U.S. Housing Starts Give Back Some of December Gains in January
Housing starts fell 3.6% m/m (+21.4% y/y) in January to 1.567 million units at an annual rate, giving back some of the outsized weather-aided 17.7% m/m jump in December (1.626 million units), which was revised up from a 16.9% m/m gain (1.608 million units). Still, the decline was smaller than had been anticipated by the Action Economics Forecast Survey, which looked for a decline in January to 1.420 million units.
The January retreat in total starts was due completely to weaker single-family starts, which fell 5.9% m/m (+4.6% y/y) to 1.010 million units. Multi-family starts in January added to their marked 25.4% m/m December surge by edging up 0.7% m/m (+71.4% y/y) to 557,000 units. Multi-family starts are now at their highest level since December 1986. Residential investment in the national accounts rose in both Q3 and Q4; January housing starts point to a robust 2020 Q1 as starts in January were 8.1% above the Q4 average.
Building permits were stronger than expected in January, rising 9.2% m/m (17.9% y/y) to 1.551 million units after having fallen 3.7% m/m in December. The January reading was the highest since March 2007. The issuance of permits is not nearly as affected by weather as are starts. Permits to build single-family homes rose 6.4% m/m (20.2% y/y) to 987,000 while multi-family permits jumped 14.6% m/m (13.9% y/y) to 564,000.
By region, housing starts jumped up 31.9% m/m to 178,000 units in the Northeast and edged up 1.2% m/m to 431,000 in the West. In contrast, starts slumped 25.9% m/m to 180,000 in the Midwest and fell 5.4% m/m to 778,000 in the South.
Fed Minutes Show Comfort With Economy, Rate Stance Most officials were more confident that inflation would gradually return to central bank’s 2% target
Officials at the Fed’s Jan. 28-29 policy meeting mostly “saw the distribution of risks to the outlook for economic activity as more favorable than at the previous meeting, although a number of downside risks remained prominent,†according to minutes released Wednesday. (…)
The minutes referred eight times to the coronavirus outbreak. Officials agreed the potential for disruptions from the virus “warranted close watching,†the minutes said. (…)
“There’s no way to be confident about anyone’s assessment, and there are a range of assessments,†he [Powell] said.
China serves as the hub of global supply chains for numerous products, including cars and computer chips. Beijing has imposed quarantines that have idled factories, while air travel to the country has been curtailed. (…)
Separately, the manager of the Fed’s open-market operations outlined a proposal to phase out two-week loans backed by government securities, called repurchase agreements, or repo, after April. By that point, officials expect the Fed will have sufficiently rebuilt reserve balances in the banking system to $1.5 trillion. (…)
The Fed’s market-operations manager indicated the central bank could slow its $60 billion-per-month pace of Treasury bill purchases in the second quarter. The minutes said most Fed officials were comfortable with this proposal.
China banks cut rate to prop up coronavirus-hit economy S&P warns of $1.1tn surge in bad loans and annual economic growth as low as 4.4%
Goldman Sachs:
The imposition of travel restrictions and activity controls by the Chinese government as a result of the Covid-19 outbreak adds pressure to activity levels in China, with our China economics team revising down Q1 growth to 4.0% and 2020 full-year growth to 5.5%. (…) recent indicators suggest the ramping up in industrial production post Chinese New Year has been slower than expected. (…)
We do see slower growth having a negative impact on overall credit quality, with our China banks team recently raising their implied NPL ratio within the China banking sector to 8.1% from their earlier estimate of 5.4%. So the weaker economic outlook should add to the amount of potential stressed credit in China. However, this is partly offset by a number of policy easing measures. In particular, a recent joint statement from several departments introduced a series of measures to support the financial system. These include a pledge from the central bank to ensure sufficient liquidity is supplied, and that support will be provided to enterprises affected by Covid-19, including urging financial institutions to extend maturity or rollover loans coming due for borrowers in difficulties. To us, this is a clear sign of policymakers emphasizing the maintenance of financial stability given the near-term challenges to the economy. (…)
In addition to a deeper and more prolonged slowdown in growth, another key risk is an extended downturn in the property sector, with sharper price cuts and a slowdown in construction activities. (…)
Virus Update
- China death toll rises to 2,118, with cases at 74,576
- Hubei adds 108 deaths, new cases up by 349; 1,209 discharged
- Investor anxiety rises as virus spreads outside China
The Hubei province reported a sharp drop in new cases after another change in the way China diagnoses infections, raising questions over the reliability of the data.
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Hubei Asks Firms Not to Resume Work Before March 11 Producers of drugs, medical equipment and protective items are not subject to the requirement, according to a statement from the Hubei provincial government.
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Foxconn says cautiously resuming China output, warns coronavirus will hit revenue Apple iPhone maker Foxconn said on Thursday it is cautiously restarting production at its main plants in China and warned revenue will be hurt this year by the coronavirus epidemic.
(…) In mainland China, manufacturers are grappling with a logistical nightmare as many of the workers they depend on cannot return to work, hindered by travel and quarantine restrictions. The restrictions, which differ by province, city and local district, have also made it difficult to transport goods. (…)
The company, formally called Hon Hai Precision Industry Co Ltd, hopes to have production levels in China at half of normal levels by the end of February, a source with direct knowledge of the matter told Reuters last week. (…)
Coronavirus outbreak helps lawmakers make case on drug shortage bills Concerns raised over China’s place in the drug supply chain
The coronavirus outbreak is prompting fears of drug shortages in the United States because of how deeply the pharmaceutical supply chain relies on China. For lawmakers who were already working on bills to address shortages and bring more drug manufacturing back to the U.S., the epidemic is helping them prove their point. (…)
“We have to figure out a way to bring manufacturing of pharmaceutical drugs and generics back to the United States,†Rep. Anna G. Eshoo, D-Calif., told CQ Roll Call’s CQ on Congress podcast last week. “Now, it’s one thing if China makes T-shirts and sportswear and shoes and whatever, but we cannot be dependent on a foreign source, especially a country that is not exactly a 100 percent ally.†(…)
Many finished branded drugs are made in the U.S. But more commonly used generic products are mostly made in China and India, and the raw ingredients needed for them are predominantly made in China, according to the U.S.-China Economic and Security Review Commission.
That raises fear of a supply disruption if China’s government ever wanted to play geopolitical hardball, or because of other circumstances outside of its control — such as a massive outbreak. (…)
Former Food and Drug Administration Commissioner Scott Gottlieb told senators at a Homeland Security and Governmental Affairs hearing last week that China supplies the raw ingredients for many generic anti-infective drugs made in India — a class of products that includes antibiotics and antiviral medications, both of which could actually play a role in treating coronavirus patients.
The products in shortage typically have in common one thing: They’re cheap. Manufacturers have small profit margins, which means they make money on volume. That leads to industry consolidation and fewer manufacturers, so if something happens to one of them, there are fewer companies to fill the void. (…)
Reuters:
Historically, the FDA and drugmakers have turned to alternate suppliers to help make up shortfalls, but in this case that may be hard to do. That is because China is considered the largest producer of the ingredients drugmakers everywhere require to make their products. Many of those APIs are for generic drugs, and generic drugs make up nearly 90% of the U.S. drug supply.
In India, which gets two-thirds of its APIs from China, the government determined drugmakers have about two-months supply on hand, the Indian Express reports. That is particularly important to the U.S. since the FDA estimates that India accounts for 40% of the U.S. generics.
India’s Business Today:
Indian pharma companies procure nearly 70 per cent of the active pharmaceutical ingredients for their medicines from China. This is largely for drugs like antibiotics – crucial among them being penicillin G (and other products based on it such as amoxicillin and ampicillin), tetracycline – and for vitamins such as vitamin C and D. All of these are based on drug ingredients made using the fermentation-based process, an area where China has achieved global dominance. (…)
[On Feb. 17] Business Today reported that the government could soon ban around 12 essential medicines – mainly antibiotics, vitamins and hormones – to ensure that there is no shortage of essential drugs in wake of the coronavirus outbreak in Hubei province in China. The government is mulling the ban as the Chinese government continues to impose a lockdown in Hubei as it is the epicentre of the coronavirus epidemic. (…)
Sure looks like the trade war and this virus episode will boost the “reshoring†theme. Ask the automotive industry about it.
Energy Companies Face Looming Debt Burden U.S. oil-and-gas companies need cash, but it won’t come at a cheap price.
Explorers and producers have more than $85 billion of debt maturing over the next four years. Those with junk-rated debt will likely have a hard time tapping capital markets in 2020, increasing the odds for wave of defaults, according to a new report by Moody’s Investors Service.
“Despite our expectation of a generally low interest rate environment globally, such companies face greater risk because of continuing overproduction, depressed natural gas prices and widespread investor risk aversion toward the exploration and production sector,†said Moody’s analyst Sajjad Alam. (…)
EARNINGS WATCH
We now have 410 companies in, a 71% beat rate with a +5.1% surprise factor. Q4 earnings are now expected up 3.2% vs –0.3% on Jan. 1. Revenues are up 5.1% vs +4.1% on Jan. 1.
Q1’20 earnings are seen up 3.4%, much slower than the +6.3% of Jan. 1. Q2 forecasts are also trimmed, from +7.2% to +6.0%. Still, full year earnings are seen up 7.8% (vs +9.7% on Jan. 1), a sharp acceleration from +2.0% in 2019.
Pre-announcements remain generally positive compared to Q1’19 and Q4’19 but the all of the last 4 were negative…
Trailing EPS are now $164.59. The Rule of 20 P/E is 22.79.