Canada housing

U.S. retail sales jump 0.7% in November after +0.5% in October.

China Injects $65 Billion Into Banks China’s central bank is pumping about 400 billion yuan (nearly $65 billion) into the country’s banking system, the latest step aimed at boosting Chinese banks’ lending abilities to help spur the economy.

About 500 billion yuan in loans made in September by China’s central bank to the country’s top five state-owned banks are coming due this month. Uncertainty over whether the central bank would renew those loans has led the banks to grow wary of lending out their funds. Meanwhile, banks in China have been squeezed in recent weeks because many investors shifted their funds out of banks and into the stock market.

By pumping in the additional 400 billion yuan of short-term credit, the central bank is hoping to signal to the market that it is ready to step in when liquidity is short, according to the people.

The fund injections so far have been seen as a short-term effort to spur growth without flooding China’s financial system with excess credit. The moves fall short of more-dramatic efforts such as cutting the amount of deposits banks have to keep in reserve. Still, by extending more credit as those past loans expire, Beijing is showing it is getting increasingly uncomfortable with the slow growth.

The PBOC hasn’t publicly disclosed the fund injection—which started on Wednesday—for fears of sending the market too strong a signal that it is broadly loosening its monetary policy, according to the people.

The PBOC is doing the opposite of the ECB which is all talk, little walk…

(…) But many Chinese bank executives said such targeted steps are inadequate to address banks’ funding problems. Overall deposits—traditionally the main source of cheap funding for Chinese banks—dropped by 950 billion yuan in the third quarter, to 112.7 trillion yuan, the first quarterly decline since the late 1990s. The total fell to 112.5 trillion yuan in October.

As deposits decline, banks face pressure to either cut lending or find other, more-costly sources of funds. Chinese banks issued 548.3 billion yuan of new loans in October, down from 857.2 billion yuan in September. (…)

Oil’s Decline Puts a Chill on Drilling U.S. energy companies are starting to cut drilling, lay off workers and slash spending in the face of an accelerating decline in oil prices, which hit a fresh five-year low on Wednesday.

The number of rigs drilling for oil in North Dakota and parts of Texas has started to edge down, new drilling permits have dropped sharply since October, and many companies say they are going to focus on their most profitable wells.

EOG Resources Inc. this week said it would shed many of its Canadian oil and gas fields, close its Calgary office and lay off employees there as it refocuses in the U.S. Matador Resources Co. of Dallas is contemplating temporarily leaving the prolific Eagle Ford Shale area in South Texas in favor of drilling elsewhere in Texas and New Mexico where it can make more money. (…)

Drilling permits issued in the U.S. dropped 36% between October and November, according to data from Drillinginfo, but remain 13% above their year earlier level.

Another sign of the energy industry’s pullback: the number of rigs drilling for oil in the Eagle Ford Shale in Texas has started to drop. Drilling in the nation’s second most active oil region hit a peak of 210 rigs in July but recently fell to 190 rigs. (…)

Japan Machinery Orders Fall The first fall in Japanese core machinery orders in five months suggests capital spending could be set to weaken as Japan struggles to recover from an April sales tax increase that pushed the economy into recession.

Machinery orders dropped a larger-than-expected 6.4% from September, the government said Thursday, indicating that capital spending could be set to weaken as Japan struggles to recover from an April sales tax increase that pushed the economy into recession. Economists surveyed by The Wall Street Journal and the Nikkei had estimated that core orders would decrease 2.1%.

The figures are widely regarded as a leading indicator of capital expenditure, but are also known for their volatility, limiting the conclusions that can be drawn from one month’s data. (…)

Dollar rise set to harm emerging markets

(…) Part of the problem is that falling prices of oil and other commodities have been more bad than good for emerging economies as a whole. Commodities exporters have lost more than importers have gained, says David Lubin, head of emerging markets economics at Citi Research. (…)

Even a commodities importer such as Turkey is suffering. Mr Lubin notes that some of the gains on Ankara’s current account from cheaper oil imports have been countered by what has happened to the capital account, where portfolio flows have slowed. The Turkish lira has resumed its slide after staging a recovery in the first quarter of this year.

In commodities-exporting Brazil, where in 2010 ministers complained that the weak US dollar was putting the country at an unfair disadvantage, the weak real has not delivered the gains expected. This is a demonstration that for Brazil and others, a depreciating currency is not enough. Its benefits have been outweighed by a failure to raise competitiveness through investment in productivity. (…)

More generally, exports have ceased to be an engine of expansion for emerging markets in recent years, possibly because the quick wins of globalisation from low-cost labour arbitrage are being used up.

In a note released this week Capital Economics, a consultancy, notes that the growth of emerging market exports has been weak — and lower than overall GDP growth — for several years. It concludes: “[T]he tailwinds which supported the staggering EM export growth rates in the 2000s can’t be counted on to provide the same support to growth over the coming years”.

As a result, the stronger dollar is proving more of a threat than an opportunity. This is not a novel phenomenon: emerging market economies and asset prices have historically suffered from a rising dollar. (…)

Deeper and broader capital markets have meant that much sovereign debt has shifted into local currency. But private borrowing is another matter. The Bank for International Settlements, the central bankers’ central bank, this week warned that rapidly growing debt issuance by emerging market corporations may have created substantial currency mismatches.

The sparsity of the data means that the extent of the problem is unknown. The BIS says that international banks had increased cross-border lending to emerging markets to a total of $3.1tn by mid-2014, mainly in dollars. Non-bank private sector borrowers from emerging markets issued almost $375bn in international debt securities in 2009-2012, more than double the rate in the four years before the crisis. And that despite the sobering experience during the crisis itself, when a sharp rise in the dollar caused tens of billions of dollars’ worth of losses to emerging market corporations and drove some into bankruptcy. (…)

The damage that falls in emerging market currencies can wreak cannot be known in advance. That such depreciations are likely to do more harm than good, however, is all too probable.

And there’s the falling Yen:

Bank of Korea Mulls Cutting Growth Forecast as Headwinds Build

Tumbling oil prices and the yen’s slide to a six-year low against the won this week are increasing uncertainty for an economy that’s shown signs of weakness in exports and industrial production in recent months. (…)

Exports from Asia’s fourth-biggest economy fell 1.9 percent in November from a year earlier. Industrial production contracted 3.2 percent in October from the same month last year, the biggest decline since January, according to figures released Nov. 28. (…)

Bank of Canada Says Housing Market as Much as 30% Overvalued

The market is more likely to achieve a soft landing than the destabilizing crash some economists have predicted, the Bank of Canada said Wednesday in its semiannual Financial System Review. That soft landing, however, has yet to materialize in part because mortgage rates, long at ultralow levels, declined even further this year. Competition among retail lenders is also spurring some riskier lending, it said.

The Bank of Canada hadn’t previous provided an estimate of the market’s overvaluation, and the top of its range—10% to 30%—was high enough to surprise some economists. (…)

The proportion of Canadian households with a total debt-to-income ratio above 250% has almost doubled to 12% since 2000, and those Canadians carry about 40% of all household debt in the country, the Bank of Canada said.

More uninsured mortgages are being issued to “riskier borrowers” by both banks and other financial players, some of which face less stringent oversight, it said. In Canada, home buyers must insure mortgages if they put down less than 20% of the cost of the home.

Consumers with low credit scores are responsible for about 25% of new auto loans, with many seeking longer amortization periods and high loan-to-value ratios, it added. (…)

FT Alphaville adds:

(…) Canadian households owe, on average, a little more than 160 per cent of their annual income. That’s up from about 130 per cent in 2006, 105 per cent in 2001, and 85 per cent in 1990. To be fair, mortgage rates have dropped by about 10 percentage points over that period so the actual burden on households is actually lower now than it was in the early 1990s:

The danger is that these burdens are concentrated on people who may have trouble repaying if house prices drop or incomes take a hit. For one thing, about a third of Canadians have no debt, so the average debt-to-income ratio of borrowers is probably a lot higher than the aggregate numbers suggest. (If the distribution of income among those with and without debt were similar, we could say that the average debt-to-income ratio for Canadian borrowers is around 240 per cent. We don’t know enough to say that with any conviction, however.)

The debt burden is highly skewed among borrowers. About 12 per cent of Canadian households owe at least 250 per cent of their income. That share is small, but it has doubled since 2000. Moreover, these ultra-indebted borrowers owe a little more than 40 per cent of all Canadian household debt, while 19 per cent of all household debt is owed by borrowers with debt-to-income ratios of at least 350 per cent:

As if that weren’t bad enough, the Bank of Canada estimates that the ultra-indebted tend to be younger, and therefore more exposed to job loss or wage cuts during downturns. (…)

Here’s the BOC chart:

The staff economists were struck by the relative stability of their estimate of overvaluation compared to the two previous boom-bust cycles in the early and late 1980s. (…)

They also found that Canadian housing markets seems to be just as overvalued as in Australia and New Zealand, two other anglophone commodity exporters that have served as havens for Chinese flight capital. As the economists drily note, “little is known about foreign investment in housing, and this is an area for further research.”

One thing we wonder about is the width of the error bars in the last few years. There is a gap of nearly 20 percentage points between the upper and lower bound of house price overvaluation right now, compared to about 5 percentage points in the years before 2007. Isn’t it worrying that the model is becoming so unreliable right as people’s concerns about overvaluation are becoming most acute?

We don’t want you to get too gloomy. The following footnote suggests that the Bank of Canada thinks that even under a really unpleasant scenario, the impact wouldn’t be nearly as bad as it was south of the border:

Any parallels to the U.S. housing crash and its impact on the financial system are, however, limited. First, unlike in the United States, nearly all mortgages in Canada are full-recourse loans. Second, there is no evidence that the poor underwriting standards that supported the explosion of subprime mortgages in the United States prior to the crisis are present in Canada. Third, much of the Canadian housing finance system is backstopped by CMHC-guaranteed mortgages and, ultimately, by a fiscally sound federal government.

Then again, the Fed was pretty sanguine about the US housing market before that bubble burst, too.

Santa, Baby, the Market Needs You Now

For investors, Santa can’t come fast enough.

The Dow has been down more than 200 points during trading two days in a row; on Wednesday it closed down closer to 300 points. In the oil market, the wheels seem have come completely off the bus. Greece is back in political crisis. Europe is barely staying out of recession, barely avoiding deflation. The crash in the oil market has people concerned about defaults on the junk bonds that financed so many shale-oil projects. Also, it’s all coming at a time when the Fed is debating how and when to change policy directions, and the world’s other central banks seem unable to fill the void. (…)

In fact, some weakness at this point in December has a historical precedent, Bespoke Investment Group noted. “The recent declines have been pretty typical for a December,” they write. The last month of the year tends to open strongly. From about the sixth on to mid-December, however, it usually gives away those gains. “It isn’t until the second half of the month when the typical seasonal December strength kicks into gear.”

This month, the S&P 500 rallied a bit more than 1% through the fifth, and this week has “been under a fair amount of selling pressure.” After Wednesday’s rout, it’s down 2% on the month. “If the typical seasonal pattern holds, don’t be surprised to see more short-term weakness, before a strong second half to the month.”

Writing on the same theme, technical analyst Chad Gassaway wrote, “when the second week of December has traded lower, the following week closed higher by 0.97% with a 79.17% win rate since 1970.” (…)

Raymond James’ Jeffrey Saut had this last week:

According to “Moneychimp,” since 1950 the SPX has been “up” during December 49 years and “down” 15 years with an average monthly gain of 1.62%. I would note that if there is going to be some pre-Santa rally weakness, it historically comes in the first two weeks of December. If those historical odds hold this year, it is going to put tremendous pressure on the 90% of money managers that are underperforming their respective benchmarks. Indeed, even from most financial advisors I get the question, “Would you please explain in one of your letters why our portfolios are underperforming the S&P 500.” The answer to said question is pretty easy. You probably have too much cash and have too big a position in international investments. I would suggest advisors tell their clients just what their benchmark is. Additionally, if you are underperforming, but doing so with half of the S&P 500’s “risk” (beta), then you are a “risk-adjusted” financial advisor and have nothing to apologize for to your clients.

From Bespoke Investment: