Did you miss yesterday’s Desperately Seeking The Low?
Chicago Fed National Activity Index Declines Sharply in May
The Federal Reserve Bank of Chicago reported that the Chicago Fed National Activity Index (CFNAI) declined to 0.01 during May following a rise to 0.40 in April, revised from 0.47. It was the weakest reading of economic activity since September of last year.
Smoothing out the m/m volatility, the index’s three-month moving average fell to 0.20 from 0.40 in April. That was the lowest figure since June 2021. During the last 10 years, there has been 76% correlation between the change in the Chicago Fed Index and quarterly growth in real GDP.
Two of the four index’s major components weakened versus April, and two improved. The Personal Consumption & Housing component fell to -0.11 from 0.10. It was the weakest reading since December, down from a high of 0.18 in January. The Production & Income index fell to -0.01 after rising to 0.29 in April. Working the other way, the Sales, Orders & Inventories reading rose to 0.05 last month following three consecutive negative monthly readings. The Employment, Unemployment & Hours figure improved to 0.08 from 0.07.
The diffusion index, which measures the breadth of movement in the component series, fell to 0.27 during May after having reached highs of 0.46 last November and December. Forty-seven of the index components contributed positively to the May index while 38 contributed negatively. (…)
More on the CFNAI here.
Tomorrow we get the flash Purchasing Managers Index. Here’s the Sales Managers Index:
The World Economics SMI report indicates that US business activity is already in contraction mode (SMI < 50). It appears that companies are now shedding jobs.
Source: World Economics via The Daily Shot
DEMAND DESTRUCTION UNDERWAY
Existing-Home Prices Hit Record The median existing-home sale price shot above $400,000 in May, while sales activity slowed under the weight of higher mortgage-interest rates.
(…) The median existing-home price rose 14.8% in May from a year earlier to $407,600, a record high in data going back to 1999, the National Association of Realtors said Tuesday. That rate was up slightly from the previous month. (…)
Sales of previously owned homes slid for a fourth straight month, declining 3.4% in May from the prior month to a seasonally adjusted annual rate of 5.41 million, the weakest rate since June 2020, NAR said. May sales fell 8.6% from a year earlier. (…)
The average rate on a 30-year fixed-rate mortgage was 5.78% in the week ended Thursday, the highest level since 2008 and up from 2.93% a year earlier, according to housing-finance agency Freddie Mac. The May sales data largely reflect purchase decisions made in April or March. (…)
Nearly 60% of the homes sold in May were sold above their list price, according to real-estate brokerage Redfin Corp. (…)
The typical home sold in May was on the market for 16 days, down from 17 days from the prior month, NAR said. (…)
“We’ve seen our traffic really drop off,” said George Hale, president of builder Woodhill Homes in Bend, Ore. “As appreciation has gone up and then you add on the factor of rates going up…it’s just become too expensive.” (…)
- The World’s Bubbliest Housing Markets Are Flashing Warning Signs Global monetary tightening is squeezing homebuyers, adding risks that a slowdown could ripple through the economy.
(…) The effects are being seen in countries such as Canada, the US and New Zealand, where once-hot residential real estate markets have suddenly turned cold. (…)
An analysis by Bloomberg Economics shows that 19 OECD countries have combined price-to-rent and home price-to-income ratios that are higher today than they were ahead of the 2008 financial crisis — an indication that prices have moved out of line with fundamentals. (…)
Housing markets in New Zealand, the Czech Republic, Australia and Canada rank among the world’s bubbliest and are particularly vulnerable to falling prices, according to Bloomberg Economics. Portugal is especially at risk in the euro area, while Austria, Germany and the Netherlands also are looking frothy.
In Asia, South Korea house prices also look vulnerable, according to an analysis by S&P Global Ratings. That report noted risks from household credit relative to nominal GDP, the growth rate of household debt and the speed of house-price gains. Elsewhere in Europe, Sweden has seen a dramatic turnaround in housing demand, sparking concern in a country where debt runs at 200% of household income. (…)
- English Home Rental Prices Surge 9% in a Year to Hit Record High
- UK house price growth pushes average above £280,000 for first time
- UK inflation hits 9.1% as food prices jump
High Gas Prices Hit Demand as Drivers Cut Back at the Pump
(…) In the first full week of June, gasoline sales at U.S. stations were down about 8.2% compared with the same week last year—the 14th consecutive week that sales have lagged behind 2021 levels, according to surveys by energy-data provider OPIS.
In the week ended June 10, the Energy Information Administration’s measure of implied demand—an estimate of products supplied to consumers—declined by roughly 110,000 barrels a day from the prior week, to about 9.1 million barrels a day. That figure is down from about 9.4 million barrels a day the same time last year. (…)
The EIA’s estimate for implied demand for months has declined compared with the average for 2017 to 2019, sliding from 99% of that average in late February to 93% by late May, and to 95% in June. (…)
- Biden to Call for Three-Month Federal Gasoline Tax Suspension President Biden is planning to call for a three-month suspension of the federal gasoline and diesel taxes, according to senior administration officials.
BTW, “The average driver of a large SUV — one of the most popular vehicle types in the country — would save about $4.60 a week, according to calculations by GasBuddy.”
- India Tells Oil Companies to Scoop Up Russian Crude The emergence of India as a major buyer of Russian oil has the potential to take the sting out of Western sanctions.
- Energy Investments Aren’t Enough to Bring Down Prices, IEA Says Investment in energy supplies, including clean energy, should jump this year, energy watchdog says. But it won’t be enough to tame prices.
(…) Total energy investment is forecast to rise by 8% this year to $2.4 trillion, above pre-Covid-19 levels. A jump in spending on clean and renewable energy sources comprises the largest chunk of the rise, a promising sign for global efforts to reduce carbon emissions following years of lackluster growth, the IEA said. (…)
Spending on clean energy is expected to exceed $1.4 trillion in 2022, far behind the roughly $2.8 trillion which would be required to meet current climate pledges by 2030 and further still behind the more than $4 trillion that will be needed to achieve net-zero emissions by 2050. Both are targets embraced by Western governments. (…)
Oil and gas investments rose 10% in 2021 but remain below pre-Covid levels, the IEA said. Investment in coal supply rose 10% in 2021 and is expected to rise by a similar amount this year, despite global pledges to move away from the fuel. (…)
- IEA chief warns Europe to prepare for total shutdown of Russian gas exports Fatih Birol says governments should keep ageing nuclear plants open and take other contingency measures
- Yellen Says ‘Stay Tuned’ for Word on Russian Oil Price-Cap Plan
Global Food Inflation Gets Reprieve as Wheat and Oilseeds Tumble
(…) Subdued economies can mean lower fuel use or spur shoppers to cut back on higher-priced foods like meat. Chicago soybean oil is headed for its longest retreat since 2019, Paris rapeseed erased its year-to-date gain and Malaysian palm oil recently entered a bear market as rival producer Indonesia ramps up exports. (…)
Corn, wheat and soybean futures retreated in Chicago, as trading resumed following a holiday weekend in the US. Corn tumbled as much as 5% to $6.9425 a bushel, touching the lowest intraday price since March. Soybeans sunk to the lowest level since February, while wheat slipped below $10 a bushel to touch the lowest price since early April. (…)
A European Union agency cut its outlook for the bloc’s soft-wheat yields to a below-average level in a report on Monday, following spring heat and drought. Dryness will also remain a concern across most of the US corn and soybean belt into early July, according to forecaster Maxar.
FIBER: Industrial Commodity Prices Decline Further
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The hot commodities rally is cooling off fast as recession fears gain ground and cloud the outlook for demand.
Canadian Shoppers Show Resiliency as Retail Sales Jump
The nation’s retailers recorded a 0.9% sales increase in April, Statistics Canada reported, driven primarily by higher volumes. In May, receipts were up 1.6%, according to initial preliminary estimates also released on Tuesday. (…)
Excluding price increases, retail sales were up 0.9% during the month. (…)
Only six of 11 subsectors posted gains in April. Sales at new car dealerships continued to slump, while purchases at building material stores fell sharply in April — possibly reflecting falling activity in home sales.
General merchandise stores led increases in April, with a 4.2% gain. Receipts at gasoline stations posted a 3% increase, and were up 5.4% in volume terms as prices temporarily dipped during the month. (…) Core retail sales – which exclude gasoline stations and motor vehicle and parts dealers – rose 1.0 per cent.
Growing forecasts for U.S. recession may spell more trouble for stocks
(…) Morgan Stanley strategists including Michael Wilson wrote Tuesday that an S&P 500 level of 2,900 to 3,100 – roughly 18-23% below where it stands today – would more fully reflect the typical corporate earnings contractions during recessions.
“At this point, a recession is no longer just a tail risk given the Fed’s predicament with inflation,” the Morgan Stanley analysts wrote.
Similarly, strategists at the BlackRock Investment Institute on Tuesday reiterated warnings against buying the dip in stocks, saying many are ignoring the “crushing effect” that central banks’ policy tightening is going to have on growth.
“This dynamic raises serious growth risks, and we now see the U.S. restart of economic activity stalling over the coming quarters,” wrote Jean Boivin, head of the institute, in a report on Tuesday.
While Deutsche Bank’s analysts believe a recession is more likely in 2023, “the risk of an earlier move is clearly building with declining financial conditions, and consumer and business confidence plummeting,” wrote Deutsche Bank strategist Jim Reid.
“It’s hard to see markets recovering in the second half of the year if we see firm evidence of the recession,” he said.
Societe Generale analysts said that while recession was not their base case, a “typical” recession would put the S&P 500 at 3,200 while a 1970s style stagnation with high inflation and low growth would bring stocks down to 2,525. (…)
Bear markets accompanied by recession have tended to be longer and steeper, with a median decline of about 35%, data from Bespoke Investment Group showed. (…)
- Citi offered up today’s recession chatter, saying odds are now nearing 50%. It sees the global economy growing 3% this year and 2.8% in 2023. It also noted that if a recession does occur, it may be a “garden variety” one. The wildcard is, of course, inflation dynamics. (Bloomberg)
Ray Dalio Says Reducing Inflation Will Come at Great Cost
(…) “With debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy,” Dalio said.
“Over the long run the Fed will most likely chart a middle course that will take the form of stagflation,” he added. (…)
The Fire Burning Beneath Crypto’s Meltdown Are bitcoin and other crypto tokens crashing because of the usual excesses that accompany advances in finance? Or do they have the sort of fundamental flaws that will see them as historical relics?
(…) Crypto supporters point to previous “crypto winters” that eventually came good again, and say prices will recover. But this blowout and bust is different, because of defi.
In the booms and busts of the past decade crypto prices were pushed up and fell back down based on the level of interest, rather like Pokémon cards or Beanie Babies.
Defi changed everything, by creating a parallel crypto banking system—without any of the limits or safety nets that have been introduced in the real world in response to past busts. Only now are we starting to find out some of the problems, as brokers and lenders freeze withdrawals, multibillion-dollar “stablecoins” designed to hold a fixed value vanish, and wild leverage leads to widespread forced selling.
At the very minimum this suggests the new crypto winter will be worse than the last few. Defi speeded the bubble’s expansion, and now it is accelerating the deflation.
The irony in all this is that part of the original appeal of crypto was the cap on how many bitcoin can ever exist, something supposed to prevent the sort of unlimited money creation that worries many critics of government-issued, or “fiat,” currencies. Rather than unlimited creation of bitcoin, crypto ended up with unlimited proliferation of new tokens. The new structures of intermediaries and defi tools allowed even bitcoin to be reused or lent on, meaning multiple people thought they owned the same token. Lender Celsius Network is an extreme example: Those who deposited bitcoin and other tokens there were promised high interest rates, but have been unable to get their coins—which Celsius lent out—back.
In the 19th century, the Bank of England discovered that the private spread of bills of exchange could overcome limits on official money-printing set by the backing of gold. Crypto owners are finding something similar, as monetary innovation got round their favorite claim, that the value of their bitcoin was underpinned by its protection from debasement. (…)
The hope for crypto is that the speculators who used too much borrowed money are cleared out, the proliferation of tokens is pared back, prices reset lower and the core cryptocurrencies can continue with their grand monetary experiment. Sure, they’re worth less, but survive. (…)
[Bitcoin] failed to take off as a medium of exchange, as it is clunky and costly to use. Other cryptocurrencies are somewhat more practical for transactions, but all suffer from a core problem: The more they are used, the more expensive transactions become as a way to regulate capacity on the network. Like Uber, Bitcoin has surge pricing built in.
“In a way congestion is a feature, not a bug,” says Hyun Song Shin, economic adviser and head of research at the Bank for International Settlements in Basel. For normal currencies “network effects mean the more the merrier, but crypto achieves exactly the opposite, the more the sorrier.”
The BIS on Tuesday laid out a program for taking the best parts of crypto and using them in digital dollars, pounds or other currencies that could be issued electronically by central banks. (…)
Bitcoin holders have discovered that not only is it not a hedge against inflation, it isn’t a haven either. Its price tends to move in line with risky assets, not safe ones. (…)
But in the long run, crypto’s best hope of survival is to come up with some useful function in the real [non-criminal] world. That will require another round of innovation, and there’s no reason to think it will be the existing cryptocurrencies, let alone bitcoin, that will be the winners.