HOUSING SLOWING
From John Burns’ @RickPalaciosJr: April homebuilder survey results are here. Top themes: 1) Demand is slowing, namely entry-level due to payment shock. 2) Investors are pulling back. 3) Ripple effect of rising rates starting to hit move-up market.
- #SanJose builder: “Quality traffic has significantly decreased.” THE END
- #Sacramento builder: “Seeing trouble qualifying for entry-level buyers as they are priced out by rates.”
- #Cleveland builder: “Once we reach home closings, about 5% of our current customers on the books will be forced to bust out as they originally qualified at a 3.25% rate and won’t be able to stretch beyond this.”
- #Fresno builder: “Finding an increase in cancellations due to the rate increase. The majority of cancellations are resulting from fear vs non-qualification.”
- #Reno builder: “Cancellation rate last month more than doubled from 6% to 16%. We attribute this to buyers that did not lock interest rates early in purchase process. Also seeing many buyers put buying decision on hold.”
- #KansasCity builder: “Our lower end product has paused or slowed dramatically.”
- #Indianapolis builder: “Traffic has significantly declined and people have paused on moving forward with purchases.”
- #Tampa builder: “We’ve seen a significant shift in buyer behavior in the last 30 days. Florida was on fire and pricing has really come to a high point, and people are not willing to pay the prices anymore.”
- #Philadelphia builder: “Between higher interest rates and higher sales prices, along with high gas prices and a volatile stock market, we’re seeing a pullback in our sales.”
- #Denver builder: “Sales are slowing due to higher prices and rates. Backlog of buyers have remained but we are seeing new prospects priced out with interest rates and anticipated payments. Conforming loans quoting over 6%.”
- #LosAngeles builder: “Buyers who are stretching to purchase have become more cautious.”
- #RiversideSanBernardino builder: “Cancellations are starting to creep up due to loan declines and job losses. Waiting lists are certainly smaller. Saw an immediate change in buyer behavior when rates climbed over 5%.”
- #Seattle builder: “Pause by a large population of buyers. To achieve our desired [sales] pace, we had to make price adjustments. Rates starting to knock people out of qualification.”
- #WashingtonDC builder: “Traffic half what it was in March. Worried about first time buyers. Many fewer REAL buyers than number of people collected on interest list last 6 months. Certainly more attempts [from buyers] to negotiate.”
- #Provo builder: “Investors are evaluating the investment more critically than in the past.”
- #Raleigh builder: “Investor activity has slowed dramatically.”
There’s more but you see the point(s)…
But I don’t see this next point, from the NY Fed’s Survey of Consumer Expectations:
Hence:
Another Record Monthly Increase in U.S. Consumer Credit 
Tesla halts most output at Shanghai plant, April sales dive
Tesla Inc (TSLA.O) has halted most of its production at its Shanghai plant due to problems securing parts for its electric vehicles, according to an internal memo seen by Reuters, the latest in a series of difficulties for the factory.
The automaker’s sales in China had already slumped by 98% in April from a month earlier, data released by the China Passenger Car Association (CPCA) showed on Tuesday, underscoring the hit from China’s hard COVID-19 lockdowns. (…)
Tesla planned to manufacture fewer than 200 vehicles at its factory in the city on Tuesday, according to the memo, far below the roughly 1,200 units per day it had ramped up to shortly after reopening on April 19 following a 22-day closure. (…)
The company had been aiming to increase output at the plant to 2,600 cars a day as soon as next week, Reuters reported previously.
Overall passenger car sales for China, the world’s largest auto market, dropped almost 36% in April from a year earlier, the CPCA said. However, sales of battery-electric vehicles and plug-in hybrids – a category China targets for incentives – rose more than 50%, boosted by particularly good performances by BYD (002594.SZ) and SAIC-GM-Wuling (GM.N), (600104.SS).
Another auto association estimated last week that overall auto sales in China had dropped 48% in April as lockdowns shut factories, limited traffic to showrooms and put the brakes on spending. (…)
U.S. producers undo years of efficiency gains in fight for supplies
Industrial companies reporting earnings over the past few weeks have described steps they’ve taken – from acquiring trucks to move their own goods to building products that sit around on factory floors waiting for missing semiconductors – to deal with delays and shortages that have dogged them over the past year.
“We want to optimize our supply chain to its fullest,” said John Morikis, chief executive of Sherwin Williams Co (SHW.N), describing to analysts last month how the Cleveland-based paint maker has started using its own trucks – a much costlier route than using third-party services – to get around bottlenecks in transport systems.
Morikis admitted this is “less efficient,” but necessary to meet surging demand. Over time, he said, he hopes “the efficiency will work its way back.” (…)
Many companies focused on how they were responding to these problems in their earnings calls. In many cases, the moves add to costs and complexity in their systems.
Rockwell Automation Inc (ROK.N), the Milwaukee-based maker of factory software and automation equipment, said one response to shortages has been to build more products that had to wait for scarce semiconductors to be finished.
“That’s one reason we saw our working capital increase in the (latest) quarter – as we had a higher amount of product being built in anticipation of getting chips,” Blake Moret, Rockwell’s chief executive told Reuters. Moret said he considers many of the efficiencies created by shortages to be part of a new normal.
(…) Generac has worked on finding second and third suppliers for more of its parts – seeking them in multiple regions of the world – more costly than relying on one source but, he said, more secure.
“What we’ve learned is that we need a buffer,” said Jagdfeld. “The way we’ll create that is by carrying more inventories of the component supplies we consume.”
Companies currently don’t mind higher costs which they can easily pass on. ING on today’s NFIB report:
Looking to tomorrow’s inflation data the NFIB report shows a net 70% of companies raised their selling prices in the past 3 month – down from last month’s 72% balance, but this is still the second highest reading in the survey’s 47-year history. Moreover, a net 46% of firms plan to raise their prices further over the next three months (down from 50%, but this is still the 6th highest reading in the survey’s history). This reinforces the message that despite concerns about where the economy is heading, businesses continue to have pricing power and highlights the breadth of inflation pressures in the economy. The ability to raise prices is seen across all sectors and all sizes of businesses.
NFIB price indicators show no sign of a turn in inflation
New York Fed: Longer Term Inflation Expectations Rose in April Respondents see prices rising by 3.9% three years from now, up from a rise of 3.7% they predicted in March.
Meanwhile, respondents believe inflation one year from now will rise by 6.3%, down from March’s 6.6% level. (…)
The expected rise of gasoline prices a year from now hit 5.2%, a sharp drop from the 9.6% rise seen in March. Food and medical care costs 12 months from now were seen up by a smaller degree relative to the prior month, while the 10.3% increase seen for rent was the highest reading in a report that goes back to 2013. Home-price increases a year from now held steady at an expected 6% gain. (…)
In the report, the New York Fed said survey respondents “remained positive about their labor market prospects, with earnings growth expectations stable at its series high and job loss expectations hovering near its series low.” It said household spending expectations hit a new high in April, even as expectations about future access to credit worsened to its worst reading since the survey started in 2013.
- Greek Inflation Hits Double Digits for First Time in 27 Years
- RBC to hike pay 3 per cent for lower-paid employees as fight for talent intensifies
Royal Bank of Canada is raising base pay by 3 per cent for its lower-paid employees as part of a $200-million spending package that aims to fend off fierce competition for talent by improving salaries and benefits.
The unusual increase takes effect on July 1, and applies to all employees in a range of entry-level and less senior positions, including at branches, call centres and other divisions. Collectively, the employees receiving raises make up nearly half of all RBC staff, and chief executive officer Dave McKay said in a company memo that the raises are intended “to address the market pressures and the rising cost of living that is having a greater impact on colleagues in lower salary bands.” (…)
Mr. McKay has said that a “massive” imbalance between demand and supply for labour is emerging as a top concern for business leaders. (…)
Last month, Toronto-Dominion Bank – which is RBC’s largest competitor in Canada – promised a 3-per-cent pay raise to most of its employees in July, and $1,500 cash bonuses to some other staff.
On Monday, RBC also said it will contribute more to employee pensions over two years, enhance benefits for fertility and surrogacy services and adoption, and add a paid sabbatical program for staff when they reach employment anniversaries. (…)
Inflation, Sharp Rise in Rates Pose Financial Risks, Fed Says Central bank identifies near-term threats in Monday’s Financial Stability Report
(…) “Further adverse surprises in inflation and interest rates, particularly if accompanied by a decline in economic activity, could negatively affect the financial system,” the central bank said in its latest semiannual Financial Stability Report.
Near-term risks highlighted in the report reflect a survey by staff from the Federal Reserve Bank of New York with a range of contacts, including academics, community groups and domestic and international policy- makers, the Fed said.
A combination of higher inflation and rising interest rates could weaken the balance sheets of households and businesses, leading to an increase in delinquencies, bankruptcies, and other forms of financial distress, the Fed said. Households could be affected by job losses, higher interest payments, and a reduction in house prices caused by higher mortgage rates and decreased housing demand.
Meanwhile, business credit quality could be eroded by a steep rise in rates that would increase business borrowing costs, which in turn could have negative consequences on employment and business investment, the Fed said. (…)
The Fed said that vulnerabilities from business and household debt are moderate. The financial position of many households continued to improve since the previous stability report in late 2021, supported in part by a strong labor market, high personal savings, remaining pandemic relief programs and rising house prices, the Fed said.
The report also warned that a prolonged conflict in Russia could have adverse consequences to U.S. financial markets, particularly through exposures to tumult in commodities markets, the Fed said.
Russia’s war in Ukraine has spar only when too lateked large price movements and margin calls in commodities markets and highlighted a potential channel through which large financial institutions could be exposed to contagion, Fed governor Lael Brainard said in a written statement. “The Federal Reserve is working with domestic and international regulators to better understand the exposures of commodity market participants and their linkages with the core financial system,” she said.
At present, financial market stresses don’t appear to have significantly disrupted broader economic activity or created substantial pressure on key financial intermediaries, including banks, the Fed added. (…)
“At present”, and from what is known. But there are unknowns, even known unknowns, that often reveal themselves only when it’s too late. The tide is receding fast and we shall soon know who was swimming naked as Warren Buffett says. Watch commodity and FX markets when complex leverage schemes are often used. Also watch that, below. It’s black swan season!
- Cryptocurrency Stablecoin Breaks Its $1 Peg The third-biggest stablecoin, which is meant to keep its value at $1, fell as low as 89 cents, causing a flood of investors to sell their holdings.
One type of cryptocurrency, a so-called stablecoin, is meant to keep its value at $1. But on Monday, the third-biggest stablecoin, TerraUSD, fell as low as 69 cents, causing a flood of investors to sell their holdings.
Stablecoins get their name from their being tied to the value of government-issued currencies, such as the dollar. These $1 pegs are usually backed by Treasurys, cash and other dollar debt that is easily sold in times of market stress. (…)
But unlike traditional stablecoins, TerraUSD is an algorithmic stablecoin. These pseudo dollars aren’t necessarily backed by any assets at all, instead relying on financial engineering to maintain their link to the dollar.
Such designs have been criticized by market observers as risky because they rely on traders to push the value back to $1 rather than having assets that continuously support the price. If traders aren’t willing to buy them, coins can go into a so-called death spiral. TerraUSD has mostly maintained its dollar peg, but it has been broken in bouts of heavy volatility.
In TerraUSD’s case, if its price falls below $1, traders can “burn” the coin—or permanently remove it from circulation—in exchange for $1 worth of new units of another cryptocurrency called Luna. That reduces the supply of TerraUSD and raises its price. Conversely, if TerraUSD climbs above $1, traders can burn Luna and create new TerraUSD. That increases supply of the stablecoin and lowers its price back toward $1.
The break in the peg, which began over the weekend, started with a series of large withdrawals of TerraUSD from Anchor Protocol, a sort of decentralized bank for crypto investors, said Ilan Solot, a partner at crypto hedge fund Tagus Capital LLP. Anchor Protocol—which is built on the technology of the same Terra blockchain network that TerraUSD is based on—had been a major factor in the growth of the stablecoin in recent months, by allowing crypto investors to earn returns of nearly 20% annually by lending out their TerraUSD holdings.
In tandem with the big withdrawals, TerraUSD was also being sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges.
The dislocation of TerraUSD from its peg caused some traders to panic and sell. To reinstate the peg, others began selling ether and buying TerraUSD, weighing on the dollar value of the second-largest cryptocurrency by market value. Some traders also sold bitcoin over the weekend in anticipation that the platform would need to sell its bitcoin reserves to support the peg, Mr. Solot said. Bitcoin fell 10% Monday to about $31,076 amid a broad selloff in the crypto markets. (…)
Panic selling also hit the related Luna cryptocurrency, which plunged 50% from Sunday to Monday, wiping out more than $10 billion of market value, CoinMarketCap data show.
The Luna Foundation Guard, a nonprofit supporting Terra, said it voted to support TerraUSD by lending $750 million of bitcoin to trading firms to protect the stablecoin’s peg and lending out an additional 750 million in TerraUSD to buy more bitcoin. (…)
One has to be a “lunatic” to follow the flow…but Bitcoin Mag warns us: “Now the main risk to the market is that the biggest buyer of bitcoin over the last couple months will now become the market’s biggest forced seller.”
President Truman had a sign on his desk: “The buck stops here”. Let’s see where that sign is now…Hopefully nothing spelling like “tether” which, according to CoinMarketCap, has a market cap of $86.7B and traded $164B in the last 24 hours. Who’s nervous?
- Stablecoins Are Vulnerable to Runs, May Heighten Risks, Fed Says
- Bitcoin Price Falls 54% From Its High The world’s largest cryptocurrency fell to $31,000 on Monday. In November, it hit its record high of $67,802.
BTW, the Financial Stability Report also warned of
(…) deteriorating liquidity conditions across key financial markets amid rising risks from the war in Ukraine, monetary tightening and high inflation in a semi-annual report published Monday.
“According to some measures, market liquidity has declined since late 2021 in the markets for recently-issued U.S. cash Treasury securities and for equity index futures,” the U.S. central bank said in its Financial Stability Report.
“While the recent deterioration in liquidity has not been as extreme as in some past episodes, the risk of a sudden significant deterioration appears higher than normal,” the report said. “In addition, since the Russian invasion of Ukraine, liquidity has been somewhat strained at times in oil futures markets, while markets for some other affected commodities have been subject to notable dysfunction.” (…)
- Tiger Global hit by $17bn losses in tech rout
- Emerging markets hit by ‘toxic’ mix of rising rates and slower growth
And a rising USD…
Another risk off move:
Global Banks Flee the Monster SPAC Market They Helped Create
Goldman Sachs Group Inc. is ending its involvement with most of the special purpose acquisition companies it took public and pausing new U.S. SPAC issuance, Bloomberg reported on Monday. Bank of America Corp. scaled back work with some SPACs and could retreat further as it evaluates its policies surrounding the deals, people familiar with the matter said. (…)
The banks’ recent concerns center around liability risks stemming from the new rules, which are aimed at tightening oversight on a market after it set back-to-back yearly records. The proposals would require SPACs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections.
They also would require underwriters of a blank-check offering to also be underwriters of the SPAC’s subsequent purchase of a target firm, known as the de-SPAC. That expansion of underwriter liability poses a greater risk for investment banks, prominent law firms have cautioned. (…)
It’s unusual for a bank to withdraw from an active blank-check firm because it typically works on the de-SPAC as well. The move risks leaving the sponsor of the SPAC — its client — in the lurch and unhappy.
The sentiment also weighed on shares, with the De-SPAC Index — which tracks 25 companies that have gone public through a merger with a SPAC — plunging 10.4% on Monday. (…)
MORE RISK OFF!
Yesterday was a 90% down day on very heavy volume. Truly breadth taking as just about every asset class and most things in each asset class was in the red.
The estimated earnings growth rate for the S&P 500 for 22Q2 is 5.6% [6.4% last week, 6.6% the week previous]. If the energy sector is excluded, the growth rate declines to -0.9% [0.6%, 1.0%].
