Month: January 2024

Fed’s Williams Says Rates Are High Enough to Cool Inflation to Goal Need policy to stay restrictive for ‘some time,’ Williams says

(…) “I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis,” he said.

The New York Fed chief said it would be natural for interest rates to decline as inflation falls — a sentiment expressed by several other policymakers in recent weeks — but the timing and speed of any cuts would be dependent on the path of inflation and the economy.

“As inflation comes down over time” and the economy and labor market re-balances, Williams said, “my expectation is interest rates will also come down over time.” (…)

The tone of Williams’ comments differed from those he made on Dec. 15, when he said the near-term question for Fed officials was whether policy was “sufficiently restrictive” to ensure inflation comes back to 2%. At the time, he also added that officials “aren’t really talking about rate cuts.” (…)

“I’m not worried about inflation kind of getting stuck at too high a level — like 3 or 4% — right now,” he said. “Things are moving in the right direction.” (…)

Wage Growth Tracker Was 5.2 Percent in December

The Atlanta Fed’s Wage Growth Tracker was 5.2 percent in December, the same as for November. For people who changed jobs, the Tracker in December was 5.7 percent, the same as for November. For those not changing jobs, the Tracker was 4.9 percent, up from 4.6 percent in November.

This 3-m m.a. series has been stuck at 5.2% for 4 consecutive months.

Same data for job switchers, presumably “the market rate”, has hooked up to 5.7%. The correlation with overall hourly wages is 78%.

FYI, the correlation between hourly wages and core CPI is 79%.

Manhattan Renters Get No Relief in a Still-Competitive Market

The median rent on new leases signed in December was $4,050 — virtually unchanged from a year earlier and up 1.3% from November, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported Thursday. It was the first month-over-month increase since July, in a season when rents typically are expected to decline.

Leasing surged for the second month in a row, with deals jumping 14% from December 2022, a sign of continued high demand that has kept the market competitive.

While rents have slipped from their record highs reached last summer, and the supply of apartments has been climbing, it hasn’t been enough to bring New Yorkers the relief that would generally come in the winter months. A period without sharp rent increases may be the best they’ll see for some time, according to Jonathan Miller, president of Miller Samuel. (…)

Manhattan’s vacancy rate reached 3.42% last month, the highest level since July 2021, the firms reported. Listing inventory was up 33% from a year earlier to 7,621 units.

However, that’s still historically low, according to Miller, who said the share of leases with bidding wars held steady last month at around 15%.

“We wouldn’t be having bidding wars if supply was adequate,” he said. (…)

Outer boroughs are also seeing robust demand. New leases more than doubled from a year earlier in Brooklyn, where the median rent increased annually for the 24th time, to $3,469. In northwest Queens — the neighborhoods closest to Manhattan — leasing rose from a year earlier at the highest rate in 21 months. The median rent there was $3,485, up 24% from the prior December.

Axios Vibes: America’s unhappiest people

Republicans, rural residents, renters, women and singles disproportionately feel like they’re in a big fat funk financially, our debut Axios Vibes survey by The Harris Poll reveals.

It’s not what voters see — the economy’s improving with rising wages and low unemployment. It’s how they feel that could tank President Biden in November. (…)

Harris’ research also suggests that many Americans are “consuming in denial” — continuing to spend and run up credit card bills even though they’re short on cash — and that “they’re looking to deflect some of the blame” to leaders in government, said John Gerzema, CEO of The Harris Poll.

“There’s a sense of entitlement, that Americans feel like, ‘We’re worth it, so I might change my vote but I’m not going to change my lifestyle,'” Gerzema said. (…)

37% of Americans rate their financial situation as poor. That climbs to 42% for Republicans, 43% for women, 46% for rural residents, 47% for singles and 57% for renters. (…)

• 25% of Americans say they’re falling behind financially, compared with 30% of women and Republicans, 33% of rural residents and 36% of renters.
• 41% of Americans say their finances are worse today than they’d have predicted if they’d been asked, pre-COVID, to imagine the future. That surged to 51% for renters, 53% for rural residents and 55% for Republicans. (…)

76% of respondents — and 82% of Republican and Hispanic respondents —agree with this statement: “Economists may say things are getting better, but we’re not feeling it where I live.” (…)

Despite widespread concern over the economy and the promise of a turbulent election year, many Americans did express optimism about 2024.

Two-thirds say they feel 2024 will be better than 2023.

Importers Face Surging Shipping Costs, Delays as Red Sea Diversions Pile Up Average costs to ship containers have nearly doubled since late November

(…) The increases have also accelerated in the past two weeks on routes that traditionally use the Suez. The spot-market price to move containers between China and Rotterdam in the Netherlands reached $3,577 in the week ending Jan. 4, a 115% increase from the week before. (…)

The Suez is used by about one-third of global container cargo and about 30% of freight bound for U.S. East Coast ports, according to Everstream Analytics, a supply-chain risk-management company. (…)

The higher costs are hitting even importers that negotiate longer-term contract rates, industry experts say, because operators are imposing surcharges ranging from hundreds of dollars to more than $1,000 per box to cover rising costs as a result of the Red Sea diversions. Some shippers’ woes are being compounded by restrictions at the Panama Canal where a drought is limiting the number of vessels that can transit the waterway.

The shift to longer shipping routes around Africa is raising fuel and insurance costs and reducing containership availability, said Lars Jensen, chief executive of Denmark-based consulting firm Vespucci Maritime. (…)

Low unemployment isn’t just a U.S. story

The unemployment rate in the eurozone fell to 6.4% in November, matching an all-time low, the Eurostat statistics agency said. That coincided with inflation of only 2.4% for the 12 months ended that month.

Price pressures have diminished on both sides of the Atlantic without workers bearing the brunt, contrary to traditional economic models. (…)

There are exceptions to the low-unemployment conditions that apply in the U.S. and eurozone. The jobless rate has moved up significantly over the last year in the United Kingdom and Canada, for example.

The experience of the last year in both the U.S. and Europe could trigger acknowledgement that higher unemployment isn’t always the medicine needed to relieve price pressures. (Axios)

China Developer Sino-Ocean Said to Seek Yuan Bond Extensions It proposes to extend four yuan bonds by up to 30 months

The state-backed developer’s extension plan is a reminder that China’s unprecedented real estate debt crisis is far from over, despite emerging signs of relief in the credit market after two major developers said they plan to repay some maturing debt. Sino-Ocean’s discussions also intimate the debt risk spreading beyond the private sector. (…)

Sino-Ocean offers to repay the notes via six installments every three months starting from the 15th month, they added.

The builder told creditors that housing sales continue to slump and there’s no improvement in liquidity, the people said. (…)

SENTIMENT WATCH

The latest batch of indicators are all consistent with our “immaculate disinflation” economic scenario, which is bullish for stocks. The only question is whether the market has discounted all the good news for now. Sentiment indicators remain very bullish, which is bearish from a contrarian perspective. (Ed Yardeni)

TECHNICALS WATCH

S&P 500 Large Cap Index – 13/34–Week EMA Trend (CMGWealth)

SEC Approves Bitcoin ETFs for Everyday Investors The exchange-traded funds will allow investors to buy bitcoin as easily as stocks or mutual funds.

US Consumer Borrowing Surges on Jump in Credit-Card Balances

Total credit rose $23.8 billion after rising a revised $5.8 billion in October, according to Federal Reserve data out Monday. The figure well exceeded the highest estimate in a Bloomberg survey of economists, which had a median forecast of $8.6 billion.

Revolving credit outstanding, which includes credit cards, increased $19.1 billion in November, the most since March 2022. Non-revolving credit, such as loans for vehicle purchases and school tuition, climbed $4.6 billion. The figures aren’t adjusted for inflation. (…)

According to separate data from the New York Fed, the amount of revolving debt outstanding was more than $150 billion higher in the third quarter than a year earlier, the largest annual increase in data back to 1999.

There are some signs of stress. New York Fed data also showed the rate of credit-card debt becoming newly delinquent rose in the third quarter. The increases were largest for millennials, or those born between 1980 and 1994, as well as people who also have auto loans and student debt.

Goldman Sachs:

(…) in recent quarters stock and home prices have recovered from their declines, strengthening household balance sheets. This has left total household net worth as a share of disposable income at 740%, the highest level in history aside from 2022.

Recent data releases from the Distributional Financial Accounts suggest that balance sheets have strengthened across the income distribution. In particular, households in the lower half of the income distribution, who typically have about twice as much of their wealth in real estate as in equities, have benefited from the steady rise in home prices over the past few years and experienced a meaningful increase in their net worth-to-income ratio since 2019.

See also my Sept. 11,2023 post: The Wealth Defect

Rent Rant (4)

We get good data on most everything from the BLS or other research outfits. Why can’t we get decent data on rent which is about 30% of CPI and 40% of core CPI? The FOMC itself has been wrongly guessing trends in the rental market for over 3 years.

Here’s a non-exhaustive run down of recent “expert” analysis for your consideration.

The WSJ: U.S. Rents Drop for Third Straight Month as Apartment Construction Booms Rising supply and vacancies are motivating landlords to lower asking rents, particularly in the South and West

The median U.S. asking rent fell 0.8% year over year in December to $1,964, according to Redfin’s report Monday. That’s on the heels of a 2.1% annual drop in November—the largest since 2020—and a 0.3% decline in October. December rents only slightly changed from the month prior (-0.2%).

As landlords look to fill vacancies created by the building boom, many have turned to dropping asking rents. They also are offering incentives, such as a free month of rent and reduced parking costs, as a way to draw potential renters. These additional concessions mean the total price that renters are paying is likely falling faster than the data suggest.

“High supply—more so than low demand—is driving rent declines,” Redfin economics research lead Chen Zhao said in the report. “But if mortgage rates continue to drop at a fast clip in 2024, slowing rental demand could become a major driver of rent declines. That’s because more Americans would ditch the rental market to become homeowners, leaving landlords with even more vacancies.”

There are currently more newly completed and under-construction apartments in the U.S. than there were a year ago. The number of completed apartments is near the highest level in more than 30 years, and the number of buildings still under construction is just below the record high.

Because renters have more options these days, the rental vacancy rate grew to 6.6% in the third quarter—the highest level since the first quarter of 2021. (…)

Goldman Sachs: “We expect a 0.45% increase in both rent and OER in December. Rent growth for new tenants has slowed from 5.7% in 2022 to only 0.6% in November, and we expect this to translate into a slower pace of shelter inflation in 2024. We expect shelter inflation to be running at a monthly pace of 0.25-0.30% by 2024H2.

Rosenberg Research:

The Apartment List National Rent report just came out for January and showed apartment rents going in the complete opposite direction of the Case-Shiller home price index — sagging -0.8% MoM for the fifth consecutive decline (and deflating in 83 of the 100 cities in the sample).

The YoY trend remained in negative territory at -1% — a far cry from the 2021-2022 peak of around +18%. The gap between tepid demand and abundant supply of multi-family units (and there are still around 1 million units under construction and soon to flood the market) has taken the national vacancy rate up to 6.5% (above the pre-Covid level of closer to 6%) from the cycle-low of 3.9% in October 2021.

As per the report:
“Despite a recent slowdown in new building permits being issued, the number of multifamily units under construction remains near record levels. As developers work through this robust construction pipeline, the supply of new apartment inventory should remain strong throughout 2024. This means that renters should have more available options than they have in some time, especially in the Sun Belt markets where construction activity has been strongest.”

Just imagine what happens to the YoY inflation rate and core rate once the lagged BLS rental data (showing near +7% YoY increases) “catches down” to what is happening in real time. The math is almost incredible: all else equal, we could well end up seeing the former (headline) easing sharply to 0.6% and the latter (core) decelerating to 0.9%.

  

For the record, here’s what Rosenberg Research headlined in January 2023: “Big Rental Disinflation Coming Our Way”

And in April 2023: “RENTAL INFLATION TO HEAD IN REVERSE”

(…) we think that the demand-supply mismatch is going to correct itself because of an outward shift in the supply curve during the second half of the year. The supply of rental units, which are predominantly apartment buildings (multi-family units), was severely curtailed last year. In fact, completed units built for rent grew by a meagre 0.6% in 2021 (the average annual change for the last 20 years is 2.5%). As a consequence, the rental vacancy rate dipped to 5.6%, the lowest since Q3-1984.

This tightness in the apartment rental market has contributed to the surge in rents. But builders have responded to high demand with a classic supply response, that is, by building more. Housing starts on multi-unit structures averaged about 40% higher on a monthly basis throughout the entirety of 2021, when compared to the past 10-years.

Given the surge in starts, apartment construction is now booming (…). The level of multi-family units under construction is currently at 811k — the highest it has been since June 1974. This means that there is a rich supply pipeline, which will increase the number of units available to rent.

Currently, it takes around 15 months for a start to morph into a completion. By factoring in that lag and taking into account the number of multi-family units started last year, we will end up adding about 450k units to the rental stock in the next 12 months. This is roughly 25% higher than 2021 and will be the largest 12-month percent change since 2014 (a 1.5 standard deviation event). Additionally, there are also about 120k multi-family units which have been “authorized but not yet started.” Once the builders commence working on these projects, it will only add to the wave of incoming supply.

(…) We find that the upcoming increase in the supply of rental apartments can potentially cause the vacancy rate to hook up by 1 to 1.2 percentage points in the next 12 months. Since the vacancy rate is inversely related with rents (primary rents and OER), an increase in the former can result in the latter declining by up to 1.5 percentage points to roughly 3% (YoY) over the same timeframe.

A 1.5 percentage point reduction in rents will shave off 45 basis points from headline CPI and 60 basis points from the core index. While this may not sound like much given the inflation prints that we have seen lately, the large flow of multi-family units coming our way implies that rental inflation has a higher chance of going down than up, which would be contrary to what the consensus expects.

Builders have taken a cue from higher rental demand and are building units at an unprecedented pace. As such, we can expect the vacancy rate start to start hooking back up and rental inflation to reverse course. This process seems to have already started as evidenced by the moderation observed in March in the pace of CPI rents. Other private rental websites like Apartment List are also witnessing the same phenomenon, with monthly changes in rent at much lower levels than were seen last year and the vacancy rate is also gradually starting to increase.

CPI-Rent was up 6.9% YoY in November with MoM growth rates stable around 0.5% (6.0%+ a.r.) since March 2023.

Rosenberg was far from being alone crying wolf on rent in recent years. The strong consensus remains that rentflation is about to slow down considerably.

I am no rent expert, I simply observe the available data:

• This puzzling chart highlights what many say is the coming tsunami of apartments. Units under construction have exploded, well above starts since 2016 and even more so since 2021 (note that “starts” and “completions” are at annual rates unlike “under construction”). The data implie that, of the roughly 1.35 million apartment units started since 2021, ~685k were completed in the last 7 quarters but 991k are still under construction, and still rising even though starts and completions have declined in 2023. Strange math that a Census Bureau economist suggested is possibly due to “constraints preventing the builder from completing a project”. At the end of the day, builders can only complete what they started. It seems better to focus on “completed” units which totalled 391k units, 9% more than the average of the previous 4 years.



• True, rental vacancy rates have gone up and, at 6.6%, exceed pre-pandemic levels. But they are still historically very low. Furthermore, CPI-Rent is significantly better correlated with wages. On housing, people tend to dwell based on what they can afford to pay:

• Zillow has the most comprehensive rent data. It is still not as good as it should because it also only uses new rentals which are less than 10% of all rentals in the U.S.. Seasonally adjusted MoM rent growth troughed in June 2023 and has been accelerating every month since, reaching 0.32% in November, +3.9% annualized. On a YoY basis, Zillow rent is up 3.2% in November, close to John Burns Research’s 3.5% growth rate. CPI-Rent, which includes renewals, is still rising 0.5%+ MoM (+6.9% YoY).

• In absolute terms, Zillow rent has continued to rise, with CPI-Rent trying to catch up to close the apparent 10% gap to “market”.

• John Burns Research estimates that the monthly premium to own versus rent has now hit $1,030 per month, compared to $884 per month at this time last year, “increasing demand for rental homes while reducing demand for homeownership”. JBR reckons that 5.5% is the magic mortgage rate:

• 62% of consumers believe a historically normal mortgage rate is below 5.5%.

• 71% of prospective home buyers who plan to purchase their next home with a mortgage say they are not willing to accept a mortgage rate above 5.5%.

US Small-Business Optimism Rises to Five-Month High on Earnings

Price Wars Break Out Among Consumer Brands in China as Growth Slows Aggressive discounts from local players pull in global brands

A $3 KFC combo featuring a chicken sandwich, fries and soda. A $1.20 beer from a German supermarket. A new chain of grocery stores that stocks only deeply discounted soon-to-expire foods.

These are some of the deals foreign and domestic brands are rolling out to woo Chinese shoppers trying to stretch every penny as consumer confidence in the world’s second biggest economy fades. Across Chinese high streets, discounts and special deals are being advertised from clothing to cosmetics, a reflection of an alarming shift in consumption attitudes that has sent retailers scrambling. (…)

These cheaper fares are being rolled out by brands and companies that traditionally projected themselves as premium choices for the aspiring Chinese middle class. The pivot to discount offerings marks a sea change in their strategy to drive sales in the new Chinese economic reality and is weighing on their prospects. And those that aren’t slashing prices, like Starbucks Corp., are losing ground to cheaper rivals. (…)

The discounts will erode profit margins until the price war – which is currently accelerating – normalizes, they wrote in a note on Friday downgrading Yum to neutral. (…)