THE DAILY EDGE: 21 SEPTEMBER 2022

U.S. Housing Starts Rebound in August

New residential construction activity during August recovered all of its July decline. Total housing starts rose 12.2% (-0.1% y/y) last month to 1.575 million units (SAAR) after falling to 1.404 million units in July, revised from 1.446 million. Starts in June of 1.575 million were revised from 1.599 million. The Action Economics Forecast Survey had expected 1.45 million starts in August.

Leading last month’s increase were multi-family starts. They surged 28.0% (33.1% y/y) to 640,000 following an 11.0% July decline. The latest level of multi-family starts was the highest since April 1986. Single-family starts rose 3.4% in August (-14.5% y/y) to 935,000 following five consecutive monthly declines.

Housing starts were mixed regionally. In the South, housing starts rose 24.5% (-0.3% y/y) to 885,000 following an 18.7% July decline. Starts in the Midwest strengthened 19.3% in August (-14.8% y/y) to 167,000 following a 32.0% July drop. Starts in the West rose 1.1% (10.7% y/y) to 361,000 after falling 2.7% in July. Moving lower last month were starts in the Northeast by 17.3% (-2.4% y/y) to 162,000 after surging 54.3% in July.

Building permits fell 10.0% (-14.4% y/y) to 1.517 million in August, the fourth decline in the last five months. Permits were at the lowest level since June 2020. Single-family permits weakened 3.5% (-15.3% y/y) to 899,000, the sixth consecutive monthly decline. Multi-family permits weakened 17.9% (-13.1% y/y) to 618,000, the lowest level in nine months.

“Rebound” is a tad strong…likely unsustainable:

(Morgan Stanley via The Market Ear)

• In Canada:

The Teranet-National Bank Home Price Index report shows that in August, home prices experienced their largest one-month decline since the index began in 1999 and has already decreased by 4.1% since its peak in May 2022. Although this may seem like an abrupt slowdown, it must be put in perspective with the vertiginous price increases recorded in the last two years around the country. (…)

With the Bank of Canada expected to continue to raise its policy rate deeper in restrictive territory, we believe that the Teranet-National Bank Composite HPI should see a 10%-15% decline from peak to trough by the end of next year depending on where interest rates settle. (…) (NBF)

• Core Inflation Cools in Canada, Easing Pressure for Bigger Rate Hikes

The consumer price index rose 7% from a year ago, down from 7.6% in July and a four-decade high of 8.1% in June, Statistics Canada reported on Tuesday. Economists expected a reading of 7.3%. During the month of August, prices fell 0.3%, the largest monthly decline since the early months of the Covid-19 pandemic.

So-called core inflation — which excludes more volatile prices to generate a better gauge of underlying pressures — also decelerated. The average of the central bank’s three key measures dropped to 5.23% from a revised 5.43% in July, a record high.

• Inflation Still Too High, Bank of Canada Says Amid Softer Data

Port Labor Talks Stall as Worker Disruptions Grow Shipping industry officials worry that chances of supply-chain disruptions are increasing as contract talks bog down without resolution.

World Food Supply Stays Tight After Weak U.S. Harvest Agriculture executives say that at least two years of bumper crops are needed to relieve pressure from drought and the war in Ukraine.

(…) some said at least two more years of good harvests in North and South America are needed to ease the pressure. Persistent drought conditions in the U.S. and agricultural countries in South America, along with uncertainty over crop production in Ukraine, are making that harder, they said. (…)

The U.S. Agriculture Department on Sept. 12 lowered its nationwide corn-production estimate to 13.9 billion bushels, 3% lower than its August projection, and 8% below 2021’s total. Soybean-production estimates this month were down 3% from a record projection in August, and down slightly from a year earlier. Agriculture advisory firm Professional Farmers of America Inc. last month cut its outlook for corn yields by 13% in Nebraska and 22% in South Dakota, compared with last year.

The corn harvest this year is currently expected to come in below typical recent yields in North America and Europe, hindering 2022 from being a year of restocking worldwide supplies, said Chuck Magro, chief executive of seed and pesticide maker Corteva, at an investor presentation this week. (…)

Futures prices for wheat at the Chicago Board of Trade are up 17% over the past 12 months, while corn prices are up about 28% and soybeans roughly 14%. (…)

German price shock

Soaring input prices in Germany and throughout the continent — largely due to energy costs related to Russia’s war on Ukraine — are making it uneconomic for major European industries such as chemicals, fertilizers and metal making to keep operating. (Axios)

• Energy prices were up 139% compared to the prior year.
• Electricity prices were up 175%, compared to August 2021.

CONSUMER WATCH

Via The Transcript:

“(…) market demand for core appliances in Europe and the U.S. have decreased at a significantly accelerated pace compared with the second quarter. We estimate that the year-over-year demand drop is as much as twice of what we saw in the second quarter. This is driven by the impact of high inflation on consumer durables purchases and low consumer confidence. (…) Higher retailer inventory levels have further amplified the impact of a slowdown in consumer demand. The weak market environment in combination with supply chain imbalances is expected to result in third-quarter group earnings to decline significantly compared to the second quarter — Against this background, the Board has this morning decided to initiate a group-wide cost reduction program, addressing both variable and structural costs as well as a turnaround program in North America.” – Electrolux ($ELUX-B) CEO Jonas Samuelson

“We are seeing a much more promotional retail environment than in years past due to the excess inventory across the industry.” – Five Below (FIVE ) CEO Joel Anderson

“I would say, the PC market continues to track lower than expected. Typically, you would see the second half of the year higher. But as it relates to the PC market, I think, it’s lower than expected, it’s kind of the current view” – Advanced Micro Devices (AMD ) SVP, Marketing, Human Resources and Investor Relations Ruth Cotter

“nominal levels of spending have stayed quite stable, and that’s largely true around the world.” – Visa (V ) CFO Vasant Prabhu

Most banks and credit card companies keep saying that spending levels are not slowing much. But note the use of “nominal” levels of spending.

The Chase card spending tracker, largely mid-to-high end clients, is tracking for 1.0% MoM nominal growth in September (through Sept. 16).

VALUATIONS

Eurozone P/E relative to US has never been this cheap.

JPM Equity strategy

But beware of the “E”…

China Says It Has Patience Needed to Bring Taiwan Under Control

China said it has the patience to someday bring Taiwan under its control, partly because “compatriots” there want it to happen — a view that contrasts with polling showing skeptical views of Beijing in the democracy.

“With regard to resolving the Taiwan question and realizing the complete unification of China, we have strategic composure and historic patience, and we are also full of confidence,” Qiu Kaiming, an official in a Chinese government department that handles ties with the island, said Wednesday. (…)

A survey in August that was commissioned by the Taiwan government found some two-thirds of respondents saw Beijing as unfriendly to them, the highest level in more than two decades. More than a quarter said they backed immediate or eventual independence, while less than 10% supported unification at some point. (…)