Month: October 2022

U.S. New Home Sales Drop Back in September

Last month, new single-family home sales declined 10.9% (-17.6% y/y) to 603,000 (AR) from 677,00 in August, revised from 685,000. July sales totaled 543,000. Sales have fallen 40.1% from their peak of 1.007 million in July 2020. The Action Economics Forecast Survey expected sales of 594,000 new homes.

Last month’s decline in new home sales was concentrated in the South where they declined 20.2% (-19.3% y/y) to 356,000. The decline fully reversed the August increase to 446,000. Sales in the West eased 0.7% in September (-30.4% y/y) to 135,000 which came after a 24.8% August rise. Moving 56.0% higher last month (25.8% y/y) were sales in the Northeast to 39,000, the highest level since April. New home sales in the Midwest gained 4.3% (10.6% y/y) in September to 73,000, a six-month high.

The median price of a new home increased 8.0% last month (13.9% y/y) to $470, 600 after weakening 9.2% in August. The average sales price of a new home fell 2.1% (+10.0% y/y) to $517,700 following a 6.6% August decline. These sales price data are not seasonally adjusted.

The number of unsold new homes on the market fell 1.1% (+23.2% y/y) to a seasonally adjusted 462,000, up from a low of 142,000 in July 2012. (…)

Recession eclipses U.S. midterm result (BlackRock)

Equities usually do well after U.S. midterms. Why? Gridlock is common and prevents policy change that could spook stocks. We don’t see that past playbook working this time due to the recession we expect from the Fed ratcheting up rates. Gridlock dims any prospect of fiscal stimulus that only works at cross-purposes with monetary policy in the new regime – take the UK. We stay underweight DM stocks but see the politics of higher rates taking over from the politics of inflation.

We see a bigger problem for stocks than any potential positives from the midterm election outcome: a looming recession. We have argued how central banks rushing to hike policy rates to get inflation back to target would need to crush interest rate-sensitive parts of the economy first. That’s because higher inflation is driven by production constraints. Recession will pressure other sectors in time, but we’ re already seeing damage in important rate-sensitive sectors like housing. (…)

The slide in housing starts this year is already steeper than past mega Fed rate-hike cycles such as in the 1970s and early 1980s – as well as the unwind of the mid- 2000s U.S. housing boom. (…)

We see political focus increasingly shifting to the economy. We expect inflation to come down, but stay above target – and recession will still hit. We then think the politics of inflation could switch to the politics of higher interest rates. We see the politics of rates creeping into the politicization of everything with more voices beginning to decry the aggressive rise in interest rates that is causing recession. We see the Fed stopping its hikes amid the economic damage and pressure to ease up on tightening, but price pressures will persist. That’s why we think it will eventually have to live with some inflation.

Mortgage rates now exceed 7.0%, killing demand:

Mortgage rates are unusually high vs Treasuries. Coincidence? The Fed is no longer a buyer of MBS.

Another Railroad Union Rejects Contract The vote by the Brotherhood of Signalmen complicates the outlook for labor peace after White House had brokered a deal in July.

The latest vote, by the Brotherhood of Railroad Signalmen, sends the two sides back to the negotiating table. Failure to agree on a revised deal could result in a strike as early as December.

The Brotherhood of Railroad Signalmen is the third union whose members have rejected their respective agreements initially reached with the National Carriers’ Conference Committee, which represents the freight railroads in collective bargaining.

Of the 12 labor unions involved in bargaining, six have ratified their agreements.

Two of the largest unions, the Brotherhood of Locomotive Engineers and Trainmen and the Transportation Division of the International Association of Sheet Metal, Air, Rail, and Transportation Workers, are still in the process of ratification and are expected to announce results in mid-November. (…)

Biden Touts Steps to Curb Consumer Fees President says the administration is seeking to rein in billions of dollars in charges across industries including banking, entertainment and travel

• French President Emmanuel Macron says his government will unveil measures to shield more companies from rising electricity prices on Friday (Bloomberg)

Bank of Canada Surprises With Half-Point Interest-Rate Rise to 3.75% Bank of Canada Gov. Tiff Macklem says the bank’s tightening phase is getting closer to ending

(…) “We judged that it was appropriate to slow the pace of increase in our policy rates from very big steps to a big step,” Mr. Macklem said. (…)

(…) Three-quarters of economists surveyed last week by The Wall Street Journal expected the Bank of Canada to deliver a second straight 0.75-percentage-point rate increase, citing elevated inflation.

Instead, Bank of Canada Gov. Tiff Macklem said officials were trying to balance the risks of delivering too many rate increases to contain historically elevated inflation and failing to raise rates enough for fear of triggering a severe recession.

“This tightening phase will draw to a close. We are getting closer, but we are not there yet,” Mr. Macklem said at a press conference, adding that the central bank will need to raise rates further before inflation returns to its preferred target of 2%. He said future rate increases would be tied to how the economy is responding to higher rates. (…)

The Bank of Canada’s quarterly economic report envisages household spending to decline starting in the fourth quarter until mid-2023. It expects businesses to markedly scale back business investment next year, due to higher borrowing costs. (…)

The Bank of Canada forecasts growth to essentially stall beginning in the fourth quarter and predicts the economy won’t pick up strength until the second half of 2023. Officials downgraded growth in 2022 to 3.3% from 3.5% and anticipate a 0.9% expansion next year, versus its previous call for a 1.8% advance. While the central bank isn’t officially forecasting a recession, it said two consecutive quarters of growth slightly below zero “is just as likely as a couple of quarters with small positive growth.” (…)

Peak Fossil-Fuel Demand Possible in a Few Years The energy crisis stemming from Russia’s invasion of Ukraine is seen as hastening a shift to lower-emission sources, according to the International Energy Agency.

The International Energy Agency, a Paris-based group of some of the world’s biggest energy users, said the war and the disruption to energy markets that it has unleashed has set off a realignment of global supply and demand. If governments make good on policy goals they have set in motion recently in response to the crisis, they would speed up the shift from fossil fuels to cleaner renewable energy, the agency said.

Based on such a scenario, the IEA said additional coal demand prompted by the energy crisis would be temporary, while natural-gas demand would plateau by the end of this decade. As a result of the increased use of electric vehicles, the IEA said, oil demand would peak sometime in the middle of the next decade, plateauing until about 2050, and then falling. (…)

While the IEA previously said it expects near-plateauing oil demand starting in the mid-2030s, a report from the agency Thursday marks the first time it has set out a possible timeline for declining or plateauing demand across all fossil fuels. (…)

The IEA’s scenario doesn’t forecast a rapid deterioration in the world’s thirst for oil, gas and coal. Instead, it provides a timeline for a near-term peak in demand. As a share of global energy supplies, fossil fuels have held steady at 80% for decades. The IEA said the shift presaged by the current energy crisis will reduce that to below 75% by 2030 and to 60% by 2050.

OPEC has said that demand for oil should peak in wealthier nations starting in the mid-2020s, but that demand in poorer countries will continue to grow at least until 2045. (…)

The IEA said that Russia’s falling output is a significant factor in the agency’s timeline and that the reduction is likely to be permanent. Europe’s pivot to renewables will make it an unlikely future market for Russian energy. While Russia has sought to redirect its gas-and-oil supplies to Asian economies such as China and India, it faces challenges there too. The EU aims to levy new sanctions on shipping Russian crude worldwide. Meanwhile, a lack of gas pipelines in Russia’s eastern regions will make sending its gas supplies to China difficult, the IEA said. (…)

Natural gas prices are plunging, as warm weather and growing stockpiles have massively alleviated pressure. (Axios)

• European stockpiling of natural gas has pushed storage levels to over 90% of capacity.
• Warm weather on the continent has cut heating needs.
• European officials continue to move toward price caps on the TTF contract.

“Europe has enough gas stored to survive this winter unless it gets very, very cold,” wrote analysts with research firm Rystad Energy in a note yesterday.

Data: FactSet; Chart: Axios Visuals

EARNINGS WATCH

JPM yesterday published a list of EPS changes for the next fiscal year: 21 ups, 33 downs.

Goldman Sachs:

(…) unlike earnings, even the potential for recession could weigh on management decision-making and spending priorities in 2023. We expect continued growth in R&D (+10%), dividends (+5%), and capex (+3%). However, we expect buybacks will decline by 10% year/year. Following the collapse in cash M&A YTD, we expect a slight rebound in 2023 (+3%).

Cash M&A and buybacks are the most volatile uses of cash. During the four recessions since 1990, cash M&A typically fell by 60% and buybacks fell by 46%. Corporates typically pulled back on capex, but to a lesser extent (-16%), while dividends and R&D were the stickiest. We introduce recession scenario forecasts for the five uses of cash. In a 2023 recession scenario, we expect the declines would be largest among buybacks (-40%) and cash M&A (-20%). Capex would likely fall by 15%, dividends would fall by 1%, and R&D would be flat.

  Xi Says China Can Work With US Before Possible Biden Meeting 

Chinese President Xi Jinping said his nation is willing to work with the US to find ways to cooperate, comments that come before a potential meeting with President Joe Biden at a Group of 20 summit next month.

Better communication between the two nations would bolster global peace and development, Xi said in a letter to the National Committee on US-China Relations’ annual dinner Wednesday, the official Xinhua News Agency reported.

“China stands ready to work with the United States to find the right way to get along with each other in the new era on the basis of mutual respect, peaceful coexistence and win-win cooperation, which will benefit not only the two countries but also the whole world,” Xi said, according to the report on Thursday.

Xi’s remarks echoed his message last year to the same gala for the group that aims to promote China-US cooperation. That event similarly came before a video summit with the US leader in November. Still, they signal an effort to maintain ties despite disputes over Taiwan, the semiconductor industry and Beijing’s response to Russia’s invasion of Ukraine.

Speaking to Department of Defense leaders on Wednesday, Biden emphasized that even as the US maintains its military advantage over China, “we’re making it clear that we don’t seek conflict.”

“There’ll be stiff competition, but there doesn’t need to be conflict,” he added. (…)

• Missing Data

Chinese economic data always comes with an implicit asterisk. It’s hard to know what to believe from a government that exercises such ruthless control, and which isn’t shy about rewarding those who make it look good and punishing those who reveal too much. One way this happens is by simply not reporting as much data. A recent Financial Times analysis indicates that’s exactly what happened since Xi Jinping’s elevation in 2012.

Let’s hope that Xi still receives these data…

Richmond Fed’s Survey of Service Sector Activity

Fifth District service sector activity deteriorated in October, according to the most recent survey by the Federal Reserve Bank of Richmond. The revenues and demand indexes fell notably to -8 and -7, nearly returning to their August levels.

Firms’ assessments of local business conditions plummeted from September, with a reading of -19 in October. Moreover, a burgeoning share of firms were pessimistic about future business conditions, as the expected business conditions index slid to -28 from -9, nearly matching the -31 reading in July.

A smaller share of firms reported increased hiring in October, but their ability to find workers with the necessary skills improved. Firms were split on the issue of labor availability over the next six months and expect wage increases to persist. Growth in prices paid decreased very slightly in October, while prices received increased somewhat.

  

U.S. Consumer Confidence Falls in October

The Conference Board’s Index of Consumer Confidence Index fell 4.9% during October (-8.2% y/y) to 102.5 following a 4.1% September rise to 107.8, revised from 108.0. The index was 20.5% below its most recent high of 128.9 in June 2021. A reading of 105.0 had been expected in the Action Economics Forecast Survey for October.

Consumers’ views of both the current & future economic situation deteriorated this month. The Present Situation Index fell 7.5% (-4.5% y/y) to 138.9 and reversed two consecutive months of increase. The index settled at the lowest level since April of 2021. The Expectations Index weakened 1.8% (-12.2% y/y) to 78.1 this month, after rising 5.9% in September and 15.5% in August. It remained 30.1% below its recent peak in March 2021.

Consumers’ assessment of current business conditions deteriorated as only 17.5% of respondents characterized them as good, the weakest reading in three months.

Labor market readings showed less optimism this month. The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, fell to 32.5% in October, the lowest level in 18 months. Calculated by Haver Analytics, this series has a 67% correlation with the unemployment rate over the last ten years. The jobs plentiful measure fell sharply this month, also to an 18-month low. The jobs hard-to-get measure rose similarly. (…)

Inflation expectations turned up. The expected inflation rate in twelve months edged up to 7.0% in October after falling to 6.8% in September. It remained below the June high of 7.9%. The figure is higher than the 4.4% low in January 2020. A lessened 64.9% of respondents expected interest rates to rise over the next twelve months.

The share of respondents planning to buy a home within six months increased to 6.8% in October, up from a 4.5% July low. It stood at the highest level in six months and occurred even as mortgage rates rose. Those planning to buy a major appliance jumped to 49.5% of respondents in October, up from a 41.1% July low. 

Surging Rents Push More Americans to Live With Roommates or Parents Rents have risen 25% over the past two years, and inflation is eating into how much people have left to spend on housing.

(…) Apartment demand in the quarter, measured by the one-year change in the occupancy of units, was the lowest since 2009, when the U.S. was feeling the effects of the subprime crisis, according to rental software company RealPage. Measured quarterly, the drop in demand was the worst of any third quarter—normally prime leasing season—in the more than 30 years RealPage has compiled the data.

Meanwhile, the apartment-vacancy rate rose to 5.5% in the third quarter, up from 5.1% the quarter prior, according to property data firm CoStar. (…) “The spring and summer leasing season was a total bust,” said Jay Lybik, national director of multifamily research at CoStar. (…)

Eighteen percent of U.S. adults surveyed said they had lived rent free with other people during the last six months, up from 11% at the same time one year ago. That was the highest share of adults living rent free with friends and family since UBS began asking the question in 2015. (…)

John Authers: The Fed’s Cunning Plan to Make You Feel Poorer

(…) The Fed’s hope, he said, lies in a behavioral economic theory called reverse wealth effect, in which consumers spend less as their wealth decreases.

(…) keeping the stock market down for a while matters far more to today’s Fed under Jerome Powell than it did to the Paul Volcker Fed of the early 1980s. To illustrate, Ramsey analyzed the performance of the Wilshire 5000 Total Market index (W5000), which measures the performance of all US equity securities and found that the gauge is currently down as much as the drawdown during Volcker’s term.

But unlike the negligible 14% wealth loss as a percentage of gross domestic product experienced at that time, W5000’s present-day decline is already equivalent to 54% of GDP — nearly four times more. In fact, it’s not that far off from the 61% seen during the Great Financial Crisis: (…)

Chipmakers in ‘Unprecedented’ Slump Rule Out Quick Turnaround Texas Instruments and SK Hynix add to warnings about demand

Dallas-based TI, whose chips go into everything from home appliances to missiles, said Tuesday that revenue will top out at $4.8 billion this quarter — at best — short of the $4.93 billion analysts had projected. Hynix, meanwhile, said memory prices fell 20% over the last quarter and warned of “unprecedented deterioration in market conditions.” The Icheon-based company slashed its capital spending for next year by at least half. (…)

TI rekindled fears that the slowdown is spreading, saying sluggish demand had affected chips for industrial equipment — an area that had been seen as more immune to the slump. (…)

Texas Instruments said it wasn’t surprised by a slowdown in demand for personal devices, but the industrial-equipment market was weaker than expected. Overall, orders have worsened and cancellations have increased during the current quarter, the chipmaker said.

Fellow memory maker Kioxia Holdings Corp., which is cutting output by 30%, also said the market is in a severe condition and there’s little certainty of when sentiment will improve. Demand for NAND memory is weakening across the board, the Japanese firm said in a news conference at its Yokkaichi factory Wednesday. (…)

“Demand from PCs, smartphones and data centers is falling and I can’t foresee when this will start recovering.” (…)

Homebuilder’s Orders Plunge 65% in Canadian Market’s Deep Freeze

Health-Insurance Inflation Is Poised to Drop Sharply The subindex of the consumer-price index is about to turn from a driver of inflation into a deflationary drag

(…) Health-insurance prices rose 28.2% from a year earlier in September, the sharpest increase in the history of the index going back to 2006, as measured by the Labor Department’s consumer-price index. That added just less than 0.4 percentage point to September’s rise in core CPI.

But that will morph into a deflationary drag with October’s CPI, to be released on Nov. 10, as the Labor Department updates the health-insurance index’s data, an effect that will last for the next 12 months.

Omair Sharif, founder of Inflation Insights LLC, estimated the health-insurance index will decline 38% by September of next year from this past September. That would mean health insurance would go from adding around 0.38 percentage point to the 12-month increase in core inflation as of last month, to subtracting about 0.42 percentage point by next September, Mr. Sharif said.

The change to the one-month rate that shows up in October will continue at a fairly consistent pace for the next 11 months. “When we establish that new trend, this trend is likely to persist for a full year,” said Ryan Wang, U.S. economist at HSBC. “That’s one of the aspects of this methodological quirk.”

The Labor Department bases the price of health insurance in large part on health-insurer profits, which are reported with a lag of about 10 months. Thus, data in the October 2022 CPI reflect what happened in 2021.

This lag is currently amplifying big swings in medical-care spending. In 2020, lockdowns, limited healthcare capacity and consumer reluctance to seek care translated to lower healthcare spending and thus reduced benefits paid by insurers and commensurately increased net premium income. That showed up as skyrocketing health-insurance prices starting in October 2021, when the 2020 data were incorporated.

This year’s updated data are based on 2021, when consumers caught up on preventive care and elective procedures, eating into insurers’ premium income, which should translate to a drop in health-insurance prices in the CPI.

(…) the methodological quirk only affects the CPI. While that is closely watched by investors, the media and consumers, the Federal Reserve officially bases its 2% inflation target on the Commerce Department’s separate personal-consumption expenditure price index.

That index is designed to capture a broader range of prices than the CPI which focuses on consumers’ out-of-pocket expenditures. The PCE price index draws from the producer-price index, said Oscar Munoz, macro strategist at TD Securities, which includes expenditures by governments, such as through Medicare and Medicaid. Moreover, health services have a much bigger weight in the PCE price index than in CPI. The healthcare category of the PCE price index rose about 2.5% in August from the same month in 2021.

The lagged nature of the CPI’s health-insurance index means that it may not reflect current underlying price pressures in medical-care services. Those are likely building, thanks largely to labor costs. Medicare’s recently negotiated 4.3% reimbursement rate for inpatient hospital services for fiscal 2023 was the biggest increase in around 15 years. A large share of how Medicare calculates those rates is based on employment cost index data for hospital wages, said Mr. Sharif. That measure rose at an annual rate of 5.6% in the second quarter, up from 2.3% in the last quarter of 2020. The increase is likely to spill over into negotiations now under way between private insurers and hospital groups, he said. (…)

EARNINGS WATCH

Before yesterday’s reports, we now have 129 reports in, a 74% beat rate and a +5.8% surprise factor. These 129 companies have reported actual earnings up 1.7% on a 10.4% revenue gain.

By comparison, after 133 reports in Q2, the beat rate was 76%, the surprise factor +4.3% and those 133 companies reported actual earnings down 3.5%.

Q3 earnings are now expected up 3.3% (+4.1% on October 7). Ex-Energy: -3.3% (-2.6%).

Q4 earnings are now expected up 4.1% (+5.2% on October 7). Ex-Energy: +0.1% (+1.3%).

• Tech Futures Fall After Google, Microsoft Earnings U.S. stock futures declined after disappointing earnings from Microsoft and Google parent Alphabet pointed to challenges faced by major technology firms as the economy slows.
• Microsoft warns of cloud computing slowdown
• Yesterday we got strong results from Sherwin-Williams, UPS, Coca-Cola, and GM.
• UPS delivered a surprisingly upbeat outlook Tuesday, its financial path diverging from that of its rival FedEx, which recently sounded alarms about the economy in reporting its own down quarter, Axios Nathan writes.

UPS posted better-than-expected profit in the third quarter — with higher prices making up for lower volume. It reaffirmed its financial outlook for 2022, including projected revenue of about $102 billion and an adjusted operating margin of about 13.7%.

While executives said volumes are expected to continue a decline from a year ago, they were measured in their outlook. “We have not seen any demand destruction at this point,” UPS CEO Carol Tomé told investors on a conference call, referencing a term used to define sustained decline. (…)

Management still matters. FedEx didn’t see the downturn coming. UPS did, and it reacted.