Year: 2023

Fed Signals Higher-for-Longer Rates With Hikes Almost Finished Powell stresses ‘careful’ approach in Wednesday press briefing

Federal Reserve Chair Jerome Powell made clear Wednesday the central bank is close to done raising interest rates, but his colleagues delivered the message that resonated: Borrowing costs must remain higher for longer amid renewed strength in the economy.

After a series of rapid rate hikes over the past 18 months, the Fed can now “proceed carefully,” Powell said — a sentiment he repeated at least a dozen times Wednesday during a press conference that followed the central bank’s decision to leave rates unchanged.

In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.

The projections also showed they expect inflation to fall below 3% next year, and return to their 2% target by 2026. In other words, the “soft landing” for the US economy that looked more remote three months ago now seems within reach.

“They’re basically saying that a soft landing scenario is going to be met with tighter policy,” said Brett Ryan, a senior US economist at Deutsche Bank AG. “That was the main takeaway.” (…)

Fed officials now expect their benchmark rate to be at 5.1% by the end of next year, according to their median estimate, up from 4.6% in the last projection round in June.

During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally. (…)

Futures show roughly even odds of more tightening in 2023. (…)

The FOMC meets Oct. 31-Nov. 1 and again in December.

The WSJ’s Nick Timiraos:

“Really, what people are saying is, ‘Let’s see how the data come in,’” [Powell] said at a news conference Wednesday. “They want to be convinced. They want to be careful not to jump to a conclusion.” (…)

“The fact that we’ve come this far lets us really proceed carefully,” said Powell. He used those words—“proceed carefully”—six times during Wednesday’s news conference, a sign of heightened caution about lifting rates. (…)

“They’re worried about taking a victory lap too early, obviously, but these forecasts are soft landing-adjacent,” said Jan Hatzius, chief economist at Goldman Sachs. He doesn’t think the Fed will raise rates again because he thinks inflation is likely to decline more in the coming months than officials projected Wednesday.

Fed officials’ projection for annual core inflation, which excludes volatile food and energy prices, edged down to 3.7% for the fourth quarter. They see it falling to 2.6% next year. The Fed targets 2% inflation on average.

Media and pundits have their own narratives but let’s hear it from the horse’s mouth to better read his mind (my emphasis):

• Clearly, we are just—what we’ve decided to do is maintain the policy rate and await further data. We want to see convincing evidence, really, that we have reached the appropriate level.
• But what it reflects, though, is that economic activity has been stronger than we expected; stronger than I think everyone expected.
• And really, what people are saying is let’s see how the data come in. We want to see that this—these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months, right? We want to see—you know, the labor market report that we received, the last one that we received, was a good example of what we do—what we do want to see. It was a combination of—you know, of across a broad range of indicators continuing rebalancing of the labor market. So those are the two things that—those are our two mandate variables, and that’s the progress that we want to see.
• Now, we’re fairly close, we think, to where we need to get. It’s just a question of reaching the right stance. Nonetheless, you know, we need—we need to get to a place where we’re confident that we have a stance that will bring inflation down to 2 percent over time. That’s where we need to get to.
• But I think broadly, stronger economic activity means rates—we have to do more with rates. And that’s what that that’s what that—that’s what that meeting is telling you.
• It is certainly possible that—you know, that the neutral rate at this moment is higher than that. And that’s part of the explanation for why the economy has been more resilient than expected.
• And I think confidence comes from seeing, you know, enough data that you feel like, yes, OK, this feels like we can—we can, for now, decide that this is the right level and just agree to stay here. And then the question is how long do you stay at that level, and that’s a whole nother set of questions. For now the question is trying to find that level where we think we can stay there. And we haven’t—we haven’t gotten to a point of confidence about that yet. That’s what we’re—that’s the stage we’re at, though.
• So I think the question will be—GDP is not a mandate, right. Maximum employment and price stability are the mandates. The question will be is the—is GDP—is the heat that we see in GDP, is it really a threat to our ability to get back to 2 percent inflation? That’s going to be the question. It’s not a question about GDP on its own. It’s, you know, you’re expecting to see this improvement—you know, continued rebalancing in the labor market and inflation moving back down to 2 percent in a sustainable way. We have to have confidence in that. And, you know, we’d be looking at GDP just to the extent that it threatens one or both of those.
• The real point, though, is the worst thing we can do is to fail to restore price stability, because the record is clear on that. If you don’t restore price stability, inflation comes back and you go through—you can have a long period where the economy is just very uncertain. And it’ll affect growth. It’ll affect all kinds of things. It can be a miserable period to have inflation constantly coming back, and the Fed coming in and having to tighten again and again.
• what’s happened is growth has come in stronger, right—stronger than expected and that’s required higher rates.
• In terms of inflation, you are seeing—the last three readings are very good readings. It’s only three readings. You know, we were well aware that we need to see more than three readings. But if you look at June, July, and August you’re looking at, you know, really significant declines in core inflation, largely in the goods sector, also to some extent in housing services and just a little in non-housing services. Those are the three buckets.
• If the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy to get back to 2 percent, because we will get back to 2 percent.
• So what—I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that. The savings rate for consumers has come down a lot. The question is whether that’s sustainable. That could be—it could just mean that the data effect is later. It could also be that for other reasons the neutral rate of interest is higher, for various reasons. We don’t know that. It could also just be that policy hasn’t been restrictive enough for long enough. And there are many candidate explanations. We have to, in all this uncertainty, make policy. And, you know, I feel like what we have right now is what’s still a very strong labor market but that’s coming back into balance. We’re making progress on inflation. Growth, by many forecasts—many, many forecasts call for growth to moderate over the course of the next year. So that’s where we are. And, you know, we have to—we have to deal with what comes.

So:

• Powell and co., certainly Powell, remain totally focused on inflation and wages.
• Inflation came in better than expected but they need more than 3 months of good data.
• The economy is not part of their mandate…but, recently, “growth came in stronger than expected and that’s required higher rates.
• And, looking ahead, “if the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy.”
• Why stronger than expected? “We don’t know that.”

With a government shutdown looming, no new data to convince them one way or the other, poor man!

John Authers:

The Fed has doubled its estimate for economic growth this year, while upgrading 2024 to 1.5% from 1.1%. That would explain why its projections for the fed funds rate have risen by 50 basis points for both 2024 and 2025.

What’s strange is that the FOMC has also grown far more optimistic about unemployment, cutting its estimate for the jobless rate in both the next two years to 4.1% from 4.5%. On the face of it, that sounds contradictory; TS Lombard’s Steven Blitz dubbed it a belief in “immaculate disinflation.”

UAW Negotiator Says New Stellantis Offer Doesn’t Look Good UAW workers at a Mercedes parts plant declared their own strike.

Stellantis NV’s new contract offer to the United Auto Workers lacks the job security guarantees the union wants, a negotiator said, suggesting workers will reject it days before a deadline to expand their historic strike.

UAW President Shawn Fain has yet to announce whether he’ll green light the latest Stellantis offer, but the proposal had a similar pay increase to the 19.5% already offered. Additionally, it doesn’t give workers the clear vision of the future they’re seeking, said Scott Moldenhauer, a negotiator for the union. (…)

General Motors Co. isn’t having an easy time finding a deal, either. GM Chief Executive Officer Mary Barra told the automaker’s salaried staff Wednesday morning that the union’s salary demands were too costly. The company’s current offer would raise average yearly compensation to $150,000 a year with benefits, according to people familiar with the matter. And while GM continued bargaining, the people said the two sides were far apart.

The labor actions spread beyond Detroit for the first time as 190 UAW workers struck a ZF plant in Tuscaloosa, Alabama, that supplies front axles for Mercedes-Benz Group AG vehicles. While the UAW represents part supplier plants, these locals make their own decisions about job actions and have contracts that differ from the ones governing Detroit’s autoworkers. But the local is striking over some of the same issues, such as equal pay for all workers in the same plant. (…)

But on Tuesday, Stellantis’ North American Chief Operating Officer Mark Stewart told CNBC that his company has inventory on hand to offset the strike’s impact. Cox Automotive reported that the auto companies turned out cars at a fast clip ahead of the strike, leaving them with the highest inventory level since April 2021. (…)

Memo for Mr. Powell’s better understanding: during the last 5 months, monthly production of Motor Vehicles and Parts was 7.8% higher, on average, than during the first 3 months of the year. Related employment was up 4.6% YoY in August.

• Bank of America to raise minimum wage to $23 an hour in October

Bank of America (BAC.N) will boost its minimum hourly wage to $23 in October as it heads toward a goal of raising hourly pay to $25 by 2025, the company said in a statement Wednesday.

The pay bump translates to a minimum salary of almost $48,000 a year for full-time employees, according to the second largest U.S. lender.

BofA has increased pay several times in recent years, starting with a move to $15 an hour in 2017.

Xi’s Purge of Handpicked Ministers Shatters Stability Image Chinese leader has ousted top officials with no explanation

After President Xi Jinping tore up the Communist Party rulebook to promote key loyalists last year, some observers expected his new team to operate more smoothly in tackling China’s biggest challenges.

Instead, his government looks like it’s in disarray. Xi’s mysterious purge of his foreign minister in July, followed by the reported ouster of his defense chief less than two months later, is making China appear unstable to the outside world. The Chinese leader also overhauled the generals overseeing China’s Rocket Force, which manages the nation’s nuclear arsenal, without giving an explanation.

And those are just the firings that have been made public. (…)

China hasn’t seen such an intense period of high-profile purges since the reform era of the 1980s, exposing the “opacity and brutality” of Xi’s system, according to Richard McGregor, a senior fellow at the Lowy Institute in Sydney who wrote The Party: The Secret World of China’s Communist Rulers.

“These men were handpicked by Xi himself for promotion,” McGregor said. “So their fall reflects on him.” (…)

As Xi’s mistrust of his officials grows, the system is showing signs of becoming paralyzed as he tries to micromanage domestic operations. One foreign executive in Beijing, who asked not to be identified, said Chinese officials now operate in “silos of fear,” with everyone scared of Xi and also isolated from each other. (…)

The Fed’s Next Challenge: $100 Oil Saudi output cuts and record demand have pushed crude prices 26% higher this quarter

(…) Record levels of oil demand—fueled by unexpected economic strength—have outstripped production. As a result, traders and petroleum refiners are draining oil stockpiles at a rapid clip. Many analysts expect crude prices to keep rising, which would feed into higher fuel bills, quicker inflation—and, potentially, higher interest rates. (…)

One of Wall Street’s most bearish oil analysts, Edward Morse of Citigroup, said in a note that Brent could surpass $100 a barrel for a short while. But he said higher prices now make lower prices likely next year by encouraging higher output and denting demand. Saudi Arabia could boost supplies if prices get too high, he added. (…)

Saudi Energy Minister Abdulaziz bin Salman on Monday said the OPEC+ cartel sought to reduce volatility and make energy markets more predictable.

“OPEC conduct is nothing different from what a central bank, or a group of central bankers, is doing,” Abdulaziz said, describing the cuts as soft-touch market regulation.

Analysts say China, where refiners have stocked up on cheap Russian and Iranian oil for much of the year, could switch tack to a policy of lower imports and higher exports now prices are on the rise. In the U.S. shale patch, oil and gas producers are standing up new drilling rigs at the fastest rate since last November, according to Baker Hughes. (…)

For oil consumers outside the U.S., crude’s advance is particularly problematic. Crude prices are typically denominated in dollars, and the greenback has strengthened since mid-July. The Reserve Bank of India said on Monday that the oil-price rise poses a risk to global financial stability and threatens to juice inflation unless an economic downturn knocks energy demand.

Giovanni Serio, head of research at giant oil trader Vitol, said stockpiles are currently shrinking at a pace of nearly 2 million barrels each day. One of the reasons is that demand in China has been stronger than its weak economy would suggest. But there may be relief ahead. Serio expects higher output in North and Latin America to bring global production and demand more into balance in the fourth quarter.

The Fed and most economists tend to measure inflation excluding food and energy. But energy costs, oil in particular, influence prices of services. The correlation between CPI-Services and WTI prices is not perfect (like with wages) but oil price trends do seem to have a bearing on trends in services prices (e.g. transportation, heating).

PMI PREVIEWS

Last week, we got the NY Fed Manufacturing Survey showing that business remains very volatile at a low level:

We also got the Business Leaders Survey covering service firms in New York, northern New Jersey, and southwestern Connecticut. Business activity has improved but only because it is not quite as bad.

Employment growth has stopped to a crawl while wages keep rising.

Amazon plans to hire 250,000 US workers for holiday season

Amazon (AMZN.O) said it plans to add 250,000 U.S. workers for the holiday shopping season, 67% more than the number of people it hired for the past two years, as it scrambles to expand next-day delivery for shoppers.

Amazon’s plans contrast with other U.S. retailers, who say they will hire fewer people in stores and warehouses this year on expectations for reduced consumer spending in 2023. Forecasters expect holiday sales to come in at half of last year’s rate due to concerns about higher prices.

Seasonal hiring is expected to drop to its lowest since 2008, according to researcher Challenger, Gray and Christmas, due to higher costs and weak consumer confidence.

Target (TGT.N) on Tuesday said it would hire 100,000 employees for the holiday shopping season, flat year over year. Target also plans to begin offering discounts in October.

Macy’s (M.N) said it would hire more than 38,000 full and part-time workers for the upcoming holiday season, a decline from the previous year.

U.S. retail giant Walmart (WMT.N) has not yet announced holiday hiring plans. However, it hired 40,000 seasonal workers in 2022.

Amazon’s boost in hiring comes after it added 50 new fulfillment centers, delivery stations and same-day delivery in the United States, and as it prepares for its expanded fall Prime Event, scheduled for Oct. 10-11. (…)

New seasonal workers hired to pick, sort, pack and ship orders will get a sign-on bonuses between $1,000 and $3,000 in select locations, compared to associates who received $3,000 bonuses in 2022 and 2021 in some locations, it said.

Amazon said it will pay its seasonal workers $17 to $28 per hour on average depending on their jobs and locations, compared to the $19 hourly wage workers were offered last year. (…)

“A fulfillment or transportation employee who starts with us today will see a 13% increase in pay over the next three years —likely more, including our annual wage investments,” John Felton, Amazon senior vice president of worldwide operations, said in a statement.

Amazon earlier this year laid off 27,000 staffers, or about 9% of its workforce, in its advertising, cloud computing and human resources departments following a string of tech lay offs.

America’s Biggest Landlords Can’t Find Houses to Buy High borrowing costs and the shortage of properties for sale have slowed home buying by Wall Street’s rental giants, limiting their ability to grow at the same time suburban rents are climbing.

(…) Prices have pushed past what big landlords, including AMH and Invitation Homes can pay and still meet profit targets.

There has rarely been a better time to own tens of thousands of single-family rentals. Record home prices, the highest mortgage rates in a generation and limited properties for sale are pushing homeownership beyond the reach of many Americans and leave plenty of room for rents to rise and still be cheaper than owning, analysts say. (…)

“We write hundreds of offers every week at price points that we’d be willing to transact at,” Invitation Chief Executive Dallas Tanner told investors this summer. “We’re striking out quite a bit.”

Landlords with 1,000 properties or more accounted for 0.4% of U.S. home purchases during the second quarter, down from a peak of 2.4% in late 2021, according to John Burns Research & Consulting. (…)

Sidelined landlords are a sign that the Federal Reserve might be closing in on the magic number for interest rates needed to shift the housing market down from overdrive and slow the breakneck spending that accompanies billowing property values.

Invitation, which owns about 83,000 houses, has been selling properties that have appreciated to the point that they are yielding less than 4% and putting the proceeds in the bank, where the cash is earning more than 5%.

Executives say they are amassing money to spend when pools of homes are offered by motivated sellers, such as the property fund that sold Invitation 1,870 houses in July for $645 million. That was less than seller Starwood Real Estate Income Trust paid for the houses during the 2021 frenzy, according to securities filings and people familiar with the matter.

Before that bulk purchase, Invitation had added just 470 houses in 2023, mostly straight from builders. It sold 675 in the first half and executives said they expect to sell more aggressively in the second.

AMH, formerly known as American Homes 4 Rent and owner of about 59,000 houses, was also a net seller during the first half of 2023. It sold nearly 1,100 while adding 780, mostly built in house.

AMH plans to build more than 2,200 houses total in 2023 and has bought land to add 13,000 more down the road. Yields are greater with houses that AMH builds specifically to rent than those it can buy, especially now that lumber prices have fallen back from their pandemic surge, CEO David Singelyn told investors at a conference last week.

The same dynamics that are making it hard to buy houses make it a great time to be renting them out. (…)

AMH’s Singelyn estimates that AMH’s rents, which have averaged $2,063 a month, could rise more than 30% before they reach the cost of buying comparable houses.

“The reality is the rental-rate increases, as aggressive as they’ve been, have not kept up with home-price appreciation,” he said.

Since the pandemic, homes have appreciated 45% on average while CPI-Rent is up 19%. And home prices have turned back up…

But we will likely hear Mr. Powell today tell us that rents are falling…

Canada Inflation Quickens to 4%, Driven by Higher Gas Prices BoC’s preferred 3-month core measure rises by a full point

The consumer price index rose 4% in August from a year ago, the quickest pace since April, after a 3.3% increase in July, Statistics Canada reported Tuesday in Ottawa. That’s faster than the median estimate of 3.8% in a Bloomberg survey of economists. On a monthly basis, the index rose 0.4%, double expectations.

Excluding gasoline, the index held steady at 4.1% in July and August.

Two key yearly inflation measures that filter out components with extreme price fluctuations and are tracked closely by the central bank — the so-called trim and median core rates — also increased, averaging 4% from an upwardly revised 3.75% a month earlier, exceeding the 3.7% pace expected by economists.

A three-month moving average of the measures that Governor Tiff Macklem has flagged as key to his team’s thinking rose by a full percentage point to an annualized pace of 4.49%, according to Bloomberg calculations.

Traders in overnight swaps upped bets the central bank will resume tightening, with odds of another rate hike in October rising to about a coin flip, from about a third before the release. (…)

In a separate report Tuesday, Statistics Canada said the job vacancy rate — or the number of vacant positions as a proportion of total labor demand — fell to 4.4% in the second quarter, the fourth consecutive quarterly decline. (…)

Shelter prices were up 6% in August compared with a year earlier, after increasing 5.1% in July. Faster growth in shelter prices was led by the rent index, which rose 6.5% after a 5.5% gain in July, as a higher interest-rate environment raised barriers to homeownership. (…)

In August, services inflation held steady at 4.3%.

FYI, rent inflation was +0.7% MoM in August after +0.4% in July.

National Bank’s economists add:

But the resurgence of inflation in Canada this summer is not confined to energy. From July to August, all 8 major categories were rising at an annualized rate above the Bank of Canada’s target, a third occurrence in three decades.

The widespread nature of price rises is also reflected in the core inflation measures favored by the central bank. Both the CPI trim and the CPI median increased by 0.44% m/m, which translates to the strongest average monthly pace since May 2022. On a three-month annualized basis, the average of the two core measures now stands at 4.5% after evolving in the 3.5%-4.0% band since last August, a situation that was already making the central bank uncomfortable.

However, it is interesting to note that other measures of underlying inflation are evolving at a much less worrying pace. Indeed, still on a three-month annualized basis, CPI excluding food and energy and CPI excluding the eight most volatile components are rising by 3.6% and 3.2% respectively.

This morning’s report presents the BoC with a complex dilemma, as inflation is accelerating while the Canadian economy is starting to bend its knees. Given the lag in transmission and the extremely restrictive level of monetary policy, we still believe that further rate hikes are perilous.

Indeed, the underlying economic weakness, especially the less tight labour market, should eventually ease inflationary pressures. We are also comforted by the fact that deflation in China could mean weak goods inflation in 2024. However, given the BoC’s hawkish bias, the likelihood of it pulling the trigger again increased substantially this morning.

  

• UK rental prices (OOH) rise at fastest pace since records began

Housing Starts Declined in August Higher Interest Rates Intensify the Headwinds for Residential Construction

Total housing starts dropped 11.3% to a 1.28 million-unit pace in August. The monthly decline was broad-based, with single-family and multifamily starts falling by 4.3% and 26.3%, respectively. The surprising pull-back in starts stands in contrast to a strong gain in both single-family and multifamily building permits. (…)

Single-family permits rose 2.0% during August. The monthly gain indicates that a relatively deep pool of potential buyers who have been boxed out of the resale market are leading builders to press ahead despite higher mortgage rates.

A second consecutive pullback in builder sentiment suggests builders may be starting to reassess plans to scale up production in light of the recent rise in 30-year mortgage rates, which are now hovering above 7%. The NAHB Housing Market Index fell to 45 in September, the lowest reading since April. (…)

Meanwhile, multifamily construction continues to shift to a lower gear. Multifamily starts declined 26.3% during August. The 342K-unit pace hit during the month was 41.6% below the same pace registered a year ago.

Multifamily permits picked up 15.8% during August. Multifamily data tends to highly volatile, and substantial monthly swings in starts and permits are not unusual. On balance, however, multifamily construction has trended significantly lower this year as apartment vacancy rates have moved higher, financing costs have increased and lending has become more restrictive.

Higher mortgage rates are exerting renewed pressure on single-family affordability, which could help bolster rental demand in the months ahead. While not quite as robust as recent years, apartment demand has partially bounced back from the drop-off seen in 2022.

Thought the U.S. Office Market Was Bad? Try China China is facing a more basic real-estate problem than the U.S.’s shift toward hybrid work: Developers simply built too much supply, and now the economy is too weak to absorb it.

Nearly 24% of the office-tower space in 18 major Chinese cities was unoccupied as of June, according to CBRE, the real-estate services firm. That is worse than the U.S., where office vacancy rates hit a 30-year-high of 18.2% in June. (…)

China is facing a more basic real-estate problem: Developers simply built too much supply, and now the economy is too weak to absorb it. (…)

A wave of new office towers will hit the market this year, adding to the market gloom. 

“We are closer to the bottom but we aren’t seeing it just yet,” said Henry Chin, head of research for Asia Pacific at CBRE. (…

Most office assets are owned by domestic investors such as real-estate developers, insurance firms and technology giants like Tencent, but some big foreign firms are in China’s commercial property market, too, including BlackRock and U.S. developer Tishman Speyer. (…)

Soho China, one of China’s largest commercial real-estate developers, reported a 93% drop in net profit to around $1.9 million in the first half of the year, and said rents and occupancy rates will be “under continuous pressure” as more projects enter the market in the next three years. (…)

Tencent, which has been renting 15 floors in a Shenzhen office building since 2011, terminated the lease three years ahead of schedule, said the lessor, Netac Technology, in a filing this January. The early end of the contract was due to “intensifying downward pressure on the economy” and slowing consumption growth, Netac said. (…)

Ford Avoids Strike at Canada Plants With Late-Night Union Deal

Unifor, the Canadian autoworkers’ union, pushed for improved pension benefits, higher wages and support for workers during the electric-vehicle transition.

“When faced with the prospect of an all-out strike by 5,600 Unifor members at every single one of Ford’s facilities in Canada, the company made a significant offer to the union,” the union said in a statement.

“The gains achieved were hard fought for over weeks of negotiations at every subcommittee, local and main economic bargaining table,” it said. “This painstaking work has resulted in fundamental, transformative gains that addressed our core priorities of pensions, wages and the EV transition.” (…)

Fain has rejected a Stellantis offer of a 21% raise for UAW members. “It’s definitely a no-go,” Fain said Sunday on CBS’s Face the Nation. “We’ve made that very clear.”

In Canada, rather than negotiating with all three major automakers at once, Unifor selected Ford as the “target” company for bargaining. (…)

Uber makes first operating profit after racking up $31.5bn of losses