Month: January 2024

Americans Are Suddenly a Lot More Upbeat About the Economy  Consumer sentiment gauge posted the largest two-month gain since 1991

Consumer sentiment surged 29% since November, the biggest two-month increase since 1991, the University of Michigan said Friday, adding to gauges showing improving moods. (…)

Consumer sentiment leapt 13% in the first half of January from December, the Michigan survey said, after a sharp rise the prior month. The pickup in sentiment was broad-based, spanning consumers of different age, income, education and geography. (…)

What has changed is that inflation is cooling rapidly, while mortgage rates are down sharply from last year (…).

Consumers’ expectations for inflation a year ahead dropped to 2.9% in January, the lowest level since December 2020, and down from 4.5% in November, according to the Michigan survey.

Fannie Mae’s index of home-buying sentiment jumped 10% in December from a year earlier. That was driven in part by a surge in the share of consumers anticipating lower mortgage rates over the next year. (…)

Media coverage might be rubbing off on consumers, too. The mood of economy-related articles has rebounded since November to the highest level since 2018, according to the San Francisco Fed’s Daily News Sentiment Index. Coverage had skewed much more negatively in the past three years relative to economic fundamentals, a Brookings Institution analysis found. (…)

Wells Fargo:

The fact this outturn comes on the heels of a big December gain means that over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991. Back then, a recession was just ending, today expectations of imminent recession are fading. (…)

Income expectations are on the rise as well. When asked “what do you think is the percent chance that your income in the next twelve months will be higher than your income in the past twelve months?”, 60% responded ‘yes’. Not only does this mark the largest share on record in data going back to the early 2000s, but as long as consumers think their income will be higher, so too will their spending. (…)

Longer term inflation expectations also declined to 2.8% in January from 2.9% in December. This is the lowest reading for five-to-ten year inflation expectations in a year and a half, demonstrating expectations remain well anchored—a welcome sign for the Fed. For context, longer term expectations are now approaching the average rate of 2.7% that prevailed in the measure during the 2010-20 decade. Consumers are thus presently taking note of slowing inflation.

Gas prices have declined thus far in January with the average price of a gallon of gas down about $0.10 to $3.01 from the start of the month, according to AAA. As prices at the pump are one of the most visible measures of the cost of living to U.S. consumers, it is a major driver of month-to-month movement in inflation expectations. The remarkable decline in gas prices since summer 2023 is without a doubt affecting how consumers feel about the cost of living, and this in turn can affect how consumers feel about the economy more broadly.

Source: The University of Michigan, AAA and Wells Fargo Economics

Take big swings in sentiment with a grain of salt. Despite how they “feel” about their income prospects, the labor market is losing momentum. The reality may fall short of the euphoria that has taken hold in terms of income expectations. Also, if consumers rush out and spend more, the increased demand could cause the trend decline in inflation to slow or even reverse course.

Existing Home Sales Dip in December Despite Lower Rates, Home Buying Constrained by Low Supply and Rising Prices

Existing home sales ended last year on a low note and declined 1.0% in December. Single-family sales and condo sales both declined during the month. The 3.78 million-unit pace of total resales hit during the month marks a fresh cycle low and was the slowest sales pace since 2010.

December’s unexpected dip is a reminder that financing costs are just one factor in the decision to purchase a home. Mortgage rates have dropped by over a full percentage point since last October, yet buyers still need to contend with low supply and rising prices.

That noted, there is plenty of evidence that buyers are starting to come out of hibernation as rates move lower. Mortgage applications for purchase, which have risen nearly 30% since bottoming in October at a low not seen since the 1990s, registered another solid gain in the second week of January. The upturn suggests resale activity should begin to gain momentum in coming months.

  

      Freddie Mac and Wells Fargo Economics                         NAR, Mortgage Bankers Association and Wells Fargo Economics

Pending Home Sales Rose 4% in December—Biggest Jump in Over Two Years

Pending home sales rose 4.1% month over month in December on a seasonally adjusted basis—the biggest increase since September 2021—to the highest level in more than a year. They climbed 5.9% from a year earlier, the biggest annual gain since June 2021.

Pending sales jumped because a steep drop in mortgage rates lured buyers to the market. The average 30-year-fixed mortgage rate fell to 6.82% in December from 7.44% in November, the biggest monthly decline since 2008. Buyers who were casually looking when rates were above 7% are now getting serious, Redfin agents say.

The dip in mortgage rates has also brought sellers off of the sidelines, though they haven’t returned with as much intensity as buyers, likely because a majority of them don’t want to give up the ultra low mortgage rate they scored during the pandemic. New listings rose 0.1% month over month to the highest seasonally adjusted level since September 2022, and were up 2.7% year over year—the largest increase since July 2021.

While housing supply has ticked up, it remains below pre-pandemic levels. Active listings, or the total number of homes for sale, rose 3.1% month over month on a seasonally adjusted basis but fell 5.1% from a year earlier. (…)

“Bidding wars are happening again, but they’re much more reasonable than they were during the pandemic homebuying frenzy,” Alwan said. “Houses are getting between one and five competing bids, and instead of offering one or two hundred thousand dollars over the asking price, competitive buyers are offering 3% to 5% over.” (…)

• Renting vs. owning:

Source: @WSJ

• FYI: KB Home last week indicated that selling conditions improved substantially in December with the fall in interest rates. It provided strong guidance on all important metrics for Q1’24 and FY24.

China Buys Near-Record $40 Billion of Chip Gear to Beat US Curbs Imports of machines to make chips rose 14% last year

(…) China’s imports from the Netherlands soared last year ahead of new export controls, which will further limit the ability of companies such as Semiconductor Manufacturing International Corp. to get the latest machinery.

In December, imports of lithography equipment from the Netherlands jumped almost 1,000% from a year earlier to $1.1 billion as firms rushed to buy ahead of the start of Dutch restrictions this month. (…)

EARNINGS WATCH

We now have 52 reports in: the beat rate is 85% and the surprise factor +3.7%.

The actual earnings growth rate of these 52 companies is –0.1% on a +5.2% revenue growth rate.

Trailing EPS are now $220.05 and full year 2024 estimates $243.17.

From The Transcript: CEO confidence is improving

“We’re seeing improved confidence among CEOs and we like our pipeline, but of course, the timing for a robust recovery is uncertain.” – Citigroup © CEO Jane Fraser

“Corporate confidence will ultimately drive the cycle forward, and we are encouraged that CEO and boardroom optimism is growing evidenced by the build of our advisory and IPO pipeline.” – Morgan Stanley (MS ) CFO Sharon Yeshaya

From Callum Thomas:

Fund Manager Performance Cycles:  It’s harder for stock pickers (who get measured against cap-weighted indexes) to outperform the index when leadership is very narrow and the index gets increasingly concentrated (e.g. dot com bubble, US big-tech decade). But it’s precisely those conditions which improve the odds for fund managers to outperform in the future (market cap-weighted indexes end up becoming more concentrated and exposed to the most expensive stocks during a sector-specific boom e.g. dot-com, mag-7), meanwhile the out-of-favor stocks get cheaper. So active management likely makes a come back in the coming years.

Source: Cambridge Associates via Snippet Finance

US Stockmarket Valuations — Tech vs The Rest:  An important chart from my Q1 Strategy Pack, often requested, and highly relevant to some of the themes throughout this edition — it shows the combined PE ratio (average of cyclically adjusted PE, trailing PE, forward PE) for US tech stocks (blue line) and for the rest of the market.

Basically the takeaway is that tech stocks are expensive, and the rest of the market is not.

Ed Yardeni offers several complementary charts:

• IT P/Es are back to their recent peaks, unlike the S&P 500 Index P/E:

• Yardeni’s Megacap-8 now account for more than 27.8% of the S&P 500 market cap and 50.8% of its growth component:

• The S&P 500 ex-Megacap-8 P/E is 16.7. Using the Rule of 20, the R20 P/E is 20.6, roughly fair value.

• The Megacap-8’s expected long term earnings growth rate is above 40x. Unrealistic given their size.

• But this is not a homogeneous group…

Unemployment Claims Drop to Lowest Level Since September 2022

In the week ending January 13, initial jobless claims were at a seasonally adjusted level of 187,000, a decrease of 16,000 from the previous week’s revised figure. The latest reading is lower than the forecast of 207,000 and marks the lowest level for initial jobless claims since September 2022.

The 4-week moving average was 203,250, a decrease of 4,750 from the previous week’s revised average.

The dash line is 2019 average:

• Jobless Claims (LEADING Indicator!!!) posts its 2nd strongest reading since the 1960s!! Yet, #economists continue to discuss “landing.” (@RBAdvisors)

Single-Family Trending Up as Multifamily Downshifts

Total housing starts declined 4.3% to a 1.46 million-unit pace in December. A monthly drop in starts was widely expected given November’s surprising surge in activity that looks to have been a result of unseasonably warm weather pulling forward activity into the month. The payback in December occurred from a dip in single-family starts, while multifamily starts registered a solid gain.

Through the monthly volatility, multifamily construction is moving to a lower gear as apartment market fundamentals soften. By contrast, single-family construction still looks to be improving on trend as builders become more optimistic about future sales on account of lower mortgage rates and brightening economic growth prospects. Although multifamily construction looks set to remain sluggish, another solid gain in single-family permits during December and a jump in builder confidence suggest single-family activity should continue to gradually march higher in coming months.

  

China’s Travelers Stay Home, Draining $130 Billion From Global Tourism

Chinese travelers, once the biggest spenders on overseas trips, have been staying close to home since the country reopened its borders 12 months ago from the Covid-19 pandemic.

Outbound airline capacity from China stood at about 60% of 2019 levels during the fourth quarter, based on figures from aviation analytics firm Cirium. That’s a much slower recovery than in the US or UK — something that has disappointed airline executives, tourism officials and luxury store owners alike.

Chinese travelers made 170 million trips outside of its borders in 2019, according to the China Outbound Tourism Research Institute. The $248 billion they lavished on items from plane tickets to hotel rooms and designer brands made up 14% of the globe’s foreign-travel spending, based on World Travel and Tourism Council data.

The Chinese pullback has erased $129 billion from global tourism, a loss being felt from Taipei noodle shops to Paris boutiques. China’s network of international airline routes has retracted by 43%, according to Cirium. Forty-five foreign destinations are no longer served by direct flights at all. (…)

With the economy struggling, Chinese officials have prioritized local tourism over distant trips – adding duty-free shopping on the island of Hainan, for example, and opening new concert venues. The government has also pushed travel to a handful of spots like Saudi Arabia, a key partner in China’s One Belt One Road initiative. (…)

Carriers in the US, Canada and the European Union, for example, can no longer traverse Russia — making flights with Asia longer, costlier and less attractive. (…)

China’s Mutual Funds Implode at Fastest Pace in Five Years as Stocks Sink Fund closures quicken as assets shrink, redemptions rise

About 240 local mutual funds were liquidated last year, according to Bloomberg-compiled data dating back to 2014. That’s the most since 2018, when stricter asset management rules triggered a major industry shakeup. Among the closed funds, four out of five had a stock-focused mandate, which was a record.

The trend has continued into this year, with another 14 funds already liquidated and two dozen more warning of imminent closures, according to Bloomberg calculations of official data.

China’s mutual fund industry is confronting a double whammy as the country’s stock selloff intensifies, with the surge in product closures coinciding with a plunge in the amount of new subscriptions to a decade-low. The fund liquidations have accelerated the downward spiral in the world’s second-largest stock market, forming a vicious cycle as retail investors abandon their once-preferred product for the safety of cash. (…)

Actively managed mutual funds, once a favored investment tool among Chinese retail investors, are fast losing their appeal: a gauge of stock-focused mutual funds has declined 7.7% this year, according to China Securities Index Co. Meantime, investors also are falling out of love with exchange-traded funds that drew record subscriptions last year but now suffer a supply glut, said Morningstar’s Li. (…)

“The market also is aware that there has been a lot of redemption. There are funds that were set up three years ago and now we have come to the end of that lockup,” said Nicholas Yeo, head of China equities at abrdn at a briefing Thursday. “So there is a concern about short-term pressure on selling and that’s why domestic investors are not willing to go into the market right now.”

Also:

Asian fund managers have cut their allocation to China by 12 percentage points to a net 20% underweight, the lowest in more than a year, according to the latest Bank of America survey.

Managers of benchmark-tracking funds have sold a net $300 million of shares traded in mainland China and Hong Kong this month, according to a Morgan Stanley analysis. That’s a reversal from the last half of 2023, when they bought $700 million on a net basis even as stock indexes declined.

• Chinese stock rout accelerates as foreign investors sell out

FYI from Ed Yardeni:

The S&P 500 Semiconductors stock price index jumped to another record high (chart). It is back to the pre-pandemic uptrend. The industry’s forward earnings is at a record high too. The forward P/E is also high at 25, up from 15 in early October 2022. Chips aren’t cheap, but they are hot.