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

THE DAILY EDGE: 29 SEPTEMBER 2021

Home-Price Growth Hit Record in July The Case-Shiller index rose 19.7% in the year that ended in July, as buyers continued to compete amid a shortage of homes for sale. But there are signs the market could be starting to cool.

(…) “The last several months have been extraordinary not only in the level of price gains but in the consistency of gains across the country,” said Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices.

July marked the fourth consecutive month of record price appreciation, he said.

But the data suggest the market could be starting to cool. Price growth slowed slightly in three of the 20 cities tracked by the index: Detroit, Cleveland and Washington, D.C. (…)

Home-price increases are outweighing the advantage of low mortgage rates. Households that bought homes in May are spending almost 21% of their income on monthly mortgage payments, above the average rate for the past decade, according to Realtor.com. (…)

That was for July. Here’s Redfin’s Housing Market Update covering the four-week period ending September 19. Starting to cool?

Early homebuyer demand reached the highest point in at least three years during the week ending September 19, according to Redfin’s Homebuyer Demand Index, which measures requests for home tours and other home-buying services from Redfin agents, adjusted for seasonality. Mortgage purchase applications also increased 2%, on top of an 8% increase the prior week.

During the four-week period ending September 19, most other housing market measures showed a typical late-summer seasonal decline with pending sales down 12% from their 2021 peak, the share of homes sold above list price falling below 50%, and time on market inching up to 20 days. Asking prices, which often increase in September, were up 2.4% from the four-week period ending September 5.

“The fact that homebuyer demand is setting new records as summer draws to a close leads me to believe that home prices have room to grow,” said Redfin Chief Economist Daryl Fairweather. “This fall will be a litmus test for how hot the 2022 housing market will get. And it looks like we are heading into another unseasonably hot fall as ultra-low mortgage rates and employers’ remote-work policies mean Americans are still on the move.”

Data based on homes listed and/or sold during the period:

  • The median home-sale price increased 13% year over year to $356,663. This was essentially flat from the four-week period ending September 12.
  • Asking prices of newly listed homes were up 11% from the same time a year ago to a median of $359,724, an all-time high.
  • Pending home sales were up 6% year over year.
  • New listings of homes for sale were down 6% from a year earlier. New listings have been below 2020 levels since the four-week period ending August 22.
  • Active listings (the number of homes listed for sale at any point during the period) fell 21% from 2020.
  • 46% of homes that went under contract had an accepted offer within the first two weeks on the market, above the 43% rate of a year earlier.
  • 33% of homes that went under contract had an accepted offer within one week of hitting the market, up from 31% during the same period a year earlier.
  • Homes that sold were on the market for a median of 20 days, up from the all-time low of 15 days seen in late June and July, and down from 32 days a year earlier.
  • 49% of homes sold above list price, up from 34% a year earlier.
  • On average, 4.9% of homes for sale each week had a price drop, up 0.8 percentage points from the same time in 2020, and the highest level since the four-week period ending October 13, 2019.
  • The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, decreased to 101.2%. In other words, the average home sold for 1.2% above its asking price.

Other leading indicators of homebuying activity:

fredgraph - 2021-09-29T060207.007

  • Housing components account for 31% of the weight of the basket of goods and services that make up headline CPI and 40% of the core (ex food and energy). The primary rents and owners’ equivalent rents components that form housing within CPI lag behind actual house price changes by anywhere between 12 and 18 months  – 14 months is currently the best fit: (ING)

House prices to boost inflation

 Source: Macrobond, ING

(Macrobond, ING)

(…) The current real estate boom has spread into smaller cities and suburbs, with buyers taking advantage of low mortgage rates to purchase bigger properties. Home prices in some parts of Ontario are 35 per cent to 55 per cent higher than before the COVID-19 pandemic, according to Canadian Real Estate Association data.

“We are now detecting price acceleration for Canada as a whole,” CMHC chief economist Bob Dugan said on a conference call Tuesday.

Now, six of the 14 census metropolitan areas (CMAs) assessed by the agency are in its high-risk category. That is up from five in the agency’s previous report issued in March. (…)

U.S. Consumer Confidence Deteriorates Further in September

The Conference Board Consumer Confidence Index declined 5.1% (+7.9% y/y) this month to 109.3 from 115.2 in August, revised from 113.8. Confidence index has fallen 15.2% during the last three months. The confidence index remained at the lowest level since February. A September reading of 115.0 had been expected in the Action Economics Forecast Survey.

The Present Situation index declined 3.7% this month (+45.0% y/y) to 143.4 following a 5.3% August decline to 148.9, revised from 147.3. The Consumer Expectations reading weakened 6.7% (-15.8% y/y) in September to 86.6 after a 10.6% decline in August to 92.8, revised from 91.4.

The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, fell to 42.5% this month from 44.4% in August, revised from 42.8%. This series has a 73% correlation with the unemployment rate over the last ten years. The jobs plentiful measure edged up to a record high of 55.9% this month. The jobs hard-to-get measure rose for the third straight month to 13.4%, the highest level since April.

Current business conditions were perceived as good by a greatly lessened 19.3% of respondents in August, down from a high of 25.2% in June. Expectations that business conditions would improve in six months weakened to 21.5% from 39.1% six months ago. More jobs were expected in six months by a 21.5% of respondents, down from 35.4% in March. The percentage expecting income to increase backpedaled to 17.3%, the least in four months.

The expected inflation rate in twelve months eased to 6.5% from 6.7% in August, but remained up from a 4.4% low in January of last year. The share of respondents planning to buy a new home within six months held at 0.5% and remained down from 2.0% in June 2020. Those planning to buy a major appliance fell to 47.0%, down from 53.9% two months ago.

Confidence of individuals under 35 years fell sharply to the lowest level since April. Confidence amongst those between 35 and 54 also fell sharply to the lowest level since January. Confidence amongst individuals 55 and over was fairly steady at the lowest level in six months.

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Confident or not, Americans keep spending judging from the latest Chase Consumer Spending Tracker (through September 20):

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Control sales hanging in at a high level:image

  • Eurozone consumer activity returns to pre-pandemic levels Data show rising confidence but high energy prices and supply-chain disruptions pose threat
  • Global food inflation may be sparked by ruined harvests in Brazil. The country faces the most extreme drought in at least a century, leaving orange and sugar cane fields parched. The frost plaguing crops is the worst in two decades, killing coffee plants that would have supplied the world for years to come. The disruptions may cause logistical bottlenecks. Read more in our Big Take.
Evergrande to Raise $1.5 Billion by Selling Bank Stake to State-Owned Firm China Evergrande plans to raise about $1.5 billion by selling most of its minority stake in a Chinese bank to a state-owned enterprise, an indication that authorities are moving to contain the fallout from its financial difficulties.

(…) Shengjing Bank has also demanded that Evergrande use net proceeds from the stake sale to repay what the developer owes it, according to a regulatory filing. (…) Evergrande said in a regulatory filing Wednesday that “its liquidity issue has adversely affected Shengjing Bank in a material way” and that the purchase of most of its stake by a state-owned enterprise would help stabilize the lender’s operations.

The local government had little choice but to help Evergrande resolve its liabilities with the bank, said Li Gen, chief executive of Beijing BG Capital Management Ltd., a credit-focused asset manager. If the state-owned enterprise hadn’t stepped in to buy some of Evergrande’s stake, Shengjing Bank would likely have to book significant loan losses, which could affect its lending to other businesses. (…)

Shengjing Bank’s chairman, Qiu Huofa, previously worked as an executive vice president at Evergrande, as did the bank’s chief approval officer. Its board also has other Evergrande representatives who were appointed after the developer became its controlling shareholder. (…)

Seems like the objective was really to save the bank, not Evergrande…

Some holders of a bond issued by a company called Jumbo Fortune Enterprises are forming a committee to press their claims in the event of a default because they maintain China Evergrande Group is a guarantor of the debt, according to people familiar with the plans.

The $260 million note from Jumbo Fortune Enterprises matures Oct. 3, according to data compiled by Bloomberg. The dollar note is guaranteed by China Evergrande Group and its unit Tianji Holding Ltd., people familiar with the matter said, asking not to be identified because the details are private. (…)

It’s already fallen behind on payments to banks, suppliers and holders of onshore investment products. The builder faces a $45 million coupon on Sept. 29 for a dollar bond that matures 2024, after giving no sign last week of having met a separate $83.5 million coupon payment on other securities. (…)

Five business days would be allowed if any failure to pay were due to administrative or technical error, though beyond that there would be no grace period, the people said. (…)

Evergrande’s next major public note to mature will be in March, part of $7.4 billion of securities due in 2022.

The total debt of local government financing vehicles rose to about 53 trillion yuan ($8.2 trillion) at the end of last year from 16 trillion yuan in 2013, the economists wrote in a report. That’s equal to about 52% of gross domestic product and is larger than amount of official outstanding government debt. (…)

Land sales are a major source of revenue for local governments and sales have slowed down as the crisis at property developer China Evergrande Group worsens. To make up the funding gap left by shrinking land sales revenue, Goldman recommended the government increase the bond quota for 2022 by more than 500 billion yuan from this year’s level of 3.65 trillion yuan. (…)

COVID-19

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(NBF)

THE DAILY EDGE: 28 SEPTEMBER 2021: Higher for longer!

U.S. Durable Goods Orders Surge in August

Factory sector improvement continued during August. Manufacturers’ orders for durable goods increased 1.8% (18.1% y/y) following a 0.5% July rise, revised from -0.1%. A 0.7% August increase had been expected in the Action Economics Forecast Survey.

A 5.5% surge (24.4% y/y) in transportation equipment orders accounted for last month’s overall increase. Orders for nondefense aircraft rose by roughly three-quarters after falling 36.3% in July. Motor vehicles & parts orders fell 3.1% (-5.1% y/y) after rising 5.3% in July. Excluding transportation, orders improved 0.2% in August (15.6% y/y) following a 0.8% July gain.

Nondefense capital goods orders excluding aircraft improved 0.5% during August (13.7% y/y) after gaining 0.3% in July, revised from no change. (…)

Durable goods shipments fell 0.5% (+9.4% y/y) during August after rising 2.0% in July, revised from 2.2%. Shipments of nondefense capital goods excluding aircraft improved 0.7% (11.7% y/y), the sixth straight month of firm increase. Shipments of transportation products overall fell 2.7% (-0.1% y/y) with fewer motor vehicle shipments, while shipments excluding transportation products rose 0.5% (13.7% y/y) after two months of 1.2% increase.

Unfilled orders for durable goods rose 1.0% in August (3.7% y/y) following a 0.5% July rise. Order backlogs excluding transportation improved 1.1% (15.1% y/y) and have been strengthening for more than a year, continuing to reflect shortages of key component products.

Inventories of durable goods rose 0.8% (7.1% y/y) in August, the same as in July. Excluding transportation, inventories rose 0.7% (8.2% y/y) after a 0.9% July rise, following inventory decumulation during all of last year.

fredgraph - 2021-09-28T060638.252

Core orders are up 18.8% from pre-pandemic levels but shipments only 15.3%. Unfilled orders are trailing shipments by 6.3% at the end of August. From Markit’s flash manufacturing PMI for September:

The health of the manufacturing sector improved substantially in September, as highlighted by the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posting 60.5 at the end of the third quarter (…).

Supporting the overall upturn was a robust increase in new business. New orders were reportedly driven by strong demand conditions. At the same time, new export orders rose solidly and at the fastest pace for four months.

(…) the rate of selling price inflation accelerated to the sharpest since data collection began in May 2007 as firms passed higher costs on to their clients.

The WSJ:

The Labor Department’s measure of prices private companies pay for capital equipment was 4.6% higher in August than a year earlier—the largest gain since inflationary 1982. So while the amount of money companies are devoting toward capital spending is rising, the quantity of equipment buying isn’t going up quite so much.

(…) A surge in inflation because of supply-chain bottlenecks and other challenges related to the reopening of the economy has been larger and longer-lasting than anticipated, Mr. Powell said in his prepared remarks [for a Tuesday morning address to Congress]. “But they will abate, and as they do, inflation is expected to drop back toward” the Fed’s 2% goal, Mr. Powell said.

Mr. Powell acknowledged that there are risks that price pressures are higher than anticipated or more enduring. The Fed would raise interest rates “if sustained higher inflation were to become a serious concern,” he said. (…)

(…) Chinese manufacturers warn that strict measures to cut electricity use will slash output in economic powerhouses like Jiangsu, Zhejiang and Guangdong provinces — which together account for almost a third of the nation’s gross domestic product — and possibly drive up prices.

Local governments are ordering the power cuts as they try to avoid missing targets for reducing energy and emissions intensity, while some are facing an actual lack of electricity. (…)

Authorities are watching for disruption, with the People’s Daily, the official newspaper of the Chinese Communist Party, saying in an Sunday editorial that the shortages would force companies to raise the prices of goods for Chinese consumers. (…)

(…) News organisations and social media carried reports and posts saying the lack of power in the northeast had shut down traffic lights, residential elevators and 3G mobile phone coverage as well as triggering factory shutdowns. A utility in Jilin even warned power shortages could disrupt water supplies at any time, before apologising for causing alarm. (…)

Jilin is one of more than 10 provinces that have been forced to ration power as generators feel the heat of soaring coal prices that they can’t pass on to consumers. (…)

Goldman Sachs estimated that as much as 44% of China’s industrial activity has been affected by power shortages, potentially causing a 1-percentage point decline in annualised GDP growth in the third quarter, and a 2-percentage point drop from October to December. (…)

The China Electricity Council, which represents the country’s power suppliers, said in a note on Monday that coal-fired power companies were now “expanding their procurement channels at any cost” in order to guarantee winter heat and electricity supplies. (…)

Coal traders noted finding fresh import sources may be easier said than done. (…)

Nations are more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and increase the use of cleaner energy sources. But there isn’t enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months. Countries are trying to outbid one another for supplies as exporters such as Russia move to keep more natural gas home. The crunch will get a lot worse when temperatures drop.

The crisis in Europe presages trouble for the rest of the planet as the continent’s energy shortage has governments warning of blackouts and factories being forced to shut. (…)

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Higher for longer!

The Dallas Fed’s recent manufacturing survey included a special question as Bespoke reports:

“When do you expect supply chains to return to normal?”  This question was first asked back in June of this year. Back then 71.8% of respondents reported that they expected the issues to resolve themselves within 9 months. But three months later, the answers to the same question had a more pessimistic tone. The entire distribution shifted, meaning a larger share of businesses expect supply chain problems to linger around longer.  In fact, this time around only 58.7% reported expecting things to get back to normal within 9 months.  Meanwhile, those expecting these issues to last 10 to 12 months jumped 8.1 percentage points and nearly 5 percentage points more expect the issues to last for more than a year.

(Bespoke)

Sunac Leads Rebound in Chinese Property Stocks The real-estate developer played down a leaked request for government help, and the country’s central bank said it wants healthy development of the property market.

(…) After a meeting of its monetary-policy committee, the central bank said late Monday that it would “maintain the healthy development of the property market and safeguard the legitimate rights and interests of house buyers.” (…)

Investors interpreted the central bank’s message as a positive signal that authorities could fine-tune their property policies to maintain financial and social stability, said Bruce Pang, head of macro and strategy research at China Renaissance Securities. (…)

East Asia’s Economies Face Slowing Growth and Rising Inequality, World Bank Warns Most countries in East Asia and the Pacific face major setbacks in recovering from the coronavirus, the World Bank said, adding to concerns that the resurgent pandemic will widen the economic divide between the region and the West.

Overall, the economy of East Asia and the Pacific is on track to expand by 7.5% this year, according to forecasts released Tuesday by the World Bank Group, up from its April forecast of 7.4%. But that improvement is all China, now expected to grow 8.5%, up from 8.1%. The outlook for the rest of the region worsened, with the bank now forecasting growth of just 2.5% this year, down from 4.4% in April. (…)

Last week, the Manila-based Asia Development Bank cut its growth outlook for developing Asia to 7.1%, from 7.3% in April, in large part because Covid-19 outbreaks led to major lockdowns that slowed manufacturing activity in Southeast Asia, a regional export hub. The ADB now forecasts 3.1% growth this year for Southeast Asia, where countries have struggled to ramp up vaccinations, down from 4.4% previously. (…)

As of the end of August, less than one-third of the region’s population had been fully vaccinated, compared with 52% in the U.S. and 58% in the European Union, according to the ADB.

The World Bank predicts that most Asian countries will push vaccination rates up to 60% by the first half of 2022, which it says will allow for a fuller resumption of economic activity—though it won’t be enough to eliminate infections. (…)

The World Bank’s forecast for China takes no account of the developing energy crunch.