Prices of New Home Sales Point to Broad-Based Recovery
Purchases of new homes climbed 7.8 percent from the previous month to a seasonally adjusted 539,000 annualized pace in February, a seven-year high. Perhaps the best news for the housing industry as a whole came in the breakdown of sales, by price. Americans signed contracts to purchase 17,000 new houses in the $200,000-to-$299,999 price range last month, the most since March 2008. That amounts to 39 percent of the 44,000 properties sold in February (not adjusted or annualized). Another 8,000 homes — the most in nine months — sold in the range of $150,000 to $199,999. The pickup may hint at greater demand from lower-income Americans.
GDP Growth Estimates Tumble, Again
(…) At least one first-quarter tracking estimate is already close to zero. The Federal Reserve Bank of Atlanta on Wednesday put its gauge at 0.2%, down from its earlier estimate of 0.3%.
Morgan Stanley economists lowered their estimate for first-quarter growth to an annualized 0.9% from an earlier forecast of 1.2%, pointing to light inventories and lower capital goods exports as weighing on GDP. They said other factors, including severe winter weather and the West Coast ports slowdown, also could weigh on GDP. (…)
Economists at Barclays lowered their projection a tenth of a percentage point to 1.2%. The forecasting firm Macroeconomic Advisers also trimmed its estimate down to 1.2% from 1.5% before Wednesday. (…)
J.P. Morgan Chase economists lowered their first-quarter forecast to an annualized 1.5%, from 2%, saying a decline in investment by oil companies — the result of the plunge in oil prices — could offset the lift from higher consumer spending. (…)
February Durables Goods Miss Highlights Factory Sector Woes
But the Markit flash U.S. PMI was strong in March with new orders firming to their best pace in five months and strong hiring by manufacturers.
THE INFLATION-DEFLATION DEBATE
First, this from BloombergBriefs:
February CPI showed the first headline increase since October as energy prices finally reversed course. This probably indicates that the transitory soft patch due to lower oil prices is receding, at least in first order effects, clearing the way for a better picture of underlying inflation. Core inflation edged higher, driven by rents. (…)
More important, core inflation similarly edged up a tenth in year-on-year terms (to 1.7 percent), as the monthly change rounded up to 0.2 percent (0.1568 unrounded).
The details of the core showed an odd mix between goods and services, with the former rising more rapidly. Core goods rose 0.2 percent versus minus 0.1 percent previously, whereas services ex-energy rose just 0.1 percent versus a prior 0.3 percent. In broad terms, service inflation continues to significantly outpace goods inflation. Year on year, core CPI services continue to hover around 2.5 percent, while core CPI goods prices remain in contraction (minus 0.5 percent). (…)
Recent Headline Inflation Plunges Look to Be Ending
Then, the median CPI also deflates the deflation theme:
MEDIAN CPI UP 0.2% IN FEBRUARY
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (3.0% annualized rate) in February. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.0% 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.
And in case you worry about the weak dollar, this academic report from the Cleveland Fed:
(…) Some worry that the price impacts of the dollar’s appreciation will push an already soft US inflation rate deeper into negative territory. The threat is real, but certainly overblown. Most of the change in import prices reflects declines in petroleum products, which have not been driven by exchange-rate movements. So we focus instead on nonpetroleum imports to show how the dollar’s appreciation is passing through to import prices and on to the CPI.
Dollar appreciations can have both direct and secondary impacts on import prices; consequently their effects can linger. All else constant, an appreciation will quickly lower the dollar price of goods produced abroad and priced at their source in foreign currencies. In addition, the dollar appreciation will raise the foreign-currency price of US exports. Together, these direct price impacts will shift global demand—both US and foreign—away from goods and services produced in the United States and toward those produced abroad. This shift in demand can then induce secondary price effects, raising the foreign-currency price of US imports.
These secondary effects—often based on the strategic decisions of foreign producers—can offset, or even negate, the direct price effects from a dollar appreciation. Our rough calculations, which are consistent with previous findings, suggest that, in general, a jump in dollar exchange rates can affect import prices for at least six months, but that the overall impact is fairly small. A 1 percent change in the Board of Governor’s broad dollar exchange-rate index lowers non-petroleum import prices by 0.3 percent cumulatively over six months. (…)
Still, large exchange-rate movements can induce price effects, as we are beginning to see. From its trough in early July through the end of December 2014—a date that facilitates comparisons with available import-price data—the dollar appreciated 9.0 percent on a broad trade-weighted basis. Over that same period, total import prices fell by 9.7 percent, but nonpetroleum import prices fell only 1.3 percent. Our rough estimates of the effects of exchange-rate changes on nonpetroleum import prices suggest that virtually the entire decline in these prices reflects the dollar’s appreciation. (We estimated a 1.6 percent change in nonpetroleum import prices, all else constant.) A further drop seems likely in February. (…)
Lastly, my little table showing trends in select goods categories as they relate to retail sales trends. Clearly not the definitive research on retail inflation but these categories catch a fair section of U.S. core retail sales. These categories are showing YoY deflation in February and even worse trends over the last 3 months. The point is to try to explain the weakness in nominal retail sales since December and warn of a possible margin squeeze at the retail level when wages are rising must faster than nominal sales.
Retail sales volumes excluding fuel were 0.7 per cent higher in February than in January and 5.1 per cent higher than a year earlier, beating economists’ expectations of 0.4 and 4.2 per cent.
Meanwhile average store prices including petrol stations fell for the eighth consecutive month. They dropped 3.6 per cent from a year earlier, the biggest annual fall since records began in 1997.
Some analysts had feared that falling shop prices could prompt people to delay their purchases, which could trigger a self-fulfilling deflationary downward spiral.
“If you wanted a demonstration that low food and energy prices are good for consumer spending, then this is it,” said Alan Clarke, an economist at Scotia Bank. “People are clearly not deferring their spending plans amid deflation speculation — they are spending the windfall. This is good news for growth and should probably mean that the second round effects for inflation will be positive.” (…)
OIL
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Yemen Houthis fire rockets at Saudis Oil rises as conflict with rebels threatens to escalate into regional war
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Oil Rallies, Gulf Stocks Fall Oil prices surged, while stocks fell sharply, as Saudi Arabia and its allies in the Middle East launched airstrikes against Houthi rebel forces in Yemen.
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Why Bombing This Tiny Oil Producer Is Roiling the Energy Market
While Yemen contributes less than 0.2 percent of global oil output, its location puts it near the center of world energy trade.
The nation shares a border with Saudi Arabia, the world’s biggest crude exporter, and sits on one side of a shipping chokepoint used by crude tankers heading West from the Persian Gulf. (…)
(…) And since to Saudi Arabia preserving the logistics of oil supply is critical, it is hardly surprising that as Egypt’s Ahram Gate reported earlier, the Saudi-led Firmness Storm coalition imposed a naval blockade on Bab El-Mandab strait earlier today. The Saudi navy’s western fleet has also secured Yemen’s main ports including Aden and Midi.
It is not just Saudi Arabia: moments ago Reuters reported that four Egyptian naval vessels have crossed the Suez Canal en route to Yemen to secure the Gulf of Aden, maritime sources at the Suez Canal said on Thursday. The sources said they expected the vessels to reach the Red Sea by Thursday evening.
The naval blockade is just part of what so far has been mostly an air-based proxy war. As Al Arabia reported previously, as part of the “Decisive Storm” coalition against the Yemen rebels, Saudi Arabia has deployed at least 150,000 soldiers in preparation for what appears to be a land assault next, an assault that already has the preemptive blessing of the US. As a reminder, Saudi Arabia will be fighting US-armed rebels, but that’s a different story.
Just as importantly, and since as we reported first yesterday the Yemen conflict is merely a proxy war between the Saudis and Iran, we also now have reports that Iran has condemned Saudi Arabia’s intervention, is demanding an immediate halt to the military action, and has warned that a war on Yemen won’t be contained in one area.
From Reuters:
Iran demanded an immediate halt to Saudi-led military operations in Yemen on Thursday and said it would make all necessary efforts to control the crisis there, Iranian news agencies reported.
“The Saudi-led air strikes should stop immediately and it is against Yemen’s sovereignty,” the Students News Agency quoted Iranian Foreign Minister Mohammad Javad Zarif as saying. “We will make all efforts to control the crisis in Yemen,” Zarif said, according to the agency’s report from the Swiss city of Lausanne where he is negotiating with six world powers to resolve a years-old dispute over Tehran’s nuclear ambitions.
Earlier on Thursday, the Foreign Ministry in Tehran called for an end to the military operation.
“Iran wants an immediate halt to all military aggressions and air strikes against Yemen and its people,” Fars quoted Foreign Ministry spokeswoman Marzieh Afkham as saying.
“Military actions in Yemen, which faces a domestic crisis, … will further complicate the situation … and will hinder efforts to resolve the crisis through peaceful ways.”
Prior to that, Bloomberg cited the head of the Iranian parliament’s national security and foreign policy committee, who told Iran’s Fars News Agency that Saudi Arabia’s strikes on Yemen will haunt the kingdom as war won’t be contained,
So as the proxy war snags more and more countries, threatens to become less proxy, more war and much more global, keep an eye on Russia which is caught in that “other” proxy war from 2014 and which is also going nowhere fast. Because if and when Russia and China pick sides and get involved, that’s when it may be a good time to take a vacation far away from any major metropolitan areas.
Euro-Area Bank Lending Posts Longest Rising Streak Since 2011
The European Central Bank said lending to companies and households rose for a fourth month in February, signaling that record monetary stimulus is finally reaching the real economy.
Euro-area bank lending climbed 0.2 percent from January, the ECB said in a statement on Thursday. The run of monthly increases is the longest since October 2011. (…)
The recovery in lending remains frail. Loans fell 0.1 percent from a year earlier, extending a run of annual declines that started in May 2012, the ECB statement showed. (…)
Of Chinese exceptionalism and price-to-whatever ratios
A Chinese rendering of jusqu’ici tout va bien courtesy of Bloomberg:
The chief China strategist at Bocom International Holdings Co. points to soaring price-to-earnings ratios, the shrinking yield advantage that stocks offer over bonds and the fact that mainland-listed equities now trade at a 34 percent premium over nearly identical shares in Hong Kong.
So what’s Hong’s advice to investors?
Keep buying, of course.
“Our traditional market models may not be able to capture the full picture,” he said a few days after spelling out his stance in a March 20 report titled “Price-to-Whatever Ratio: A Bubble Scenario.”
The 40-year-old strategist, who turned bullish just as the steepest four-month surge in seven years began last September, is among a growing number of forecasters who say traditional measures of value have little sway in a market where individual investors drive 80 percent of volumes and the biggest companies are run by the state. As long as China’s government maintains its support for the rally and keeps borrowing costs low, they say money will flow into shares and drive prices higher.
Yeah, he has a point but as soon as we hear things like “our traditional market models may not be able to capture the full picture” we get nervous. It’s not as if tales of Chinese exceptionalism more generally aren’t in the process of being shouted down by those of slowing GDP growth and a looming debt wall. (…)
And that’s within an environment where state media has been lauding the market and “retail investors appear to have poured into the stock market with an unprecedented surge in margin debt powering purchases.” Lets face it, greater fools can’t always be found folks. (…)
But back to Hao Hong to close. The fact is he’s not quite as sanguine as the quotes at the top suggest (our emphasis):
Currently, the yield gap shown in our chart [ showing earnings yield minus bond yield in China versus the Shanghai Comp] is plunging nearing its historical extreme. If bond yield can continue to fall to the 3% range due to slowdown and monetary easing, and if the change in gap approaches once again the extremes seen at the peaks of 2007 and 2009, then earnings yield can rise to 5% from where it is now at just over 6%, taking the Shanghai Composite to above 4,000. But note that these last few hundred points are fraught with volatility. (…)
