U.S. Housing Starts Are Unexpectedly Strong in December
Housing starts rose 1.4% (2.5% y/y) during December to 1.702 million units (SAAR) from 1.678 million in November, revised from 1.679 million. They reached the highest level since March of 2021. During all of last year, 1.598 million units were started, up 14.4% from 1.397 million in 2020 and the most since 2006. A December level of 1.660 million starts had been expected in the Action Economics Forecast Survey.
The rise in starts overall in December reflected a 10.6% gain (53.2% y/y) in multi-family starts to 530,000, the highest level since February 2020. During all of 2021, multi-family starts rose 20.0% to 472,000. Starts of single-family units declined 2.3% in December (-10.9% y/y) to 1.172 million, but for the whole year, single-family starts rose 12.3% to 1.127 million.
Building permits increased 9.1% (6.5% y/y) to 1.873 million from 1.717 million in November. It was the highest level of permits since January 2021. During all of 2021, permits rose 15.8% to 1.713 million. Permits to build single-family homes gained 2.0% in December (-8.5% y/y) to 1.128 million. Permits to build multi-family homes rose 21.9% (41.9% y/y) in December to 745,000.
By region, housing starts in the Northeast rose 20.2% (0.7% y/y) in December to 137,000. Starts in the Midwest increased 36.5% (17.1% y/y) to 288,000. Working lower were housing starts in the South by 1.9% (+9.3% y/y) to 915,000. Starts in the West fell 13.8% (-18.1% y/y) to 362,000.
P&G Says Prices Will Keep Rising Its quarterly sales rose 6%, led by health and cleaning products, with price increases accounting for half of the jump.
Executives on Wednesday said its price increases will continue throughout 2022, and predicted higher profitability and improved margins in coming quarters even as labor, freight and raw-materials costs continue to balloon due to the global supply-chain turmoil.
“The consumer is very resilient and very focused on these categories of clean home and health and hygiene,” P&G finance chief Andre Schulten said in an interview. (…)
P&G’s core earnings per share rose 1%, to $1.66, from the same period a year earlier. Margins fell despite the added revenues and cost cutting. (…)
On Wednesday, executives said there is no relief in sight from higher costs for labor, transportation of goods and raw materials such as fuel, resin and pulp. “The flexibility that we’ve talked about that our supply people have generated doesn’t come for free,” said Mr. Schulten, the CFO. “When we need to shift to alternate materials, when we need to shift to alternate suppliers, all our sources of materials geographically, that comes at a premium.” (…)
P&G said it expects to commit $2.8 billion more to commodity, freight and foreign-exchange costs this fiscal year. The figure is about $500 million more than it forecast last quarter. Its earnings estimates remained unchanged. (…)
Mr. Schulten said that in addition to absorbing higher prices, consumers also are switching to pricier, higher-end products, such as trading liquid laundry detergent for costlier single-dose pods. (…)
P&G now expects organic sales, which strips out deals and currency moves, to grow 4% to 5% for the fiscal year, up from the previous forecast for growth of 2% to 4%.
Canadian Consumer Price Inflation Hits 4.8%, Highest Since 1991 The average of the central bank’s core measures — often seen as a better indicator of underlying price pressures — rose to 2.93%, also the highest since 1991.
Scotiabank forecasts the Bank of Canada will make its first move with a 25-basis-point hike at its Jan. 26 policy decision. That’s expected to be followed by another 25-point hike in March, a 50-point increase in April, and then three more 25-point hikes by year-end. (…)
Markets are pricing in as many as six increases in borrowing costs over the next 12 months, and see another two rate increases in 2023 to bring the policy rate to 2.25% in two years. Perrault sees Canada’s policy rate rising a bit higher, to 2.5% by early 2023. It was 1.75% before the Covid-19 pandemic hit in early 2020.
Canada won’t be alone. Scotiabank also expects aggressive rate increases form the the U.S. Federal Reserve, which is seen lifting the upper bound of its key policy rate to 2% by the end of 2022. That would represent an increase of 1.75 percentage points from current levels.
“Even with this pace of tightening, the real policy rate would remain negative at the end of this year,” Perreault said.
EMU inflation is high and rising. The month-to-month grinds broke lower in December as EMU-wide inflation gained by 0.3% after a 0.7% rise in November. Rising by less month-to-month was inflation in Germany where the monthly inflation gauge fell by 0.2% after a 1.3% rise in November, in France where the inflation pace in December went flat after a 0.4% gain in November and in Italy where a 0.8% November gain ‘withered’ to a 0.4% rise in December. Spain showed an acceleration in the monthly gain to 1.4% in December from 0.2% in November. (…)
Ex-energy inflation in Germany ticked up by a slower amount rising by 0.5% in December after rising by 0.6% in November. In Italy, core inflation accelerated to a 0.5% monthly gain in December from a 0.3% rise in November.
The year-on year pace for the HICP is 5% in the EMU in December; that is up from 4.7% in November. The pace for 12-month gain in prices in December is weaker in Germany as the pace fell to 5.7% from 6% in November. It is unchanged in France at 3.4%. Inflation stepped up in Italy to 4.2% in December from 3.9% in November. And it stepped up in Spain as well rising to 6.6% after a November gain of 5.5%.
Clearly the forces of inflation are still strong. The ECB may have shifted to an inflation averaging approach, but all of these inflation results are too high, and averaging is not going make everything okay again – or is it?
In Germany, ex-energy inflation stepped up to a 3.9% gain over 12 months in December from 3.6% in November while Italian core inflation rose by 1.6% in December from 1.3% in November. While Italian core inflation stepped up, it alone remains within the boundaries set by the ECB. And that is not enough. But averaging can work a different ‘magic on these trends.
(…) the sequential pattern of inflation from 12-months to six-months to three-months shows EMU-wide inflation is accelerating from 5.0% to 5.8% to 7.1%. These sequentially annualized rates are shockingly high and bear no relationship to the ECB’s inflation objective which is to average 2% inflation. (…)
The real question is why not begin to withdraw some stimulus in the presence of so much inflation when no one can be sure how much of it will be lasting and how much might evaporate on its own? Why roll the dice, instead of act, especially when interest rates are clearly too low for long term sustainability? In this policy tact, Lagarde is pushing ideology onto the ECB and fighting back at the old Bundesbank (and early ECB) notion that any 12-month violation of the inflation yardstick was tantamount to a crime and required a policy response. Taking away that automaticity is a good thing. But if automaticity is replaced with judgement, then judgment needs to be used and hopefully not applied through the filter of ideology. (…)
Just five days ago, Lagarde said this:
“Our commitment to price stability remains unwavering,” she said in a speech. “We will take any measures necessary to ensure that we deliver on our inflation target of 2% over the medium term.” “We understand that rising prices are a concern for many people, and we take that concern very seriously,” Lagarde added (Source here).
Lagarde also argues that some of the collateral impact of inflation is a drag on growth and that is an automatic braking of sorts that already is occurring. But will it be enough? Markets are beginning to line up and to challenge that view. Lagarde’s promise that the ECB will “take any measures necessary” underlines that she does not ‘intend’ to let inflation run wild but has a different view on how the inflation process will play out. This is how we know that, if she is wrong, she will respond and hike rates…eventually. And markets are beginning to price in the end of sub-zero borrowing costs but only eventually. While the ECB is not the Fed, it may be instructive to remember how demonstrative the Fed was about using language to fight inflation and try to convince markets that inflation would heal itself…until it was forced to use policy. The ECB could find an equally significant and rapid shift awaits it in 2022 as well.
Wage Pickup Will Allow ECB to Hike Early Next Year, ING Says
While there are no signs that soaring inflation has fed through to pay yet, labor shortages, robust corporate profits and higher minimum wages will contribute to growth of about 3.5% this year and next, Bert Colijn and Carsten Brzeski said Thursday. (…)
With hiring expectations strong and vacancies high, “it looks as if labor shortages are set to remain a dominant economic theme of 2022,” they said. What’s more, elevated consumer-price gains — currently running at 5% — will empower union demands.
ING found that wage growth trails inflation by about half a year, while corporate profits, which have been “healthy” since economies reopened in mid-2020, historically feed through to pay with a five-quarter lag.
“It’s very early days, but it looks like the relationship between unemployment and inflation is becoming more significant again,” Colijn and Brzeski said. “For the ECB, this will be an important argument for a rate hike in early 2023.” (…)
Inflation leads wage growth as it is an important driver of wage negotiations
A high corporate profit share brings room for compensation growth
Another important factor contributing to higher wage growth in 2022 is the sizeable increase in minimum wages in several countries. Germany is the most notable of course, with an expected increase to €12 per hour promised by the new coalition (an almost 30% increase). Other countries have also seen minimum wages increase, such as Portugal with a rise of 6%, while France and Belgium will adjust for inflation, which will result in a sizable jump. The Netherlands has also agreed to increase the minimum wage by 7.5% but will do so in steps over the duration of the government’s term. The impact of higher minimum wages works through to the average of course, also because it generally impacts wage categories above the minimum as well.
A simple empirical model that has performed well historically would suggest nominal wage growth will recover to about 3-3.5% over the course of 2022, but relationships in economics are rarely mechanical. We have to keep in mind that Germany has relatively few wage negotiations coming up, which dampens the growth in negotiated wages. Also, a key question is whether unions – whose positions have weakened over recent decades – can convert the better negotiation positions into higher wage growth.
On the other hand, overall wage growth in sectors without collective bargaining already seems to be significantly outpacing negotiated wages in some eurozone markets, although data on this is severely distorted at the moment due to compositional effects in the labour cost index data. Overall, therefore, we think that wage growth of around 3% seems like a fair number for wage growth to rebound to, possibly over the next two years. (…)
It’s very early days, but it looks like the relationship between unemployment and inflation is becoming more significant again.
For the ECB, this will be an important argument for a rate hike in early 2023. For the current inflation spike, policy is not so relevant. The ECB can hardly fill gas reserves or add to the container shortage. What it can do is act on cyclical developments that look favourable, and with an economy recovering quicker-than-expected and wage growth which is set to rebound this year. With inflation expectations around 2%, ECB President Christine Lagarde will have the luxury that former President Mario Draghi never had: hiking interest rates.
(…) “The cycle of the economic recovery in the U.S. is ahead of that in Europe. We thus have every reason not to act as rapidly and as brutally that one can imagine the Fed would do,” she said, adding that inflation, too, was higher in the U.S.
“But we have started to react and we obviously are standing ready, to react by monetary policy measures if the figures, the data, the facts demand it,” she said. (…)
China Cuts Benchmark Rates to Bolster Flagging Economy The country’s central bank stepped in to support a slowing economy that has been weighed down by a slump in the property market during a politically important year for leader Xi Jinping.
The People’s Bank of China said Thursday that it cut its five-year loan prime rate, a benchmark for medium- and longer-term loans including mortgages, to 4.60% from 4.65%—the first such cut since April 2020. The Chinese central bank also lowered the one-year loan prime rate by 10 basis points to 3.70%, the second cut to that rate in as many months.
The moves were widely expected by analysts and traders after the central bank on Monday lowered rates on its one-year medium-term lending facility by 10 basis points, to 2.85%, underscoring Beijing’s shift to a looser policy stance as economic clouds gather. (…)
On Sunday, China’s top law-enforcement body issued a rare warning about the political implications of domestic economic weakness, warning that, “with the economic downturn, some deep-seated problems may surface.”
“Once economic and financial risks are mishandled, they can easily be transmitted into the social and political sphere,” read the commentary, which was published by the Communist Party’s Central Political and Legal Affairs Commission, which oversees the country’s police, prosecutors and courts. (…)
Sentiment turns risk-off as the market environment sours
More and more indicators are showing deteriorating conditions under the surface, and it’s contributing to a general risk-off attitude among investors. When this is the case, stocks tend to struggle until a pessimistic extreme is reached.
There have been some worrying signs lately. Rallies are being met with less and less enthusiasm, while declines, even tiny ones, are greeted with high anxiety.
On the surface, this could be a good thing and sometimes is. Knee-jerk contrarianism can work, especially in solid trends. But we’ve seen an extended period now where good news is being met with a collective yawn, or even aggressive selling pressure, while bad news is being exaggerated and extrapolated.
In the first week of the New Year, there was a thrust in short-term positive trends in the S&P 500. Instead of generating even more positive momentum as more buyers got sucked in, we’ve seen almost nothing but selling pressure. This runs counter to most of the other signals and has been a warning shot that we might be in a different environment to which we’ve become accustomed. A massive build-up of technical warning signs isn’t helping.
The anxiety has reached a point where inverse ETF volume, funds that profit when stocks decline, reached a record high on Friday. The 5-day average is now 20% higher than the previous peak from October 2021. Each successive dip has coincided with higher and higher anxiety. We can blame the new cadre of retail traders, but it’s deeper than that.
Corporate insiders have not been interested in buying stock in their own companies. Granted, they’re not selling heavily, either. There has been significant buying interest in some sectors (even technology).
A couple of weeks ago, we saw that a record number of securities on the Nasdaq exchange had been cut in half, relative to how little the Nasdaq Composite has declined from its peak. While not nearly as dramatic, within the S&P 500, there has been a steady uptick in the percentage of companies mired in bear markets.
This is similar to what happened in 2014-15 when a steadily rising number of stocks were getting sold heavily while the index made new highs. It didn’t bottom until half of all stocks were in bear markets. (…)
The lack of enthusiasm is evident in the percentage of securities on the NYSE reaching 52-week highs versus those sinking to 52-week lows. In the aftermath of the pandemic panic bottom, there was a steady rise in the net number of securities reaching new highs. That peaked last spring, and subsequent rallies in the S&P 500 have seen fewer new highs. It’s now negative again. (…)
The fact that the Summation Index is below zero and declining is a worry. This is the worst possible regime for the indicator. The chart below shows the growth of $10,000 invested in the S&P 500 (using next-day returns) depending on the behavior of the Summation Index. Returns are far and away better when it’s above zero, preferably also rising.
All of this can be seen in the increasingly hesitant amount of risk behavior. Since September, the Risk-On / Risk-Off Indicator has had a series of lower highs and lower lows. (…)
Most of the above charts have a subjective interpretation, which we usually shy from in lieu of historical testing when possible. But it sometimes pays to step back and look at what’s happening and how it “looks.” And right now, it’s not looking great. The lack of follow-through after recent breadth thrusts is troubling, as is the general risk-off attitude. It hasn’t cycled down to a pessimistic extreme and is looking more and more like a trading range type of market at best. That means waiting for deeper pessimistic extremes than we’ve seen since the summer of 2020.
Still in “risk down” mode. Large caps are hanging in but for how long? NDX (-10.2%), S&P 600 (-10.6%), Russell 200 (-16.4%) and NYFANG (-13.5%) are all in correction territory, after most of the speculative stuff are in bear markets. We are near the end of the risk scale…
CMG Wealth’s Steve Blumenthal:
An early trend signal to watch is the S&P 500 Index Daily MACD Indicator. It’s been in a sell for several weeks. The overall message is to focus on downside risk management – play more defense than offense.
With valuations high and investor margin debt extremely high, the risk of loss is high. Leverage is always the bad actor and the cause of extreme market dislocations.
Biden predicts Russia will ‘move in’ on Ukraine US president admits ‘differences’ with allies over Kremlin sanctions as Macron calls for new EU plan
- The European Union threatened “massive” economic sanctions if Moscow attacks Ukraine, and U.S. Secretary of State Antony Blinken rallied allies ahead of last-ditch crisis talks with Russia aimed at preventing war. We explain how Western sanctions might target Russia, and look at how a Russian troop buildup has sparked an unintended NATO renewal. (Reuters)
Omicron fills U.S. hospitals America is seeing more COVID hospitalizations than other wealthy countries during the Omicron surge, Axios health care reporter Caitlin Owens notes.
