Year: 2023

US Housing Starts Unexpectedly Rise to a Six-Month High Construction of new houses jumped almost 15% in November

Construction of single-family houses jumped 18% to the highest level since April 2022, while starts of multifamily projects increased 6.9%.

Permit applications, an indicator of future construction, decreased to a 1.46 million pace due to a drop in multifamily projects. Permits for one-family homes increased to the highest level since May 2022. (…)

The annualized pace of new-home starts is on par with pre-pandemic rates, suggesting the toll on gross domestic product from weak residential investment is beginning to ease. (…)

• No rush to buy…

Data: National Association of Realtors via FactSet; Chart: Axios Visuals

• Fourth-Quarter GDP Growth Estimate Increases

On December 19, the GDPNow model estimate for real GDP growth in the fourth quarter of 2023 is 2.7 percent, up from 2.6 percent on December 14. After recent releases from the US Census Bureau and the Federal Reserve Board of Governors, the nowcast of fourth-quarter real gross private domestic investment growth increased from 0.5 percent to 0.8 percent.

• US Sales Managers Jobs Index Rises to 25-Month High in December

The US Sales Managers Jobs Index accelerated to a 53.3 reading in December a 25-month high, indicating considerable confidence in the future. The Market Growth Index also stayed positive at an even more elevated level. All growth-related Indexes registered positive readings in December. The overall Sales Managers Index reflected all the positive news with a reading of 52.5.

The Price Index remains high with a December reading of 53.3, reflecting continuing price inflation, but this Index reading also represented an 11-month low, indicating a continuing downward trend, which must be comfortable reading for the Federal Reserve.

Best of all the Index news for incurable optimists, the December Staffing index came in with a reading of 53.3, a 25-month high, indicating considerable confidence in US employers that the good news is likely to stay with us for some time to come.

Suddenly 2024 looks less like the widely anticipated recession year, and more like a year of growth.

Red Sea Attacks Risk Driving Up Price of Goods for Global Economy Rerouting means higher shipping costs and longer delivery time

Shipping companies are diverting cargoes after Iran-backed Houthi militants attacked commercial vessels plying the Red Sea. The vessels will have to sail around Africa instead of taking the shorter route through the Suez Canal.

This rerouting will mean higher shipping costs and longer delivery time, Bloomberg Economics analysts including Gerard DiPippo wrote in a note. The Red Sea is one of the world’s most important shipping lanes, carrying about 14% of global maritime trade. (…)

More than 20% of containers passing through the Suez Canal carry goods from Asia to European and Mediterranean nations, according to logistics intelligence firm project44. Diverted ships would have to sail around Africa to reach Europe, adding a minimum of seven to 10 days to the journey, they estimated.

Still, there are reasons to believe the disruptions will have only a moderate economic impact, Bloomberg Economics said.

While the cost to send a 40-foot container from Shanghai to Rotterdam has jumped 44% from the end of October before the attacks began, and by more than 26% to Genoa, they remain well below levels in 2021 and 2022 during the pandemic, data compiled by Bloomberg show. (…)

“The best the world can hope for may be a moderate risk scenario, in which shipping is diverted for at least several months until the security situation in the Red Sea stabilizes,” the Bloomberg Economics analysts wrote.

This may not be the optimal scenario but it’s happening when there’s more shipping capacity and it’s better than some of the alternatives, they added.

• That’s Two for Two: The World’s Other Big Canal Is in Trouble While the Panama Canal has been running dry, Gaza-related attacks have created a crisis in the Red Sea.

(…) A containership traveling from the Far East to Europe takes 21 days via the Suez Canal but 42 days if going around Africa, according to the bank [Jefferies]. A tanker from the Middle East takes 17 days to get to Europe using the Suez Canal but 41 days if going around Africa. (…)

How Is China’s Economy Doing? Not Nearly as Well as China Says It Is

Daniel H. Rosen is a co-founder and partner at Rhodium Group, an independent research provider combining economic data and policy insight to analyze global trends.

(…) Despite the obvious, Chinese officials forecast a 5% to 6% target for 2023.

Once the target was set, officials got to work to make sure it happened. But with business investment still flat or negative due to the still-falling property sector, net exports declining and government spending constrained by shrinking tax and fee revenues, the full burden of delivering China’s forecast growth fell on household consumption.

By spring, it was becoming evident that getting enough consumption to drive 5% GDP growth would require government stimulus. However, though support for state-owned enterprises and banks was perennial, rumors of leader distaste for support for households as “welfarism” swirled, and fiscal stimulus never happened.

This left officials with only one option for making their targets: They changed previous consumption statistics to make the numbers add up to 5%-plus growth for 2023. While this result is fundamentally inconsistent with evidence over the year, the IMF accepted Beijing’s calculations and updated its own 2023 China projection, out of cycle, on Nov. 7.

An independent tally of 2023 growth might accept Beijing’s official figures of 5% consumption growth as of the third quarter, but the other components of GDP remain flat or negative: government spending, net exports and business investment. Taken together, depending on how negative property investment is assumed to have been in 2023, China’s 2023 GDP probably grew 0 to 2.5%.

This slower growth estimate is far out of whack with the official figures endorsed by Beijing and the IMF, but is far easier to reconcile with the anecdotal evidence this year: 

• Localities cutting bus service and street lighting
• Unexplained alteration of statistics to inflate apparent growth
• Suppression of data series telling a bleak story
• Negative foreign direct investment for the first time in modern history
• Price deflation
• Emergency expansion of fiscal deficit despite reporting solid growth
• Further takeover of private developers
• Net collection of debt repayment from Belt and Road Initiative countries rather than new official development assistance
• Persistent effort to fix the value of the renminbi stronger against the dollar all year
• Among the worst-performing major stock markets of the year
• Strong reported and unreported capital outflows
• The lowest marriage and birth rates on record

These are just selected bearish indications that are widely known. Officials regularly airbrush over evidence of economic stress, and citizens can be punished for being negative. (…)

Chinese officials put political targets over economic credibility, finding ways to claim growth was on track, such as by stipulating that hard-to-measure services activity was suddenly booming—a claim that couldn’t be refuted given the paucity of quality services-sector data. Authorities insisted the system was working fine and GDP growth would be above 5%, brushing off questions about why foreign firms were leaving, private domestic firms were refusing to invest or make new hires, and consumers were behaving with such caution. (…)

Three implications for 2024 flow from this.

First, after the severe 2021-23 property correction, we are approaching a bottom, and construction could add to growth next year instead of subtracting. But few other cyclical drivers are set to turn up, and long-term structural constraints on consumption, government spending and net exports remain.

Crisis risks and liabilities were only kicked down the road in 2023, not resolved, and will continue to drive anxiety in 2024. Compared with this year’s anemic actual GDP, China could see a modest cyclical improvement in 2024, but nowhere near the aspiration of 5%.

Second, 2024 is the year the global spillover implications of China’s slowdown will sink in. Advanced economies will downgrade the importance of market access in China, and Global South nations will be forced to find other engines of development. This means a new phase of geopolitical conditions, with the anchor assumption of a rising China and declining U.S. being retired. The implications of this will be far reaching and challenging to forecast.

Finally, the 2024 wild card is that China could turn back to the market pragmatism that made it the star of globalization over past decades. Security and political experts doubt that Xi Jinping has a single reform-oriented bone in his body. Maybe not, but if market overhaul is the only thing that can enable the Communist Party to pay its bills and finance its aspirations, then no one should rule it out.

In fact, in his first term, starting in 2013, Xi tried to make the market more central, only to suspend the effort after realizing how challenging it would be. Yes, it is difficult to imagine China reversing course on statism today, but it was just as hard to imagine it ending zero-Covid policies last year, or selling stakes in the national oil companies to foreigners 20 years ago.

Reform isn’t the base case for China 2024, but China has a record of surprising, and reform is more than a trivial possibility. That is why smart firms are protecting the option to stay in the China game, even while breathless American politicians talk about gratuitous and unlimited decoupling. In 2024, smart Western officials will give priority to rationality on China, so they can take advantage of Beijing’s economic stumbles—without needlessly damaging the economic and geopolitical interests of their own nations.

Throughout 2023, chronicling the slow developing real estate disaster (leading to my November 20, 2023 post CHINA IMPLODING? NO, EXPLODING!), I could not imagine China reaching its ambitious growth target with housing accounting for more than 20% of the economy and with more than 70% of Chinese losing  confidence about their future well being as their life savings deflated.

Private surveys also never suggested anything close to a 5% growth rate for an economy still centered on manufacturing and foreign demand:

Chinese officials now recognize the gravity of the situation. Their recent actions suggest more pro-active and forceful measures early in 2024. But China is a huge, complex vessel navigating in tumultuous waters. Whether its officers navigate smartly and convince the aging pessimistic crew to support their leaders is an open question.

Meanwhile, in the USA:

Bloomberg today:

• As 2023 draws to a close, Xi’s much-anticipated economic bonanza has failed to materialize. The Chinese economy remains burdened by a collapsing real estate sector, gargantuan local government debt, falling exports, and pervasive pessimism among private entrepreneurs.
• Beijing finds itself in an awkward position. It needs people to spend, but it still hasn’t cracked the nut of oversupply. Bloomberg Economics estimates that despite an 18% drop in property construction, the market is only about halfway through the correction it needs. Economic signals in China are a little more positive these days, with signs of a return to growth, albeit fragile. But there are harder-to-quantify effects. Officials may have one eye on a deeper social malaise tied to the housing crisis. It’s reflected in a saying making the rounds on Chinese social media: “No dating, no marriage, no kids, no home.”

BTW: China’s helping us out with inflation

China is the top exporter of goods to the U.S., and the prices of its goods are falling, making it an important contributor to the sharp slowdown in inflation that the U.S. is enjoying.

Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

Further on yesterday’s discussion on supply- and demand-driven inflation, in 2023 Chinese goods landed in the U.S. with declining prices in spite of strong demand.

Canadian Dollar Surges to Highest Since August as Inflation Stays Elevated Consumer prices rose 3.1% in November, higher than estimates

The consumer price index rose by 3.1% in November from a year ago, matching the increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s faster than the median estimate of 2.9% in a Bloomberg survey of economists.

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — were unchanged, averaging 3.45% year-over-year.

On a monthly basis, the consumer price index rose 0.1%, versus expectations for a decrease of 0.1%.

Another key measure, a three-month moving average of underlying price pressures, fell to an annualized pace of 2.45% from 2.86% a month earlier, according to Bloomberg calculations. It’s an important metric because Bank of Canada Governor Tiff Macklem has said policymakers are tracking it closely to understand inflation trends.

Mortgage interest costs remain the largest upside contributor to the consumer price index, with the inflation rate excluding those costs sitting at 2.2% in November. Excluding shelter costs entirely, that figure is 1.9%. (…)

In November, services inflation held steady at 4.6%. Goods inflation slightly rose by 1.4%. (…)

With the Canadian economy already showing signs of stagnation and the rate of inflation expected to slow further, many economists say rate hikes are done for this cycle. (…)

Population Growth in Canada Hits 3.2%, Among World’s Fastest Canada added a record 1.25 million people over the past year

The country’s population rose by 1.25 million in the year to Oct. 1 — the largest number in any 12-month period since its creation in 1867, according to new data from Statistics Canada.

Almost all of the increase was driven by a surge in international migration. Canada accepted 454,590 new permanent residents over the past year, while bringing in 804,690 non-permanent residents, a category that includes temporary workers, foreign students and, to a lesser extent, refugees.

The surge of newcomers brought Canada’s population to an estimated 40.5 million, slightly more than California.

The last time Canada’s population grew at a faster rate was in the late 1950s, during the postwar baby boom and a period when the country was accepting Hungarian refugees fleeing Soviet repression. It is expanding much faster than any Group of Seven nation, China or India — in fact, most countries growing at a similar pace are in Africa, according to 2021 data.

While boosting economic growth, the rapid influx of people is worsening housing affordability, keeping a floor under home prices even with borrowing costs at two-decade highs.

Population pressure is also evident in rental prices, which rose at a 7.4% yearly pace in November. Shelter costs are the largest contributor to the inflation rate of 3.1%, according to a separate release from the agency on Tuesday. (…)

Some economists have said Canada’s population growth is masking an underlying deterioration in living standards. On a per-capita basis, gross domestic product is declining.

Earlier this month, Bank of Canada Deputy Governor Toni Gravelle said population growth and a chronic undersupply of housing are major reasons why rent price inflation isn’t slowing, as in the US. (…)

Surprise UK inflation slide bolsters chances of summer rate cut

UK inflation has come in much lower than expected for November and markets are now pricing a whopping 140bp of cuts next year. That’s maybe pushing it, but investors are right to be thinking about several cuts next year, despite the Bank of England’s recent pushback. (…)

UK inflation has dipped below 4%, and that’s a huge surprise compared to what had been expected. What’s more, the fall in headline CPI to 3.9% (from 4.6%) seems to be fairly broad-based at first glance. We’re seeing discounting across the board on consumer goods, from clothing to household goods, and cars. Lower fuel and food contributions helped too.

But the Bank of England will be particularly comforted by the further surprise fall in services inflation, which came down to 6.3%, having peaked at 7.4% over the summer. (…)

Despite today’s positive surprise, we think services inflation could stay sticky in the 6% region into early next year. At face value, that would justify the Bank of England’s more cautious approach at last week’s meeting. The BoE took a decidedly different line to the Federal Reserve, offering implicit pushback against the quantity of rate cuts priced into financial markets in 2024. Expect officials to keep up that cautious narrative as we enter the new year. (…)

SENTIMENT WATCH

World’s Biggest ETF Sees Record $21 Billion Flow on Stock Rally

State Street’s $478 billion SPDR S&P 500 ETF (ticker SPY) raked in $20.8 billion on Friday, the biggest inflow since the fund’s inception in 1993. According to Bloomberg Intelligence, it was the largest one-day flow for any ETF. For the week, the ETF garnered more than $24 billion, also a record, data compiled by Bloomberg showed. (…)

“The flow that we saw on Friday was 100% organic from clients and investors and traders,” Bartolini said by phone. “It also reflects the massive Santa Claus rally that we have seen in the past few days — so momentum-trading going into SPY as well.” (…)

BofA Poll Shows Rate Cut Expectations Fueling Rush Into Stocks

Investors are the most optimistic since the beginning of 2022 as expectations of policy easing by the Federal Reserve are fueling a rush into stocks, according to a Bank of America Corp. survey.

The sentiment of global fund managers surveyed in December was the most upbeat since January 2022 on a Goldilocks environment — a steady economy that is not running too hot or too cold — as the case for next year, a team of strategists led by Michael Hartnett wrote in Tuesday note.

Against that backdrop, the poll showed investors are the most overweight on stocks since before the Fed started to hike interest rates, with cash allocations cut to a two-year low of 4.5% from 4.7%. Meanwhile, fund managers are the most overweight on bonds in 15 years. They are also the most bearish on commodities relative to bonds since March 2009. (…)

A net 91% of the BofA poll participants said hikes from the US central bank are over and expectations of lower rates along with bond yields are at a record high for this century. (…)

In terms of risks, investors are most wary of a hard landing — or a recession — in 2024. That said, a net 66% is anticipating a soft landing for the global economy over the next 12 months. (…)

The poll was conducted between Dec. 8 to Dec. 14, spanning 219 participants with $611 billion in assets under management. Other findings include:

• The outlook for profits are improving with only a net 26% expecting global earnings to deteriorate
• FMS investors turned overweight on banks for the first time since February while most underweight on energy since December 2020
• The most crowded trade is long magnificent seven, short China equities and long Japan equities
• A record 73% say the Japanese yen is undervalued
• China real estate is now the most likely source for a systemic credit event

New COVID Shot Uptake Lagging Behind Annual Flu Shot Rates

• 29% have gotten new COVID-19 shot; 47% have gotten flu shot
• Prior COVID-19 infection, safety concerns top reasons for not getting new shot
• Near record-low 23% of Americans are worried about getting COVID-19

State of Affairs: Dec 19, 2023

(…) The big question is if and how hospitalizations will follow wastewater trends, especially in places like the U.S., where vaccination rates are low. The U.K. and Singapore, which have high vaccination rates, are seeing a steep increase in hospitalizations now that JN.1 has taken over. Last week, CDC warned about the potential impact of low vaccination rates in the U.S.

Covid-19 hospitalizations by epi week (Singapore) or date (UK) (Source UK; Source Singapore)

Fed Official Says Rate Cuts Could Be Needed to Prevent Overtightening The central bank must make sure “we don’t give people price stability but take away jobs,” said San Francisco Fed President Mary Daly.

(…) Daly said that if inflation continues its steady decline of recent months, the Fed’s benchmark interest rate “will still be quite restrictive even if we [cut rates] three times next year.”

Daly said she is watching the effect that restrictive policy has on the labor market. When the unemployment rate starts to rise, it tends to go up by a lot and not by only a little bit, Daly said. As a result, “we have to be forward looking and make sure that we don’t give people price stability but take away jobs.” (…)

In a notable shift, she said the Fed’s focus now needed to turn toward paying attention to both sides of its mandate. (…)

Allowing real rates to increase would create an elevated possibility “that we could overtighten quite easily, and so that’s what I’m mindful of,” said Daly, who will become a voter on the Fed’s rate-setting committee next year. (…)

While much of the initial decline in inflation this summer stemmed from supply-chain healing, more recent declines appear to have been driven by a cooling in demand-driven components, she said.

A model maintained by the San Francisco Fed suggests two thirds of the decline in core inflation had been related to changes in demand. “To me, that’s a material development,” said Daly. “That means we have monetary policy working.” (…)

The San Fran Fed report:

• Supply- and Demand-Driven PCE Inflation

(…) Demand-driven categories are identified as those where an unexpected change in price moves in the same direction as the change in quantity in a given month. Supply-driven categories are identified as those where unexpected changes in price and quantity move in opposite directions. (…)

The data isolate the unexpected component of the change in prices and quantities because they are likely to represent a shift in demand or supply rather than longer-run factors such as technological improvements, cost-of-living adjustments to wages, or demographic changes. (…)

The bars for each month reflect the contributions from supply-driven (green), demand-driven (blue) inflation, and ambiguous categories.

Since 1999, the split averaged 51/49 excluding the “ambiguous”. Last 12 months: 51% demand driven on average; last 6 months: 48%; last 3 months: 46%.

Looking at the MoM annualized data, the contribution of demand-driven inflation has declined throughout and was only 15% in the last 3 months.

I am not comfortable with the methodology that “isolates the unexpected component of the change in prices and quantities”, particularly in the recent years when price behavior was really unexpected (e.g. cars, housing, air fares). There is also no measure of the effect of exchange rates which can be temporary.

I side with Jay Powell who acknowledged that much of the decline in inflation so far has come from the reversion of pandemic-related goods and labor supply issues and that “at some point we will run out of supply side help; then it comes down to demand, and that’s harder”.

Actually, all components of domestic demand accelerated as the Fed was tightening. Whither those famous lag effects?

The most interest rate sensitive sectors have yet to flinch to this rather forceful tightening:

• Inflation: China Is Killing It

One of the main reasons that the US doesn’t need to have a recession to bring down inflation is that China is having the recession for us. China’s property bubble has burst, and the deflationary consequences are far greater and more global than those following the bursting of similar bubbles in Japan during the late 1980s and in the US during the Great Financial Crisis of 2008. (…)

The path of sticky services inflation

• John Authers: Ghosts of Inflation Past Haunt Fed’s Pivot Party

(…) The debate over Powell’s pivot is like Ebenezer Scrooge facing the spirits on Christmas Eve, and centers on spectres from the central bank’s past, with a strong element of undigested denialism. Austan Goolsbee of the Chicago Fed said: “I thought there seemed to be some confusion about how the FOMC even works. We don’t debate specific policies speculatively about the future.” Although he’s no longer on the FOMC, Bloomberg Opinion’s own Bill Dudley, for years the governor of the New York Fed, set out why he thought a pivot was (in his words) “a pretty big gamble.”

So without specifically offering alternative rate paths, the Fed seems to be saying that the market reaction has gone too far.

The discussion has focused on the 1970s, when US inflation slipped out of control in a way that hasn’t happened before or since. Premature declarations of victory, both under Arthur Burns and later Paul Volcker early in his term, come in for much criticism. Cutting rates when inflation is trending downward but is still high proved disastrous, leading to the assumption that no Fed chief would ever want to risk being compared to Burns in their obituary.

Is it just possible that the risks of leaving rates too high for too long and taking the blame for an avoidable recession now bulk larger? (…)

• Real interest rates finally becoming restrictive

“Real, or after-inflation, interest rates have only recently turned positive and by historical standards haven’t approached levels where they would weaken the economy sufficiently to consider the inflation fight over. We expect real rates to climb in 2024 as the pace of inflation slows and eventually become restrictive enough to push inflation the last mile to the Fed’s 2% target.”

Cargo Ships Forced on a Long, Slow Detour to Avoid Red Sea Houthi militants have vowed to attack any merchant vessel with a connection to Israel.

• U.S. Says Naval Forces Will Protect Ships Passing Through Suez Canal The move is aimed at protecting merchant vessels after Houthi rebel attacks threatened the canal’s role in global trade.