Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

U.S. SERVICES PMI SUGGESTS SLOW EMPLOYMENT GROWTH

U.S. service providers indicated an upturn in business activity growth from the six-month low recorded during August. Nonetheless, the pace of expansion remained modest and softer than its post-crisis trend, largely reflecting subdued new business gains in recent months.

The latest survey highlighted that new work increased at the weakest rate since May, which contributed to another moderation in staff hiring across the service economy. Pointing up The rise in payroll numbers during September was only marginal and the slowest seen for three-and-a-half years.

The seasonally adjusted final Markit U.S. Services Business Activity Index registered 52.3 in September (‘flash’ reading: 51.9), up from 51.0 in August, to signal the fastest upturn in service sector output since April.

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That said, on average in the third quarter, the headline index posted 51.5, little-changed from 51.8 in Q2. Companies reporting a rise in business activity suggested that new product launches and the completion of unfinished work had helped to offset subdued underlying new order growth.

Volumes of new work received by service providers in September increased only moderately since the previous month. Moreover, the rate of new business growth eased to its joint-slowest since the post-crisis low recorded in March.

Anecdotal evidence suggested that generally subdued domestic economic conditions and uncertainty ahead of the presidential election had continued to act as headwinds to client spending.

Despite a further moderation in new business growth, the latest survey indicated that backlogs of work were accumulated across the service sector for the third month running in September. The latest rise was the second-fastest since April 2015, which survey respondents linked to new projects and softer rates of staff recruitment. September data signalled only a marginal increase in service sector payroll numbers, with the pace of job creation the weakest since March 2013.

Service providers indicated that their growth forecasts for the next 12 months remain subdued in comparison to those seen at the beginning of 2016. Moreover, the degree of positive sentiment eased in September and was close to June’s survey-record low. Survey respondents cited fragile economic conditions, some noted hopes of a rebound in client spending after the election.

Meanwhile, latest data showed that input cost inflation eased to its slowest since February 2015. This resulted in the weakest pace of output charge inflation for five months in September.

Markit Final U.S. Composite PMI™

At 52.3 in September, the final Markit U.S. Composite PMI™ Output Index was up from 51.5 in August and signalled the fastest rise in private sector business activity since April. However, new business volumes and employment numbers expanded at slower rates during the latest survey period.

The latest increase in private sector output reflected moderate rises in both manufacturing production and service sector activity. That said, the rate of manufacturing output growth eased to a three month low in September, which contrasted with the steeper upturn in business activity recorded by service providers.

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Chris Williamson, Chief Business Economist at IHS Markit:

Even with the latest increase the surveys are indicating that the economy is growing at an annualized rate of only 1%.

THE ISM

The ISM Services continues to display a very erratic behavior, jumping 5.7 points to 57.1, its biggest jump on record.

The NMI® registered 57.1 percent in September, 5.7 percentage points higher than the August reading of 51.4 percent. This represents continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index increased substantially to 60.3 percent, 8.5 percentage points higher than the August reading of 51.8 percent, reflecting growth for the 86th consecutive month, at a noticeably faster rate in September.

The New Orders Index registered 60 percent, 8.6 percentage points higher than the reading of 51.4 percent in August. The Employment Index increased 6.5 percentage points in September to 57.2 percent from the August reading of 50.7 percent. The Prices Index increased 2.2 percentage points from the August reading of 51.8 percent to 54 percent, indicating prices increased in September for the sixth consecutive month.

According to the NMI®, 14 non-manufacturing industries reported growth in September. The comments from the respondents are mostly positive about business conditions and the overall economy. A degree of uncertainty does exist due to geopolitical conditions coupled with the upcoming U.S. presidential election.

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Zerohedge plots the ISM with Markit’s Services PMI…

…further mocking the ISM with this:

The last 2 times ISM Services jumped this much, the economy crashed into recession…


THE DAILY EDGE (5 October 2016): Rent Rants

WHERE’S THE BOTTOM?

The totally data dependent GDPNow model is sinking fast! At 2.2%, it stands below the range of 20 economists. This after three 1% quarters…

Evolution of Atlanta Fed GDPNow real GDP forecast

BTW, the NY Fed Nowcast is also at +2.2% for Q3 (left), but at a shocking +1.2% for Q4. Yet, the market-based odds for a December hike now stand at 61%.

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Punch The bean counters see something else:

Meanwhile, via The Daily Shot:

Even though, as we saw this morning:

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Apartment Rents Decline in Some Big Cities

Rents in San Francisco declined 3%, while they fell about 1% in New York and edged lower in Houston and San Jose, Calif., the first drops in those markets since 2010, according to apartment tracker MPF Research. Across the U.S., rent growth was 4.1% on average.

According to a report by Axiometrics Inc., growth in the U.S., slowed to 3% in the third quarter from 5.2% in the year-earlier period. The rate remains above the long-term average of about 2%, the report said.

But rent increases have slowed for four straight quarters and turned negative in key regions, suggesting the overall market could be headed lower. (…)

The foreclosure crisis, along with a trend toward urban living, has created seven million new renter households since the housing-market peak in 2006, as the homeownership rate declined to 51-year lows. (…)

Across the country, rents have jumped 22% in urban areas since 2010, according to Axiometrics. High-end apartments now command a 45% premium over older ones, while historically they have fetched about a third more, according to MPF. (…)

Rents for midprice apartments across the U.S. are still up 4.9% from the year before, according to MPF.

More affordable cities are seeing some of the strongest rent growth. Rents in Sacramento shot up 12% in the third quarter, while in Riverside, Calif., they jumped 7.9%, according to Axiometrics. (…)

The main cause of the rent slowdown is a flood of new supply, with more than 555,000 units under construction across the 100 largest U.S. metro areas, according to MPF. Tenants also are beginning to tighten their purse strings as rents have jumped by as much as 60% in some markets since 2010. Growth of high-paying jobs, meanwhile, is slowing in New York, San Francisco and nearby Silicon Valley. (…)

On the other hand, house prices have been rising 5%+ per year since 2014. Hence

(…) Mr. Mullen, the onetime head of Goldman’s mortgage-and-credit business, is now pitching pensions, endowments and other large investors on a wager that, four years after the housing market hit bottom, rents and home prices will continue to rise.

“We believe tight credit availability is preventing new households from being able to obtain mortgages to purchase their first home,” Pretium wrote in its 69-page pitch to investors. “Households that have been unable to obtain mortgages have become renters, thus driving high occupancy rates and robust rent growth.” (…)

In its latest pitch, Pretium said it won’t likely find the bargains it once did. The firm plans to bulk up in ZIP Codes with favorable economic and demographic trends as it fine-tunes its portfolio of thousands of homes in an effort to build a potentially long-lasting rental business. It expects it will be able to buy homes in its target markets, which include Houston, Phoenix, Atlanta and Indianapolis, for roughly 20% less than it would cost to build similar homes. (…)

CalculatedRisk offers another analysis of the rental market:

Reis reported that the apartment vacancy rate was at 4.4% in Q3 2016, unchanged from Q2, and up from 4.3% in Q3 2015. (…)

A few comments from Reis Economist Barbara Denham:

For the sixth quarter in a row, new construction exceeded net absorption in the apartment market but only by a slim margin: 37,744 in completed units to 37,693 absorbed units. …

Asking and effective rents both grew by 0.9% during the third quarter, slightly below last quarter’s growth of 1.1% and well short of the post-recovery high of 1.7% quarterly growth rate seen in Q3 2015. We had expected rent growth to slow so do not view this deceleration as cause for alarm. In fact, the gap between asking rents and effective rents – that net out concessions such as free rent – has not widened in the last few quarters which suggests that landlords generally remain confident that conditions will continue to improve in the wake of stronger job growth, although rents have declined in a few of the top submarkets. (…)

(Apartment vacancy data courtesy of Reis.)

We can stare at the chart as long as we want, it still looks like a cyclical bottom.

Gundlach: “Deutsche Bank Will Be Bailed Out But What About Credit Suisse” 

While Germany’s largest lender would ultimately be rescued by the German government if needed, other banks in the region wouldn’t be able to count on such support, Gundlach said. “Deutsche Bank will be supported by Germany if push comes to shove, but what about Credit Suisse, which has shown a similar decline in stock price? Who’s there to bail them out?”

Surprised smile Low-Vol Stocks Go Wild With Price Swings Hitting Record Levels

Low-volatility stocks have gone wild in recent months, discovering the danger in the second part of their name and rattling investors who sought safety by sending $6 billion dollars to the biggest exchange-traded funds that track them. Those flows have slowed as a measure of the group’s swings exceeds the broader market’s, reaching levels not seen in 20 years, data compiled by Bank of America Corp. and Bloomberg show. (…)

Utility shares, the biggest component of the low-vol universe because of a once-coveted dividend payout, fell for an eighth straight day as rising bond yields erode the allure of equity income. (…)

The S&P 500 Low Volatility Index trades at 20 times earnings, in line with the broader equity gauge. The low-vol group peaked at a valuation of 22 times in July, when the utility stocks that are its biggest component were 13 percent moreexpensive than technology shares that normally have among the highest valuations. (…)

An investor retreat from ETFs may have exacerbated volatility in these stocks, according to Bank of America. The iShares Edge MSCI Minimum-Volatility ETF, the most favored equity fund in the first half with cash inflows that surpassed $6 billion, experienced two consecutive monthly declines in deposits through September. The PowerShares S&P 500 Low Volatility Portfolio ETF saw investors pull $471 million last month, the biggest withdrawal in two years. (…)