U.S. Housing Starts Decline
Total housing starts fell 5.3% during September to 1.201 million units (AR) from 1.268 million in August, revised from 1.282 million.
Last month’s shortfall reflected a 13.7% drop in the South to 567,000 units from 657,000, as Hurricane Florence made landfall. Nevertheless, starts remained 4.4% higher than twelve months earlier. In the Midwest, housing starts also were weak and posted a 14.0% decline to 160,000 units (-14.0% y/y) from 186,000. In the Northeast, housing starts improved 29.0% (18.8% y/y) to 120,000 units, the highest level in six months. Housing starts in the West increased 6.6% (7.9% y/y) to 354,000, also the highest level in six months.
Starts of single-family homes eased 0.9% (+4.8% y/y) last month to 871,000 units following a 2.1% rise to 879,000. Starts of multi-family units declined 15.2% (+0.9% y/y) to 330,000 and reversed most of their rise during August.
Building permits slipped 0.6% (-1.0% y/y) to 1.241 million, the lowest level since May 2017, from 1.249 million, revised from 1.229 million. Single-family permits increased 2.9% (2.4% y/y) to 851,000. Permits to build multi-family homes declined 7.6% (-7.8% y/y) to 390,000, the lowest level since March 2016.
Fed Minutes Point to Continued, Gradual Interest-Rate Increases
(…) “A few participants expected that policy would need to become modestly restrictive for a time,” the Fed said in minutes of the Sept. 25-26 meeting released Wednesday. “A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.” (…)
The most recent projections revealed most officials believed interest rates over the long-run should settle around 2.75% or 3% to balance supply and demand. The minutes showed “a number” of officials believed they would need to raise rates above that level “to reduce the risk of a sustained overshooting” of the inflation target or “significant financial imbalances.” (…)
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The Fed Is Anything but Crazy By Alan S. Blinder
(…) The U.S. is lucky that a cautious, thoughtful and intelligent man named Jerome Powell is running the Fed—not the mercurial Donald Trump. Mr. Powell is not doctrinaire, and he is not stubborn. So if the Fed makes a mistake—which is always possible—it should be a small one that can be rectified quickly. It won’t do anything wild or crazy.
Trump Seeks 5% Budget Cuts From Cabinet Agencies
President Trump on Wednesday asked his cabinet members to find ways to cut their department budgets by 5% next year, targeting government spending after an official tally showed Republicans’ tax cuts drove the federal budget deficit to its widest level in six years. (…)
The Peterson Foundation, a nonprofit group that advocates for reducing budget deficits, estimated that cutting discretionary spending by 5% in fiscal 2020 would yield savings of about $67 billion. The savings would be about half of that if military spending is excluded from the calculation. In comparison, payments on the national debt are projected to total about $479 billion in 2020, the group said. (…)
“There’s been a bipartisan reluctance to tackle entitlement changes because of the popularity of those programs,” Mr. McConnell told Bloomberg News. “Hopefully at some point here we’ll get serious about this. We haven’t been yet.” (…)
During last year’s tax debate, Democrats warned that Republicans would use the deficits created by the tax cut to press for cuts in safety-net programs. Many have spent the past two days saying “I told you so” and folding that into their midterm campaigns. (…)
Top Republican Mitch McConnell warns Trump’s trade war hurting U.S. economy Senate GOP Leader voiced his concerns about the effects of rising trade tensions, particularly with China
(…) “The tariffs are beginning to have some impact in a negative way, so I hope that we make some progress quickly on some of these other fronts, in particular with China,” Mr. McConnell told the round table discussion with Reuters journalists, although he said of the overall U.S. economy: “I think it’s red hot.” (…)
U.S. Assails China on Currency, but Doesn’t Add Manipulator Designation But Treasury Secretary Mnuchin says China’s practices are a source of ‘particular concern’
China Stock Market Rocked by Forced Sellers; Yuan Hits Fresh Low
Ross Says Progress of Trade Talks With EU Is Unsatisfactory
(…) He said the U.S. stressed “the need for speed and for getting to near-term deliverables.”
Mr. Ross’s remarks came just hours after Ms. Malmstrom blamed Washington for not engaging with the EU to establish the framework of a trade pact.
The fighting words by Mr. Ross and Ms. Malmstrom highlight the difficulty of clinching any U.S.-EU trade deal less than three months after Mr. Trump and European Commission President Jean-Claude Juncker agreed to slash tariffs and regulatory barriers to trade. They also raise the risk of U.S. tariffs on European car exporters, which the White House pledged to withhold as long as negotiations continue. (…)
“We are ready to start the scoping exercise on a limited agreement focused on industrial goods,” Ms. Malmstrom said Wednesday. “The U.S. has not shown any big interest in this. The ball is in their court.”
Mr. Ross hit back within hours that Ms. Malmstrom’s allegation was “simply inaccurate.”
On Wednesday, Washington’s ambassador to the EU, Gordon Sondland, reiterated the U.S. view that any final trade deal would have to include agriculture. That is a problem for Brussels, and EU officials said the White House agreement specifically left out agriculture to avoid prolonged, contentious negotiations. (…)
EARNINGS WATCH
We got 51 reports in, 84% above expectations with a +4.0% beat rate. Blended Q3 estimates now +21.9% (+19.0% ex-Energy). Q4 estimates unchanged at +19.9% (17.2% ex-E).
The Earnings Elephant in the Room The strengthening dollar weighs on U.S. multinationals’ earnings
The U.S. dollar rose 5% in the third quarter from a year ago against a basket of currencies weighted by trade volume, according to Federal Reserve data. That is the strongest reading since the first quarter of 2016 as higher U.S. interest rates have attracted foreign capital.
This presents a challenge for companies that report earnings in dollars but have significant overseas businesses. Shares of health-care giant Abbott Laboratories sold off after earnings Wednesday despite reporting impressive operating results. Abbott, which books two-thirds of its sales in international markets, said unfavorable exchange rates shaved 2.7% off of reported sales in the third quarter. That drag could exceed 3% in the fourth quarter, the company said. (…)
On Tuesday, Johnson & Johnson said international sales in the third quarter grew by 3.5% from a year ago but expanded 7.5% excluding foreign exchange. (…)
Makers of Dove Soap, Nescafe Are Raising Prices Again Two of the world’s largest consumer goods companies, Unilever and Nestlé, reported stronger sales as a wave of inflation in many markets emboldened them to raise prices
(…) “The combination of underlying commodity increases but also the stronger U.S. dollar is really putting a lot of inflation into our market,” said Unilever Chief Financial Officer Graeme Pitkethly. “I see pricing being a key feature of the entire sector through the balance of the year and in 2019.”
Unilever said commodity costs and hence price growth was particularly strong in emerging markets while both companies said prices rose in the U.S. However, in Western Europe both cut prices. (…)
In developed markets, Unilever said underlying third-quarter sales climbed by 1.3%, driven mostly by volume gains. Emerging market sales jumped 5.6% as Unilever was able to raise prices by 2.1%. The results exclude pricing in Argentina, which is going through a period of hyperinflation. The company raised prices there by 34% in the third quarter while volumes dropped 10%. (…)
“We got to get the price moving but keep volume first,” he said. “The true test of the strength of a brand is the ability to price and give a degree of inflation protection.” (…)
Nestlé said higher pricing in the third quarter reflected inflation in commodity and freight costs in North America.
In plain English, this is companies struggling to protect margins against cost-push inflation.
SENTIMENT WATCH
‘Bonds are the bubble, not stocks,’ says billionaire investor Cooperman
(…) he also argued that stocks are “fundamentally cheap” following a U.S.-led global equity rout last week. (…)
While market bears argued that the rise in yields and stock-market reaction belied investor fears that a growth slowdown is around the corner, Cooperman, the founder of Omega Advisors, argued that the economy, “if anything, is too strong” and that the conditions “that normally lead to a big decline just aren’t present.” (…)
Howard Marks, the ultimate bargain hunter Renowned investor on appetite for risk and failing to learn lessons from the crash
In an FT interview, Marks says risk appetite is close to the level seen just before the 2008-09 financial crisis that felled US investment bank Lehman Brothers. He says credit markets are at 7-8 on a 1 to 10 risk aversion scale with 10 being extreme risk tolerance.
2007 was totally risk-averse, totally unconscious of risk. It’s not that bad today. The building block of the crash last time was subprime [mortgages]. There is no parallel in terms of magnitude that’s comparable today. People have been very diligent in trying to identify the risks. (…)