U.S. Housing Starts Dropped 2.5% in December Home-building in the U.S. slipped unexpectedly in December, with declines in both single-family and apartment-building construction despite unusually mild winter weather.
Housing starts, which reflect ground breakings on single-family homes and apartments ,fell 2.5% from a month earlier to a seasonally adjusted annual rate of 1.15 million, the Commerce Department said Wednesday. Building permits, an indication of future building activity, also had a weaker showing, falling 3.9% to 1.23 million in December.
Ground breakings on single-family homes, which exclude apartments and represent almost two-thirds of the residential real-estate market, fell 3.3% from November. Multifamily units, including apartments and condominiums, dropped 1%. (…)
Housing starts rose a seasonally adjusted 24.4% in the Northeast, but fell 12.4% in the Midwest, 3.3% in the South and 7.6% in the West. The Northeast and South were the only regions to post gains for the year as a whole. (…)
(U.S. Consumer Prices Fall 0.1%; Low Oil Prices Help Rein in Inflation U.S. consumer prices fell 0.1% in December, a sign that the economy is still absorbing the impacts of a strong dollar and sinking energy costs.
The index is up just 0.7% over the past 12 months.
Excluding the volatile food and energy categories, so-called core prices rose 0.1%, their smallest increase since August.
Prices for services, nearly all of which are purchased domestically, have been steadily increasing, even as prices for energy products and consumer goods have fallen. Because shelter and medical care make up a substantial share of the price index, their overall rise during the past year has pushed core prices up by 2.1% over the past 12 months, the largest increase since 2012 but still fairly low by historical standards.
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.8% annualized rate) in December. The 16% trimmed-mean Consumer Price Index also rose 0.1% (0.8% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.
Over the last 12 months, the median CPI rose 2.4%, the trimmed-mean CPI rose 1.8%, the CPI rose 0.7%, and the CPI less food and energy rose 2.1%.
Oil — ‘Almost as cheap as the world has seen in 50 years’
Consider this chart from Charles Robertson at Renaissance Capital.
Rather than waste his time with nominal price comparisons or eat far too much time trying use suitable inflation stats, Robertson simply compares the oil price to global GDP.
The peak was 1979, when the world spent 7.5 per cent of total GDP on oil — more than education and defence spending globally, combined.
The low came in 1998, when spending on oil amounted to 1.1 per cent of global GDP — and pretty much the entire emerging world was in some sort of crisis.
And now?
If oil AVERAGES $23 in 2016 – then it comes in at 1.0% of GDP vs the IMF GDP estimate for 2016. That price would be a 50 year low.
WTI at pixel: $26.88 for Feb.
George Soros: “Europe Is On The Verge Of Collapse”
(…) China is exhausting these reserves very rapidly. It also has an incredibly large reservoir of trust from the Chinese population: many people may not understand how the Chinese regime actually works, but they believe that a regime that has managed to overcome so many problems knows what it is doing. But the reservoir of trust is also being exhausted at a remarkably fast rate because the leadership has made many mistakes. President Xi Jinping can carry on with his current policies for another three years or so, but during that time, China will exert a negative influence on the rest of the world by reinforcing the deflationary tendencies that are already prevalent. China is responsible for a larger share of the world economy than ever before and the problems it faces have never been more intractable.
Schmitz: Can President Xi rise to the challenge?
Soros: There is a fundamental flaw in Xi’s approach. He has taken direct control of the economy and of security. If he were to succeed in a market-oriented solution it would be much better for the world and for China. But you cannot have a market solution without some political changes. You cannot fight corruption without independent media. And that’s one thing that Xi is not willing to allow. On that point he is closer to Putin’s Russia than to our ideal of an open society. (…)
China pledges to maintain stable currency
China’s securities regulator committed Beijing to maintaining a stable currency and resisting depreciation on Thursday at the World Economic Forum in Davos, while recognising that much of the market turmoil this year has been the result of poor communication from the authorities.
Coming under pressure to outline the country’s attitude to capital outflows and the depreciation of the renminbi against the dollar, Fang Xinghai, vice- chairman of China’s securities regulator, insisted China had “no basis†for seeking a weaker currency. (…)
Seeking to clarify the country’s policy, Mr Fang, a financial veteran with a doctorate from Stanford University, said concerns about Chinese stock market volatility were overblown given its weak link to the real economy, but accepted currency volatility is more important.
“China used to have a crawling peg [against the dollar]â€, he said, but now “the stated goal is to move towards a basket approachâ€.
“We should not focus on a few days’ movement [in the renminbi]. Moving towards a basket approach is the decided policy… the rate [in future] will be quite stable,†Mr Fang added.
“A depreciation of the currency is not in the interest of China. It’s not good for domestic consumption,†he said. (…)
Senior Adviser to Chinese President Defends Economy Fang Xinghai says economy transitioning from investment-led to consumption-led
(…) “The biggest risk for China is not to slow down in a measured way, but to stimulate the economy to such an unrealistic speed that it implodes suddenly and goes down in flames,†Mr. Fang said. The focus for coming years, he said, is to accelerate “structural reforms in the supply side of the economy to better meet changing consumer demands.†(…)
Mr. Fang also said “China will not allow the economy to slow down too sharply,†meaning its fiscal and monetary policies will be kept “appropriately supportive†in 2016. “But China can’t afford to further expand financial risks and further degrade our air, water and soil by building up more factories,†he added. (…)
PBOC Injects Most Cash in Three Years in Open-Market Operations
China Is ‘Not Falling Off a Cliff’, Rajan Says
Carmakers: pile-up
(…) Slower economic growth in China will hurt sales. It is the world’s largest car market — more than a quarter of the total last year. Hopes are high for the future, too. Euromonitor’s forecast has China contributing a third of the industry’s growth over the next three years, for example. Worse, Chinese sales also contribute an outsized portion of the profits of the global brands. Prices, and therefore margins, are under pressure from domestic competitors. If you are bearish on China, it is hard to be bullish on carmakers.
Outside of China, other emerging markets such as Brazil and Russia are stumbling. The strengthening US dollar and weaker euro helped earnings of the European carmakers with American sales, but this cannot last for ever. (…)
Rouble tumbles more than 5% to fresh low Russian currency under increased pressure from falling oil prices
Global Bond Downgrades Climb to Highest in Six Years, S&P Says
S&P last year downgraded 892 issuers, representing 69 percent of all ratings actions, according to a report published on Wednesday. That’s the most since 2009, when it downgraded 1,325 issuers, or 83 percent of total actions. Downgrade potential remains under historical averages, S&P said.
“While we expect further deterioration in global credit markets, we do not see a particularly disruptive or abrupt acceleration, despite a backdrop of financial and market volatility in recent weeks,” S&P analysts including Diane Vazza and Sudeep Kesh wrote in the report. The impact of a slowdown in China has been “more pronounced with respect to market volatility than a rapid, lower revision of our ratings on global corporate issuers,” they wrote. (…)
The fourth quarter saw “a rather extreme” number of credit cuts in the oil-and-gas sector, with 58 downgrades — compared with just two upgrades — reflecting lower credit-protection measures, negative cash flow and uncertain liquidity over the next 12 months, S&P said. Emerging markets will stay the focal point for negative rating actions, with pressure largely concentrated in Middle East, Africa and Latin America.
SENTIMENT WATCH
Markets’ Panic Incongruent With Economic Reality—For Now Financial markets are in a panic over a sharp economic downturn that has yet to make an appearance—and may never, writes Greg Ip. Stock selloff could presage recession (unlikely), trigger a recession (unlikely) or indicate a lack of faith in policy makers (plausible).
(…)There are three possible reasons the market selloff could be cause for concern.
The first is that a recession is coming but has yet to show up in the data. (…) But hard economic data is not behaving in pre-recessionary fashion. While U.S. growth was probably near zero in the last quarter of 2015, employment growth actually accelerated. Consumer sentiment rose in early January despite anxieties about stocks. Housing typically leads the economy into a downturn, yet the number of permits issued to build single-family homes actually rose in December.
What about the rest of the world? “A collapse of growth in China would…be a world-changing event,†Olivier Blanchard, former chief economist of the International Monetary Fund, recently noted. “But there is just no evidence of such a collapse.â€
(…) December imports and export data suggest China is in fact stabilizing.
Surveys of purchasing managers from around the world compiled by J.P. Morgan Chase and Markit show that overall economic activity slowed a bit in December but to a level consistent with normal, long-term trend growth.
A multiyear slump in commodity prices and related exports has set back manufacturing in the U.S. and overseas. But oil prices have cratered, less because of declining demand—in fact, Chinese consumption is still growing—than a glut of supply. U.S. shale producers haven’t cut back as much as Saudi Arabia expected when it ramped up output in 2014, and Iranian exports are about to surge now that sanctions are being lifted.
The price collapse has in turn hammered energy investment, and that could be a potential drag. But Torsten Slok, an economist at Deutsche Bank, notes it has fallen from more than 10% of total capital spending to around 5%. That means it can’t fall much further.
The second possibility is that rather than economic weakness triggering financial panic, the panic itself produces a crisis or recession. The collapse in oil prices, for example, has caused yields on corporate bonds issued by both energy and nonenergy companies to jump, and many banks have reported big loan losses to energy companies. The spread between interest rates on super-safe Treasury bills and slightly less safe offshore three-month interbank dollar loans, known as the “TED spread,†a gauge of financial stress, has jumped.
On the other hand, banks have little exposure to energy compared with their exposure to subprime mortgages in 2008 or Latin American debt in 1982. And regulators have forced them to thicken their capital and liquidity buffers since the last crisis.
The third and most plausible possibility is that markets are losing confidence in policy makers, driven in particular by events in China and the U.S.
Chinese leaders fumbled in their efforts to stop their stock bubble from deflating and confused the world when they devalued the yuan last August and again this month. Chinese monetary policy is opaque and politicized, which means outsiders are skeptical of the official story that the devaluations are part of a move to a more market-determined exchange rate. (…)
By contrast, the Federal Reserve is transparent and independent. The problem is markets disagree with its plans. (…)
But the plunge in oil prices has put the Fed’s 2% inflation target even further out of reach, which, markets believe, merits even slower rate normalization.
The Fed’s determination (so far) to tighten means it is now a headwind for the stock market rather than the tailwind it has been with its multiple rounds of stimulus since 2008. (…)
If the Fed is no longer encouraging investors to embrace risk, then stock valuations, such as price-to-earnings ratios, should decline. That’s unpleasant for stockholders, but largely irrelevant to the economy.
A bigger worry is that if recession or crisis do loom, central banks and governments can’t, or won’t, help. China’s leaders ​have ruled out opening the taps for another government-backed investment and lending boom​, which they think went too far the last time​. The Fed has only a quarter percentage point of interest-rate cut ammunition, and other central banks have none.
Andrew Balls, an executive at fund manager Pacific Investment Management Co., says markets should turn around when they are cheap enough, or when they anticipate some sort of “circuit breaker†like a central-bank rate cut. “I’m worried about the lack of central-bank circuit breakers.â€
(…) even if we don’t go into a recession that doesn’t mean the stock market can’t or won’t see a significant sell-off. Double-digit losses and even bear markets can certainly occur without a big economic downturn. This scenario has played out many times throughout history, as you can see from the following data:
This has happened roughly one out of every five years since the late-1930s. If this does turn out to be one of these non-recessionary down markets then we’re more than half way through the average loss scenario (with the standard caveat that markets are never average in real time).
While losses in the stock market are never enjoyable they’re still the best chance most of us have to see large gains in the future. This is the paradox of investing that is so painful and counterintuitive for people to grasp. Lower prices mean higher yields and higher expected future returns when new cash is put to work.
Here are those same losses but this time I have added the subsequent 5 and 10 year total returns. (And because no one can really nail the bottom perfectly, I even showed the gains starting at the beginning of the following year, thus making these numbers fairly conservative.):
(…) The Standard & Poor’s 500 Index will drop another 10 percent to 1,650 and oil could fall as low as $20 a barrel as investors flee for safety, according to Scott Minerd, chief investment officer of Guggenheim Partners. Jeffrey Rottinghaus, whose T. Rowe Price mutual fund beat 99 percent of rivals over the past year, said stock prices could fall another 10 percent as the U.S. economy slips into a mild recession.
“I expect a protracted decline in the S&P 500,” Jeffrey Gundlach, co-founder of DoubleLine Capital, said in an e-mailed response to questions. “Investors should sell the bounce-back rally which could come at any time.” (…)
“Excessive risk exposure is adding to the selling pressure,†Gundlach said. “Today’s plunge into the lows looked like a margin call liquidation type of event.â€
Russ Koesterich, global chief investment strategist at BlackRock Inc., said there needs to be a fundamental catalyst to signal a market bottom, whether it comes from corporate earnings, economic data or an improvement in China.
“You need to have some stabilization of fundamentals to give people conviction this has gone too far,” Koesterich, whose firm is the world’s largest money manager, said in an interview. “Certainly you are getting closer to capitulation. The magnitude of the drop suggests that.”
Hedge fund manager Ray Dalio said global markets face risks to the downside as economies near the end of a long-term debt cycle. The Federal Reserve’s next move will be toward quantitative easing, rather than monetary tightening, the founder of Bridgewater Associates said in an interview with CNBC from the World Economic Forum in Davos. That won’t be easy, because rates are already so low, he said.
“When you hit zero, you can’t lower interest rates anymore,†Dalio said, according to a transcript of the interview. “That end of the long-term debt cycle is the issue that means that the risks are asymmetric on the downside because risks are comparatively high at the same time there’s not an ability to ease.â€
The rout in global stocks is being fueled by investors seeking to reduce leverage as central bank run out of options to prop up economies, according to Janus Capital Group Inc.’s Bill Gross.
“Real economies are being levered with QEs and negative interest rates to little effect,†Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail responding to questions from Bloomberg. “Markets sense this lack of growth potential and observe recessions beginning in major emerging-market economies.â€
While overseas economies are wobbling, the U.S. remains an island of stability, according to money managers such as Omar Aguilar, chief investment officer for equities at Charles Schwab Corp. (…)
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“If Assets Remain Correlated, There’ll Be A Depression”: Ray Dalio Says QE4 Just Around The Corner The “zen master†again predicted the Fed will reverse course and embark on more QE.
EARNINGS WATCH
Earnings are holding.
- 49 companies (14.5% of the S&P 500’s market cap) have reported. Earnings are beating by 5.6% (4.8% yesterday) while revenues have surprised by 0.2%.
- The beat rate is 78% (76%).
- Expectations are for a decline in revenue, earnings, and EPS of -3.3%, -4.9%, and -3.4%. EPS growth is on pace for +1.4% (0.6%), assuming the current 5.6% beat rate for the remainder of the season. This would be +7.3% (6.4%)excluding Energy. (RBC)
Big US bank revenue is flat as a pancake Sector is struggling amid ultra-low rates and tougher regulation
(…) Among the big five banks with big Wall Street presences, only Bank of America and Citigroup generated increases in fourth-quarter revenues of more than 1 per cent. At Goldman Sachs and Morgan Stanley, the two banks most exposed to the swings of capital markets, revenues were off 5 per cent and 0.3 per cent, respectively. Wells Fargo, which is less exposed to the markets, saw revenues rise 2 per cent. (…)
Over the past few weeks banks have increased their benchmark lending rates while mostly holding the line on the interest they pay on deposits. That is consistent with past cycles. Margins increase first, and then the banks eventually pass through roughly half of each rate rise.
But the Fed’s minutes from its December meeting were so gloomy and the market has fallen so sharply in the first weeks of January, that some bank executives are now downplaying the prospect of improving margins. (…)
Wells Fargo, the largest US mortgage lender, said its net interest margin slid from 3.04 per cent a year ago to 2.92 per cent during the fourth quarter. (…)
Meanwhile, loan quality is beginning to deteriorate — most notably in the banks’ energy portfolios, but also in other sectors. At JPMorgan Chase, for example, all five of the main reporting units showed a fall in asset quality, with rising delinquencies in credit cards and car loans, among other areas. (…)
Even wealth-management businesses — often seen as ballast for more volatile trading businesses — are failing to provide the support they once did. Market turbulence is causing clients to sit on their hands or shift into cash, which affects the fees advisers can earn. Revenue for BofA’s global wealth and investment management division slipped 2 per cent last year to $18bn, while profit fell 12 per cent to $2.61bn.
To offset revenue pressure, the big banks have sought to squeeze customers on fees. At Wells Fargo, for instance, service charges on customer accounts — ATM fees, overdraft fees, maintenance charges — came to $1.3bn in the fourth quarter, up 7 per cent.
They are also hammering down on expenses. Morgan Stanley announced a new programme — “Project Streamline†— to remove $1bn of annual operating costs by the end of 2017, mostly by moving back-office staff to cheaper locations.
James Gorman, chairman and chief executive, said the bank’s new cost-cutting targets assumed no revenue growth at all over the next couple of years. Mr Gorman said that while he was hoping for growth in some segments such as lending to wealth-management clients, an assumption of flat revenues was “appropriately conservative.†(…)
Even Goldman Sachs, which has a reputation for moving into new business areas more swiftly than peers, has struggled to grow. On a call with analysts on Wednesday, Harvey Schwartz, chief financial officer, noted that revenues had stalled at about $34bn for the fourth year in a row, and that the bank had “chopped a lot of wood†to keep expenses from rising. (…)