Month: November 2022

“Getting into the Zone”

St. Louis Fed President Jim Bullard addressed the question of what is a “sufficiently restrictive” policy rate for the current macroeconomic environment. His approach is based on generous assumptions that tend to favor a more dovish policy. Still, the policy rate isn’t yet in a zone that may be considered sufficiently restrictive, he said.

• Francois Trahan, analyst at Macro Specialist Designation and former Institutional Investor’s all-star strategist:

A pivot would NOT mark the beginning of a new bull market. Surely, a real pivot would give us a nice bounce in equities, but the beginning of a new bull market will have to first start with enduring and pricing in a proper recession. This chart shows that Growth P/Es fell during the Fed tightening cycle of 2004/06, had brief rebound once tightening was done, and then melted even more once EPS began to collapse … and all that fun stuff is ahead of us.

Bear talk

Say what you want about David Rosenberg, he’s a one-handed economist with strong convictions.

Link here.

Philly Fed Manufacturing Business Outlook Survey

Manufacturing activity in the region continued to decline, according to the firms responding to the November Manufacturing Business Outlook Survey. The general activity index declined further, the new orders index remained negative, and the shipments index remained positive but low. The employment index declined but continued to suggest overall hiring, and the price indexes continued to suggest overall increases. Although the survey’s future indexes rose slightly, they continued to suggest that the firms expect overall declines in activity and new orders six months from now.

(Haver Analytics)

The indexes for prices paid and prices received continue to indicate overall price increases for inputs and the firms’ own goods. The prices paid diffusion index ticked down 1 point to 35.3. Nearly 47 percent of the firms reported increases in input prices, and 12 percent reported decreases; 41 percent reported no change. The current prices received index moved up 4 points to 34.6, its highest reading since June. Almost 38 percent of the firms reported increases in the prices of their own goods, 3 percent reported decreases, and 59 percent reported no change.

In this month’s special questions, the firms were asked to forecast the changes in prices of their own products and for U.S. consumers over the next four quarters. Regarding their own prices over the next year, the firms’ median forecast was for an expected increase of 4.8 percent, down slightly from 5.0 percent when this question was last asked in August. The firms reported a median increase of 7.5 percent in their own prices over the past year, down from 10.0 percent in August. The firms’ median forecast for the rate of inflation for U.S. consumers over the next year was 5.0 percent, down from 6.0 percent in August. Over the long run, the firms’ median forecast for the 10-year average inflation rate was 4.0 percent, up from 3.0 percent in August.

• Kansa City Fed Manufacturing Activity Declined at a Steady Pace
• Gap warned that sales in the fourth quarter might decline in the mid-single digits as economic headwinds persist. (WSJ)

Jobless Claims Fell Slightly Last Week Filings for U.S. unemployment insurance, a proxy for layoffs, remained near historically low levels amid a still-tight labor market.

U.S. Housing Starts Fall Sharply in October

Total housing starts fell 4.2% (-8.8% y/y) during October to 1.425 million (SAAR) from 1.488 million in September, revised from 1.439 million. Starts in August were revised to 1.508 million from 1.566 million. Starts in October were 21.1% lower last month than the April 2022 peak. The Action Economics Forecast Survey expected 1.41 million starts in October.

Single-family starts weakened 6.1% (-20.8% y/y) in October to 855,000 after falling 1.3% to 911,000 in September. Single-family starts were 34.6% below their December 2020 peak. Multi-family starts declined 1.2% (+17.8% y/y) to 570,000 after falling 1.4% in September. They were 9.8% below the April 2022 peak. (…)

Building permits declined 2.4% (-10.1% y/y) during October to 1.526 million after rising 1.4% in September. Single-family permits weakened 3.6% (-22.1% y/y) to 839,000. It was the eighth straight consecutive monthly decline. Multi-family permits eased 1.0% (+10.6% y/y) to 687,000 after rising 8.1% in September.

Housing units under construction are still at an all-time high, as are construction jobs, both at significant risks when these units are completed.

Companies Still Boost Capital Spending Despite Higher Rates Capital spending among companies in the S&P 500 in the third quarter is set to top $200 billion even as a potential recession looms.

Capital spending among companies in the S&P 500 in the third quarter is set to top $200 billion, according to S&P Dow Jones Indices, which analyzed data through Monday from roughly 90% of index components. That is on pace for a jump of about 20% from a year earlier, roughly in line with the first and second quarter’s growth rates. (…)

Stock repurchases are on pace for 11% decline in the third quarter from a year earlier at roughly $180 billion, S&P Dow Jones Indices data through Monday show. Dividend payments, which are committed before the quarter begins, rose about 8% to $140 billion. (…)

Total new orders for nondefense capital goods, a proxy for economy-wide capex, is up 8.3% YoY in Q3 while PPI-Industrial commodities is +15.8%.

U.K. Unveils Largest Tax Increases and Spending Cuts in a Decade The U.K. is the first major Western economy to start sharply limiting spending growth after years of fiscal stimulus.

(…) The measures mark a second major shift in U.K. economic policy in just a matter of months, after previous British Prime Minister Liz Truss spooked financial markets by pledging to jump-start growth with tax cuts funded by more borrowing. Her successor, Rishi Sunak, is now taking economic policy in the other direction, trying to convince investors the U.K. is serious about eventually taming rising government debt. His challenge will be to regain market confidence without causing major damage to an economy widely expected to enter a recession.

Chancellor Jeremy Hunt announced £55 billion, equivalent to around $66 billion, of spending cuts and tax increases over the next five years, an attempt to begin lowering the size of government debt relative to the economy from the fiscal year ending March 2028. The bulk of the spending cuts, however, are due to take effect starting in 2025, after the next U.K. general election. (…)

Oaktree’s Marks Sees ‘Great Bargains’ Coming as Recession Looms

(…) Marks predicts US inflation has likely peaked, and expects rates to stay near the 5% mark in the next 5 to 10 years. An accompanying shift in consumer appetite alongside higher borrowing costs will lead to “significant distress” at many companies, he said.

“A year ago the outlook was considered flawless and I think we’re going to reach a point where they consider it hopeless,” he said of investors. “And that’s when you get the big buys. That’s when you get to be a buyer of assets cheap and a maker of loans at high yields with safety.” (…)

Marks said losses for banks on hung bridge loan deals has damaged credit markets. One example was the acquisition of Twitter Inc. Elon Musk saddled the firm with almost $13 billion of debt that’s now in the hands of Wall Street banks struggling to offload it to investors.

After poorly-timed debt sales, the banks have resorted to selling the loans at discounts of as low as 70 cents on the dollar, Bloomberg previously reported.

“Just imagine the magnitude of those losses,” Marks said.

And while corporate America as a whole is not highly levered, the distress is piling up, he said. (…)

“We’ll be looking among the ruins for great bargains.”

German wage settlement points to dampened second-round effects A regional wage agreement in Baden-Wuerttemberg yesterday will pave the way for broader wage developments and shows the European Central Bank that second-round effects will kick in next year but should be dampened

Last night, employers and unions in the metal and electronics industry in Baden-Wuerttemberg reached a new wage agreement. Wages will be increased by 5.2% in June 2023 and by 3.3% in May 2024. There will also be a one-off payment of €3,000, exactly the amount the German government had offered to exempt from tax and social security contributions. While this is “only” a regional wage agreement, it will have knock-on effects on other regional and sectoral wage negotiations. Almost four million people in Germany work in the metal and electronics industry.

Traditionally, there has been a lot of attention on German wage settlements across the eurozone. The takeaway for German wage developments and the risk of second-round effects is that last night’s deal shows what a compromise can look like. It won’t be enough to fully offset the drop in purchasing power caused by higher inflation, but it softens the damage. For the ECB, it signals that second-round effects remain dampened and that a lower, subdued inflationary pressure can last for longer than markets currently think.

China’s New Daily Covid Cases Jump Above 24,000 Guangzhou, the provincial capital of China’s manufacturing powerhouse Guangdong, had the highest tally, with more than 9,000 new cases among its 19 million residents.

China’s central government has laid out preparations to deal with surging Covid-19 infections, while warning local authorities against “irresponsible loosening” of pandemic-control measures.

China would continue to “rectify the practice of excessive measures such as lockdowns, while also opposing irresponsible attitudes and prevent a loosening up,” said Mi Feng, spokesman for China’s National Health Commission during a briefing on Thursday. (…)

Guangzhou, the provincial capital of China’s manufacturing powerhouse Guangdong, had the highest tally, with more than 9,000 new cases among its 19 million residents. (…)

Before stopping the lockdowns, China needs to vaccinate a larger percentage of its population. China has yet to produce a strong and effective vaccine. Senior health officials seemed to be opening the door to BNTX vaccine distributed by Fosun.

• Health officials double down on strengthening hospital network, vow to speed vaccination rate

China’s top health officials on Thursday stressed enhancing medical resources to upgrade the country’s ability to fight COVID-19 flare-ups, and vowed to push forward the vaccination campaign, two steps epidemiologists believe are needed for further adjustment of anti-epidemic policies. (…)

When asked when BioNTech’s COVID-19 vaccines will be available for the Chinese public, Shen Hongbing, deputy director of the National Administration of Disease Prevention and Control, said that safety, effectiveness, availability and affordability should be considered during vaccination, and China is making plans to speed up its vaccination campaign. (…)

The expert also emphasized strengthening hospital networks and speeding vaccination, especially among vulnerable groups, as local governments’ priorities in addition to virus control. The Chinese mainland should strive to avoid what happened in Hong Kong this year, when the fifth wave took roughly 10,000 lives, so major policy adjustments will not happen until the country is fully prepared, according to the CDC expert. (…)

• ‘We’re not ready’: threat of Covid exit wave stymies China’s reopening Beijing has failed to prepare for an inevitable mass outbreak by focusing on containment, experts say

China, Japan reach consensus on stabilizing, developing bilateral ties, stressing the two sides should ‘be partners, not threats’

HISTORY RHYMES

FTX Didn’t Name Names in Related-Party Transactions The lack of detail in financial statements echoes past scandals including Enron.

• FTX Auditors Doubled as Crypto Industry Cheerleaders

• Hong Kong’s leading crypto retail operator says it ceases trading as FTX fallout roils sector

U.S. Consumers Show Strength With Jump in Retail Sales Robust spending and a tight labor market complicate the Federal Reserve’s fight against high inflation

Retail sales rose a seasonally adjusted 1.3% in October compared with September, when they were unchanged, the Commerce Department said Wednesday.

Shoppers spent more on increasingly expensive everyday staples such as gasoline and food, but they also shelled out more on discretionary items such as cars, furniture and restaurant meals. Some of the spending was due to purchases of building materials and home furnishings in the aftermath of Hurricane Ian, economists said.

The jump in sales showed households continued to have the resources to increase their spending despite inflation running close to a four-decade high, climbing interest rates and economic uncertainty. (…)

Retailers also started discounting early ahead of the traditional holiday shopping season, and some economists said strong October sales could harbinger less consumer spending later in the year. (…)

More from the WSJ:

Sales at electronics and appliance stores, which were surging a year ago, were down 12.1% from last October. Department store sales were down 1.6%. Sales at furniture and home furnishing stores, and at the category that includes sporting goods stores, hobby stores and the like, were up only modestly, which puts them lower in inflation-adjusted terms.

Meanwhile, sales at food service and drinking places were up 14.1% from a year earlier—a reflection of how people are continuing to shift spending away from the goods they stocked up on during the pandemic toward services categories. Sales at building materials stores were up 9.2%. In its earnings call Tuesday, Home Depot noted that even though the housing market has slowed markedly, it continues to see solid home-improvement demand.

My estimation of real retail sales shows continued negative YoY trends (-1.8% in October):

The Census Bureau is finally waking up to the inflation reality and testing some measures of real retail sales. Their chart is to July 2022:

Last few days:

• WMT showed “encouraging numbers” but food represents about 55% proportion of its sales. CPI Food-At-Home is +12.4%!!!
• TGT’s food sales are lower (~43%). Its comparable-store sales grew 2.7% in its quarter ended Oct. 29. Well below inflation. “Target said demand only worsened later in the quarter. The retailer now expects a low-single digit percentage decline in comparable sales in the fourth quarter and slashed its operating margin expectation to 3%. The company said it would start a cost-cutting effort aimed at saving $2 billion to $3 billion over the next three years.”
• TJX “posted lower sales for the period ended Oct. 29 as declines in its U.S. homegoods division and the strong U.S. dollar weighed on the quarter’s results. U.S. comparable-store sales, which exclude e-commerce sites, fell 2%, driven by a 16% drop in comparable sales for the U.S. homegoods business. Meanwhile, comparable sales for the company’s Marmaxx business, which includes T.J. Maxx, Marshalls and Sierra stores, rose 3%.”

U.S. Industrial Production Slipped in October

Industrial production unexpectedly slipped 0.1% m/m (+3.3% y/y) in October following a downwardly revised 0.1% monthly increase in September (initially +0.4% m/m). The Action Economics Forecast Survey had looked for a 0.2% monthly gain. This was the fourth monthly decline in the past six months, pointing to an industrial sector stressed by a slowing global economy and an aggressive tightening of U.S. monetary policy.

Manufacturing output managed a 0.1% m/m (2.4% y/y) gain in October, the fourth consecutive monthly increase. By contrast, mining production fell 0.4% m/m (+6.9% y/y), its second decline in the past three months. Utilities production decreased 1.5% m/m (+2.5% y/y) in October following a downwardly revised 1.7% monthly decline in September (initially -0.3% m/m).

The rate of capacity utilization fell to 79.9% in October from a downwardly revised 80.1% in September (initially 80.4%, which had been the expansion high). This was the lowest reading in four months. The rate of capacity utilization has been little changed since the spring. The rate of capacity utilization in manufacturing was unchanged at 79.5% in October. Its expansion peak was 80.0% in April. While moving sideways over the past several months, manufacturing capacity utilization remains considerably higher than during the entire decade-long expansion that followed the Great Recession and indicates that manufacturing production may be nearing supply constraints.

By industry group, the slight increase in manufacturing output reflected a 0.5% m/m gain in durable goods production and a 0.3% m/m decline in production of nondurable goods. Durable goods production was led by a 2.0% m/m increase in motor vehicle output, a 1.9% m/m gain in the production of electrical equipment and appliances, and a 1.9% monthly increase in the production of aerospace and other transportation equipment. (…)

By market groups, the production of consumer goods edged up 0.1% m/m in October, just offsetting a 0.1% monthly decline in September. This category has been essentially unchanged for the past three months. By contrast, output of business equipment rose a solid 0.8% m/m, the same increase as in September. Business equipment production has risen 3.3% since June. Construction supplies fell 0.7% m/m in October, their third decline in the past five months. (…)

• “New Orders?” or “No Orders!” The empire manufacturing future new orders indicator has dropped into recession territory.

Source:  @Lvieweconomics (via Callum  Thomas)

AiA: Demand for design services decreases considerably

Demand for design services from architecture firms softened considerably in October, according to a new report from The American Institute of Architects (AIA).

AIA’s Architecture Billings Index (ABI) score for October was 47.7, the first decline in billings since January 2021 (any score below 50 indicates a decline in firm billings). Inquiries into new projects continued to grow in October with a score of 52.3, while the value of new design contracts declined, with a score of 48.6.

“Economic headwinds have been steadily mounting, and finally led to weakening demand for new projects,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “Firm backlogs are healthy and will hopefully provide healthy levels of design activity against fewer new projects entering the pipeline should this weakness persist.”

CalculatedRisk adds:

This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. This index had been positive for 20 consecutive months.   This index usually leads CRE investment by 9 to 12 months, so this index suggests a pickup in CRE investment in early 2023, but if the weakness persists – a slowdown in CRE investment later in 2023.

Note that multi-family billing turned down in September and declined again in October, and if that continues, we will see a downturn in multi-family starts sometime in 2023.

U.S. Home Builder Index Continues to Fall

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 13.2% (-60.2% y/y) during November to 33, the lowest level since April 2020. The index is down 63.3% from its November 2020 high of 90. A reading of 36 had been expected in the Informa Global Markets survey.

Each of the three HMI components declined again this month. The index of present sales conditions fell 13.3% (-56.2% y/y) to 39, the tenth decline in eleven months. The November level was 59.4% below the record-high of 96 in November 2020. The index of expected sales over the next six months dropped 11.4% in November (-63.1% y/y), down for a seventh consecutive month. The November value was the lowest level since April 2012. The index measuring traffic of prospective buyers fell 20.0% (-71.0% y/y), the eighth consecutive monthly decline.

Among the regions of the country, the Housing Market Index in Northeast fell 36.2% (-56.5% y/y). The other regions, the index in the South fell 17.1% (-60.9% y/y). In the Midwest, the index weakened 2.7% (-52.0% y/y). Working 12.0% higher (-68.2% y/y) was the index in the West.

Reducing Inflation Without a Recession Might Not Be Feasible, Fed Official Says Kansas City Fed President Esther George cites the tight labor market for continued high inflation.

BTW: The section of the U.S. Treasury yield curve that most accurately predicts economic downturns has “inverted,” or gone negative (Axios)

Data: FactSet; Chart: Axios Visual

• Fed’s Daly Says Rate Peak of 4.75% to 5.25% Is Reasonable Range Pausing rate hikes is off the table
• J.P.Morgan predicts a mild U.S. recession next year
• Financial Risks Shouldn’t Shape Fed Rate Decisions, Williams Says The Federal Reserve should stay focused on its economic goals and avoid incorporating financial stability risks into its deliberations as it raises interest rates

(…) The remarks, coming from a top Fed official amid heightened volatility in financial markets, underscored the central bank’s resolve to keep monetary policy tight enough to slow the economy and bring inflation down from the four-decade highs reached this year.

Williams, who as president of the New York Fed plays a key role overseeing the central bank’s main point of contact with the financial system, suggested efforts to strengthen its resiliency in recent years are allowing officials to stay focused on the inflation fight, which he described as “of paramount importance.” (…)

Williams’s remarks followed a blog post on the bank’s website the day before highlighting the deterioration of liquidity in the Treasury market this year. Its authors said worsened liquidity conditions in the critical market were “consistent with the current level of volatility” and reflected a “well-known negative relationship between volatility and liquidity.” (…)

“Lower-than-usual liquidity implies that a liquidity shock will have larger-than-usual effects on prices and perhaps be more likely to precipitate a negative feedback loop between security sales, volatility, and illiquidity.”

• The cracks in the US Treasury bond market “The odds of a financial accident are just higher”

Inflationary Pressures in Canada Hit Their Broadest Since 1991 Annual price gains stalled at 6.9% in October from a peak of 8.1% in June

(…) But over 85% of 62 subcategories tracked in the consumer price index are still rising by more than the Bank of Canada’s 2% inflation target. That’s the highest proportion since 1991, well above the historical average of 56% and up from 79% in September.

In March, when Governor Tiff Macklem began an aggressive series of interest-rate increases, 71% of subcategories were above target. Nearly three-fifths of prices are now rising by more than 5% on an annual basis. (…)

Eric La Fleche, chief executive officer of supermarket chain Metro Inc., said Wednesday that suppliers are expecting to pass on higher costs to customers in the new year. “The inflation outlook remains uncertain as we continue to receive many vendor requests for price increases,” he said on a conference call. (…)

Two key inflation measures tracked closely by the central bank — the so-called trim and median core rates — inched higher, averaging 5.05% in October from 4.95% a month earlier. On a month-over-month seasonally adjusted basis, the consumer price index rose 0.6%, up from 0.4% in September. (…)

Alibaba Posts Surprise Loss as China Covid Curbs Take a Toll

Revenue rose a slightly less-than-expected 3% to 207.2 billion yuan ($29 billion) in the September quarter, versus the 209 billion yuan average projection. It reported a net loss of 20.6 billion yuan versus estimates for a profit of 18.8 billion yuan, after adjusting for market investments. The company also green-lit a $15 billion expansion to its buyback program.

Wall Street Sours on Coinbase, Signaling Broad Crypto Doubts The prices of the exchange’s stock and bonds reflect anxieties after the collapse of rival FTX and sharp declines in bitcoin.

(…) Coinbase has been burning through its cash and losing the confidence of investors. Its shares are down 81% since the start of the year, its market capitalization has shrunk to $11 billion [from $85B], and its bonds are trading at a little more than half their face value. (…)

Last quarter, Coinbase burned through $278 million in cash, according to S&P Global Market Intelligence. That happened even though it saved $391 million in cash outlays by paying employees with stock—an unsustainable amount, some investors argue, given the company’s declining stock price. (…)

The contagion is underway (from Bloomberg and Axios):

• Crypto Lender BlockFi Plans Bankruptcy Filing Within Days
• Bankrupt crypto brokerage firm Voyager Digital, whose assets FTX founder Sam Bankman-Fried agreed to purchase for $1.4 billion, has reopened bidding to find a replacement buyer.
• Crypto hedge fund Galois Capital said roughly half its capital is stuck in FTX, according to the Financial Times.
• Travis Kling, who ran crypto hedge fund Ikigai Asset Management said on Tuesday that “a large majority of the hedge fund’s total assets” had been ensnared in FTX.
• The Gemini Earn program allowed users to deposit their coins in exchange for regular interest payments — typically at generous rates that could be as high as 8%. In a note to clients posted on its site, Gemini pointed out that its lending partner in the Earn program — a separate crypto lender known as Genesis — had “paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days.”