U.S. New Home Sales Drop Back in September
Last month, new single-family home sales declined 10.9% (-17.6% y/y) to 603,000 (AR) from 677,00 in August, revised from 685,000. July sales totaled 543,000. Sales have fallen 40.1% from their peak of 1.007 million in July 2020. The Action Economics Forecast Survey expected sales of 594,000 new homes.
Last month’s decline in new home sales was concentrated in the South where they declined 20.2% (-19.3% y/y) to 356,000. The decline fully reversed the August increase to 446,000. Sales in the West eased 0.7% in September (-30.4% y/y) to 135,000 which came after a 24.8% August rise. Moving 56.0% higher last month (25.8% y/y) were sales in the Northeast to 39,000, the highest level since April. New home sales in the Midwest gained 4.3% (10.6% y/y) in September to 73,000, a six-month high.
The median price of a new home increased 8.0% last month (13.9% y/y) to $470, 600 after weakening 9.2% in August. The average sales price of a new home fell 2.1% (+10.0% y/y) to $517,700 following a 6.6% August decline. These sales price data are not seasonally adjusted.
The number of unsold new homes on the market fell 1.1% (+23.2% y/y) to a seasonally adjusted 462,000, up from a low of 142,000 in July 2012. (…)
Recession eclipses U.S. midterm result (BlackRock)
Equities usually do well after U.S. midterms. Why? Gridlock is common and prevents policy change that could spook stocks. We don’t see that past playbook working this time due to the recession we expect from the Fed ratcheting up rates. Gridlock dims any prospect of fiscal stimulus that only works at cross-purposes with monetary policy in the new regime – take the UK. We stay underweight DM stocks but see the politics of higher rates taking over from the politics of inflation.
We see a bigger problem for stocks than any potential positives from the midterm election outcome: a looming recession. We have argued how central banks rushing to hike policy rates to get inflation back to target would need to crush interest rate-sensitive parts of the economy first. That’s because higher inflation is driven by production constraints. Recession will pressure other sectors in time, but we’ re already seeing damage in important rate-sensitive sectors like housing. (…)
The slide in housing starts this year is already steeper than past mega Fed rate-hike cycles such as in the 1970s and early 1980s – as well as the unwind of the mid- 2000s U.S. housing boom. (…)
We see political focus increasingly shifting to the economy. We expect inflation to come down, but stay above target – and recession will still hit. We then think the politics of inflation could switch to the politics of higher interest rates. We see the politics of rates creeping into the politicization of everything with more voices beginning to decry the aggressive rise in interest rates that is causing recession. We see the Fed stopping its hikes amid the economic damage and pressure to ease up on tightening, but price pressures will persist. That’s why we think it will eventually have to live with some inflation.
Mortgage rates now exceed 7.0%, killing demand:
Mortgage rates are unusually high vs Treasuries. Coincidence? The Fed is no longer a buyer of MBS.
Another Railroad Union Rejects Contract The vote by the Brotherhood of Signalmen complicates the outlook for labor peace after White House had brokered a deal in July.
The latest vote, by the Brotherhood of Railroad Signalmen, sends the two sides back to the negotiating table. Failure to agree on a revised deal could result in a strike as early as December.
The Brotherhood of Railroad Signalmen is the third union whose members have rejected their respective agreements initially reached with the National Carriers’ Conference Committee, which represents the freight railroads in collective bargaining.
Of the 12 labor unions involved in bargaining, six have ratified their agreements.
Two of the largest unions, the Brotherhood of Locomotive Engineers and Trainmen and the Transportation Division of the International Association of Sheet Metal, Air, Rail, and Transportation Workers, are still in the process of ratification and are expected to announce results in mid-November. (…)
Biden Touts Steps to Curb Consumer Fees President says the administration is seeking to rein in billions of dollars in charges across industries including banking, entertainment and travel
- French President Emmanuel Macron says his government will unveil measures to shield more companies from rising electricity prices on Friday (Bloomberg)
Bank of Canada Surprises With Half-Point Interest-Rate Rise to 3.75% Bank of Canada Gov. Tiff Macklem says the bank’s tightening phase is getting closer to ending
(…) “We judged that it was appropriate to slow the pace of increase in our policy rates from very big steps to a big step,” Mr. Macklem said. (…)
(…) Three-quarters of economists surveyed last week by The Wall Street Journal expected the Bank of Canada to deliver a second straight 0.75-percentage-point rate increase, citing elevated inflation.
Instead, Bank of Canada Gov. Tiff Macklem said officials were trying to balance the risks of delivering too many rate increases to contain historically elevated inflation and failing to raise rates enough for fear of triggering a severe recession.
“This tightening phase will draw to a close. We are getting closer, but we are not there yet,” Mr. Macklem said at a press conference, adding that the central bank will need to raise rates further before inflation returns to its preferred target of 2%. He said future rate increases would be tied to how the economy is responding to higher rates. (…)
The Bank of Canada’s quarterly economic report envisages household spending to decline starting in the fourth quarter until mid-2023. It expects businesses to markedly scale back business investment next year, due to higher borrowing costs. (…)
The Bank of Canada forecasts growth to essentially stall beginning in the fourth quarter and predicts the economy won’t pick up strength until the second half of 2023. Officials downgraded growth in 2022 to 3.3% from 3.5% and anticipate a 0.9% expansion next year, versus its previous call for a 1.8% advance. While the central bank isn’t officially forecasting a recession, it said two consecutive quarters of growth slightly below zero “is just as likely as a couple of quarters with small positive growth.” (…)
Peak Fossil-Fuel Demand Possible in a Few Years The energy crisis stemming from Russia’s invasion of Ukraine is seen as hastening a shift to lower-emission sources, according to the International Energy Agency.
The International Energy Agency, a Paris-based group of some of the world’s biggest energy users, said the war and the disruption to energy markets that it has unleashed has set off a realignment of global supply and demand. If governments make good on policy goals they have set in motion recently in response to the crisis, they would speed up the shift from fossil fuels to cleaner renewable energy, the agency said.
Based on such a scenario, the IEA said additional coal demand prompted by the energy crisis would be temporary, while natural-gas demand would plateau by the end of this decade. As a result of the increased use of electric vehicles, the IEA said, oil demand would peak sometime in the middle of the next decade, plateauing until about 2050, and then falling. (…)
While the IEA previously said it expects near-plateauing oil demand starting in the mid-2030s, a report from the agency Thursday marks the first time it has set out a possible timeline for declining or plateauing demand across all fossil fuels. (…)
The IEA’s scenario doesn’t forecast a rapid deterioration in the world’s thirst for oil, gas and coal. Instead, it provides a timeline for a near-term peak in demand. As a share of global energy supplies, fossil fuels have held steady at 80% for decades. The IEA said the shift presaged by the current energy crisis will reduce that to below 75% by 2030 and to 60% by 2050.
OPEC has said that demand for oil should peak in wealthier nations starting in the mid-2020s, but that demand in poorer countries will continue to grow at least until 2045. (…)
The IEA said that Russia’s falling output is a significant factor in the agency’s timeline and that the reduction is likely to be permanent. Europe’s pivot to renewables will make it an unlikely future market for Russian energy. While Russia has sought to redirect its gas-and-oil supplies to Asian economies such as China and India, it faces challenges there too. The EU aims to levy new sanctions on shipping Russian crude worldwide. Meanwhile, a lack of gas pipelines in Russia’s eastern regions will make sending its gas supplies to China difficult, the IEA said. (…)
Natural gas prices are plunging, as warm weather and growing stockpiles have massively alleviated pressure. (Axios)
- European stockpiling of natural gas has pushed storage levels to over 90% of capacity.
- Warm weather on the continent has cut heating needs.
- European officials continue to move toward price caps on the TTF contract.
“Europe has enough gas stored to survive this winter unless it gets very, very cold,” wrote analysts with research firm Rystad Energy in a note yesterday.
Data: FactSet; Chart: Axios Visuals
EARNINGS WATCH
JPM yesterday published a list of EPS changes for the next fiscal year: 21 ups, 33 downs.
Goldman Sachs:
(…) unlike earnings, even the potential for recession could weigh on management decision-making and spending priorities in 2023. We expect continued growth in R&D (+10%), dividends (+5%), and capex (+3%). However, we expect buybacks will decline by 10% year/year. Following the collapse in cash M&A YTD, we expect a slight rebound in 2023 (+3%).
Cash M&A and buybacks are the most volatile uses of cash. During the four recessions since 1990, cash M&A typically fell by 60% and buybacks fell by 46%. Corporates typically pulled back on capex, but to a lesser extent (-16%), while dividends and R&D were the stickiest. We introduce recession scenario forecasts for the five uses of cash. In a 2023 recession scenario, we expect the declines would be largest among buybacks (-40%) and cash M&A (-20%). Capex would likely fall by 15%, dividends would fall by 1%, and R&D would be flat.
Xi Says China Can Work With US Before Possible Biden Meeting 
Chinese President Xi Jinping said his nation is willing to work with the US to find ways to cooperate, comments that come before a potential meeting with President Joe Biden at a Group of 20 summit next month.
Better communication between the two nations would bolster global peace and development, Xi said in a letter to the National Committee on US-China Relations’ annual dinner Wednesday, the official Xinhua News Agency reported.
“China stands ready to work with the United States to find the right way to get along with each other in the new era on the basis of mutual respect, peaceful coexistence and win-win cooperation, which will benefit not only the two countries but also the whole world,” Xi said, according to the report on Thursday.
Xi’s remarks echoed his message last year to the same gala for the group that aims to promote China-US cooperation. That event similarly came before a video summit with the US leader in November. Still, they signal an effort to maintain ties despite disputes over Taiwan, the semiconductor industry and Beijing’s response to Russia’s invasion of Ukraine.
Speaking to Department of Defense leaders on Wednesday, Biden emphasized that even as the US maintains its military advantage over China, “we’re making it clear that we don’t seek conflict.”
“There’ll be stiff competition, but there doesn’t need to be conflict,” he added. (…)
- Missing Data
Chinese economic data always comes with an implicit asterisk. It’s hard to know what to believe from a government that exercises such ruthless control, and which isn’t shy about rewarding those who make it look good and punishing those who reveal too much. One way this happens is by simply not reporting as much data. A recent Financial Times analysis indicates that’s exactly what happened since Xi Jinping’s elevation in 2012.
Let’s hope that Xi still receives these data…