Business Investment Stalls in the First Months of 2018 Demand for long-lasting U.S. factory goods rose in March due to increased aircraft orders, but an underlying proxy for business investment fell.

Orders for durable goods—manufactured products intended to last at least three years, such as stoves and industrial robots—increased a seasonally adjusted 2.6% in March from the prior month, the Commerce Department said Thursday. Meanwhile, a business-investment gauge, new orders for nondefense capital goods excluding aircraft, declined 0.1% in March from the prior month.

Have Analytics’ table shows non-def ex-air choppy but reasonably healthy…

…but going nowhere since last October after recovering from the 2016 dip. Where are the tax cuts going?

Owning Is the New Renting: Homeownership Trends Upward as U.S. Loses Renter Households

The homeownership rate rose from the prior year for the fifth consecutive quarter in 2018,  according to U.S. Census data released Thursday. It held steady at 64.2%, unchanged from the prior quarter and its highest level since 2014. The share of Americans who own a home rose from the prior year, from 63.6% in the first quarter of 2017.

The homeownership rate rose last year for the first time in 13 years. (…)

The U.S. added 1.3 million owner households over the last year and lost 286,000 renter households, the fourth consecutive quarter in which the number of renter households declined from the same quarter a year earlier. That could pose challenges for apartment landlords, who are bracing this year for one of the largest infusions of new rental supply in three decades. (…)

Demographics trends also increasingly favor homeownership, as members of the large millennial generation are entering their early to mid 30s, when people typically marry, have children and purchase their first home.

Nonetheless, challenges remain. Rising interest rates this year and a tax bill that passed late last year that diminished the tax benefits of homeownership were expected to dampen demand for homes this year. (…)

The homeownership rate for households headed by someone 35 years or younger declined to 35.3% from 36% the prior quarter. Nonetheless, it rose a full percentage point from 34.3% in the first quarter a year ago—the fifth consecutive quarter it has gone up on an annual basis.

A lack of homes for sale is also creating challenges for would-be buyers. The homeowner vacancy rate declined to 1.5% from 1.7% a year earlier, according to the Census data. That is down significantly from the recent peak of 2.8% during the housing bust in 2008 and close to the level seen in the early 1990s, according to Tian Liu, chief economist at Genworth Mortgage Insurance.

That is likely to push home prices up even further, Mr. Liu said.

@jbjakobsen

There’s the ownership rate and there’s actual ownership as NBF explains:

According to latest data from the U.S. Census Bureau, the number of households, proxied by occupied housing units, fell in the first quarter of 2018 to just under 120 million, i.e. growth of less than 1% on a year-on-year basis. The persistence of such weak pace of household formation should not be surprising given that high student debt and low income growth make it hard for young adults to leave their parents’ basements. And those able to leave the nest often end up in rentals given the significant obstacles to homeownership.

As today’s Hot Charts show, homeownership rates remain below prerecession levels across all demographic groups, but the shortfall from the 2006/07 peak is most pronounced among those aged 44 and under. That has implications for economic growth. Homeownership tends to encourage spending on durable goods and hence its depressed levels could explain why real U.S. consumption growth over 2011-2017 has been much weaker (by about half a percentage point annualized every quarter) than the pre-recession average.

Mnuchin’s Treasury Poised to Rev Up Supply With Budget Gap Widening

(…) Government debt sales will more than double this year, to a net $1.44 trillion by JPMorgan Chase & Co.’s estimate, raising the specter of buyers’ fatigue just as the Federal Reserve is shrinking its $4.4 trillion balance sheet and raising interest rates.

“The Treasury’s funding needs are massive,” said John Briggs, head of strategy for the Americas at NatWest Markets. “A lot of clients we speak to around the world say they are concerned about how the U.S. is going to fund this deficit. With the supply outlook following the tax changes and new budget, Treasury yields should move upward through the year.” (…)

The public debt will rise more than $10 trillion by 2028, the nonpartisan Congressional Budget Office estimates. The load will reach an estimated 116.9 percent of the economic output in five years, surpassing the ratio for Italy, the perennial poor man among major industrialized nations, according to the International Monetary Fund. (…)

Toronto-Dominion Raises Mortgage Rate in ‘Biggest Move in Years’

Toronto-Dominion Bank has lifted its posted rate for five-year fixed mortgages by 45 basis points to 5.59 percent as government bond yields touched their highest levels since 2011 this week. (…)

Toronto-Dominion, Canada’s second-largest lender, lifted its five-year closed rate on Wednesday, along with increases to its two-year, three-year, six-year and seven-year mortgage rates, bank spokeswoman Julie Bellissimo said Thursday in an e-mailed statement.

Banks generally give homebuyers better terms than their posted rates. Canada’s big banks are charging their preferred customers with sound credit quality 3.39 percent for five-year fixed mortgages and 2.75 percent for variable mortgages this month, according to RateSpy.com. That’s little changed from late January. (…)

The change comes as the yield on five-year federal government bonds rose to 2.18 percent Wednesday, the highest in almost seven years. (…)

Europe’s Mixed Economic Fortunes Complicate Path for Stimulus Europe’s economies displayed mixed fortunes in the first three months of the year, injecting a fresh source of uncertainty as central banks consider further steps to withdraw crisis-era stimulus.

Figures released Friday on gross domestic product—the broadest measure of the goods and services produced in an economy—recorded sharp slowdowns in France and the U.K., while Spain and Austria continued to record strong growth.

At the same time, a European Commission survey showed business confidence stabilized in April, suggesting the slowdown in the early part of the year was caused by temporary factors such as poor weather and strikes. Indeed, economic forecasters surveyed by the European Central Bank have raised their growth forecasts for the year as a whole. (…)

In France growth in business investment slowed sharply while consumer spending—the traditional motor of France’s economy—grew at an unchanged, but modest pace. And there were signs the headwinds to growth won’t be removed quickly. (…)

But many French companies now warn they are struggling to keep pace with demand as they lack capacity and skilled workers. Capacity utilization rates are at decade-highs over 85% and 42% of employers in manufacturing are reporting difficulties recruiting, recent statistics show. (…)

The above is based on Q1 GDP. We know that the slowdown continued in April. Recall Markit’s April flash composite PMI for Europe: (my emphasis)

Output growth across the two sectors has fallen sharply since an 11-and-a-half year peak at the start of the year, in line with a slowdown in order book growth. Inflows of new orders rose at the weakest rate for 15 months in April.

Factories reported the smallest gains in both total goods orders and export orders for a year-and-a-half during April, the latter in part dampened by the recent strength of the euro, notably against the US dollar. New business inflows in the service sector meanwhile slipped to an eight-month low, adding to signs of a broad-based waning of demand growth both at home and in export markets.

The survey also continued to suggest that supply constraints contributed to the slowdown in output and orders. In manufacturing, supply chain delays remained widespread, with average delivery times once again lengthening to one of the greatest extents seen in the survey’s two-decade history. Backlogs of work also continued to rise in both sectors as firms struggled to cope with the influx of new business, in some instances linked to shortages of materials and suitable staff. (…)

While manufacturing acted as the main drag in France, it was the service sector that lagged behind in Germany. Elsewhere, growth slowed to an 18-month low, with both
manufacturing and services recording weaker expansions.

Two important charts:

• The Euro almost hit parity with the USD at the end of 2016. It rose 18% since.

• The Eurozone manufacturing capacity is maxed out:

• There are no available workers left in Germany. Quite a few in France but France is …France.

As I reported on April 19, 2018:

German unions have reached an inflation-busting pay hike deal for more than 2 million public sector workers that could push up prices and boost a consumer-led upswing in Europe’s biggest economy. (…)

The complex wage agreement gives public sector workers a 3.2 percent pay raise backdated to March 1, followed by a 3.1 percent increase from April 2019. In a third stage, wages will rise by a further 1 percent from March 2020. (…)

It comes in the wake of an unusually high pay hike reached in February for 3.9 million workers in the industrial sector, amounting to a roughly 4 percent annual rise for 2018 and 2019. (…)

Yes, it’s getting complicated.

Companies Feel the Impact of Rising Oil Prices The highest oil prices in years are increasing expenses for companies that had grown used to low energy costs since crude’s 2014 tumble, while the turnabout is proving to be a boon for some businesses.

(…) In response, some companies are looking to pass on the costs to their customers, which would push inflation higher. That, in turn, could slow growth and weigh on an already vulnerable stock market.

“I do believe that consumers will pay more,” said American Airlines Chief Executive Doug Parker.

The airline on Thursday lowered its profit outlook for the year, citing in part a 12% increase in the average price of jet fuel over the past two weeks. (…)

Railroad operator Union Pacific Corp. reported Thursday that its fuel expenses surged 28% to $589 million in the latest quarter, with most of the increase coming from a 22% increase in diesel prices. However, Union Pacific passed along some of that higher cost to customers through fuel surcharges, which totaled $353 million, up 67% from the year-earlier period. (…)

Elsewhere, United Parcel Service Inc. said its fuel expenses jumped 21%, or $129 million, in the March quarter. But the company said fuel surcharges and higher prices helped offset rising delivery costs in its U.S. ground business. (…)

On Thursday, Schneider National Inc., a large trucking company based in Green Bay, Wis., reported its fuel expenses rose 16% in the first quarter to $84.7 million. The carrier’s revenue from fuel surcharges to customers jumped by 31% to $117.8 million.

USA Truck Inc., another national carrier, reported $13.5 million in fuel expenses for the quarter, up 25% year-over-year. The Van Buren, Ark.-based company said rising fuel was among several factors offsetting strong freight demand. (…)

The U.S. Energy Information Administration has estimated that the average household will spend about $190 more on fuel in 2018 compared with 2017—a 9% increase.

Executives at both 3M and Caterpillar Inc. CAT 0.77% said this week that they would raise prices to offset the hit to profits from rising commodity prices. (…)

FYI, there are 120 million households in the U.S., meaning that higher fuel prices will divert nearly $23B from discretionary spending, almost 0.2% of disposable income. This excludes even higher prices and excludes any other price increases passed through by businesses.

• Amazon Raises Annual Prime Price by 20%

EARNINGS WATCH

Almost half way in the season with 227 reports in. The beat rate holds at 80% with the surprise factor still a strong +6.8% (+1.5% on revenues).

The blended growth rate for Q1 keeps rising and is now +23.1% (+21,.% ex-Energy).

Trailing EPS are now $138.88 but, adjusted for tax reform, is about $146.00 which puts the Rule of 20 P/E at 20.4.

TECHNICALS WATCH

Yesterday’s “up Volume was moderate at 64% of total Up/Down Volume, while breadth was 2:1 in favor of Advancing Issues of total Adv-Dec Issues. Demand was strong with Buying Power up 4 points and the Short Term Index up 3 points today while Supply fell with Selling Pressure losing 4 points. Sustained strong Demand, like that displayed today, would help to reassert the next leg of the advance.” (Lowry’s)

Stock Funds Suffer as Rattled Investors Rush to the Exits

U.S. equity mutual funds and exchange-traded funds recorded $2.4 billion in outflows for the week ended April 18, according to the Investment Company Institute. That followed $41 billion in outflows from these funds in February—the biggest monthly exodus since January 2008, ICI data show. Overall, investors have yanked $67 billion out of these stock funds since the start of February.

That rush for the exits marked a sharp reversal from January, when investors poured $10.8 billion into U.S. equity funds, helping propel major indexes to records. (…)

While the outflows account for less than 1% of assets in U.S. equity funds, the flood of cash leaving stock funds marks a shift from the buy-the-dip mentality that characterized much of last year. (…)