U.S. Housing Starts Unexpectedly Fall Sharply in April

Housing starts declined 9.5% (+67.3% y/y) during April 1.569 million units (SAAR) from 1.733 million in March, revised from 1.739 million. The Action Economics Forecast Survey expected April starts of 1.718 million. February starts were revised to 1.447 million from 1.457 million. Earlier figures also were revised.

Starts of single-family homes fell 13.4% (+58.7% y/y) in April to 1.087 million from 1.255 million in March, revised from 1.238 million. Single-family starts during February were revised as well to 1.069 million from 1.074 million. Starts of multi-family units improved 0.8% last month (+90.5% y/y) to 482,000 from 478,000 in March, revised from 501,000. Multi-family starts were revised to 378,000 in February from 383,000.

Building permits rose 0.3% (60.9% y/y) last month to 1.760 million from 1.755 million  in March, revised from 1.766 million. Permits fell to 1.726 million in February, revised from 1.720 million. Permits to build single-family homes declined 3.8% (+70.7% y/y) to 1.149 million and reversed most of the March increase. Permits to build multi-family homes improved 8.9% (45.1% y/y) to 611,000 after falling for two straight months.

By region, housing starts in the Northeast rose 6.2% (244.0% y/y) to 172,000 after rising 48.6% in March. In the Midwest, starts weakened 34.8% (+40.9% y/y) to 193,000 after more-than-doubling in March. Housing starts in the South fell 11.5% (+41.3% y/y) to 804,000 following a 17.8% rise in March. In the West, starts improved 9.0% (119.8% y/y) to 400,000 after falling 14.8% during March.

From CalculatedRisk:

It is possible that supply constraints held back housing starts in April. Here is a comment from MBA SVP and Chief Economist Mike Fratantoni:

“Single-family starts in April dropped more than 13% compared to last month, but permits to build single-family homes saw a smaller decline. This is consistent with reports that builders are delaying starting new construction because of the marked increase in costs for lumber and other inputs. Moreover, builders are also reporting difficulty obtaining other inputs like appliances.”

Record-High Prices on All Building Materials Threaten Housing Affordability

It’s not just lumber. The rapidly rising prices for other heavily relied upon building materials are causing widespread concerns throughout the housing industry.

While skyrocketing lumber prices (up more than 300% from April 2020) have dominated industry headlines over the past year, the prices for other materials like steel, concrete and gypsum products all continue to climb at a record pace. (…)

Ultimately, price surges and supply constraints will increasingly price prospective buyers out of the market. Moreover, the issue is disproportionately harming middle- and low-income households. (…)

• Lumber Futures’ Rout Deepens to 27%, Hinting at Rally’s End

(…) “The mills have this order file where they’ve sold the physical production through the middle of June,” said Westline Capital Strategies Inc. Chief Executive Officer Greg Kuta, whose Ohio-based firm specializes in lumber trading strategies. “They don’t have to come to the open market here and take counteroffers on their physical cash for at least two to three weeks.” (…)

“Futures are getting driven down right now by computerized trading and other platforms not related to the physical product, so it may end up going lower than the real market needs to go,” he said. “The mills know there’s a lot more buying than needs to happen.”

He expects the cash market will fall to a new base level in June and trigger more buying, while futures could head back up by August. Leonard said he has seen this pattern repeat in his 35 years of trading in the market.

“The market is digesting some very high levels right now,” he said. “I don’t know if we’ll make a new high, but I think we’ll take a shot at it again.” (…)

Demand for wood remains robust among retailers including Home Depot Inc., which is reporting strong sales in lumber products as well as across its home-improvement business.

“We compare it to a storm environment where literally as soon as you bring it in, it’s selling,” Home Depot Chief Financial Officer Richard McPhail said Tuesday in an interview. (…)

• U.S. Home Builder Index Holds Steady in May

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo was unchanged this month at 83, after rising slightly in April from 82 in March. Stability was expected m/m in the INFORMA Global Markets survey. The seasonally-adjusted index reached a record of 90 last November. Over the past 15 years, there has been a 70% correlation between the y/y change in the home builders index and the y/y change in new plus existing home sales.

Performance amongst the composite index’s three components was mixed this month. The index of present sales conditions remained at 88, after rising slightly from 87 in March. The index of expected sales six months improved modestly to 81 and reversed a piece of its April decline. The index measuring traffic of prospective buyers slipped 1.4% m/m but remained down 5.2% from the cycle high in November.

Regional index performance also varied in May. The index for the Northeast fell 8.3%, down for the third straight month. The index for the Midwest declined 4.0% m/m and was down 4.9% over the last six months. The index for the South rose 2.4% for the second straight month. The index for the West held steady m/m but was 7.1% below the November high. These regional series begin in December 2004.

THE INFLATION DEBATE

• Summers Sticks With Fed Criticism, Laments New Climate Policy Focus Lawrence Summers, a former Treasury secretary and economic adviser to Democratic presidents, argued again on Tuesday the Federal Reserve’s current monetary policy outlook risks serious trouble, and criticized the central bank’s newfound interest in climate change.
• Specter of 1960s Inflation Take-Off Haunts U.S. Economy Today

A newly-elected president promising to tackle racial injustice and build a better and fairer economy and society. A Federal Reserve chairman who’d voiced satisfaction with the course of monetary policy the previous year. A sharply accelerating economy with an inflation rate that’s been below 2% for years.

2021? No, 1965, a year that marked the start of a years-long climb in inflation to double-digit levels the following decade. That’s an upward trend that some experts fear could be about to begin today, as a super-charged federal budget combines with a lax monetary posture to once again overheat the economy.

“If we do not have a recession that exerts disinflation, the odds are better-than-even that inflation will exceed 3% over the next five years,” former Treasury Secretary and paid Bloomberg contributor Lawrence Summers said. “They’re one in four that we will have at least a year of inflation above 5%.” (…)

“I’m fairly relaxed but not as relaxed as I was,” said former Fed Vice Chairman and Princeton University professor Alan Blinder. “I’m moving a bit in the more alarmed direction, but not to the Summers camp.”

The argument of those who worry about a rerun of the 1960’s rests with the simple law of supply and demand.

Just as then-President Lyndon Baines Johnson did in 1965 with his Great Society spending programs, current commander in chief Joe Biden wants to use the federal budget to reshape America. He’s already won congressional approval of a $1.9 trillion package and is seeking some $4 trillion more for an economy that is already booming coming out of the pandemic.

Some economists also see disturbing parallels in Fed policy between now and then. They worry that the Fed’s new strategic framework — it’s openly seeking higher inflation — risks letting price increases get out of control, just as occurred more than a half century ago.

While then-Fed Chairman William McChesney Martin had a nasty confrontation with Johnson at the end of 1965 after the central bank raised interest rates, economists generally fault him for not acting more forcefully to restrain a rise in inflation to 4.9% at the start of 1970. (…)

White House officials also have played down worries about overheating and have portrayed the administration’s push for more spending as long-term investments rather than short-term fillips to demand. But they’ve made clear that it’s the politically-independent Fed’s job to make sure price hikes don’t run amuck. (…)

“We think that the inflation dynamics that we’ve seen around the world for a quarter of a century are essentially intact,” he told lawmakers in March. “The U.S. has had low inflation for some time, and we think those dynamics haven’t gone away.”

Those dynamics include increased globalization — and the cheaper-priced imports it brings — waning worker bargaining power, and well-anchored inflation expectations. (…)

While he doesn’t see anything like the economic overheating Summers fears, Blinder said he wouldn’t be surprised if inflation rises too high for the Fed’s liking sometime in the next few years. That could prompt a reaction from the central bank that inadvertently tips the economy into what is a “hopefully mild” recession.

“The Summers view — which you can summarize as saying there is a hell of a lot of aggregate demand pushing on less aggregate supply — is not completely wrong,” he said. “There is a point there.”

Funny that Bloomberg would run this article the day after I published my own (THE INFLATION DEBATE: JFK, LBJ, JOE AND JAY). Two things to add:

• The current White House “made clear that it’s the politically-independent Fed’s job to make sure price hikes don’t run amuck.” The LBJ administration, “if inflation did emerge, they believed fiscal policy, rather than the Fed, was the most effective tool to manage it.”
• “The U.S. has had low inflation for some time, and we think those dynamics haven’t gone away.”
• Globalization? Trump’s tariffs war and the pandemic seem to have significantly changed this dynamic.
• Waning worker bargaining power? Read below for but one example on this changing dynamic.
• Well-anchored inflation expectations? Time will tell but recent data and surveys suggest a changing dynamic. (See below)

And about “The Summers view — which you can summarize as saying there is a hell of a lot of aggregate demand pushing on less aggregate supply — is not completely wrong”, William McChesney Martin said

Certainly the history of the years I have touched upon tonight demonstrates that you can change the nature of demand and alter the composition of supply, but you can’t abolish the law of supply and demand. That is a law we must reckon with always, for whenever we ignore the working of the market we do so at our peril, and ultimately must pay the piper.

• Bank of America to Raise Minimum Wage to $25 by 2025 Just over one year after raising its U.S. minimum wage to $20 an hour

The Charlotte, N.C., banking giant also said it is requiring all of its U.S. vendors to pay employees who are dedicated to the bank at least $15 an hour. (…)

JPMorgan Chase & Co., the largest U.S. lender, in January raised its minimum hourly base pay to between $16 and $20, depending on the local cost of living. Wells Fargo & Co. last year raised its pay to between $15 and $20 an hour, also depending on geography. And Citigroup Inc. raised its base pay to $15 an hour in 2019, though a spokeswoman said its average for hourly U.S. workers is $23.89.

In March 2020, Bank of America raised its minimum hourly wage to $20, a year ahead of plan, after boosting it to $17 an hour in 2019. The bank said it has more than doubled its minimum hourly pay since 2010. (…)

Simple math: 2010 to 2019, from $10 to $17: +6.1% per year. 2019 to 2025, from $17 to $25: +6.6% per year.

• John Authers: The Biggest Tail Risk in Markets Has Shifted With belief in an inflationary boom now the consensus, the key danger is that the Fed will move too late.

(…) Beautiful evidence that the current preoccupation with inflation doesn’t just come from journalists appears in the latest monthly Fund Managers Survey from BofA Securities Inc. Belief in an inflationary boom is its highest since the survey started:

(…) The greatest tail risk is that the Fed moves too late, not too early, and fails to stop inflation from taking hold:

(…) Jack Farchy, Bloomberg News’s energy market correspondent, was on hand to offer some answers. He suggested that it wasn’t clear we could attribute all the excitement in commodity prices to transitory factors:

it’s far from obvious that the rise in commodity prices can be explained away by short-term bottlenecks. Yes, trade flows have been disrupted by things like the Suez Canal closure and the shortage of shipping containers. Yes, some commodity production — for example, mining in Chile and Peru, and meatpacking in the U.S. — was affected by outbreaks of Covid last year.

But there are also longer-term trends: low investment in new supply by oil companies and miners, amid pressure from shareholders to pay higher dividends and to invest less in fossil fuels. And potential for an extended period of strong demand that has some on Wall Street calling for a new supercycle.

• Martin Wolf: There are reasons to worry about US inflation Both monetary and fiscal policy are, by historical standards, wildly expansionary

• Yellen wants business to help foot infrastructure bill

Yellen is signaling the president’s commitment to raising corporate taxes to pay for his plan. Republican senators, critical to a potential bipartisan deal, oppose any corporate tax increase.

• “We are confident that the investments and tax proposals in the (American) Jobs Plan, taken as a package, will enhance the net profitability of our corporations and improve their global competitiveness,” Yellen plans to say, according to excerpts from her speech obtained by Axios.
• “We hope that business leaders will see it this way and support the Jobs Plan.”
• “It is the time to recommit our government to playing a more active and smarter role in the economy,” she’ll say. “We’re proposing smart investments — to make our economy more competitive and sustainable, to provide opportunities for all families and workers and to make our tax system fairer.” (Axios)

Senate Democrat proposes $52 billion for U.S. chips production, R&D The emergency funding proposal will be included in a more than 1,400-page revised bill the Senate is taking up this week, as first reported by Reuters on Friday, to spend $120 billion on basic U.S. and advanced technology research to better compete with China.

CRYPTOS

Yesterday, Bloomberg’s Joe Weisenthal

There are a few things that make this moment in crypto unique. The key thing is the rise of so-called decentralized exchanges, where literally anyone can create a token and have it listed. In the past, for a token to list on a legit exchange, it had to demonstrate that it was a serious project. Or it had to pay a large fee to an exchange like Binance, in exchange for listing. No more. With decentralized exchanges where the trading happens right on a blockchain itself, there’s no gatekeepers. And in many cases, it doesn’t take much in the way of development chops to create a coin. (Just copy and paste the code from somewhere else and change a few things, like the name.)

Throw into the mix TikTok and other social media platforms where influencers can pump the coin, and you have a recipe for transparent games. Everybody knows it’s a joke, but nobody cares, because as long as they get into the joke early enough and sell before the peak, they’re happy. That’s the game.

Anyway, Dave Portnoy did a thing on Twitter yesterday where he announced his support for some sh**coin, and he picked one called SafeMoon, and then he said the magic words: “if it is a ponzi, get in on the ground floor.” As I said on April 28, the great thing about coins right now is “you can get in early on the next Bernie Madoff” and I thought maybe that was a little harsh. But he just went and said it!

• Bitcoin falls sharply after China signals crypto crackdown Price falls to three-month low as finance industry warned not to offer cryptocurrency services
• The value of more than 7,000 tokens tracked by CoinGecko shrank more than $600 billion in the past week to $1.9 trillion.

SentimenTrader on gold (remember that old, very old inflation hedge)

For the first time in months, gold is back in an uptrend.

Using intraday prices, gold finally punched above its 200-day average for the first time since the start of February. That ends the longest stretch below the 200-day since late 2018. After it regained its average then, it rallied for another couple of months before giving almost all of those gains back, and then finally managed to roar ahead.

It’s certainly better to be holding gold when it’s above-trend than not – since 1975, the metal showed an annualized return of +12.3% when above the 200-day average versus only +1.9% when below. (…)

Europe Opens Door to Vaccinated Americans With New Travel Rules European Union governments formally agreed to allow quarantine-free travel for vaccinated visitors to the bloc, paving the way for a resumption of normalcy ahead of this summer’s tourist season.