BLACK FRIDAY SALE! 
Every service I subscribe to is currently offering Thanksgiving discounts.
Seeking to better my “competition”, after 15 years, here’s the first ever Edge and Odds Thanksgiving sale.
Any new or existing subscriber, any new reader or non-reader, even anybody with zero interest in the blog, will get 50% off the regular price which, remarkably, has not changed in 15 years!
This offer will remain valid until next Thanksgiving and will be retroactive to January 3rd, 2009, the launch date, even for those who found me later, or never found me.
And for my numerous non-American readers, for fairness sake, they will be allowed to apply the very same discount, no discrimination, during any other holiday period of their choice, valid until any other holiday period of their choice, and retroactive as far back as they wish.
To take advantage of this offer, simply do nothing. The discount will be automatically applied to your account, even if you don’t have one.
Please allow a reasonable number of days, weeks or months. We have been short-staffed here since day one.
The problem is that I only hire on a profit-sharing scheme and that has yet to appeal to anybody since I still refuse to embellish the blog with ads and pop-ups.
*****
My real Thanksgiving!
Sincere thanks are hereby given to all of you who have helped the blog with donations, large or small, occasional or regular.
I truly appreciate your mark of appreciation and altruistic generosity given that you are a minority helping all Edge and Odds readers.
Getting older, slower and sloppier, busy with 5 children and 11 grand-children, some in other biz with me (or rather me with them), and being short-staffed for reasons given or not above, I often cannot find the time/energy to send a thank you note. I apologize and I will try to improve on that even though I know I should not commit to that.
Rightly or wrongly, I always decide to work on the blog rather than use time to send thank you notes.
But here it is: Marc, Larry, Rick, Patrick, Joseph, Denis, John, Steven, Richard, David, just to name some of the recent donators, I hereby sincerely thank you all and salute your generosity.
To all other free riders, thank you for reading me, a very nice compliment in itself.
Denis
Breaking News!
Sincere thanks to Jack and Eric. Truly appreciated!
*****
FLASH PMIs
Eurozone: Employment falls for first time in almost three years as eurozone downturn continues
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index posted 47.1 in November to signal a sixth consecutive monthly reduction in business activity across the euro area’s private sector. Although solid, the rate of contraction eased from that seen in October, when the headline index had been at a near three-year low of 46.5.
Manufacturing production was down for the eighth month running, and at a rapid pace, albeit one that was the least marked since May. Meanwhile, services activity decreased for the fourth successive month, but at a modest and softer pace.
The overall reduction in business activity was again mainly a symptom of falling new orders. As has been the case in each month since June, companies in the eurozone reported a decline in new business. The latest reduction was marked, but the softest in four months amid weaker falls in both manufacturing and services. New export orders, including intra-euro area trade, continued to decrease rapidly.
With new orders down, companies again depleted their outstanding business midway through the final quarter. Backlogs of work decreased for the eighth month running, and at a marked pace that was only slightly weaker than that recorded in the previous survey period.
The fall in employment was the first in just under three years, but only marginal. The overall reduction was driven by manufacturing where jobs were cut to the largest extent since August 2020. In contrast, service providers continued to expand their staffing levels. That said, the rate of job creation in services was slight and the slowest in three months.
As well as scaling back employment, manufacturers also cut their purchasing activity rapidly and lowered inventories of both purchases and finished goods. The current sequence of falling input buying has now been extended to 17 months. (…)
Eurozone companies recorded a further increase in input costs, often as a result of higher wages in the service sector. The overall rise was the fastest since May and broadly in line with the average since the series began in 1998. (…) While services input prices continued to increase rapidly, a further sharp decrease in input costs was seen in manufacturing, with the pace of reduction marginally quicker than that seen in October.
These divergent trends were also evident with regards to selling prices, which increased in services but fell in manufacturing. Factory output prices were down for the seventh straight month as firms passed on cost savings to customers amid sharply falling demand, while services charge inflation intensified to a three-month high. Overall, output prices increased solidly in November, with the rate of inflation ticking up from October.
The Eurozone economy is stuck in the mud. Over the last four to five months, the manufacturing and services sectors have both been experiencing a relatively constant contraction pace. Considering the flash PMI numbers for November in our nowcast model indicates the potential for a second consecutive quarter of shrinking GDP. This would align with the commonly accepted criterion for a technical recession.
Across much of Europe, we continue to expect slow growth and/or another stalls-peed recession in the coming quarters.
(…) Overall, we expect some economic normalization between the U.S. and Europe in 2024. Simply stated, the U.S., with its huge fiscal impulse (which is why its ratings are falling) is probably over-earning at the same time that Europe is under-earning.
Indeed, the U.S. fiscal impulse has driven what appears to be an unsustainable gap in consumption between it and Europe in recent quarters. We expect this gap to narrow next year.
However, it is not just that the U.S. faces tougher year-on-year growth comparisons. Rather, we now think that Europe will begin to spend more of its excess savings, as falling inflation supports real disposable income and monetary policy potentially becomes less restrictive (see below on rates). In addition, job growth remains solid, and vacancy rates (the number of job vacancies over current employment) are at three percent in the Eurozone (vs. a long-term average of 1.7%), hovering just off highs since the data began to be tracked in 2004.
That said, there are some more structural forces at work that are denting longer-term business pyschology in Europe. In addition to higher rates and higher fuel costs in a country like Germany (which over indexed to natural gas versus nuclear under former Chancellor Merkel), Europe’s industrial sector is also feeling the structural slowdown that China is experiencing, as Chinese nominal GDP growth dips by two-thirds to seven percent, from 21% just a few years ago.
Unfortunately, this overhang will not likely reverse course overnight. Meanwhile, NIMBY (not in my back yard) attitudes and regulations are slowing the pace of development in key European real estate markets and infrastructure development projects.
Finally, unlike in 2011 (when I joined KKR, and most governments were strong majorities that could get legislation through with minimal resistance), politicians today in Europe are hamstrung by coalitions that are deeply divided on key issues such as immigration, Russia/Ukraine, taxes, and labor representation.
Importantly, Germany is not alone. Several of the traditional steady growers across the region, including the U.K. and Netherlands, will need to overcome a sluggish global economy and continued high energy and other input costs amid high inflation. At the same time, the Nordic region is still feeling the adverse effect of over-stimulating its housing market.
By comparison, we see countries such as Spain and Greece, which were much maligned during the 2011 austerity campaign in Europe, actually performing better this cycle (helped by Europe’s Recovery and Resilience Facility).
Central Bank Policy
While the Bank of England will likely not tighten further, it may also not be able to cut rates too quickly, either. The exit of 55+ year-old workers from the labor force post-COVID, less dynamic immigration, and higher input costs have led to a meaningful negative supply shock with inflationary implications.
So, consistent with this, Huw Pill, the Bank of England’s Chief Economist, has said that UK policy rates may follow a Table Mountain path (a reference to the long flat mountain overlooking Cape Town, South Africa) pointing to a higher for longer approach, as opposed to a Matterhorn-type interest rate cycle (quick acceleration up followed by rapid rate cuts on the way down).
Meanwhile (and on a more positive note), it does feel like the ECB could turn more dovish faster than in the United States or in the United Kingdom. President Lagarde has noted that one of her key indicators that track what she calls persistent inflation is improving, and in fact has already fallen back to 2.1%.
True, this measure of inflation excludes volatile components like food and energy, but this suggests we are potentially returning to a point where the ECB needs to weigh the weakening core inflation measures as much as the volatile headline measures. As such, we would not be surprised to see the ECB easing as soon as the second quarter of 2024. (…)
The European macro and market environment remains highly complex, harking back to the ‘Adult Swim Only’ days of 2016. Simply stated, now is not the time to make a macro bet on a sharp recovery in Europe; it is unlikely to come through, despite what we believe will be a more dovish ECB in 2024.
Japan: Private sector activity stalls in November
The headline au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index™ (PMI)® fell from 48.7 in October to 48.1 in November to the strongest deterioration in Japanese manufacturing business conditions since February.
Both output and new orders were scaled back further in the latest survey period, with the rate of reduction in incoming business accelerating slightly on the month.
In line with the trend for new orders, pressure on capacity continued to ease as signalled by the strongest decrease in backlogs for eight months. In turn, Japanese manufacturers reduced staffing levels for the second successive month.
The au Jibun Bank Flash Japan Services Business Activity Index was little-changed at 51.7 in November, following a final reading of 51.6 in October. This signalled a sustained yet modest expansion in business activity in Japan’s service sector, which was the second-weakest recorded in 2023 to date.
The pace of expansion in incoming business picked up slightly midway through the fourth quarter, and was also modest overall. Moreover, November data indicated renewed pressure on capacity, as outstanding business rose at the steepest rate in five months.
Firms also signalled the strongest degree of positive sentiment regarding the year-ahead outlook for activity since August. Meanwhile, the pace of input cost inflation eased to the softest since the start of 2022.
The U.S. flash PMI is out later today.
Canada’s Real-Estate Market Stumbles as Rate Hikes Bite Stall in new-build condominium market is likely to have far-reaching implications for Canada’s economy
Several major real-estate developers are defaulting on loans, buyers are having trouble closing on units, and dozens of condominium projects are being shelved. The effects could linger for years, turning housing, once the engine that drove the Canadian economy, into a brake that stalls growth, say developers, real-estate brokers and economists.
“It’s bad,” said Daniel Foch, a Toronto-based real-estate broker and analyst. “The people who are losing are losing really, really big.” (…)
According to Urbanation, a Toronto-based real-estate-research firm, sales of new-build condominiums, which had been going up and being sold at a breakneck pace around the city in recent years, hit a nearly 20-year low during the third quarter of the year. Forty projects that were expected to launch this year remain stalled as developers wait for conditions to improve, said Shaun Hildebrand, Urbanation’s chief executive. In healthier markets, it is rare to see any developments pause, he said. (…)
In Vancouver, another Canadian market where housing prices had skyrocketed, more properties are being listed, while sales have fallen. Sales were 30% below their 10-year average, “which tells us that demand is not as strong as we might expect this time of year,” said the Real Estate Board of Greater Vancouver. Benchmark prices in October fell 1.2% in Vancouver compared with the prior three months, but rose 4.4% from a year ago, according to the real-estate board.
The Toronto Regional Real Estate Board reported in October that third-quarter condominium listings jumped 29% from a year ago, while sales rose only 6.2%. Average prices fell 0.5%.
Canada relies heavily on its real-estate sector to power the economy. Housing investment in Canada as a share of gross domestic product reached 8.9% in 2022, according to the Organization for Economic Cooperation and Development, much higher than the 4.8% on average for the 38 member countries in the OECD. (…)
Mark Morris, a real-estate lawyer who oversees title transfers between buyers and sellers, said an increasing number of people are trying to unload new-build condo units they agreed to buy years ago but are only now closing. The value of the condo projects has fallen, putting buyers “underwater,” meaning the value of their mortgage is less than what they agreed to pay for the unit and they can’t make up the difference. In some cases, buyers are simply defaulting on their deals. (…)
According to the Canadian Real Estate Association, home prices have risen more than 7% since January, although they are down almost 20% from their peak in February 2022. (…)
Canada’s housing agency estimated in a report this month that homeowners will need to renew a total of 675 billion Canadian dollars, or the equivalent of about $490 billion, of mortgage loans in 2024 and 2025. Those renewals will cause monthly mortgage payments to rise between 30% to 40%, equal to about 15 billion Canadian dollars a year diverted from consumption and savings toward debt repayment. (…)
- Canada: Home sales plummet in October as affordability remains an issue (NBF)
On a seasonally adjusted basis, home sales dropped 5.6% from September to October, a fourth monthly contraction in a row and the sharpest slowdown in sales since June 2022. On the supply side, new listings decreased 2.3% in October, a first decline in seven months.
Active listing increased by 4.6%, a fourth monthly gain in a row. As a result the number of months of inventory (active-listings to sales) increased from 3.7 in September to 4.1 in October and is now roughly back in line with its pre-pandemic level.
China Weighs Unprecedented Builder Support With First-Ever Unsecured Loans Officials are making most forceful push yet to end debt crisis
As part of a package of new measures to backstop the real estate industry, regulators are considering allowing banks to issue so-called working capital loans to some developers, the people said, asking not to be identified discussing a private matter. Unlike other types of loans available to builders that typically require land or assets as collateral, the new financing facility would be unsecured and available for day-to-day operational purposes, potentially freeing up capital for debt repayment, the people said. (…)
Implementation would require regulators to exempt bankers from being held accountable for possible bad loans given the high risks involved, the people said, adding that deliberations are ongoing and subject to change.
If the support measures are approved, they would represent China’s most forceful attempt yet to plug an estimated $446 billion shortfall in funding needed to stabilize the industry and deliver millions of uncompleted homes. President Xi Jinping is also stepping up support for the broader economy, with moves this week indicating increased urgency to stop a downward spiral in the property sector from derailing growth and endangering financial stability. (…)
China’s $57 trillion banking industry has already been battling with shrinking margins and record pile of souring loans as authorities have steadily increased pressure on lenders to shore up the economy and the property sector. Net interest margins at commercial banks dropped to a record 1.73% at the end of September, below the industry’s 1.8% threshold seen as necessary to maintain a reasonable amount of profitability. (…)
At a meeting with top financial regulators last Friday, China’s biggest lenders, brokerages and distressed asset managers were told to meet all “reasonable” funding needs from property firms.
EARNINGS WATCH
Pre-announcements are just about in line with Q3 but are much worse than during Q4’22 at the same time.
In the past 2 weeks, 14 of the 20 new pre-announcements were negative and 5 were positive, a 2.8 N/P ratio. Last week, all 7 were negative.
Q4 estimates are now +5.4% vs +11.0% on Oct.1.
Q1’24 are +8.0% vs +9.6%.
Trailing EPS are now $218.73. Full year 2023e: $220.48. Forward 12m EPS: $235.82e. Full year 2024: $245.00e.
American Dream Slips Out of Reach for Most Voters A WSJ/NORC survey offers the latest evidence that Americans are feeling economically fragile and uncertain that the ladder to higher living standards remains sturdy.
Only 36% of voters in a new Wall Street Journal/NORC survey said the American dream still holds true, substantially fewer than the 53% who said so in 2012 and 48% in 2016 in similar surveys of adults by another pollster. When a Wall Street Journal poll last year asked whether people who work hard were likely to get ahead in this country, some 68% said yes—nearly twice the share as in the new poll. (…)
Half of voters in the new poll said that life in America is worse than it was 50 years ago, compared with 30% who said it had gotten better. Asked if they believed that the economic and political system are “stacked against people like me,” half agreed with the statement, while 39% disagreed.
The American dream seemed most remote to young adults and women in the survey. Some 46% of men but only 28% of women said the ideal of advancement for hard work still holds true, as did 48% of voters age 65 or older but only about 28% of those under age 50.
People in both political parties reported a sense of precariousness and disaffection. (…)
The new survey adds to signs of pessimism found in other recent polls. An NBC News survey released this month found that 19% felt confident that life for their children’s generation would be better than for the current one—a record low in the group’s surveys dating to 1990. (…)
Some 35% of voters said they rated the economy as excellent or good, an improvement from the 20% who said so in March and 17% in May of last year. The share rating the economy as “not so good” or poor fell to 65%, compared with 80% or more in the prior two surveys. (…)