U.S. Index of Leading Economic Indicators Continues to Decline in October
The Conference Board’s Composite Leading Economic Indicators Index fell 0.8% (-2.7% y/y) during October after a 0.5% September decline, revised from -0.4%. The Action Economics Forecast Survey expected a 0.4% decline in the index for October.
Six of the Leading Index’s ten components made negative contributions to the index change in October. Declines came from initial unemployment insurance claims, the ISM new orders index, building permits, stock prices, consumer expectations for business/economic conditions and the leading credit index.
The Index of Coincident Economic Indicators improved 0.2% last month (2.1% y/y) after it edged up an unrevised 0.1% in September. (…)
The Index of Lagging Economic Indicators edged 0.1% higher last month (6.9% y/y) following a 0.8% September gain, revised from 0.6%. (…)
The ratio of the Coincident index to the Lagging index also is seen as a leading indicator. The ratio has been steadily declining since November, suggesting rising recession risks.
Advisor Perspectives has the best charts on the CB LEI, a pretty, pretty, pretty good indicator as Larry David would say (my red marks):
- The smoothed six-month rate of change also gives a strong warning:
- It’s 12-m version often only serves to confirm the economy is already contracting:
If the wealth effect worked with QE, won’t it work in reverse with QT? After all, 2022 has been one of the worst wealth destructing year.
- Stressed-Out Americans Plan to Buy Fewer Christmas Gifts, Donate Less to Charity Inflation is souring the holiday season, a crucial time when companies, charities and nonprofits typically collect their biggest haul of the year
(…) The University of Michigan estimated that household sentiment in the past six months is comparable to late 2008 and early 2009, when the financial system verged on economic disaster and unemployment was soaring. The index also echoes wary levels of the 1970s, when inflation climbed to double digits.
A Census Bureau survey of households in early October found that 41% of Americans, around 95 million people, said they were having difficulty paying for essential household expenses, compared with 29% a year earlier.
People plan to buy an average of nine gifts this year compared with 16 last year, according to Deloitte consulting’s 37th annual holiday shopping survey of 5,000 respondents in September. Total anticipated spending per household was $1,455, down from $1,463 a year ago, Deloitte said. People in the survey said they also planned to spend less time shopping than they did last year.
The Conference Board, a nonprofit research organization that surveys household confidence each month, said individuals had cut gift spending plans to $613 this year from $648 in 2021. Home décor, furniture, appliances, jewelry and tools are among the categories facing the biggest cuts. (…)
Eleven times since World War II, the consumer-price index has equaled or exceeded 6% around holiday time; this year it was at 7.7% as of October. Consumer spending had an average growth rate of 1.2% in those years, compared with a rate of 3.4% in years with lower inflation, Commerce Department data show. (…)
Holiday work parties also are looking less festive. Avital Ungar, a party planner who works with Fortune 500 companies and startups in New York City, San Francisco and Los Angeles, said many clients, facing hiring freezes or layoffs, don’t have the budget for elaborate events this year.
Restaurants around the country are feeling the fallout.
Mani Bhushan, who owns four Mexican restaurants in the Dallas area, said that in prepandemic times he would have received dozens of catering orders for 100-plus person Christmas events by this time in the holiday season. He currently has none. Large-group reservations, he said, are down 95% from 2019. (…)
- Moody’s on October retail sales: “Traditional holiday segments did poorly in October. The strong gains were concentrated in segments not related to holiday spending like gasoline stations, restaurants, grocery stores and vehicle dealers. Many of the segments more related to holiday shopping, led by department stores but including sporting goods and hobby stores, apparel stores and appliance and electronics stores, posted sales declines. (…) All in, however, holiday sales may fail to meet expectations if the data are any indication.”
So, what are the odds of a recession? Is this time so different, with the Fed aggressively tightening right into an equity bear, a bond bear, and now a crypto bear?
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Goldman Sachs Economics believes “This Cycle is Different”
The US should narrowly avoid recession as core PCE inflation slows from 5% now to 3% in late 2023 with a ½pp rise in the unemployment rate. To keep growth below potential amidst stronger real income growth, we now see the Fed hiking another 125bp to a peak of 5-5.25% with a 50bp hike in December and three 25bp hikes next year raising the funds rate to a peak of 5-5.25%. We don’t expect cuts in 2023.
First, post-pandemic labor market overheating showed up not in excessive employment but in unprecedented job openings, which are much less painful to unwind. Our jobs-workers gap has shrunk substantially, driven by a decline in job openings rather than employment. Second, the disinflationary impact of the recent normalization in supply chains and rental housing markets still has a long way to go. And third, long-term inflation expectations remain well-anchored.
BTW, Fed Tightening Is Having More Impact Than You Might Think
(…) Evercore ISI, led by the redoubtable Ed Hyman, suggested in a client note on Friday that the FTX fiasco could be a sign that Federal Reserve policy has become restrictive. A proxy federal-funds rate calculated by the San Francisco Fed, which takes into account quantitative tightening (the contraction of the central bank’s balance sheet), puts the key policy rate at 6.34%, compared with the nominal target range of 3.75%-4%. (…)
- Recession On The Horizon (Hoisington Investment Management)
(…) For the National Bureau of Economic Research (NBER) cycle dating committee recessions and expansions are determined by the seven indicators. All are based on monthly data points except the real average of quarterly GDP and GDI.
The majority of these indicators – real income, real business sales, industrial production and the weighted average of real GDP and GDI – are already declining. Significantly, the average of real GDP and GDI declined in both the first and second quarters.
Declines in real GDP in both quarters of 2022 were greater absolutely than small increases in real GDI. This suggests the drop in real GDP in the first half of 2022 was not a fluke.
The weighted average is the broadest measure of economic performance of the seven components in the NBER measuring standard. The most notable exceptions to the recessionary tendency are the two employment measures, but both are lagging rather than coincident indicators. Also, with jobs rising and aggregate demand falling, productivity is slumping at a record pace. This is a sign of job hoarding, an effect that will sharply erode profits if continued.
Real personal consumption expenditures are also still positive, but a very severe drop in the personal saving rate to 3.4% in the second quarter [3.3% in Q3 and 3.1% in September] suggests a household budget under considerable distress and weakness in spending is coming. When the labor markets turn down, consumers will be faced with an even greater urgency to live within their means.
Based on preliminary and very incomplete third quarter information, real GDP has improved while real GDI deteriorated. The key elements of real domestic final demand – consumer durable purchases, housing and business fixed investment – all decreased in the third quarter. A significant reduction in the current account deficit is a sign of future economic weakness even though it is a plus in terms of the GDP calculation. Such disparities are a common occurrence at the turn from expansion to recession.
Other troubling signs confirm this view, including an across the board weakening in rail, trucking and ocean-going freight and a long and diversified list of corporate profit warnings.
The index of leading economic indicators peaked in February and has declined for six consecutive months, resulting in a year over year decrease in the LEI. These developments point to a recession around the turn of the year. Additionally, the yield curve has inverted, a development consistent with a recession next year. (…)
The Fed’s mettle will be tested because highly over leveraged institutions will fail as they historically have done in such situations. Bad actors or their enablers should be directed to bring their collateral to the discount window or, if necessary, to the bankruptcy process rather than be given bailouts that have severely widened the income and wealth divides in the U.S. while causing the Fed to sacrifice price stability that’s so essential for broad-based economic gains.
These considerations suggest that the Fed’s current stance should continue. The long-term Treasury market is in the zone of digesting the rapid inflation of the past several quarters, and future Fed rate hikes. Barring any capitulation in the determination to quell inflation by the Fed, long Treasuries will increasingly reflect the looming recession and its deflationary circumstances.
U.S. Existing Home Sales and Prices Weaken in October
Sales of existing homes declined 5.9% during October (-28.4% y/y) to 4.43 million units (SAAR) from an unrevised 4.71 million in September. Sales have fallen for nine consecutive months and were down 31.7% during that period. The Action Economics Forecast Survey expected October sales of 4.35 million units.
Sales of single-family homes fell 6.4% (-28.2% y/y) in October to 3.95 million units. Sales have fallen in each month since January. Condo and co-op sales were off 2.0% (-30.4% y/y) in October following a 5.8% September shortfall.
The decline in total sales was most pronounced in the Western region of the country where they fell 9.1% (-37.5% y/y) to 800,000 after holding steady in September. Sales in the Northeast weakened 6.6% (-23.0% y/y) to 570,000 following a 1.6% September drop. Sales in the Midwest were off 5.3% (-25.5% y/y) in October to 1.08 million, down for the eighth month this year. Home sales in the South declined 4.8% (-27.2% y/y) to 1.98 million, down for the ninth consecutive month.
The number of existing homes for sale (NSA) fell 0.8% both m/m and y/y in October, the third straight month of decline. The months’ supply of homes on the market (NSA) rose to 3.3 months at the current selling rate, the highest since June 2020. It’s up from a record low of 1.6 months reached in January of this year. These figures date back to January 1999.
The median price of an existing home (NSA) fell 1.1% (+6.6% y/y) to $379,100, down for the fourth straight month. They were 8.4% below the June peak of $413,800. Prices declined last month in all four regions of the country.
Housing demand is obviously impacted by awful affordability ratios from exploding prices (thanks to the Fed’s previous low rates policy) multiplied by the Fed’s current high rates policy.
And housing supply, down about 50% from pre-2005-07 levels (-33% since pre-pandemic levels), is also the result of the Fed’s previous low rates policy as home owners prefer to stay in their current home rather than sell and lose their low rate 30-year mortgage.
This while the number of households rose 17% since 2004.
The Fed has thus killed both the demand and the supply of housing. That has never happened before.
It will take a 15% drop in nationwide prices to bring mortgage payments into line with household incomes, Bloomberg Economics estimates. Wealth effect?
- Housing freeze hints at rapid transmission of monetary tightening
The statement released by the Federal Reserve following its latest monetary policy meeting mentioned that, in determining the pace of future rate increases, the Committee would take into account “the lags with which monetary policy affects economic activity and inflation.”
Asked to provide more details on that topic at the press conference which followed the rate announcement, Chairman Jerome Powell stated that, although monetary policy worked with long and variable lags, newer literature suggested transmission times might be shorter today than in the past because movements in financial conditions now happened ahead of the central bank’s moves. Powell then said it would be irresponsible for the Fed to ignore this new research but admitted that a great deal of uncertainty remained around the subject of lag times.
The whole question may seem academic, but it is of vital importance for the conduct of monetary policy. If transmission times are indeed faster, the impacts of monetary tightening would be felt more quickly and the chances of seeing a deanchoring of inflation expectations would be lower. This would in turn allow the Fed to stop raising rates sooner. But how will the central bank know?
Looking solely at inflation and employment will not help, as these are lagging or coincident indicators. Instead, the Fed should focus on leading indicators. Specifically, it should pay more attention to housing. It’s true that real estate accounts for just a small part of U.S. GDP, but it tends to react faster to changes in interest rates. And boy is it reacting now!
As today’s Hot Chart shows, home resales have collapsed since the Fed started raising rates earlier this year and the scale and speed of the decline has had nothing in common with what had been observed in prior tightening cycles. To be sure, transactions have contracted every single month this year (the longest streak in data going back to the 1970s) and now stand at their lowest level in nearly 11 years.
And while some commentators are keen on describing this process as a mere return to normal following the pandemic boom, we see it as an indication that monetary policy is more restrictive than would appear, something that is being masked in consumption data by excess savings accumulated during the pandemic.
While on housing:
Source: @business Read full article (via The Daily Shot)
Fed’s Collins: Another 75-bps hike could be ahead
Federal Reserve Bank of Boston leader Susan Collins said on Friday that with little evidence price pressures are waning, the Fed may need to deliver another 75-basis point rate hike as it seeks to get inflation under control.
“We’re now in a phase where deliberate increments – all of the possible increments – should be on the table as we decide what is sufficiently tight,” Collins told CNBC. “Seventy-five still is on the table; I think it’s important to say that as well.” (…)
She said it was important that whatever the Fed does, it not engage in a cycle of moving and holding rates–stop and go, in her description–as that strategy has worse outcomes lowering inflation. (…)
“We’re starting to see some promising signs, although certainly we’re not seeing clear consistent evidence of the kind of softening in labor markets, the kind of dynamic that we would like to see and service sector prices are still very high,” Collins said in the television interview. “I do not see clear, significant evidence that the overall inflation rate is coming down at this point.” (…)
NY Fed: Bank liquidity may be tighter than thought, with policy implications
The way the banking system manages its cash suggests the financial system may not be as flush as many now understand, and that could have implications for how the Federal Reserve manages the size of its balance sheet, a paper from the Federal Reserve Bank of New York said Friday.
That’s because even though institutions like the Fed have flooded the banking system with reserves, many banks continue to manage fast-moving inflows and outflows of cash much like they always have, and that is tightly, the paper said. The authors argue this way of managing cash positions could become an issue for the Fed as it seeks to draw down the size of its holdings of bonds, which reduces the level of bank reserves in the system. (…)
Fed officials have been confident that the effort of shedding $95 billion per month in Treasury and mortgage bonds per month, known as quantitative tightening, should run smoothly in large part because banks still have far more cash than they need. (…)
The Fed has expressed confidence it can draw down reserves in a way that will not affect its interest rate target. The paper suggests the way banks are managing liquidity, even in a time of ample liquidity, could challenge that view.
And while the paper doesn’t say what it means for balance sheet policy, already some private sector forecasters are speculating the Fed may be forced to slow or halt its balance sheet contraction next year on a sooner-than-expected tightness of bank reserve levels. (…)
EARNINGS WATCH
From Refinitiv/IBES:
Through Nov. 18, 475 companies in the S&P 500 Index have reported earnings for Q3 2022. Of these companies, 70.3% reported earnings above analyst expectations and 25.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 3.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 7.0%.
Of these companies, 69.9% reported revenue above analyst expectations and 30.1% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.
In aggregate, companies are reporting revenues that are 2.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 2.7%.
The estimated earnings growth rate for the S&P 500 for 22Q3 is 4.2%. If the energy sector is excluded, the growth rate declines to -3.6%.
The estimated revenue growth rate for the S&P 500 for 22Q3 is 11.6%. If the energy sector is excluded, the growth rate declines to 8.3%.
The estimated earnings growth rate for the S&P 500 for 22Q4 is -0.4% [-0.1% last week and +5.8% on Oct.1]. If the energy sector is excluded, the growth rate declines to -5.2% [-4.9% and +1.4%].
Trailing EPS are now $222.32. Full year 2022: $220.29e. 12-m forward: $224.81. Full year 2023: $231.15e.
- Seriously?
At Zacks, we of course take earnings estimate revisions very seriously as they form the core of our stock-rating system. It follows that our analysis was showing that forward earnings estimate outside of the Energy sector peaked in April of this year, and have been steadily declining since then. (…)
Looking ahead to Q4 2022 and beyond, we continue to observe companies lowering earnings estimates as we have noted since April of this year. This should be viewed as a positive, not a negative. Lowering the bar of forward earnings estimates makes exceeding expectations easier to achieve, which is generally a boon for stocks.
- Note to Zacks: The Philly Fed’s manufacturing index is signaling a sharp decline in earnings expectations.
Source: @MikaelSarwe (via The Daily Shot)
BTW: Pivot chasers should note that there’s aggressive tightening, then slowing, then pausing, then easing…when profits really tank.
Source: @steve_donze via @MichaelAArouet
TECHNICALS WATCH
From CMG Wealth’s Steve Blumenthal: note the changes in the fixed income section.
- But David Hay warns:
(…) the refinancing risk next year is formidable and it’s not just a U.S. government headache. While close to 30% of Treasury debt matures over the next year or so — close to a $10 trillion Mt. Everest of borrowing that needs to be funded — there is also $1.6 trillion of investment-grade corporate debt that must find buyers, as well. For sure, there is maturing debt that will likely be recycled back into treasuries and “govies” but it’s still a staggering sum of money. Then, there is the much higher rate of interest that needs to be paid on these many trillions of maturing IOUs.
- Emerging Markets: Bond fund outflows have been most severe in local-currency debt.
- S&P 500 Large Cap Index – 13/34–Week EMA Trend
Source: EPFR Global Navigato (via The Daily Shot)
- FOMO Flow:
(Source: @MikeZaccardi via Callum Thomas)
- U.S. Dollar Price Trend: Medium-term (Weekly MACD) Sell Signal
- “While the Dollar’s high valuation and a better global growth outlook have markets searching for “peak Dollar”, we think the conditions for the “true” peak still look likely to be a couple of quarters away. Surveying historical Dollar cycles, we find that peaks in the broad Dollar are most reliably associated with a trough in measures of US and global growth, and an easing Fed.” (Goldman Sachs)
EMBARRASSING
But who’s the most embarrassed? I say Warren Buffett.
FTX’ new CEO John Ray:
Never in my [40-year] career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented.
- “It pains me that in my own country, I see people that once were reputable people helping these things exist, promoting their use and so forth. This is a very bad thing. The country did not need a currency is good for kidnappers and so on. There are people who think they just gotta be on every deal that’s hot and they don’t care whether it’s child prostitution or Bitcoin. If it’s hot, they wanna be in it. I think that’s totally crazy. Reputation is very helpful in financial life and to destroy your reputation by associating with scumballs and their scumball promotions [is] a huge mistake — It’s partly fraud and partly delusion. That’s a bad combination. I don’t like either fraud or delusion. And the delusion may be more extreme than the fraud. Nobody’s gonna build a new thing that every 12-year-old kid can be a billionaire or something. He just calls it Munger coin. He starts trading it or something. It’s crazy. It’s demented.” – Berkshire Hathaway ($BRK.B) Vice Chairman Charlie Munger (via The Transcript)
Crypto Markets Sag as Funds Drained From FTX Switch Out of Ether
(…) The largest token Bitcoin has shed about 4% over two days, while second-ranked Ether is roughly 7% lower. Meme token Dogecoin — an arbiter of the most speculative animus in an already racy digital playground — is down 11%. (…)
Crypto lender BlockFi Inc. could be next: people with knowledge of the matter said last week that it’s preparing to file for bankruptcy within days. (…)
The heady mix of corporate failure and potential criminality atop a 72% drop in a gauge of the top 100 tokens over the past year is naturally leading to all kinds of questions about the future — or lack thereof — for digital assets and their underlying blockchain technology. (…)
“This isn’t case of 1 fraudulent company in a serious industry,” Kashkari said on Twitter, commenting on an article about how investors fell for FTX. “Entire notion of crypto is nonsense. Not useful 4 payments. No inflation hedge. No scarcity. No taxing authority. Just a tool of speculation & greater fools.”
BOARD VISION!
Last night’s sudden replacement of Disney CEO Bob Chapek with his revered predecessor, Bob Iger, is a shocking ending to a bitter power struggle that’s been building between the two for the past couple of years.
The move marks one of the messiest corporate succession failures in recent memory, Axios’ Sara Fischer writes.
In a statement at 9:49 p.m. ET, Disney said Iger will return as chief executive, effective immediately, for the next two years — and will work with the board to find a successor.
- Susan Arnold, Disney’s board chair, said: “The Board has concluded that as Disney embarks on an increasingly complex period of industry transformation, Bob Iger is uniquely situated to lead the Company through this pivotal period.”
- Disney’s board voted unanimously in June to extend Chapek’s contract for three years. (Axios)
But, but, isn’t it Iger who had Chapek succeed him?
PEAKING!?
Lastly, here’s a look at life satisfaction by age. I am nearing that peak this week…but not there just yet. That said, happy and privileged to still be here and healthy, along with also healthy Suzanne.
Source: FlowingData Read full article