Month: October 2022

PHILLY FED MANUFACTURING INDICATORS REMAIN WEAK

Manufacturing activity in the region continued to decline overall this month, according to the firms responding to the October Manufacturing Business Outlook Survey. The survey’s indicators for general activity and new orders remained negative, and the shipments index was little changed at a low but positive reading. The firms continued to report higher employment on balance, and both price indexes indicate overall increases in prices. The survey’s future general activity indexes suggest that the surveyed firms expect declines overall over the next six months.

This is the index’s fourth negative reading in the past five months. (…)

The employment index rose from 12.0 to 28.5 this month, more than offsetting its decline from last month. Just over 29 percent of the firms reported increases in employment (up from 15 percent last month), while 1 percent reported decreases (down from 3 percent); 63 percent reported steady employment levels (down from 83 percent). The average workweek index returned to positive territory, rising 14 points to 10.4. (…)

The future new orders index fell 23 points to -16.7, its fourth negative reading in the past five months. (…)

Manufacturers’ negative sentiment is also reflected in their expected prices received 6 months from now which slumped to 23.4, the biggest slide since the onset of the pandemic. Per Bloomberg, “The future price gauge now stands 7.4 points below the present index, the second-most in data back to 1968.”

U.S. Existing Home Sales Fell Further in September

With mortgage interest rates having risen to their highest level since 2001, sales of existing homes continued to decline in September, falling 1.5% m/m (-23.8% y/y) to 4.71 million units at a seasonally adjusted annual rate. Apart from the plunge in sales associated with the COVID lockdown in the spring of 2020, this was the lowest level of sales since the summer of 2012 and was the eighth consecutive monthly decline. Since February, when the current string of monthly declines began, sales have fallen 27.4%. The Action Economics Forecast Survey expected September sales of 4.68 million units.

Sales of single-family homes fell 0.9% m/m (-23.0% y/y) in September to 4.22 million units following a 1.4% m/m decline in August. Condo and co-op sales dropped 5.8% m/m (-30.0% y/y) in September, more than offsetting their 4.0% m/m increase in August. Apart from the lockdown plunge, sales of single-family homes were the lowest since 2015 while sales of condos & co-ops were the lowest since 2012.

Home sales declined in three of the four major regions and were unchanged in the fourth. Sales fell 1.6% m/m (-18.7% y/y) in the Northeast, decreased 1.7% m/m (-19.7% y/y) in the Midwest, and dropped 1.9% m/m (-23.8% y/y) in the South. Sales were unchanged in the West in September from August but were down 31.3% from a year ago.

The number of existing homes for sale (NSA) fell 2.3% m/m (-0.8% y/y) in September, the second consecutive monthly decline. The months’ supply of homes on the market (NSA) was unchanged at 3.2 months at the current selling rate, the highest since June 2020 but still low by historical standards. It has increased from a series low of 1.6 months reached in January of this year. These figures date back to January 1999.

The median price of an existing home (NSA) fell for the third consecutive month, decreasing 1.8% m/m (+8.4% y/y) to $384,800. Prices declined in all four regions in September from August with prices in the Northeast posting the largest monthly fall.

RECESSION WATCH

• CEO Confidence Falls Deeper into Negative Territory in Q4 2022

The Conference Board Measure of CEO Confidence™ in collaboration with The Business Council stands at 32 to start Q4 2022, down from 34 in Q3. The Measure fell deeper into negative territory, to lows not seen since the depths of the Great Recession. A total of 136 CEOs participated in the Q4 survey, which was fielded between September 19 and October 3.

The recent survey asked CEOs to describe the economic conditions they are preparing to face over the next 12-18 months. An overwhelming majority—98 percent—say they are preparing for a US recession. Moreover, 99 percent of CEOs say they are preparing for an EU recession. At the same time, CEOs continue to experience inflationary pressures, with 59 percent reporting that input costs over the past three months remained the same or rose, with no easing expected by year-end. Moreover, at the start of Q4, only 19 percent reported an increase in demand over the past three months—down from 38 percent in Q3. However, despite expectations of slower growth, tight labor market conditions and wage pressures persist, while hiring plans remain robust.

This is one of those few “never miss” charts. Going back to 1980, every time when the measure of CEO confidence reached 40, a recession followed.

Another one?

• U.S. Index of Leading Economic Indicators Fall in September

The Conference Board’s Composite Leading Economic Indicators Index declined 0.4% (-1.4% y/y) during September after holding steady in August, revised from -0.3%. The Action Economics Forecast Survey expected a 0.3% decline in the index for last month.

Four of the Leading Index’s ten components made negative contributions in September. Declines came from new orders for nondefense capital goods excluding aircraft, consumer expectations for business/economic conditions, stock prices and the leading credit index.

The Index of Coincident Economic Indicators improved 0.2% last month (2.3% y/y) after it edged 0.1% higher in August, revised from 0.1%. Each of the four index components rose including payroll employment, personal income, industrial production and business sales.

The Index of Lagging Economic Indicators increased 0.6% during September (6.9% y/y) following a 0.8% August gain, revised from 0.7%. Five of the index’s seven components made positive contributions: the average duration of unemployment, the services CPI, the business inventory/sales ratio and the prime rate and C&I loans.

The ratio of the Coincident index to the Lagging index also is seen as a leading indicator. The ratio has been steadily declining since November, suggesting rising recession risks.

Advisor Perspectives’ 6-m m.a. of the 6-m rate of change is also flashing troubles:

A third one?

• The 3rd straight negative print confirmed that an economic recession is looming – Bloomberg *10 Leading Indicators gauge has a 100% success rate in anticipating every recession over the last 40 years.

@C_Barraud

Based on several recent anecdotes, there are many signs that the economy has suddenly hit a wall in the past month or so:

• The Fed’s 12 regional reserve-bank districts said business contacts noted “growing concerns about weakening demand.”
• Jeff Bezos said the economy is flashing warning signs.
• Last week’s Amazon.com 48-hour “Prime Early Access Sale” replay was rather quiet, generating some $8 billion in gross merchandise sales per Bank of America, some 25% below July’s original. The average ticket size was apparently 22% lower than in July.
• Americans have cut back on buying luxury goods like designer clothing and accessories over the past two months.
• According to Citi, both the number of U.S. individuals buying luxury goods, and the amount they spent, fell in September.
• Used car prices are now down 10% year-over-year, the biggest decline since the financial crisis. But prices of SUVs are down 12.3% and luxury cars -13.5%.
• The index measuring traffic of prospective new home buyers fell 19.4% (-61.5% y/y) to 25, the seventh consecutive monthly decline and a level last reached in 2012 ex-pandemic.
• The NY FEd’s service business activity index dropped twenty-one points to -15.5, its lowest level in nearly two years. The business climate index fell thirteen points to -41.6, also a multiyear low.
• The National Retail Federation report is one of several measures showing shipping volumes slowing sharply from August to September, signaling waning demand rippling through supply chains even as retailers are lining up goods for the traditional sales season.
• [Descartes Datamyne]’s report earlier this month said September container imports, measured in 20-foot-equivalent units, were down 11% year-over-year and were off 12.4% from August, an unusually sharp falloff in the months considered the height of the peak shipping season.
• Average weekly loads carried in intermodal operations, a combined truck-rail service favored by retailers, fell 4.8% year-over-year in September, according to the Association of American Railroads. The volume was also 5.4% below August levels.
• Microsoft becomes latest tech firm to cut staff.
• Yesterday afternoon, Snap said that Q3 revenues rose just 6% YoY, below the 8% growth Snap said it was experiencing as of late August.

Yet:

US 10-Year Treasury Yield Climbs to the Highest Level Since 2007 US 10-year yield gains 12th week, longest streak since 1984 when Paul Volcker was carrying out a series of rapid interest rate hikes.

(…) Swaps traders priced in the highest peak yet for the Fed’s policy rate, projecting it will top out at 5% in the first half of 2023. March and May 2023 overnight index swap contracts each exceeded 5% on Thursday in the New York session. Both were below 4.70% as recently as Oct. 13 before US consumer inflation exceeded estimates. (…)

• After U.K. Market Blowout, American Officials Ask: Could It Happen Here? Federal Reserve and White House officials spent last week quizzing investors and economists about the risks of a British-style meltdown at home.

The answer they got back, according to four people at separate institutions who were in such conversations and who spoke on the condition of anonymity to describe private meetings, was that it probably could — though a crash does not appear to be imminent. As the Biden administration did its own research into the potential for a meltdown, other market participants relayed the same message: The risk of a financial crisis has grown as central banks have sharply raised interest rates. (…)

Markets have been choppy for months in the United States and globally as central banks — including the Fed — rapidly raise interest rates to bring inflation under control. That has caused abnormally large price moves in currencies and other assets because their values hinge partly on the level of interest rates and on international rate differences. Stocks have been swinging. It can be hard to quickly find a buyer for U.S. government bonds, although the market is not breaking down. And in corners of finance that involve more complicated investment structures, there’s concern that volatility could trigger a dangerous chain reaction.

“In the market, there is a lot of worry, and everyone is saying it feels like something is about to break,” said Roberto Perli, an economist at Piper Sandler who used to work at the Fed and who was not part of the conversations last week. (…)

It is impossible to know what might break until something does. Markets are large and intertwined, and comprehensive data is hard to come by. Given how much central bank policy has shifted around the world in recent months, something could easily go wrong.

Yesterday, the FT’s Gillian Tett headlined: The market in Treasuries is storing up trouble. She talked about the deteriorating liquidity in Treasuries while the Fed is shrinking its balance sheet finding fewer and fewer buyers, including the primary dealers, effectively kicked out by the regulatory reforms, post the GFC. “Thus the market remains saturated with moral hazard: although many investors are aware of these structural risks, most also assume that the Fed will yet again become the buyer of last resort if a crisis erupts.”

Refinitiv via The Market Ear

What is clear, however, is that the bond vigilantes are back in business as seen in the U.K.

More Bears End in October Than Any Other Month

(Almanac Trader via The Big Picture)

• Investor capitulation has yet to show up in equity flows though. Funds saw additions of $9.2 billion in the week through Oct. 19, shrugging off deeply pessimistic sentiment, with “final capitulation” not yet here, according to BofA. Cash funds saw inflows of $14.5 billion and $12.2 billion left bonds. (Bloomberg)
• Retail traders sold -$2.4B this past week, -2.3 standard deviations below 12M average. This is the fourth consecutive week of retail selling in equities, and over this period the net order flow totaled -$6.8B. And it can (and will) get more aggressive. For comparison, in Mar-2020 retail sold as much as -$11B.

JPM Retail Radar via The Market Ear

US Eyes Expanding China Tech Ban to Quantum Computing and AI

The potential plans, which are in an early stage, are focused on the still-experimental field of quantum computing, as well as artificial intelligence software, according to the people, who asked not to be named discussing private deliberations. Industry experts are weighing in on how to set the parameters of the restrictions on this nascent technology, they said.

The efforts, if implemented, would follow separate restrictions announced earlier this month aimed at stunting Beijing’s ability to deploy cutting-edge semiconductors in weapons and surveillance systems. (…)

Businesses Expect Economy to Weaken, Fed’s Beige Book Says Consumers are starting to push back on price increases, Federal Reserve’s business contacts say

The Fed’s 12 regional reserve-bank districts said business contacts noted “growing concerns about weakening demand,” according to the central bank’s latest compilation of economic anecdotes from around the country, known as the Beige Book.

The U.S. economy expanded modestly on net, but conditions varied by district with four noting flat activity and two a decline. The Fed said the regions reporting declining activity cited “slowing or weak demand attributed to higher interest rates, inflation, and supply disruptions.”

Businesses reported that price pressures remained elevated through early October with some cost increases moderating. “Declines in commodity, fuel, and freight costs were noted,” the report said. (…)

Businesses across the country mentioned consumers pushing back against higher prices. (…)

• St. Louis Fed President James Bullard said he expects the central bank to end its ‘’front-loading” of aggressive interest-rate hikes by early next year and shift to keeping policy sufficiently restrictive with small adjustments as inflation cools. “You do have to think about what the reasonable level is,” said Bullard, who has become Wall Street’s gauge for any Fed policy pivots. (Bloomberg)
• Bond guru Jeffrey Gundlach said Treasury yields may peak between now and Dec. 31 at multiyear highs. (BB)

U.S. Housing Starts Weaken in September

Total housing starts fell 8.1% (-7.7% y/y) during September to 1.439 million units (SAAR) from 1.566 million in August, revised from 1.575 million. Starts in July were revised to 1.377 million from 1.404 million. Starts overall were 20.3% lower last month than the April 2022 peak. The Action Economics Forecast Survey expected 1.47 million starts in September.

Single-family starts weakened 4.7% (-18.5% y/y) in September to 892,000 after rising 4.0% to 936,000 in August. Single-family starts were 31.8% below their December 2020 peak. Multi-family starts declined 13.2% (+17.6% y/y) to 547,000 after rising 32.1% in August. They were 13.4% below the April 2022 peak. (…)

Building permits improved 1.4% (-3.2% y/y) in September to 1.564 million after falling 8.5% in August. Single-family permits weakened -3.1% (-17.3% y/y) to 872,000. It was the seventh consecutive monthly decline. Multi-family permits increased 7.8% (+23.4% y/y) to 692,000 after falling 14.7% in August.

• Housing valuations, measured in terms of the mortgage payment-to-income ratio, are hitting extreme levels.

Source: @TheTerminal, Bloomberg Finance L.P. via The Daily Shot

Jeff Bezos Says It’s Time to ‘Batten Down the Hatches’ as Economy Cools The Amazon founder said the economy is flashing warning signs, joining other corporate leaders who have cautioned that the U.S. is headed for a recession.

• Americans cut luxury spending ahead of key holiday season

Americans have cut back on buying luxury goods like designer clothing and accessories over the past two months, according to data from three credit-card companies, raising questions over the sector’s resilience.

Citigroup , Mastercard (MA.N) and Bank of America data released this month showing lower U.S. spending just weeks ahead of the holiday shopping season could raise concern among investors that the industry’s post-COVID-19 pandemic boom is at risk of petering out. (…)

Separate estimates from the three credit-card companies show that Americans cut spending on luxury goods in August by 2% to 4%, and in September by 5% to 6%, versus a year earlier.

Spending cuts on luxury goods were sharpest among middle-income Americans with yearly incomes of $50,000 to $125,000, and those with yearly incomes of less than $50,000 a year, according to research by Bank of America, which analyzed debit and credit card purchases by roughly 16% of U.S. households.

In 2021, people with less than $50,000 in annual income represented 39% of U.S. spending on luxury goods, according to BofA, while those with incomes of $50,000 to $125,000 represented 34%. (…)

According to Citi, both the number of U.S. individuals buying luxury goods, and the amount they spent, fell in September. Citi measured spending across 18 million accounts.

Mastercard’s “SpendingPulse” report, meanwhile, measuring retail sales across payment types, showed luxury purchases, excluding jewelry, were down 5.2% in September, year-on-year, while spending on restaurants and air travel were on the rise. (…)

Prologis Signals Caution in Industrial-Property Development The overall warehousing sector, which has been booming during the pandemic as retailers respond to changing consumer purchasing patterns, is already showing signs of peaking, with overall leasing rates slipping last quarter.

Inflation Surprise of 6.9% Shifts Canada Rate Bets, Jolts Yields

Canada’s inflation rate came in stronger than expected in September despite lower gasoline prices, with stickier underlying pressures likely to keep the Bank of Canada on an aggressive rate-hiking path.

The consumer price index was up 6.9% from a year ago, higher than economist predictions for a 6.7% gain, Statistics Canada reported Wednesday in Ottawa. During the month of September, prices rose 0.1% versus expectations for a 0.1% decline.

The data caused traders to shift bets toward a larger rate hike next week, with markets now pricing in a 60% chance of a 75-basis-point increase from the Bank of Canada. That would take the benchmark overnight lending rate to 4%, where it hasn’t been since early 2008. (…)

So-called core inflation — which excludes more volatile prices to generate a better gauge of underlying pressures — remained elevated. The average of the Bank of Canada’s three core measures was 5.3%, matching a revised number for August. (…)

Prices for food purchased from stores grew 11.4%, the fastest year-over-year pace since August 1981. Those prices have been increasing at a faster rate than overall inflation for 10 consecutive months. (…)

Average hourly wages rose 5.2% on a year-over-year basis last month, meaning that prices are still rising faster than paychecks, the agency said.

• Core CPI rose 0.4% MoM after +0.3% in August. That’s 4.3% a.r..
• Our summary indicator of [Euro Area] underlying inflation increased markedly by 101bp in September to 4.77%yoy from its July value of 3.76%, while core inflation increased 45bp to 4.75%yoy. The increase in our summary measure in September was broad-based across economic and most statistical measures of underlying inflation. (Goldman Sachs)
• Several proxies suggest that #food prices growth (YoY) should normalize downward in the coming months.

@C_Barraud

• Used car prices are now down 10% year-over-year, the biggest decline since the financial crisis. (The Daily Shot)

Yen Breaches 150 a Dollar, a 32-Year Low

While th US10Y yield keeps rising:

Refinitiv via The Market Ear

CREDIT STRESS

The latest: BofA’s Credit Stress Indicator (CSI) just breached a level — 75, on a scale of 0 to 100 — it hasn’t hit since April 2020.

The CSI measures stress in U.S. credit markets, focusing mostly on high-yield bonds (the riskiest segment with the lowest credit ratings), and looking at components like distress, volatility and access to funding.

Reaching the 75th percentile on the scale is considered a “critical zone” of credit stress. In the past, it’s coincided with significant market dysfunction, says Oleg Melentyev, credit strategist at BofA. When markets aren’t functioning smoothly, big price swings — and investor losses — are more likely. And companies have a harder time accessing capital.

Meanwhile, an index of Treasury market volatility is just shy of its COVID high; and one index of investment-grade bond market distress is at June 2020 level.

As shown yesterday from Haver Analytics:

The 6-month change in Haver’s aggregation of policy rates in advanced economies topped 2% in September. That’s the fastest pace of interest rate tightening in our aggregation’s history, which kicks off in the early 1980s.

Policy rates in advanced economies

One of the factors that is further tightening global monetary conditions is the ongoing appreciation in the US dollar. As our final chart this week suggests an appreciation in the trade-weighted value of the US dollar typically accompanies weaker growth in emerging economies.

Still, the strength of the dollar remains impressive – indeed arguably too impressive – relative to those EM growth fundamentals. This suggests that other factors (e.g. rising risk aversion) have been playing a big role in driving the dollar up.

The US dollar versus EM growth surprises

Emera Falls as Nova Scotia Moves to Limit Power Rate Hikes Shares of Canadian utility Emera Inc. fell the most in more than two years after Nova Scotia’s government proposed rules to cap electricity price hikes.