Fed’s Williams Sees Another Large Rate Rise in July as Possible Federal Reserve Bank of New York President John Williams said he’s not expecting a recession but acknowledged that there is a lot of uncertainty surrounding the outlook.
(…) “We’ve got to get interest rates higher and we need to do that expeditiously,” Mr. Williams said. “In terms of our next meeting. I think, you know, 50 [basis points] or 75 [basis points] is clearly going to be the debate” among policy makers, although the actual size of the rate increase will be driven by the data, he said. (…)
“I’m expecting growth to slow this year, quite a bit, relative to what we had last year, and actually slow to probably one to one and a half percent [gross domestic product] growth for the year,” Mr. Williams said. “But that’s not a recession, it’s a slowdown that we need to see in the economy to really reduce the inflationary pressures that we have.”
“My base case is the economy slows enough to see the unemployment rate get up to about a little over 4% over the next couple of years,” Mr. Williams said. (…)
“My own baseline projection is we do need to get into somewhat restrictive territory next year,” Mr. Williams said, adding “we definitely need to get the funds rate up to between three and three and a half percent by later this year.” In an economy beset by uncertainty, that policy outlook is “something I have a lot of confidence in,” he said. (…)
Global Recession Looms As War In Europe, Rampant Inflation, And Supply Chain Problems Take Their Toll
The Global Sales Managers Index covers the three great engines of global economic growth of the past decade: China, the USA and India. Together over the past decade, these three countries accounted for 57.8% of global economic growth.
(…) The latest Sales Managers Index shows that the world economy is rapidly heading back into recession territory, as the Chinese lockdowns (although moderating) continue to impact heavily on global supply chains; war in Europe drags on and is now damaging global energy and food supplies; and price inflation approaches and in some cases already exceeds 10%, fuelled both by shortages of goods and the lax monetary policies followed by many countries in reaction to Covid.
As a consequence, three out of four growth related Sales Managers Indexes are at near two year lows. The overall Sales Managers Index has tipped into recession with a reading of 49.1, well below the crucial 50 “no change” level. Staffing levels remain way below those seen a year ago.
Canaries in the economic coal mine
Axios is kind enough to plot all regional manufacturing surveys showing how weak is the goods part of the economy. But that canary is dead already and yesterday’s story.
Manufacturing is 12% of the U.S. economy and core goods account for 21.4% of the CPI.
We should all be much more concerned by services, 45% of GDP and 60% of CPI, as pent-up demand for services is expected to offset slower demand for goods. We must also watch services inflation, potentially offsetting goods deflation, so we need to focus on services wages.
Fifth District service sector activity softened in June, according to the most recent survey by the Federal Reserve Bank of Richmond. The revenues and demand indexes both decreased in June, with the index for revenues dropping notably, from 8 to −7. The indexes for expected revenues and demand in the next six months, however, signaled some optimism, with the expected revenues index increasing from May while the expected demand index remaining unchanged. Although still positive, the indexes for capital and equipment/software spending decreased from May, indicating that fewer firms increased spending.
More firms reported deteriorating local business conditions, as the index fell to −12 in June from -5 in May. However, firms were slightly more optimistic about future business conditions, as the expected business conditions index rose to −8 from −14.Fewer firms reported increased hiring in June as the employment index decreased slightly from May. Firms continued to report trouble finding workers with the necessary skills but expected marked improvement in the next six months. The wage index continued to drop but remained high, while firms’ expectations for price growth in the next 12 months decreased in June.
(…) The general business activity index plunged from 1.5 to -12.4, as the share of firms noting a worsening of activity rose from 20 percent to 27 percent. The company outlook index similarly dropped into negative territory at -14.7—its worst reading since July 2020. The outlook uncertainty index surged 16 points to 41.2, nearing its record-high level during the initial onset of COVID in April 2020.
Price and wage pressures remained near record highs in June. The selling prices index moderated three points to 29.4, while the input prices index increased by two points to 55.8. The wages and benefits index was roughly flat at 34.6, though nearly 40 percent of firms noted higher wages compared with May.
Respondents’ expectations regarding future business activity weakened further in June. The future general business activity index dropped deeply into negative territory at -24.0, while the future revenue index declined nearly 17 points to 19.0. Other future service sector activity indexes such as employment and capital expenditures declined, suggesting expectations for weaker growth over the second half of the year. (…)
Retailers’ perceptions of broader business conditions turned sharply pessimistic this month compared with May. The general business activity index shed 22 points to -25.2, while the company outlook index fell from -4.1 to -22.2; just 12 percent of retailers noted improved outlooks compared with 35 percent expecting worsening conditions. The outlook uncertainty index surged to 42.3, its highest reading since March 2020.
Retail price and wage pressures remained highly elevated in June. The selling prices index fell five points to 37.1, although a majority of firms continued to note they increased their selling prices over the past month. The input prices index held steady at 49.9, while the wages and benefits index was also stable at 30.4.
Expectations for future retail growth deteriorated significantly in June. The future general business activity index fell 23 points to -26.8, while the future sales index declined 17 points to 0.9. Other indexes of future retail activity also declined, suggesting lowered expectations for growth for the rest of 2022.
Home-Price Growth Slowed in April S&P CoreLogic Case-Shiller National Home Price Index rose 20.4% in the year that ended in April, down slightly from the prior month
(…) Nearly 60% of the homes sold in May were sold above their list price, according to real-estate brokerage Redfin Corp.
The Case-Shiller index, which measures repeat-sales data, reports on a two-month delay. The median existing-home price rose 14.8% in May from a year earlier and topped $400,000 for the first time on record, NAR said. (…)
The Case-Shiller 10-city index gained 19.7% over the year ended in April, compared with a 19.5% increase in March. The 20-city index rose 21.2%, after an annual gain of 21.1% in March. Price growth decelerated in 11 of the 20 cities. (…)
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The key take-away is that this series leads turning points in the primary and owners’ equivalent rent series within CPI by around 14 months. The lag is due to actual rents typically only changing once a year while the survey respondents to the owners’ equivalent rent series are not necessarily closely following house price changes month to month. The chart suggests that these housing CPI components will continue to keep headline and core inflation elevated for much of the rest of this year especially since housing is around 35% of the total basket of goods and services that make up CPI. It should support the 75bp case for the July FOMC meeting.
House prices and the key rent components within CPI
However, if we are right and the surge in mortgage rates, plunge in mortgage applications and more supply coming to the housing market soon starts to take the steam out of house prices, it could be a key component that drags CPI sharply lower in the second half of 2023. With Federal Reserve rate hikes and the strong dollar set to dampen activity and if favourable supply conditions emerge surrounding energy and supply chains, 2% inflation by the end of 2023 in not inconceivable.
- Record Home Prices Force Prospective Buyers to Rent Landlords are well-positioned as more would-be house buyers have little choice but to rent
(…) Rents for single-family homes rose 14% this April from a year ago, the 13th consecutive month in which rents grew at a record pace, according to housing data provider CoreLogic.
(…) 74% of single-family landlords surveyed by John Burns Real Estate Consulting LLC this May said they expected to continue seeing strong or very strong leasing activity over the next two quarters. That response was down from a high of 91% during 2021 but still above where sentiment was before the pandemic.
Invitation Homes Inc., one of the largest rental homeowners by homes owned, said earlier this month that its rental rates have continued to grow at an even higher pace than last year through the first five months of 2022. Its homes are 98% occupied and resident turnover is at an all-time low, the company said.
“Demand today is getting stronger and stronger,” said David Singelyn, CEO of publicly traded American Homes 4 Rent, at the May industry conference.
Smaller operators, like Mr. McNeilage, say they are having similar success. “Because of the supply and demand, we are raising rent roughly 15%,” he said, “which is below our peers in many areas.” (…)
93% of Working Americans Have A Side Hustle in 2022
Gone are the days of working 9 to 5. A new survey of over 1,000 Americans finds a whopping 93% of Americans who are currently working part-time or full-time have a side hustle. Of those, 38% work one side job, 38% work two, and 20% work three or more.
When asked what type of side hustles they have, an overwhelming 95% say they do online surveys to earn extra bucks. 18% sell items on sites like eBay, Craigslist, and Facebook Marketplace. 13% do freelance work, and 9% sell their used clothes on sites like Depop.
When asked why Americans are working a side hustle, most (63%) say it’s for something to do and a bit of extra cash. 44% say they need to do it to make ends meet and cover their bills. 32% say they genuinely enjoy it. (…)
The average monthly income from a side hustle is $483 (or almost $6,000 a year). (…)
Working Americans are dedicating an extra 13 hours per week on average to their side hustle. That’s an average hourly wage of $37. 35% have worked a side hustle for more than three years. 20% have worked their side hustle for two years, and 16% have worked their side hustle for over one year. 26% have had their side hustle for less than a year.
(…) The rise of people booking trips in a rush as the summer starts, despite higher costs, is what some refer to as “revenge travel”. But the long-awaited signs of demand destruction could be around the corner as analysts attribute a slowdown in vacation plans to exorbitant prices at the pump. With US retail gasoline prices hovering around an average of $5 a gallon, consumers simply can’t catch a break.
And it’s not just car travel. Just 36% of Americans surveyed this month intend to take a vacation within the next six months, the weakest June reading for any year in data going back over 40 years, again excluding 2020.
- Sneaker resale site StockX laid off 8% of its workforce on Tuesday as inflation and economic uncertainty hurt consumer spending, the company confirmed. StockX has more than 1,500 employees, so the 8% implies a cut of around 120 people. Online subscription retailer Stitch Fix cut 15% of its salaried staff earlier this month. More here.
Mark Carney says global recession risk is ‘uncomfortably high,’ but Canada likely to fare better than most other countries
(…) “That recession, if it comes, will be relatively mild. This isn’t 2008, for [the U.S.], but it’s also not 2001 either,” Mr. Carney said at an Alberta Relaunch conference in Calgary. That year, the dot-com bust sideswiped stock markets and helped trigger a recession
A slowdown won’t be as painful as the last global one because there aren’t the same imbalances in the U.S. economy. The banks are not in as precarious a situation, and there is not the same oversupply of houses and cars. At the same time, consumer finances are in better shape than they were in 2008, he said.
“People are starting to be crimped, but, on the whole, they are not over their skis in debt,” Mr. Carney said.
However, he said, a new recession may be worse than the one that accompanied the dot-com crash when central banks were better positioned than today to “flood in support” to limit the damage. In addition, at that time the world was in the process of liberalizing trade, which helped the situation, he said. (…)
China’s economy didn’t bounce back in the second quarter, China Beige Book survey finds
(…) “While most high-profile lockdowns were relaxed in May, June data do not show the powerhouse bounce-back most expected,” according to a report released Tuesday. The analysis found few signs that government stimulus was having much of an effect yet. (…)
Between the first and second quarters, hiring declined across all manufacturing sectors except for food and beverage processing, according to the China Beige Book report. (…)
So far, there’s been little sign that stimulus has kicked in, especially in infrastructure, said Qazi who is based in New York.
“Transportation, construction companies aren’t telling you they’re getting new products,” he said. “They’re telling you they’ve slowed investment, their new projects have actually slowed.”
Unsold goods piled up, except in autos. Orders for domestic consumption and overseas export mostly fell in the second quarter from the first. Orders for textiles and chemicals processing were among the hardest-hit.
The only standout domestically was IT and consumer electronics, which saw orders rise during that time. Orders for export grew in three of seven manufacturing categories: electronics, automotive and food and beverage processing.
“Weak domestic orders and expanding inventories indicate the presumed second-half improvement will be unpleasantly modest,” the report said.
The authors noted the services sector saw the greatest reversal. After accelerating in growth in the first quarter, services businesses saw revenue, sales volumes, capex and profits drop in the second quarter.
Across China, only the property sector and the manufacturing hub of Guangdong saw any year-on-year improvement, the China Beige Book said. (…)
(…) “In the short term, the market has bottomed out, but the recovery is a slow and gentle process and will take time,” China Vanke Co. Chairman Yu Liang said at the company’s annual general meeting Tuesday, according to a transcript posted on its WeChat account.
Yu cited a mild sales increase in May from April in first- and second-tier cities, adding that the recovery may become more distinct in June. (…)
China’s housing sales have fallen year-on-year for 11 months straight, a record since the nation’s private property market began in the 1990s. Inventories remain elevated and there’s no sign of growth in new construction, Bloomberg analysis shows.
Homes sales have gone up slightly. Home purchase vouchers for shanty town residents are a short-term policy to boost home sales. Although this is a positive move for home sales, it is not positive for property developers that have defaulted on their bonds, whether onshore or offshore, as potential home buyers will stay away from homes sold by those developers to avoid non-completion risk and after-sales property management risk.
As such, we do not expect defaulted real estate developers to get cash from home sales quickly, which will continue to put pressure on their liquidity.
Some property developers are expected to default on their bonds in 2H22 and 2023. Furthermore, some conglomerates have begun to be affected by their property development arms and have been tight on cash. The liquidity and credit risks of these conglomerates are rising.
China’s residential property market missed sales target in May before a slow recovery in June
President Xi Jinping declared Covid Zero the most “economic and effective” policy for China, during a symbolic visit to Wuhan in which he cast the strategy as proof of the superiority of the country’s political system.
Xi said during a trip Tuesday to the central Chinese city where the virus first emerged in late 2019 that relaxing Covid controls would risk too many lives in the world’s most populous country. China would rather endure some temporary impact on economic development than let the virus hurt people’s safety and health, he said, in remarks reported Wednesday by state media.
“Our country has a large population, such strategies as ‘herd immunity’ and ‘lying flat’ would lead to consequences that are unimaginable,” Xi said, according to the official Xinhua News Agency. (…)
Xi also said the country needed to be more self-reliant on developing cutting edge technologies, especially in chip industry and high-end manufacturing, saying the country must “firmly hold the lifeline of science and technology in its own hands.” (…)
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The technology war will be a long-term issue for economic growth. China does not have the technology to manufacture semiconductor equipment for the most advanced semiconductors. The obstacle comes from the US and its allies that are preventing China from gaining access to this technology. China is trying to get talent from the rest of the world, hoping to create its own advanced technologies, which is a challenging mission.
High-tech product imports and exports suffer from the technology war
Source: CEIC, ING
EARNINGS WATCH
2022 EPS revisions…well at least they are not continuing to increase….
IBES via The Market Ear- Equity analysts have been “behind the curve” and are now trying to catch up. Earnings downgrades are increasingly outpacing upgrades.
Source: The Daily Shot
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JPMorgan cut earnings estimates across big tech stocks, especially those exposed to online advertising. It lowered forecasts and price targets on Snap, Google, Meta, Pinterest, Criteo and Cardlytics and cut PTs for Amazon, Ebay and Farfetch. Still, the firm said Amazon should gain retail share in a recessionary environment. (Bloomberg)
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A sentimental recession? This is a rather intriguing chart from Crescat Capital. Consumer sentiment is a coincident indicator, often heavily influenced by gasoline prices but Crescat argues that the inflation squeeze on spending will trigger a recession that will collapse margins. The pandemic + stimmies have obviously boosted margins. Can they be sustained in a downturn? We are about to find out but if the rather long relationship resumes, it will be ugly!
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Inflation Puts Spotlight on Companies’ Use of Last-In, First-Out Accounting The method helps businesses lower their federal tax bill by inflating costs
(…) With LIFO—which is permitted under the U.S. Generally Accepted Accounting Principles, but not under International Financial Reporting Standards—companies recognize their most recently acquired inventory through their cost of goods sold. With inflation around a four-decade high, such inventory is more expensive than goods purchased earlier, and acts as a drag on earnings.
Companies use LIFO to lower their taxable income. But to do so, they also must use it for financial accounting, even though it can ding financial results. By contrast, under first-in, first-out accounting—another popular accounting method—companies record the cost of their oldest inventory first.
In 2021, approximately 15% of companies in the S&P 500 used LIFO as their primary inventory method and 50% used FIFO, according to Credit Suisse Group AG , citing annual reports. The remainder used an average-cost method, a combination of methods, or methods that couldn’t be determined, Credit Suisse said.
Investors are scrutinizing accounting methods like the use of LIFO amid recent declines in the stock market to ensure they fully understand business models in their portfolios, said Ron Graziano, a managing director at Credit Suisse. “It really matters when it matters, and it matters a lot right now,” he said.
Some companies recently disclosed millions of dollars in LIFO charges, or reserves. The charges show the difference in costs under LIFO versus FIFO, allowing investors to see the effect of the accounting method. LIFO is a cost assumption companies make on financial statements, but doesn’t reflect the actual flow of inventory in their operations. (…)
“It is a big benefit” for a company’s taxes, even though it can put pressure on earnings, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology. LIFO allows companies to use additional cash upfront from their lower tax bills to invest in their businesses. (…)
