New Home Sales Post Weak Spring Start Sales of new homes in the U.S. fell at the beginning of spring, reversing the stronger momentum seen in the first quarter.
Purchases of newly built single-family homes—a relatively narrow slice of all U.S. home sales—fell 1.5% to a seasonally adjusted annual rate of 662,000 in April, the Commerce Department said Wednesday. (…)
The average sales price for new homes grew to $407,300 in April, the highest price on records dating back to 1963. Meanwhile, at the current sales pace, there was a 5.4-month supply of new homes on the market at the end of March, down from the 6.0 levels seen in the middle of 2017.
Rising mortgage rates are also a headwind for the housing market. The average rate for a 30-year, fixed-rate mortgage was 4.47% in April, up from 4.03% in January. (…)
Note that the median price of a new home fell 6.9% (+0.4% YoY) to $312,400 from $335,400, the lowest price in twelve months.
Fed Signals June Rate Rise Federal Reserve officials earlier this month signaled they were likely to raise rates at their June meeting and debated how to characterize an evolving policy strategy that soon would no longer try to stimulate economic growth.
(…) Officials in March penciled in three rate rises this year, including their increase that month, but were about evenly divided between those who favored three and those seeing four. (…)
Officials’ March projections show a median expectation that the fed-funds rate would settle over the long-run at around 2.9%—an approximation of neutral. (…)
Some officials at the May meeting said a temporary period in which inflation rises modestly above 2% “would be consistent with the committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.” (…)
Fiscal policy and trade policy remain considerable sources of uncertainty, the minutes showed. (…) Officials view “the range of possible outcomes for economic activity and inflation to be particularly wide,” the minutes said. “The uncertainty surrounding trade issues could damp business sentiment and spending.” (…)
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Yields at 3% Fail to Entice Some of the Biggest Treasuries Fans It seems it’s once bitten, twice shy for Japanese investors.
(…) “With U.S. yields expected to rise, we need to be cautious, watching markets,” said Shizuoka Bank President Hisashi Shibata, 54, in an interview in Tokyo. “We need to be aware of the risk of yield inversion and avoid being stuck with valuation losses from foreign debt, and even if we do, we need to make sure we secure a spread so we can hold to maturity.” (…)
FLASH PMIs
Very interesting and important flash PMI reports.
- The U.S. economy seems particularly strong in spite of weak exports. May employment trends are very strong even though there are still no specific mentions of rising wage pressures. However, cost pressures are “robust”, “intense” and “accelerating” while strong demand and tight supply chains are enabling firms to lift their selling prices at a strong rate.
- The Eurozone economy is slowing fast while margins pressures are building. The euro needs to drop more.
US private sector growth strengthens in May, but input cost inflation rises close to five-year high
- Flash U.S. Composite Output Index at 55.7 (54.9 in April). 3-month high.
- Flash U.S. Services Business Activity Index at 55.7 (54.6 in April). 3-month high.
- Flash U.S. Manufacturing PMI at 56.6 (56.5 in April). 44-month high.
- Flash U.S. Manufacturing Output Index at 55.8 (56.6 in April). 2-month low.
A faster rise in service sector output was the key factor behind the acceleration in overall business activity. Manufacturing production increased markedly, but at a slightly softer pace than in April.
Another strong upturn in new business volumes helped to boost output growth in May. Survey respondents commented on resilient domestic demand and a supportive economic backdrop. Higher workloads contributed to the sharpest rise in unfinished business since March 2015.
A solid rate of employment growth was maintained across the private sector in May, which was linked to long-term business expansion plans and upbeat projections of client demand in the coming months. The index measuring business expectations for the year ahead held close to the 35-month peak seen in April.
May data revealed a sharp and accelerated rise in operating expenses across the private sector economy. The latest increase in average input prices was the fastest since July 2013. Anecdotal evidence mainly cited higher prices for metals (especially steel) and increased oil-related costs during the latest survey period.
Service sector business activity growth continued to accelerate in May. At 55.7, up from 54.6 in April, the seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index pointed to the fastest rate of expansion for three months.
May data signalled a slight slowdown in new business growth from the three-year peak recorded in April. However, the latest rise in new work was faster than seen on average since the survey began in late-2009.
Meanwhile, backlogs of work were accumulated for the thirteenth month running in May, with the latest increase the strongest since March 2015. Survey respondents noted that rising client demand had resulted in pressures on operating capacity and a corresponding need to hire additional staff.
Service providers signalled a robust and accelerated increase in their average cost burdens in May. The rate of input price inflation was the steepest for three months, which firms linked to higher oil-related costs and rising commodity prices.
The seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 56.6 in May, up fractionally from 56.5 in April, to signal the strongest improvement in business conditions since September 2014.
May data revealed relatively strong rises in both manufacturing production and incoming new business, which survey respondents attributed to improving economic conditions and a continued recovery in domestic sales.
There were signs that manufacturers intend to boost production schedules in the coming months. Backlogs of work were accumulated at the strongest pace since September 2015 and payroll numbers increased to a greater extent than in the previous month. Moreover, business optimism regarding the year ahead outlook was the highest since February 2015.
In anticipation of greater workloads, manufacturers signalled a robust increase in input buying during May. Pre-production inventories also picked up, with the degree of stock accumulation the largest since the start of 2018.
Meanwhile, latest data signalled intense pressure on supply chains, with average lead-times lengthening to the greatest extent since the survey began in May 2007.
Manufacturers widely commented on stretched supplier capacity and logistics delays during the latest survey period. Robust demand for raw materials and rising commodity prices resulted in another steep increase in input costs across the manufacturing sector. The overall rate of input price inflation eased slightly since April, but was still among the fastest seen over the past seven years. Moreover, prices charged by manufacturing companies continued to rise at the strongest rate since June 2011.
The flash May PMI surveys point to an encouragingly solid pace of economic growth of 2.5-3% with monthly job gains running at just over 200,000, though the interesting action is coming on the prices front.
Rising demand has stretched supply chains to the extent that suppliers are increasingly able to demand higher prices. At the same time, higher oil and energy prices are pushing up firms’ costs.
Eurozone growth slips to one-and-a-half year low in May
- Flash Eurozone PMI Composite Output Index at 54.1 (55.1 in April). 18-month low.
- Flash Eurozone Services PMI Activity Index at 53.9 (54.7 in April). 16-month low.
- Flash Eurozone Manufacturing PMI Output Index at 54.5 (56.2 in April). 18-month low.
- Flash Eurozone Manufacturing PMI at 55.5 (56.2 in April). 15-month low.
Growth deteriorated in both manufacturing and services, down to 18- and 16-month lows respectively.
Inflows of new business likewise grew at a reduced pace, the rate of increase waning for a fifth successive month to reach the lowest since October 2016. Nineteen-month lows were seen in terms of both manufacturing and service sector new business growth.
Reduced new order inflows in the goods-producing sector were linked in part to weaker export growth, which registered the smallest rise since August 2016.
While the surveys from February through to April had seen widespread cases of business activity being disturbed by temporary factors such as bad weather, strikes, illness and the timing of Easter, the May survey saw frequent reports of business being disrupted by a higher than usual number of public holidays, which workers often bridged on to weekends.
Input cost inflation accelerated to a three month high, buoyed in part by higher fuel and energy costs, alongside signs of rising wage pressures in some countries. In contrast, average selling prices for goods and services rose at the slowest rate since last September, with companies often reporting difficulties in hiking prices amid weak final demand.
(…) despite the headline PMI dropping to an 18-month low, the survey remains at a level consistent with the eurozone economy growing at a reasonably solid rate of just over 0.4% in the second quarter.
“A higher than usual number of public holidays”, plus illness plus strikes. Only in Europe! Anyway, we can also read more signs of margins being squeezed while demand is slowing…
Germany seems to be slowing particularly fast on weak exports:
Japan manufacturing sector grows at weakest rate since August 2017
- Flash Japan Manufacturing PMI® declines in May to 52.5, from 53.8 in April.
- New order growth softens to nine-month low.
- Input prices rise at the fastest pace since January 2014.
Despite the promising upturn in April data, May’s flash release erred on the side of disappointment as the headline figure signalled the weakest expansion in manufacturing growth in nine months.
Employment growth eased, in line with a weaker accumulation of work backlogs due to softer demand pressures. That said, new export sales expanded faster amid the recent dollar strength vs. JPY.
However, there was further evidence that supply-side constraints may be impacting output potential, as material shortages contributed to the greatest lengthening of delivery times in seven years. Consequently, input prices soared at the fastest pace in 52 months.
Trump’s Tariff Threat Vexes Global Auto Manufacturers U.S. trading partners expressed alarm about threatened American tariffs on imported cars, which could hit allies hard and disrupt the industry around the world.
The Trump administration’s plan, which could involve tariffs of up to 25%, follows an earlier battle over steel tariffs and puts the U.S. on a collision course with three of its closest military allies—Japan, South Korea and Germany—all of which are major car exporters. (…)
The Commerce Department said Wednesday that the Trump administration might use national-security laws to impose tariffs on car and auto-parts imports. President Donald Trump said on Twitter Wednesday, “There will be big news coming soon for our great American Autoworkers.” (…)
About 11% of light vehicles sold in the U.S. in 2017 were imported from Japan, according to the Center for Automotive Research, an Ann Arbor, Mich., think tank. The center said 56% of the vehicles sold in the U.S. were American-made, while Canada and Mexico accounted for an additional 22%. (…)
About a quarter of the 519,000 vehicles made last year in South Korea by GM Korea were shipped to the U.S. (…)
Chinese auto makers barely export to the U.S. at present, but the Trump administration’s proposed tariffs would affect investment plans years in the making. (…)
Ford Motor Co. is shifting its global production of the Focus compact car to China, with the expectation that many of those vehicles will be shipped to the U.S. (…)
Mr. Samuelsson [Volvo’s chief executive] said it would be unfair to penalize a company like Volvo for selling Chinese-made cars in the U.S. because the company is also building a U.S. plant that will create 4,000 jobs in Charleston, S.C., with half of that facility’s production destined for export.
A tariff on auto parts would hit Chinese companies more directly. The U.S. imported parts valued at $17 billion last year from China, according to customs data—second only to Mexico. That means American consumers might have to pay more for their new cars even if they are U.S.-made because the parts inside would cost more, and replacing old parts could also get costlier.
The U.S. study of tariffs on cars and auto parts stands in contrast to China’s move to slash tariffs on the same items. Chinese tariffs on vehicles will fall to 15% from 25% starting July 1, while auto-parts tariffs will fall to 6% from between 8% and 25%, the government said Tuesday.
(…) Threatening to use a national-security law that dates back to the 1960s—in order to bypass the global trade order—suggests U.S. policymakers aren’t yet done using arbitrary law enforcement when it suits them.
China’s Premier Li says China and Germany uphold free trade China’s Premier Li Keqiang said on Thursday China has always supported a unified and prosperous Europe and that China and Germany uphold free trade.
EMERGING SUBMERGING
- The emerging-market selloff is intensifying, and as it does, it’s bolstering the greenback and sending Treasury yields higher because central banks in developing nations need the cash to prop up their currencies. (BB)
- “It’s become at least possible to envision a classic 1997-8 style self-reinforcing crisis: emerging market currency falls, causing corporate debt to blow up, causing stress on the economy, causing further fall in the currency,” [Paul] Krugman wrote on Twitter. “Are we seeing the start of another global financial crisis? Probably not — but I’ve been saying that there was no hint of such a crisis on the horizon, and I can’t say that anymore,” he wrote. “Something slightly scary this way comes.”
- Harvard’s Reinhart Says Emerging Markets Worse Than ’08 Crisis
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Turkish lira resumes slide despite rate hike Emergency rise in rates on Wednesday has helped the lira, but strain still evident
(…) Bank of Korea governor Lee Ju-yeol noted in a press conference on Thursday that there was elevated uncertainty from financial instability in emerging market economies. (…)
To the noise of markets in Turkish Lira and Italian bonds banging about, add sounds of unusual bumps in the credit market. Wednesday saw the second investment-grade deal pulled in short order, a ten-year bond from washing machine group Whirlpool, following a similar path to a Bertlesman deal which didn’t get away, the German media group citing market conditions.
Suki Mann, of the Credit Market Daily
There’s something amiss and we’re sure syndicate desks will be scrambling around with their pricing calculators, having misread the mood of the markets twice in quick succession, and left with some serious egg on their faces. That is, pricing expectations will need to change as we suggested in a previous note. A new issue premium against a seriously manipulated secondary curve – especially so in the case of infrequent borrowers – is becoming an inaccurate and ineffecient pricing tool, and a better method is needed in the price discovery process for these type of infrequent borrowers.
EARNINGS, INFLATION WATCH
America doesn’t have enough truckers, and it’s starting to cause prices to rise
Joyce Brenny, chief executive of Brenny Transportation in Minnesota, gave her truck drivers a 15 percent raise this year, but she still can’t find enough workers for a job that now pays $80,000 a year. (…)
Brenny anticipates she will have to raise pay another 10 percent before the end of the year to ensure that other companies don’t steal her drivers. (…)
Manufacturers are complaining that higher shipping costs are causing their profits to fall. It was a constant topic of discussion as American firms reported earnings in recent weeks. Walmart said this week that high transportation costs are its “primary head wind” right now. (…)
Logistics and transportation accounts for about 10 cents of every dollar in the U.S. economy, says Donald Broughton of Broughton Capital and author of the Cass Freight Index publication.
“I don’t normally speak in hyperbole, but we’re entering some uncharted territory,” Broughton said. “If there is a 10 percent increase in transportation costs, that gives you a 1 percent increase in inflation for the broader economy. That’s real.” (…)
Uber shuts down self-driving car program in Arizona after fatal crash