Year: 2023

Higher Gasoline Prices Boost Retail Sales

Higher pump prices helped drive a 0.6% increase in total U.S. retail sales in August from the prior month, while consumers modestly boosted their spending on other goods, the Commerce Department said Thursday. Excluding gasoline, other sales at stores, online and at restaurants rose 0.2%. (…)

“The jump in energy prices is the new influence on inflation,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “Fuel filters into just about everything.” (…)

Shoppers also spent more last month at electronics and appliance stores and for clothes as students headed back to school. They boosted sales at car dealerships despite higher interest rates and prices. (…)

The producer-price index, which captures what companies charge businesses and other customers, rose 0.7% in August from the prior month, the Labor Department said.

Excluding energy, though, the PPI increased just 0.1% in August. A less volatile so-called core measure—which excludes food, energy and supplier margins—climbed 0.3% last month, the same as July’s revised reading. (…)

Based on this week’s inflation reports, the core PCE price index rose just 0.1% in August from the prior month, according to forecasts by economists at JPMorgan Chase, Goldman Sachs and Citigroup. That would mark the smallest monthly increase in over a year and would lower the 12-month core PCE inflation rate to 3.8% in August from 4.2% in July. (…)

So many ways to skin the retail sales cat as Wells Fargo shows.

Since April:

• total sales: +5.8% annualized, last 3 months: +5.2% a.r.. Last 2 months: +6.7% a.r..
• control sales: +5.6% annualized, last 3 months: +4.9% a.r.. Last 2 months: +5.5% a.r..

Americans are still buying a lot of goods.

Strong sales at apparel and general merchandise stores in July and August suggest a good back-to-school season which bodes well for holiday sales in the important 4th quarter.

A narrow measure of spending on services, sales at restaurant and bars rose 0.3% MoM in August after +0.8% in July. Since April: +9.2% annualized. Last 3 months: +7.0% a.r.. Last 2 months: +6.6% a.r..

This highly discretionary spending category is not showing any alarming sign, is it?

UAW Strikes at GM, Ford and Stellantis Plants The walkouts are the first to hit all three automakers at the same time and affect factories in Missouri, Ohio and Michigan.

China’s Economy Shows Fresh Signs of Fragile Recovery Spending in stores and factory production rose in August, and unemployment fell, but the property sector continued to threaten growth.

(…) Retail sales rose 4.6% last month from a year earlier, compared with a 2.5% annual gain in July. Industrial production expanded 4.5% year over year, after a 3.7% increase in the prior month.

The unemployment rate fell to 5.2% in August from 5.3% in July. China last month stopped publishing figures for youth unemployment, which had become a focus of international attention after joblessness among those ages 16 to 24 pushed past 20%. Officials said they wanted to make some methodological improvements to the data. (…)

The central bank said Friday that it cut the interest rate on 14-day loans to banks, while on Thursday it said it would lower banks’ reserve requirement ratio by 0.25 percentage point, to 7.4%, making more funds available for loans. The ratio was last cut in March. (…)

In the first eight months of 2023, outlays on buildings and other fixed assets were up 3.2% from the year-earlier period, slowing from the 3.4% pace of January-July. Investment in infrastructure and manufacturing was up, but real-estate investment was down 8.8%. Overall private investment was down 0.7%. (…)

Of the 70 cities, 52 reported a monthly decline in August, up from 40 cities in July. Average home prices in August were down 0.55% from a year earlier, compared with July’s 0.57%. (…)

(ZeroHedge)

Reuters:

New home prices fell at the fastest pace in 10 months in August, down 0.3% month-on-month after a 0.2% decline in July, according to Reuters calculations based on National Bureau of Statistics (NBS) data. Prices were down 0.1% from a year earlier, after a 0.1% decline in July.

For August, property investment fell for the 18th straight month, down 19.1% year-on-year from a 17.8% slump the previous month, separate data showed on Friday. Home sales are down for the 26th consecutive month, according to Reuters calculations based on the data. (…)

Around 30 cities eased home purchase curbs and relaxed mortgage rules for buyers in recent weeks but analysts say Beijing may have to introduce more aggressive property easing measures to deliver a real recovery.

Authorities may also need to lift almost all restrictions on home transactions, invest more in the urban renovation programme, speed up infrastructure spending and restructure local government debt, said Nomura.

Moody’s on Thursday cut China’s property sector outlook to negative from stable, citing economic growth challenges, which the rating’s agency said will dampen sales despite government support. (…)

• China’s Housing Woes Swamp Another State-Linked Developer

Sino-Ocean Group said on Friday that it has suspended payments on eight U.S. dollar bonds with a total face value of around $4 billion, and will seek to restructure its offshore debt. The developer, which is about 30% owned by state-owned insurer China Life, has hired Houlihan Lokey as its financial adviser and Sidley Austin as legal adviser.

The company said it recently experienced a rapid decline in contracted sales and has been facing mounting liquidity pressure. Sino-Ocean’s Hong Kong-listed shares dropped 9% on Friday. Prices of some of its dollar bonds had tumbled to below 10 cents on the dollar earlier this week, according to FactSet.

Some other state-linked property companies, including Central China Real Estate and Greenland Holdings, have defaulted in recent months. China’s top surviving private developer, Country Garden, narrowly averted an international debt default recently after making two overdue bond-coupon payments right before the end of a grace period.

European Central Bank Raises Key Interest Rate to Record High Central bank signals this might be enough to combat inflation, but doesn’t rule out further increases

In a split decision, ECB officials raised the bank’s deposit rate to 4%, the 10th increase in a row and a vertiginous rise from below zero last year. (…)

ECB officials judge that rates “have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution” to reducing inflation to their 2% target, Lagarde said, repeating language used in the bank’s policy statement. (…)

New economic forecasts published by the ECB Thursday suggested that eurozone growth will slow significantly more than previously expected this year and next, while inflation will remain markedly above the ECB’s target of 2% through next year. The bank raised its forecast for inflation next year from 3% to 3.2%, mainly to reflect “a higher path for energy prices.” (…)

Underlying inflation in August was 5.3% in the eurozone and 4.3% in the U.S. (…)

Canadian household debt ratio down in second quarter as disposable income grew

The agency says household credit market debt as a proportion of household disposable income, on a seasonally adjusted basis, fell to 180.5 per cent in the second quarter compared with 184.2 per cent in the first quarter of the year. (…)

Meanwhile, the household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, was 14.79 per cent in the most recent quarter, down from 14.90 per cent in the first quarter, when it hit its highest point since 2019.

The moves came as seasonally adjusted household credit market borrowing fell to $17.1-billion in the second quarter compared with $20.4-billion in the first quarter as demand for mortgage loans fell to their lowest point since 2005.

The seasonally adjusted total stock of household credit market debt in the second quarter was $2.86-trillion, up 0.6 per cent from the first quarter, while mortgage debt totalled $2.13-trillion.

EQUITIES

Goldman’s Peter Oppenheimer’s charts show that the S&P 500 is up 17% YtD but the median stock is up only 3%.

This chart suggests that even excluding “Big Tech”, U.S. valuations are stretched.

The decline in core inflation from 4.7% to 4.3% reduced the Rule of 20 P/E to 25.0, still expensive, even using forward PS (R20 P/E = 23.5).

Since November 2022, trailing EPS have declined 2.9% but inflation slowed from 6.6% to 4.3%, boosting the Rule of 20 Fair Value (yellow line in chart) 16% to 3400.

Inflation Rose in August as Gasoline Prices Jumped Mild price pressures excluding energy keep Fed on track to pause rate increases next week

The consumer-price index, a closely watched inflation gauge, rose 0.6% in August from the prior month, the Labor Department reported Wednesday. More than half of the increase was due to higher gasoline prices.

So-called core prices, which exclude volatile food and energy items, rose by a relatively mild 0.3% last month after even lower readings in June and July. The August increase reflected higher costs for items such as airfares and vehicle insurance. (…)

On an annual basis, prices overall were up 3.7% in August versus 3.2% in July. Annual core inflation edged lower to 4.3% in August from 4.7% the prior month. (…)

The core CPI over the three months through August rose at a 2.4% annual rate, down from a 5% annual rate for the preceding three-month period. (…)

Food prices rose a mild 0.2% in August on a monthly basis, the same pace as in July. (…)

This Bloomberg chart illustrates the components of inflation. All trends are down on a YoY basis:

But the monthly dynamics show stickiness in the heavyweights: on a MoM basis, core CPI was almost double June and July growth rates although +3.6% annualized is encouraging.

CPI-Rent must be shaking the almost universal view that declining rentflation will surely drag core inflation down to the promised landing: its +0.51% rise in August beats its +0.46% average monthly gain since March. Last 6 months annualized: +5.6%; last 3 months: +5.6%; last 2 months: +5.5%; last month: +6.2%.

This 33% weight on the CPI is still up 7.8% YoY. To get to +3.0% by December, CPI-Rent needs to decline 1.3% sequentially from August or -0.31% per month.

Since 1950, that’s more than 870 months, CPI-Rent declined in only 8 months (7 of which right after the GFC) with an average monthly “drop” of -0.05%, the largest having been -0.14% in August 1992.

Lastly, core Services (black), closely correlated with wages, reaccelerated to +0.4% in August after +0.25% in June and +0.35% in July. Last 6 months annualized: +4.5%. Last 3 months: +4.1%.

Meanwhile, my “CPI-Essentials” measure was +5.2% YoY in August, a sharp increase from its June low of +4.1% as the renewed energy cost bite added to the rent squeeze. CPI-Food-at-Home rose only 0.2% in August, like in June, but that is still higher than the -0.1% monthly average between March and June.

In all, the Fed’s job is not done yet and consumers’ discretionary income keeps getting squeezed.

Retail sales are out this morning.

Fuel Prices Are Soaring: Who Is Feeling the Pinch? Production cuts made by OPEC and its allies have pushed crude oil to 10-month highs, pressuring construction companies, transportation businesses and farmers.

(…) A growing global thirst for fuel, fading fears of a U.S. recession and last week’s extension of Saudi and Russian cuts have propelled Brent crude above $90 a barrel. Higher gasoline prices accounted for more than half of August’s 0.6% increase in U.S. goods and services prices from July, according to Labor Department data released Wednesday. The prices of heavy fuels, which are more easily made from more-dense Russian and Middle Eastern crudes than U.S. shale oil, have risen even more than those of crude and gasoline.

Jet fuel has risen the most, its price soaring more than 50% on the Gulf Coast since early May. Chinese demand has ballooned as Beijing has relaxed pandemic-era travel restrictions, pushing its August jet fuel consumption back toward its prepandemic level from below 60% a year earlier, according to the analytics company Kayrros. (…)

Jet fuel prices might have further to run. Chinese international flight-fuel use is still 40% below its prepandemic level, according to Kayrros. Meanwhile, Asian refiners are still working to reverse Covid-era adjustments that reduced their jet fuel output, said Mukesh Sahdev, an analyst at the consulting firm Rystad Energy.

A tight jet fuel market is buoying diesel and marine fuel prices, said Sahdev, since all three fuels derive from the same fraction of the oil barrel. Making a gallon more of one means a gallon less of another. (…)

The price of diesel at the pump has risen 48 cents a gallon since July, according to AAA, compared with 9 cents a gallon for gasoline. (…)

Dwindling inventories could keep crude oil prices high in the coming months. The cuts by OPEC+ and growth in global consumption will cause demand to outstrip supply through the end of the year, according to Rystad, reversing a surplus in the first quarter. (…)

• Costlier Fuel, Labor Cut Into Corporate Profit

UAW, Automakers Remain ‘Far Apart’ in Contract Talks The union’s president said the United Auto Workers are preparing walkouts at select factories when contracts expire late Thursday.

Canada needs 3.45 million more homes by 2030 to cut housing costs as population grows, CMHC predicts

This is the second report from Canada Mortgage and Housing Corp. that quantifies the number of new homes the country needs to build to ensure that households are not spending more than 40 per cent of their disposable income on shelter. (…)

If the country continues to admit record levels of about 500,000 new permanent residents per year until the end of the decade, CMHC predicts an additional 4 million new housing units will be needed instead of 3.45 million. (…)

The typical home price across the country topped $700,000 as of July. And even though home prices have declined since the Bank of Canada started hiking interest rates in March 2022, values are still 40 per cent higher than 2019, prior to the start of the pandemic. As well, the nation’s apartment vacancy rate is just below 2 per cent and the average asking rental price for a one-bedroom unit is above $2,000 per month.

The housing agency uses the years 2003 and 2004 for its benchmark on affordability because it was a time when the economy was stable and housing costs were relatively low. During that period, the average household spent about 35 per cent of its disposable income on shelter. That has since increased to nearly 50 per cent nationally and nearly 60 per cent in Ontario and in B.C., according to CMHC’s previous report. (…)

The typical home price in the Toronto region was $1,161,200 in July, according to the latest data from the Canadian Real Estate Association. In the Vancouver region, it was $1,210,700 and in the Montreal area it was $520,000. (…)

For the country to get to 5.2-million new units by 2030, the rate of building would need to more than double from current levels. New home construction has already slowed due to the rise in material and labour costs.

Speaking of affordability:

Home builders tell us 32% of net sales this year have been to first-time buyers. How are first-timer affording new homes?

• 1) Price cuts
• 2) Rate buydowns
• 3) Smaller floorplans
• 4) Lower-cost finishes
• 5) Help from Mom+Dad
• 6) Moving farther from cities
• 7) Spending “excess” savings (@EricFinnigan)

Ray Dalio Says He Doesn’t Want to Hold Bonds, Cash ‘Is Good’

(…) “Temporarily right now, cash I think is good.”

When asked how to unwind the world’s huge borrowings, he said when debt becomes a big share of the economy, the situation “tends to compound and accelerate” as interest payments also grow. “We’re at that turning point of acceleration.”

While the size of the deficit is going to require the US to sell a lot of bonds to investors around the world, it’s difficult to keep interest rates at a level that’s attractive for creditors to hold, but not too high to harm the issuer, Dalio said. When investors choose to sell, pushing up yields, the central bank will need to decide whether to print money and buy bonds, which will drive up inflation pressures, he added.

“We’re seeing that dynamic happen now,” Dalio said. “I personally believe that the bonds, longer term, are not a good investment.” (…)