U.S. New Home Sales & Prices Decline Sharply in June

The housing market remains under pressure. New single-family home sales during June declined 8.1% (-17.4% y/y) to 590,000 (AR) after rising to 642,000 during May, revised from 696,000. It was the lowest sales level since April 2020. The Action Economics Forecast Survey expected 664,000 sales in June.

A 36.7% decline (-32.9% y/y) in sales in the West to 112,000 last month led the sales weakness as it followed a 24.6% May rise. Sales have fallen 53.7% since December 2021. Sales in the Northeast weakened 5.3% last month (-37.9% y/y) to 18,000, off 64.7% in the last three months. Sales in the South eased 2.0% (-8.7% y/y) to 386,000 after rising 11.6% in May. Offsetting these declines, sales in the Midwest rose 42.3% in June (-22.1% y/y) to 74,000, the highest level in three months.

Lower prices accompanied the sales decline last month. The median price of a new home in June declined 9.5% (+7.4% y/y) to $402,400 following a 2.7% May weakening. The average sales price of a new home declined 11.1% (+5.8% y/y) to $456,800 following a 9.7% May decline. These sales price data are not seasonally adjusted.

Sales weakness prompted a 2.2% increase (32.1% y/y) in the number of unsold new homes to 457,000, the most since April 2008. The seasonally adjusted months’ supply of new homes for sale rose to 9.3 in May from 8.4 in May. It remained up from a record low of 3.3 months in August 2020. The median number of months a new home stayed on the market fell to a record of 2.5 months. These figures date back to January 1975.

The key word in the headline is sharply, a word likely to be in the next headline on housing starts (red line):

CalculatedRisk has a complete account but Bill’s best chart is this one: focus on the blue area showing the 306k homes under construction, 9% below the record set in 2006. Another inventory overhang coming.

“Sharply” is also used to qualify the recent decline in prices:

Bill concludes (my emphasis):

The good news – for the home builders – is there are few completed homes for sale (unlike during the bubble). However, there are a large number of homes under construction (over 6 months of inventory under construction at the June sales rate). During periods of rising cancellations, the Census Bureau tends to overestimate new home sales – so the actual negative impact on the homebuilders is greater than the headline number suggests.

U.S. Gasoline Prices Weaken Sharply Retail gasoline prices fell to $4.33/g (+38.1% y/y) last week after declining to $4.49/g in the prior week, from a record $5.01/g in the second week of June.

Richmond Fed’s Survey

Fifth District manufacturing activity improved but remained relatively flat in July, according to the most recent survey from the Federal Reserve Bank of Richmond. (…) the employment index, fell to 8 in July from 16 in June.

I was more interested by the survey of Services activity. Again, sharp is the word!

Fifth District service sector activity deteriorated in July, according to the most recent survey by the Federal Reserve Bank of Richmond. The revenues and demand indexes both decreased notably in July, falling to -13 and -6, respectively. Expectations for improvement in the next six months were also notably less optimistic in July.

Firms reported a sharp deterioration of local business conditions, as the index fell to -33 in July from -11 in June. Moreover, firms were notably more pessimistic about future business conditions, as the expected business conditions index fell to -31 from -23.

On a positive note, firms reported slightly increased hiring in July, and their ability to find workers with the necessary skills improved since June. Firms expected further improvement in the next six months, but also expected wages to remain elevated. Despite the continued wage pressures, firms’ expectations for growth in prices paid and prices received over the next 12 months decreased in July.

• From the Dallas Fed via Bespoke:

(Bespoke)

BAD BET!

Yesterday, Shopify laid off about 1000 of its more than 10,000 employees. Shopify CEO Tobi Lütke, not sharp on that particular call, explained:

Shopify has always been a company that makes the big strategic bets our merchants demand of us – this is how we succeed. Before the pandemic, ecommerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix – the share of dollars that travel through ecommerce rather than physical retail – would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match.

It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead. (…) Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust. (…)

I bet that bet has been made by many others. Now, they have to adjust.

Student Loan Servicers Told to Hold Off on Sending Billing Statements

Big Brands Keep Raising Prices as Costs Grow

The makers of Coca-Cola beverages, Dove shampoo, Huggies diapers and Big Macs have been raising prices as their costs increase on everything from wood pulp to wages. The executives behind these global brands on Tuesday said they would keep passing along those costs to shoppers, for now. Consumers are continuing to buy even as inflation takes a toll on households, these executives said.

However, some companies are already warning of a consumer pullback. Walmart Inc. WMT -7.60%▼ and the makers of Whirlpool Corp. WHR 2.25%▲ appliances and Weber Inc. WEBR -4.73%▼ grills this week reported weakening demand for key products. (…)

“We continue to see resilience and a lot of demand not just in the U.S. but across the world,” John Murphy, Coca-Cola Co.’s finance chief, said in an interview. Some consumers are willing, Coca-Cola said, to spend now after missing out on restaurant dining and entertainment during the pandemic.

Unilever PLC, UL 3.63%▲ whose products include Dove shampoo and Ben & Jerry’s ice cream, said prices rose 11.2% across its portfolio. Kimberly-Clark Corp., KMB 0.41%▲ which makes Huggies and Cottonelle toilet paper, said its net selling prices rose 9%. (…)

Executives from conglomerate LVMH Moët Hennessy Louis Vuitton SE said they haven’t seen any pushback from customers on price increases implemented earlier in the year. (…)

Unilever, in some parts of the world, and grocery-store chain Albertsons Cos. ACI 0.34%▲ said they were seeing signs that consumers were moving more spending to generic store brands, which generally cost less. Unilever’s volumes slipped 2.1% in the quarter. But executives said they were sticking with plans to push up prices.

“We are pricing ahead of the market, and we’re prepared to tolerate low-single-digit volume declines and some compromise on competitiveness for a limited period of time in order to land that price,” said Unilever Chief Executive Alan Jope. Unilever’s price hikes have lagged behind cost increases through the first half of the year.

Likewise, Kimberly-Clark said consumers and businesses paid more for products but cut back on how much they bought. Sales volumes fell 1% for the quarter. The company raised revenue expectations for the calendar year, but predicted that higher costs for everything from pulp to shipping will eat into profitability more than anticipated.

Executives said they told retailers last week of another round of price hikes, with the percentage increase in the mid-single digits, that, coupled with cost-cutting, should offset higher costs for the rest of the year. (…)

McDonald’s Corp. MCD 2.68%▲ executives said lower-income customers are trading down more of their purchases to value offerings and fewer combo meals. The company said it is also gaining consumers who are opting to move away from sit-down and fast-casual restaurants, even as the burger chain has been raising prices. Chipotle Mexican Grill Inc. CMG -0.94%▼ said it was primed to increase prices again in August after reporting that higher menu prices helped lift second-quarter revenue 17% from a year earlier. (…)

Customers are buying cheaper rice, beans, oils and other products, often purchasing the grocer’s store brands, said Vivek Sankaran, CEO of Albertsons. (…)

Executives seem more focused on preserving margins at the expense of volume. Powell and friends are surely unhappy about this attitude.

• Visa profit sails past estimates on resilient consumer demand The world’s largest payments processor raked in higher revenue as payment volumes jumped 12% during the third quarter, helped by a 40% surge in cross-border volumes. Travel-related cross-border volumes were 16% above 2019.

But Bank Of America’s data are not as positive as ZeroHedge revealed:

In June, spending on travel and restaurants fell for the first time since January (when the Omicron wave peaked), while durable goods spending dropped for the fourth consecutive month.

The Chase credit card tracker also suggest tepid spending, even in nominal terms (data through July 19):

Even spending at gas stations is slowing as Americans drive less:

• Mercedes raises guidance as luxury demand boosts revenue

US warns of soaring fuel prices amid new push for Russian oil price cap

(…) The result could be a drop in Russian oil deliveries if he does not find enough ships ready to sail without cover. U.S. officials have warned other countries that the expected drop in exports could leave oil markets short and send prices skyrocketing, hurting consumers while offsetting financial woes in Moscow.

The US Treasury has pushed members of the G7 group of nations and large buyers of Russian oil to impose a price cap, which would exempt Russian oil imports from the ban on insurance and shipping services as long as ‘they are priced at a substantial price. discounts from the prevailing market price, U.S. officials said.

“Russian production will fall when the services ban comes into full effect unless we use the price cap to allow exports to continue,” said a person familiar with the negotiations. “It’s the only way to prevent a significant price increase.” (…)

But U.S. officials, speaking on condition of anonymity, said they remained concerned oil traders might be underestimating the potential impact of imposing an insurance ban with no caps. prices.

They are convinced that insurance bans are capable of shutting down a significant chunk of Russian oil production once implemented. They argue that Russian exports – which averaged 7.8 million barrels per day of crude and refined petroleum products before the invasion – are too large to handle without access to the world’s tanker fleet. (…)

Elvira Nabiullina, governor of Russia’s central bank, said last week that she believed Russia would refuse to sell oil to countries that tried “to impose such a cap”. (…)

Benchmark Russian Urals crude was selling for $79 a barrel this week, compared to $104 for Brent, the world marker.

IMF Again Cuts Global Growth Forecast Amid Inflation, War in Ukraine The International Monetary Fund now sees growth slowing to 3.2% this year and 2.9% in 2023, and is warning of a risk of worse outcomes.

• ECB’s De Cos says risks to inflation outlook in eurozone have intensified De Cos said risks included “lasting deterioration” of the eurozone’s economy and persistently high energy and food prices.

In Germany where manufacturing critically need gas, and at a decent price:

EARNINGS WATCH

We now have 133 companies in, a 76% beat rate and a +4.3% surprise factor. these 133 companies reported aggregate earnings down 3.5% YoY on a 8.0% revenue growth rate.

Estimates are for Q2 EPS to rise 6.2%, -3.2% ex-Energy. Q3e: +9.6%, +3.3% ex-Energy.

• Alphabet Reports Slowest Sales Growth in 2 Years The slowdown at the Google parent follows disappointing results from tech companies last week and suggests further weakness in online advertising, an industry critical to the health of many internet companies.
• Microsoft Earnings Dented by Cloud Slowdown, Videogame Sales Drop The software giant reported its lowest earnings growth in two years as it starts to experience the effects of an ending pandemic-era boom.

China Targeted Fed to Build Informant Network, Probe Says The investigation by Senate Republicans found that the decadelong effort included threatening to imprison a Fed economist during a trip to Shanghai unless he agreed to provide nonpublic economic data.

• China Blasts Report of Spying on the Fed as ‘Political Lie’

Walmart Cuts Profit Outlook, Lowers Prices on Goods The retailer said higher food and fuel prices are denting consumer spending, requiring more markdowns on apparel and other inventory.

(…) Walmart said higher prices for food and fuel have hurt sales of general merchandise, especially apparel, which generate higher profit margins for the company. Overall, the company expects comparable-store sales, excluding fuel, for its Walmart U.S. division to rise 6% in the second quarter from a year ago, but the growth is coming from less profitable items. (…)

“The increasing levels of food and fuel inflation are affecting how customers spend,” Walmart Chief Executive Doug McMillon said in a statement, “and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars.” (…)

Mr. McMillon said the company expects additional pressure on general merchandise in the rest of the year, including the holiday shopping season, but said school supplies were selling well as families prepare for a new academic year.

Walmart now expects its operating income, excluding units it has divested, to decline between 10% and 12% for the fiscal year ending in January. In May the company said it expected operating income for the year to decrease about 1%, excluding currency fluctuations, down from a previous estimate of an around 3% increase.

Actually, Walmart said it now anticipates adjusted EPS for the Q2 and the full year to decline 8-9% and 11-13% respectively vs flat to up slightly for Q2 and -1% for the full year.

Walmart said it now expects same-store sales in the U.S. to rise by about 6% in the second quarter, ex-fuel, up from the 4-5% increase it previously expected.

This is Inflation 101 in action: higher revenue growth but declining margins and profits because real sales are dropping. Compound that with markdowns to clear a significant overstocked position and you get profits down 10-15%.

In the July 18 Daily Edge (SKINNING THE RETAIL SALES CAT) I showed that, while June total CPI was up 9.0%, a weighted average of inflation in durable and nondurable goods was 13.7%, a more accurate proxy of inflation on total retail sales.  

This chart plots my “CPI-Goods” (red), nominal retail sales (blue) and deflated retail sales (black). Nominal sales were up 7.7% in June, better than +5.2% in March, but in real terms, growth turned negative in March as many retailers have since reported.

Walmart’s profit warning is a warning on the economy. The largest U.S. retailer, a prime destination for squeezed consumers, is having negative sales growth compounding a huge inventory problem (inventories were up 33% YoY last quarter). Its problems and markdowns will reverberate throughout the economy. Remember that Target reported its own +44% bloated inventories, Amazon +47%.

Manufacturers, worldwide, currently receiving cancellation notices, will themselves reduce input orders and review staffing needs. Transportation, wholesaling, warehousing will get hit. In fact, Axios told us yesterday that spot freight rates have recently plummeted 30%.

Friday we will get consumer spending data for June, many still hoping that services will more than offset weakening demand for goods. But S&P Global’s flash PMI warned us:

At 47.0 in July, down notably from 52.7 in June, the S&P Global Flash US Services Business Activity Index indicated a solid decline in business activity at service providers. The seasonally adjusted index continued its downward trajectory seen since March’s recent high and signalled the sharpest fall in output since May 2020.

• Inventories Wreak Havoc on Economic Data, Business Planning

(…) General-merchandise stores are an extreme example, but inventory-to-sales ratios at furniture, electronics and appliance stores, and at building-equipment and garden-supplies dealers are also now above prepandemic levels. And while the overall retail inventory-to-sales ratio looks very low, that is because of the dearth of vehicles in car dealers’ lots, a consequence of continuing automotive supply-chain problems.

• Difficulty Paying Bills Tops Pandemic High in US Census Survey

Four in ten adults said it has been somewhat or very difficult to cover usual household expenses in a poll conducted end of June and early July. That’s the highest since the Census started asking the question in August 2020. It implies that more than 90 million families are struggling, up from about 60 million a year ago.

When the Census first asked the question two years ago, a third of respondents reported difficulties in covering usual household bills. The share fell over the following year but started rising about a year ago after government pandemic relief ended and inflation took hold.

Millions of households with student loans are expected to face an additional monthly expense Sept. 1, when a Covid moratorium on servicing that debt ends. (…)

Nationally, the latest Census survey shows that more than one third of households reduced or forwent expenses for basic household necessities, such as medicine or food, in order to pay an energy bill. More than one in five families kept their home at a temperature that felt unsafe or unhealthy for at least one month, and a similar share hasn’t been able to pay at least part of an energy bill.

• Unilever raises prices 11% as it grapples with ‘unprecedented cost landscape’
• The Economic Mess We’re In

From the WSJ Editorial Board:

(…) We’re about to find out if Mr. Powell has the fortitude to make up for the Fed’s great inflationary mistake.

The economic backdrop for the Open Market Committee is rare and troubling. Inflation has been raging while growth is slowing. The central bank finds itself in the strange position of having to raise interest rates on Wednesday while a day later the Commerce Department may report a second straight quarter of negative economic growth. (…)

• Why Inflation Is on the Way Down When growth of the money supply slows, so does the increase in prices.

By Donald L. Luskin, CIO at TrendMacro:

(…) Normally the Fed would never raise rates in a recession. But the most recent consumer-price index data, showing 9.1% headline inflation year-over-year as of June, is anything but normal. The last time the committee faced such a difficult decision was in the early 1980s, under the chairmanship of Paul Volcker. His courageous determination to keep policy tight through two back-to-back recessions, the second of which was severe, slayed a persistent and embedded inflation and set the stage for decades of inflation-free growth. (…)

Friedman taught Volcker that “inflation is always and everywhere a monetary phenomenon.” For Mr. Powell, inflation has gone from being a “transitory base-effects phenomenon” to a “supply-chain phenomenon” to a “Ukraine phenomenon” and now a “demand phenomenon.”

Yet the relationship between money-supply growth, as measured by M2 (currency in circulation plus liquid bank and money-market fund balances) and subsequent inflation has been statistically near-perfect in the pandemic era, with a 13-month lag. (…)

As of the most recent data, for May, M2 growth stands at just 6.6%, lower than it was immediately before the pandemic. If the relationship with inflation continues, core inflation will be at only 2.3% in 13 months, in June 2023. If inflation is always and everywhere a monetary phenomenon, that’s baked in the cake—even if it seems too good to be true.

June gasoline and food prices are sharply lower so far in July. That points to a July CPI report, released in mid-August, that will show little inflation for the month, and possibly even a slight deflation. Then there will be one more CPI report for August, released in September, just before the FOMC meets again, and it will likely be benign as well. (…)

That’s what happens when money-supply growth collapses. Always and everywhere. And that leads straight to a policy prescription that Friedman and Volcker would applaud: On Wednesday, the Fed should do nothing. (…)

Even if the Fed does what Volcker wouldn’t have done and proceeds with the expected yet wholly unnecessary 0.75-point hike on Wednesday, that is likely to be the last hike. At the September FOMC meeting, after two benign CPI reports, all the committee will need to do is take credit for another slain inflation dragon and bask in Mr. Powell’s courage.

We’ll know where credit is due, however: to a Congress that finally sobered up on pandemic spending.

China’s Slowdown Spills Over to Major Economies Through Imports

(…) Elevated global commodity prices meant that China’s official import growth of 1% in June from a year earlier hid a worse result for manufactured goods. Imports of hi-tech products and mechanical and electrical goods fell about 8% last month, according to recently released Chinese customs data. There doesn’t seem to have been an improvement this month, with South Korea’s exports to China falling 2.5% in the first 20 days of July.

The decline was mainly due to the lingering impact of lockdowns to prevent Covid-19 infections, which hit the confidence of consumers and business, according to Trinh Nguyen, Asian emerging markets economist at Natixis SA. “Countries that are directly exposed to Chinese domestic demand, especially [for] manufactured goods, are more vulnerable,” she said. (…)

Worse for those countries, some of China’s slowdown in imports is structural. China’s electric vehicle exports have surged this year, and the EV supply chain is more China-centered, reducing demand for auto parts from countries like South Korea, said John Gong, a professor at the University of International Business and Economics in Beijing. (…)

Japan’s exports to China recovered in June from year-on-year declines in April and May, but the growth may be short-lived, said Craig Botham, chief China economist at Pantheon Macroeconomics. “Ordinary exports aimed at final demand have no hope given the dire situation Chinese consumers find themselves in, and intermediate goods are only useful as long as global export demand is strong — as far as I can tell, it is fading,” he said. (…)

Russia to Cut Nord Stream Gas Flow to Europe to 20% The move raises new questions about Europe’s ability to sock away enough gas for the winter. Wholesale European gas prices jumped 12%, and analysts expect prices to keep rising.

• European gas prices soar after Russia deepens supply cuts Futures contracts hit five-month high after Gazprom announces drop in flows

Yardeni Says S&P 500 Has Already Bottomed, Sees No Hard Landing

In the view of the Yardeni Research president, the S&P 500’s plunge last month to a 3,666.77 low likely marked the trough of the 2022 equity rout. Underpinning the sanguine call is the resilience in corporate earnings and the still-healthy outlook for consumers and businesses even as the economy slows.

“It’s never easy to pick a bottom in the stock market, but I’m going to give it a try,” Yardeni said on Bloomberg TV. “The real question is going to be the earnings season, and so far the earnings season is going reasonably well. It has not really thrashed the stock market, and the stock market’s held up quite well.” (…)

The strategist, who worked at Oak Associates Ltd. and Deutsche Bank before founding his namesake research firm, called the equity bottom the same month when the 1982 bear market ended. He then repeated the success in March 2009 when the S&P 500 reached an intraday low of 666.79 — 3,000 points below this year’s trough in what he calls another “devilish number.”

While failing to foresee the turn after the dot-com crash in 2002, Yardeni predicted that the 1987 bear cycle would be short-lived less than two months before stocks staged a sustained recovery. (…)

Although Yardeni said that Thursday’s reading on second-quarter gross domestic product could turn negative — marking a second straight quarter of contraction — he would consider it a “mid-cycle slowdown.”

“I don’t see a hard landing,” he said.

LESS FEAR, BUT NOT FEARLESS

Fear & Greed Index via The Market Ear

EARNINGS WATCH

This week, 174 companies will report Q2 results. This is about 50% of S&P 500 market cap, including Apple, Amazon, Microsoft, Alphabet and Meta. Together, the five companies control 23% of the S&P 500’s market cap, according to Dow Jones Market Data Group.

COVID State of Affairs: July 25

Katelyn Jetelina:

As Omicron subvariants sweep the globe, the international death toll started rising for the first time in seven months. Although deaths still remain low, a 39% increase in death toll is noticeable. This increase is mainly driven by Southeast Asia (+20%), followed by the Eastern Mediterranean (+15%) and Americas (+7%).

Hospitalizations have doubled in Europe and no peaks have been seen yet for countries like France, U.K., Greece, or Italy, although hospitalizations do look to be slowing down. Notably, Australia has surpassed their previous Omicron peak for hospitalizations, and many systems are reaching capacity. Japan hospitalizations are also on the rise, which is not a surprise given that they just reported 152,538 new coronavirus cases—the biggest one-day increase on record.

BA.5 was slower to claim dominance in the U.S., but now accounts for 78% of cases. And, like clockwork, once it claimed dominance, wastewater trends went upwards in all regions of the U.S. Interestingly, this uptick may be short lived as wastewater recently slowed and even reversed in some places. Case trends continue to give all sorts of weird signals, but test positivity rates seem to have peaked, too. This could be the top of the wave, which would be a surprising but welcome reprieve. (…)

On a national level, hospitalization trends continue to steadily increase. And this will continue as hospitalizations lag case trends. More than 43,000 people are in hospitals with COVID-19 on an average day. Notably, many of the acceleration leaders for hospitalizations are in the South: Arkansas, Louisiana, West Virginia, Kentucky, and Georgia. (…)

The vast majority of people in hospitals are older and unvaccinated or not up-to-date with their vaccines. Below are the current hospitalization rates in Los Angeles county.

The national picture mirrors that of LA: The rise in hospitalizations is driven by 70+ year olds (see figure below). The hospitalization gap between this group and other age categories continues to widen, too. Unfortunately, even some fully vaccinated groups remain at risk for hospitalization. These groups will continue to remain at high risk until transmission calms down.

On the other side of the spectrum, pediatric hospitalizations remain relatively low compared to adults. But their hospitalization rate just passed the Delta peak, while other age groups are still far below it. This is likely explained by low vaccination rates among children. (…)