U.S. Housing Starts Fell in June Home building in the U.S. declined in June, a fresh sign of weakness in the housing market.
Housing starts, a measure of new-home construction, fell 0.9% in June from the prior month to a seasonally adjusted annual rate of 1.253 million, the Commerce Department said Wednesday.
Residential building permits, which can signal how much construction is in the pipeline, dropped 6.1% from May to an annual pace of 1.220 million. That was the biggest monthly drop since March 2016. (…)
Starts were up 6.2% from June last year. Building permits were down 6.6% from June 2018. (…)
Fed’s Beige Book Reports Modest Growth, Trade Worries
“The outlook generally was positive for the coming months, with expectations of continued modest growth despite widespread concerns about the possible negative impact of trade-related uncertainty,” said the Fed’s beige book survey, a report of anecdotes drawn from business contacts around the country by the central bank’s 12 regional banks. (…)
Businesses pointed to consumer spending as a strong point, despite flat vehicle sales. (…)
Manufacturers continued to express concern about the uncertainty surrounding trade negotiations. A maker of electronic components in the Northeast said it had laid off people in response to tariffs and moved an assembly line from the U.S. to Germany, where it could receive Chinese imports without paying tariffs. (…)
Wages grew at a modest-to-moderate pace, the report said, with some employers expanding benefit packages to draw workers.
Inflation pressures were slightly weaker from the previous reporting period, the report said. Some respondents noted competitive pressures prevented them from passing on increases in input prices. (…)
European Vehicle Registrations Remain Subdued
June marks the second monthly decline in registrations in a row with a 7.9% drop. While shorter term growth rates are positive, the year-on-year pace is -6.2%. On three-month smoothed data, the monthly declines turn to small gains and the three-month and six-month growth rates get larger. But year-on-year, while growth no longer declines, it is quite weak at just a 0.5% gain.
Unsmoothed individual country data show broad declines in June and May for vehicle registrations. Over three months and six months, the country trends are mixed and also quite erratic with no sense of ‘trend.’ Year-on-year all country level registrations show declines, ranging from a low of 1.9% in Italy to the greatest decline of 8.2% in Spain.
Further smoothing of the data shows weakness. For this, we look to the far right column and calculate a broad percentage change. Over the last 12-month average compared to the previous 12-month average, registrations are down by 1.8% overall and falling in four of five countries with France as the exception with a 0.6% increase. The largest year-average decline is in Italy at 3.9% and the smallest is in Spain at 1.0%. (…)
Trade Talks Stuck in Rut Over Huawei Progress toward a U.S.-China trade deal has stalled while the Trump administration determines how to address Beijing’s demands that it ease restrictions on Huawei Technologies.
(…) U.S. and Chinese trade negotiators spoke by phone last week to discuss next steps but officials didn’t cite any progress afterward. Though another call is expected this week, Beijing is waiting to see what the U.S. does on Huawei before making commitments, according to the people familiar with the talks. (…)
“We have a long way to go as far as tariffs, where China is concerned,” Mr. Trump warned Tuesday at a cabinet meeting. (…)
Zhong Shan, the commerce minister who took on a bigger role in the talks in recent weeks, told a Communist Party newspaper that Beijing shouldn’t back down in talks.
“We should uphold a fighting spirit, resolutely safeguard the national and people’s interests, and resolutely safeguard the multilateral trading system,” he told the People’s Daily this week. (…)
China’s slowing economy not caused by trade war
(…) “In truth net exports contribute less than 1% of China’s total GDP.’ (…) ‘The main drags on Chinese dynamism come from weakening investment in infrastructure, slowing industrial output, and a decline in the construction of new houses.’ ‘All of these weaknesses derive from domestic sources rather than from the trade war.’
‘And in any case, China remains by far the world’s most vibrant economy, even growing at its lowest level in 30 years.’ (…)
China’s economy doing better than latest numbers
Q: ‘6.2% – do we believe it?’
Leland Miller: ‘We absolutely do not believe it – the numbers are too low. We’re seeing much better metrics in our China Beige Book data than China is reporting.’ ‘China’s GDP data is, is never accurate. There’s a lot of reasons, but it’s not always political manipulation.’ ‘A lot of is simply lag – it takes a long time to collect the data.’
‘But when the Chinese see a particularly problem period in the economy like the Q4 2018 they don’t want to show that the growth indicators have fallen off a cliff.’ ‘So they smooth it out, they spread the weakness to later.’ ‘A lot of what you’re seeing reported right now is weakness that we saw Q4 2018.’
‘So the major sectors are actually doing better than is being reported right now.’ (…)
‘China Beige Book has showed an extremely active credit environment for all of 2019 – there’s a lot more credit going out.’ (…) ‘We’re seeing a lot more strength in our China Beige Book data than you are an official data right now. And that’s because it hasn’t flown through.’ ‘When an official data catches up with our data that you may see some upside surprises later in the year.’
Foreign Buying of U.S. Homes Suffers Record Drop Foreign purchases of U.S. homes have dropped by half over the past two years, a fresh blow to the top end of the market in New York City, Miami and cities in California.
Foreigners bought less than $78 billion worth of U.S. residential real estate in the year that ended in March—a 36% decline from $121 billion the previous year [-50% from 2017], according to a report released Wednesday by the National Association of Realtors.
Their pullback is leading to price cuts in several coastal cities and causing new condos to sit empty. (…)
Purchases by foreigners are now at the lowest level since 2013, when buyers from China and South America first began entering the U.S. market in large numbers in search of bargains and a safe place to stow their capital. (…)
“Generally speaking, we are in the largest market correction since the Great Recession in New York City,” said Martin Eiden, a real-estate agent at Compass, who has had to cut prices on listings from Midtown Manhattan to Brooklyn in the last year.
“The foreign buyers have pretty much all but disappeared,” he added. “I’m helping a lot of foreign buyers get their money out of this country as fast as possible.” (…)
The largest drop was in buyers from China, who purchased just over $13 billion worth of U.S. homes during that time period, a 56% decline from the prior 12 months. (…)
U.S. Targeting of Chinese Scientists Fuels a Brain Drain
(…) Inventors with Chinese last names account for one out of every 10 new patents in the U.S. today, up from less than 2% in 1975, according to William Kerr, a professor at Harvard Business School and author of “The Gift of Global Talent,” published by Stanford University Press last year. While China lost more than 50,000 inventors to emigration from 2002 to 2011, the U.S. welcomed a net gain of more than 190,000, as measured by patent registrations, according to data compiled by the World Intellectual Property Organization, an arm of the United Nations.
“Beyond just their own inventions, ethnic Chinese are integrated throughout our whole scientific establishment, including startups,” Kerr says. “If you damage that ecosystem, it’s going to harm a lot of very productive relationships that will be hard to rebuild.” (…)
Trump’s tariffs trip up the all-American RV industry Carrie Gray points to a stack of unwelcome mail on a conference table at the offices of Renegade RV, one of the leading U.S. manufacturers of high-end recreational vehicles. She’s buried in bad news from most of her about 350 suppliers.
(…) The industry has taken hits from U.S. tariffs on steel and aluminum and other duties on scores of Chinese-made RV parts, from plumbing fixtures to electronic components to vinyl seat covers.
Shipments of RVs to dealers have fallen 22% percent in the first five months of this year, compared to the same period last year, after slipping 4% in 2018, according to the Recreational Vehicle Industry Association. (…)
Michael Hicks, a Ball State University economist who tracks the industry, said its decline is far worse than he or other analysts expected and could signal a wider economic downturn. RV shipments have fallen sharply just before the last three U.S. recessions. (For a graphic on RV sales and past recessions, see: tmsnrt.rs/2XCPbL2 ) (…)
“It’s good for our country in the long haul,” said Dick, “but it’s going to hurt.”
Thor Industries Inc – which controls nearly half the RV market – said its sales in North America fell about 23% in its fiscal third quarter, which ended in April, compared to a year ago. The company said in a release that it has cut production and shifted to four-day weeks at some North American plants. (…)
Michael Happe, CEO of Winnebago Industries Inc, said he expects tariffs will add more than $10 million to the company’s costs this fiscal year, ending in August.
The upshot, he said, is that most RV manufacturers have had to boost prices they charge dealers. (…)
Despite its all-American image, the RV industry relies on imports for everything from air compressors and appliances to bedding fabrics and the LED light strings that have become a popular interior feature. (…)
Matt Arnold, president of utility trailer manufacturer Look Trailers based in Middlebury, Ind., said the axles he buys had three price hikes and are now 28% higher than before tariffs, while his Chinese tire rims were hit with a 65% tariff. (For a graphic on how tariffs drive up trailer costs, see: tmsnrt.rs/2O3HLvO )
His rim supplier shifted to a source in Vietnam, but those still cost 8% more than he was paying before. In response, he boosted his trailer prices by about 20%, but that tanked sales. So far, he’s had to shutter his Georgia factory, laying off 80 people, and cut about 10% of his workforce in Indiana. (…)
Apple tests AirPods production in Vietnam as it cuts China reliance Tech giant asks suppliers to support factory trials for wireless earphone
Apple is about to start trial production of its popular AirPods wireless earphones in Vietnam as the company accelerates plans to diversify manufacturing of its consumer electronics lineup beyond China, Nikkei Asian Review has learned.
China’s Goertek, one of Apple’s key contract manufacturers, this summer will begin testing the resilience of its manufacturing processes for the newest generation of AirPods at the company’s audio factory in northern Vietnam, two sources with knowledge of the plan said.
This will mark the first production of the wireless earbuds — which came to market in 2016 — outside the world’s second-largest economy. They are Apple’s fastest growing product, racking up 35 million shipments last year against 20 million in 2017.
Apple has written to components suppliers, asking them to support Goertek’s efforts despite initially very small volumes, according to a communication seen by the Nikkei Asian Review.
“Suppliers are requested to keep the pricing unchanged for the trial production stage, but this can be reviewed once volumes are increased,” said one of the sources with direct knowledge of the communication. (…)
“It’s very likely that Apple will adopt the ‘China plus one’ strategy when it comes to diversification efforts,” said Chiu Shih-fang, a supply chain analyst at Taiwan Institute of Economic Research. That meant the company would increase production in countries outside China without reducing Chinese volume significantly at the start. (…)
However, with just 95 million people — roughly one-fifteenth the Chinese population — Vietnam’s workforce is limited, and there are already signs of potential labor shortages and rising wage costs as many companies move there to escape the fallout from U.S.-China trade tensions. President Donald Trump’s threat to impose tariffs on Vietnam ahead of last month’s Group of 20 summit has sparked concern among those looking to diversify to the Southeast Asian country. (…)
Iran’s Revolutionary Guards seize foreign tanker Crude prices rise amid high tensions in the Gulf
EARNINGS WATCH
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Weak Earnings, Trade Tensions Weigh on Global Stocks Equities fell around the world as another snag in U.S.-China trade talks and disappointing earnings shook investor confidence.
(…) Shares in SAP dropped 6% after the German business software maker reported disappointing second-quarter results. Nordea Bank also fell 6% after the Helsinki-based lender reported a 39% drop in profit.
In premarket trading, shares in Netflix fell more than 10% after the streaming giant said the number of subscribers in the U.S. declined for the first time in nearly a decade.
The U.K.’s FTSE 100 index continued to trade down 0.5% after the government spending watchdog warned of a recession lasting at least a year if Britain quits the European Union without a deal. The report said that a no-deal Brexit could cause the U.K. economy to shrink 2.1%. (…)
Refinitiv’s tally as of yesterday morning showed 43 reports in, an 84% beat rate and a +4.9% surprise factor. The 43 companies had aggregate earnings up 8.8%.
Qualcomm Hit by Second Antitrust Fine in Europe The EU is imposing a $272 million fine on Qualcomm, its second penalty on the chip maker in 18 months, and its latest move targeting top U.S. tech companies for breaching antitrust rules.
U.S. Government Bond Auctions Show Weakness Investors bid for less than 80% of Treasury notes, bonds auctioned this week compared with 2019 average of 93%
TECHNICALS WATCH
From Steve Blumenthal’s Trade Signals:
The chart below compares the size of margin debt relative to GDP (GDP is what the U.S. collectively produces as a nation). It then plots the performance of the S&P 500 Index when the trend of margin debt is increasing (above its 15-month smoothed moving average trend line) and the performance when margin debt is being reduced relative to GDP (below its 15-month MA trend line). Indicated by the large horizontal red arrow. Think of it as buying demand (investors taking on margin debt to buy more stocks) vs. selling pressure (investors deleveraging – selling stocks). Note the current level (yellow highlight) peaked at a level higher than in on 2000 and 2008. Recall the tech buying frenzy in the late 1990’s. Up 40% in 1998 and up 85% in 1999 meant double those number less the margin cost. We all know what followed those peaks. Serious risk occurs when stocks decline enough to trigger forced margin call selling. Would be buyers back away and markets spike lower until the forced selling is complete. This is what creates V-like bottoms. Buyers then step in and with sellers out of the way, sharp rallies occur. The message today is total margin debt made a new record high in 2018, higher than the last two pre-recession market peaks and margin debt is below its 15-month trend line. Thus, margin debt signals warning.
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13/34–Week EMA Trend Chart
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NDR Crowd Sentiment Poll
Source: Ned Davis Research
NDR Disclosure; CMG Disclosure.
Paradigm Shifts (Ray Dalio Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P.)
(…) Most people now believe the best “risky investments” will continue to be equity and equity-like investments, such as leveraged private equity, leveraged real estate, and venture capital, and this is especially true when central banks are reflating. As a result, the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash). I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio. I will soon send out an explanation of why I believe that gold is an effective portfolio diversifier.
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