth consecutive month where default volumes exceeded $1.75 billion.
The trailing 12-month (TTM) U.S. leveraged loan default rate will move up to 2% in June after closing May at 1.8%, according to Fitch Ratings. (…)
Fitch expects the default rate will end 2017 at 2.5%. Among sectors with above-average defaults, Fitch anticipates retail defaults will tally 9% while energy will reach 18%. (…)
Brazil hit a daily production record of 1.5 million barrels earlier this year, 26 percent more than the previous record set in 2010. Average exports surged 39 percent in the first four months of 2017 from the previous year. State-controlled Petroleo Brasileiro SA, the country’s dominant producer and the source of half its crude exports, expects to end 2017 with 30 percent growth in international sales.
As a result, Brazil is expected to be the second-biggest source of non-OPEC supply in the second half of the year, OPEC said in its June oil market report. (…)
The growth in U.S. shale, Brazilian pre-salt, and Canadian oil sands essentially blunts the impact of OPEC’s output cuts, which have been extended through next March. The International Energy Agency expects non-OPEC countries including the U.S. and Brazil to raise output by 1.5 million barrels a day next year, lifting global supply above demand. (…)
Could it be that everybody is so focused on oil supply, the increasingly poor dynamics of oil demand are not considered. Gasoline demand is weak in the U.S., 9 years into the recovery. Demographics, changing living patterns, particularly with the younger generations, electric vehicles, green energy. Peak oil can also mean peak demand.
Not so simple. Absolute Partners’ CIO Neils Jensen in Oil Price Target: $0 (by 2050) says high volatility will continue and offers this great chart as evidence that supply will eventually haunt us all again:
Risk Mounts for Canada Housing, but Don’t Expect U.S. Crisis Redux Unsustainable home prices and record high household leverage render the Toronto and Vancouver housing markets increasingly vulnerable to a steep price correction, though key structural features will safeguard Canada from repeating the U.S. housing crisis.
Home prices in Toronto and Vancouver are up 45% and 36%, respectively, since January 2015 through May of this year. Additionally, household debt to disposable income remains elevated at 167% in 1Q17, the highest amongst G7 sovereigns.
Mortgage-market reforms are also increasing the focus on a private label RMBS market in Canada. This will inevitably draw comparisons by some in the market to the U.S. RMBS market and the influential role it played in the U.S. housing crisis a decade ago. “However, Canada is unlikely to mirror the declines and fallout experienced during the U.S. housing crisis due to major differences in the housing and mortgage finance systems,” said Fitch Director Kate Lin.
“Canadian banks are subject to rigorous oversight and regulations requiring prudent mortgage lending and underwriting standards,” added Lin. “What’s more, credit quality for Canadian mortgage loans remains strong unlike the drift towards weak borrower and loan quality that we saw a decade ago in the U.S.” Further, nonprime credit quality originations in Canada are low, making up approximately 10% of volume compared to 50% in the U.S. during the peak. The Canadian government has also been proactive in managing the risk of the nation’s housing market by taking unprecedented steps to tighten credit and limit speculation.
From Bespoke Investment:
The estimated earnings growth rate for the second quarter is 6.6% this week, which is slightly above the estimated earnings growth rate of 6.4% last week. If the Energy sector is excluded, the estimated earnings growth rate for the remaining ten sectors would fall to 3.7% from 6.6%.
The estimated revenue growth rate for Q2 2017 is 4.9%. If the Energy sector is excluded, the estimated revenue growth rate for the index would fall to 3.8% from 4.9%.
At this point in time, 114 companies in the index have issued EPS guidance for Q2 2017. Of these 114 companies, 76 have issued negative EPS guidance and 38 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (76 out of 114), which is below the 5-year average of 75%.
While the number of companies issuing negative EPS is slightly below the 5-year average (79), the number of companies issuing positive EPS guidance is well above the 5-year average (27). If 38 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance since Q4 2010 (43).
IT and Financials are expected to grow EPS 8.5% in Q2 [+7.7% last week], down from 9.5% expected on March 31. The 6 consumer-centric sectors are expected to show EPS growth of only 0.5% (+0.6%), down from +2.4% on March 31.
Ex It and HC, guidance is 47 negative (unchanged) and 10 positive (unchanged); the 82% negative ratio compares with 85% at the same time in Q1’17 and 80% at the same time in Q2’16, so essentially in line with recent experience.
Fundstrat Global Advisors slashed its outlook for S&P 500 earnings for 2017 and 2018 on Friday, citing weaker inflation, a flattening yield curve and the likelihood of delays in policies from the Trump administration such as tax cuts and fiscal stimulus.
For the full year, Fundstrat predicts S&P EPS coming in at $127.50, down from its previous estimate of $135 a share. In 2018, it sees S&P 500 EPS at $138, down from previous estimates of $147. (…)
(…) Today, energy stocks account for less than 6 percent of the S&P 500, compared with 11 percent three years ago. (…)
One of the biggest differences between now and then[2015-16], according to Sean Darby, chief global equity strategist at Jefferies Hong Kong Ltd., is that oil weakness was compounded by weakening demand from China, while the dollar was strengthening ahead of Fed hikes. Another key difference Darby noted is that break-even rates at North American shale producers are lower.
“The backdrop for oil prices is very different,” Darby wrote in a report Thursday. “There has been significant improvement in balance sheet repair in 2016 through capital raisings while many producers hedged production as oil prices rose.”
Still, 68% of Energy stocks are in bear market mode, being down 20% or more from their highs.
(…) U.S. crude futures have been pressured lower by a supply glut. They’ve averaged over $48 per barrel so far this quarter, but traded around $43 on Friday and are down more than 20 percent from February, when they hit an 18-month high. (…)
Time to brace for ‘market turmoil’, warns JPMorgan Fed rate rises and receding accommodation from ECB/BoJ will undermine high valuations
(…) Mr Kolanovic’s remarks echo those from fellow Wall Street bank Bank of America Merrill Lynch, which warned this week that “peak liquidity and peak profits [mean a] big top in autumn”. (…)
NED DAVIS RESEARCH
I have used NDR stuff throughout my career. Hopefully, I will be able to let you in on some of their great charts. Steve Blumenthal, CIO of CMG Capital Management Group, offers some interesting NDR charts in his latest letter.
Stock Picking Is Dying Because There Are No More Stocks to Pick The shrinking number of publicly traded companies should make all investors more skeptical about the market-beating claims of recently trendy strategies. A close look at the data helps explain why stock pickers have been underperforming, Jason Zweig writes.
There were 7,355 U.S. stocks in November 1997, according to the Center for Research in Security Prices at the University of Chicago’s Booth School of Business. Nowadays, there are fewer than 3,600. (…) Back in November 1997, there were more than 2,500 small stocks and nearly 4,000 tiny “microcap” stocks, according to CRSP. At the end of 2016, fewer than 1,200 small and just under 1,900 microcap stocks were left. (…)
Several factors explain the shrinking number of stocks, analysts say, including the regulatory red tape that discourages smaller companies from going and staying public; the flood of venture-capital funding that enables young companies to stay private longer; and the rise of private-equity funds, whose buyouts take shares off the public market. (…)
Most research on historical returns, points out Mr. Mauboussin, is based on the days when the stock market had twice as many companies as it does today. “Was the population of companies so different then,” he asks, “that the inferences we draw from it might no longer be valid?” (…)
Interesting chart from Topdowncharts. Ex-banks, Chinese equities don’t look cheap unless you expect another bubble.