Consumer confidence hovering above an eight month low in May. The University of Michigan final figure for May rose to 88.3 from 87.1 in April. In January it reached a recent high of 96.9.
Record gasoline prices and a softening housing market are weighing on the gains from record high nominal stock market valuations. The tight labor markets are keeping consumers confident about their incomes, and willing to continue spending as the current conditions index rose to 105.1, the highest level since February. But, the economic outlook slipped slightly as inflation expectations rose. Over the next year, consumers expect prices to rise +3.3%. Over the next five years, they expect prices to rise +3.1% annually, unchanged from April's expectation.
Friday, June 1, 2007
Manufacturing Recovering
Manufacturing continues to show signs life as inventories have been depleted. The May Manufacturing ISM report showed a continued pick-up in activity as the index rose to 55 from 54.7 in April, and the highest level since April 2006. Any reading over 50 indicates growth.
The Institute for Supply Management's survey of manufacturing conditions shows slight increases for production, new orders, and new export orders. Prices paid have eased back to 71, from the recent high of 73 last month, as energy and commodity prices remain elevated. Employment softened slightly to 51.9 from 53.1. All categories are now back above 50 except for inventory figures. Net, this is a positive report for future growth.
The Institute for Supply Management's survey of manufacturing conditions shows slight increases for production, new orders, and new export orders. Prices paid have eased back to 71, from the recent high of 73 last month, as energy and commodity prices remain elevated. Employment softened slightly to 51.9 from 53.1. All categories are now back above 50 except for inventory figures. Net, this is a positive report for future growth.
Pending Home Sales Fall to Lowest Level Since Feb 2003 as Housing Slump Continues
Pending sales of existing homes fell -3.2% MoM (consensus +.3%) to a four year low in April. Pending home sales are based on signed purchase agreements for existing homes. Weakness was focused on the coasts, with sales falling -10.4% in the Northeast and -10.2% in the West, seasonally adjusted. Sales rose +2.3% in the Midwest and +.7% in the South. No home price data is given with this report.
Core PCE Inflation Falls Back to 2%, Spending Rising Faster Than Incomes as Benefit of Bonuses Fades
Personal income growth slipped to -.1% MoM in April as bonus and stock option gains from the first quarter fade. This follows a revised higher gain of +.8% (previous +.7%) MoM for March. Over the past year, personal income has risen +5.9% YoY, with actual compensation rising +5.2% YoY. When adjusted for taxes, disposable income also fell -.1% MoM in April, but has risen +5.6% YoY. When disposable income is also adjusted for inflation, incomes fell -.4% MoM.
April personal spending rose +.5% MoM (consensus +.4%), an acceleration from the revised higher +.4% increase of March. Spending on services accounted for the majority of the increase. Since spending rose faster than incomes, people were dipping into savings to fund their purchases, and pushing the savings rate back into record negative territory of -1.3% from an improvement to -.7% in March. When adjusted for inflation, spending rose +.2% MoM in April after holding unchanged the prior month. Over the last year, personal spending has increased by +5.8% YoY. Spending is starting out the second quarter stronger than most economists expected, which should help GDP.
Core inflation grew more slowly than expected in April, rising +.1% MoM and declining to +2% YoY from +2.1% the prior month. Core PCE, which excludes volatile food and energy costs, is the Fed's preferred inflation measure. This month's 2% YoY level is the lowest it has been in over a year, and puts it at the top end of what is believed to be the Fed's comfort zone for core inflation. The PCE deflator fell to +2.2% YoY in April, down from an original estimate of +2.4% YoY for March. Unfortunately, headline inflation is likely to remain elevated as food, energy, and imported goods prices continue rising.
April personal spending rose +.5% MoM (consensus +.4%), an acceleration from the revised higher +.4% increase of March. Spending on services accounted for the majority of the increase. Since spending rose faster than incomes, people were dipping into savings to fund their purchases, and pushing the savings rate back into record negative territory of -1.3% from an improvement to -.7% in March. When adjusted for inflation, spending rose +.2% MoM in April after holding unchanged the prior month. Over the last year, personal spending has increased by +5.8% YoY. Spending is starting out the second quarter stronger than most economists expected, which should help GDP.
Core inflation grew more slowly than expected in April, rising +.1% MoM and declining to +2% YoY from +2.1% the prior month. Core PCE, which excludes volatile food and energy costs, is the Fed's preferred inflation measure. This month's 2% YoY level is the lowest it has been in over a year, and puts it at the top end of what is believed to be the Fed's comfort zone for core inflation. The PCE deflator fell to +2.2% YoY in April, down from an original estimate of +2.4% YoY for March. Unfortunately, headline inflation is likely to remain elevated as food, energy, and imported goods prices continue rising.
Strong Employment Report - jobs, wages, and hours all higher
The economy added 157k (consensus 132k) new jobs in May, while revising the April gain down to 80k from 88k. The unemployment rate held steady at 4.5%, and near the five year low of 4.4%. Average hourly earnings rose +.3% MoM, and increased from +3.7% to +3.8% YoY. In addition, the average work week rose a tenth to 33.9 hours, pushing up average weekly earnings by +.6% MoM and +4.1% YoY. Growth in the three month annualized aggregate hours index rose to +2.3%, the fastest increase in the last six months. Today's report indicates that there is still good demand for labor, but continued softness in the manufacturing sector, where hours declined.
Service industries continue to be the core source of growth in hiring, as +176k new jobs were added in services in May. Education and health added +54k in new jobs, followed by leisure and hospitality at +46k, and business services at +32k. Temporary help and retail both saw declines of less than 10k.
Manufacturing shed -19k jobs for the second month in a row, and also saw workweek and overtime hours each shed a tenth falling to 41 and 4.1 hours. Construction employment was unchanged, in line with the negligible growth in construction spending. Government payrolls expanded by 22k, about the same as the prior month.
The participation rate held constant at 66%, and the average duration of unemployment has fallen back to 16.7 weeks for 17.3 weeks in March.
Note - Recent revisions on labor data for last year have significantly reduced the initially reported labor market gains for the second half of 2006. New data, based on tax information, indicates that job growth in the third quarter of 2006 only increased by 19k, far short of the 498k job gain originally reported based on the monthly payroll survey, which is a much smaller sample. Of course this revision is at odds with the large increase in income taxes paid last year, and leaves many economists confused about which data to be watching on employment and the health of the labor market.
Service industries continue to be the core source of growth in hiring, as +176k new jobs were added in services in May. Education and health added +54k in new jobs, followed by leisure and hospitality at +46k, and business services at +32k. Temporary help and retail both saw declines of less than 10k.
Manufacturing shed -19k jobs for the second month in a row, and also saw workweek and overtime hours each shed a tenth falling to 41 and 4.1 hours. Construction employment was unchanged, in line with the negligible growth in construction spending. Government payrolls expanded by 22k, about the same as the prior month.
The participation rate held constant at 66%, and the average duration of unemployment has fallen back to 16.7 weeks for 17.3 weeks in March.
Note - Recent revisions on labor data for last year have significantly reduced the initially reported labor market gains for the second half of 2006. New data, based on tax information, indicates that job growth in the third quarter of 2006 only increased by 19k, far short of the 498k job gain originally reported based on the monthly payroll survey, which is a much smaller sample. Of course this revision is at odds with the large increase in income taxes paid last year, and leaves many economists confused about which data to be watching on employment and the health of the labor market.
Thursday, May 31, 2007
OFHEO Data Shows House Prices Continue to Appreciate
The OFHEO house price index of repeat transactions shows continued gains in house prices. For the first quarter, it shows a national gain of +.5% QoQ (consensus +.3%), and revised higher the fourth quarter gain to +1.3% from, +1.1% QoQ. Over the last year, prices are up +4.3% YoY nationally. The increase is slightly lower, at +3% YoY, when only purchase only data is used, which is considered a better indication of real price gains than refinancings, which are subject to property assessors opinions.
Regionally there were some states that saw declines, but they were all less than 1%. Only two states have seen YoY declines - Massachusetts and Michigan at -.6% YoY each. In the quarterly data, areas of weakness include FL, WV, ME, CA, NV, MA, and MI. Regionally, the strongest quarterly price increases were in the Mountain and West South Central regions, each up +1.1% YoY. The weakest quarterly price gains were in New England, where they were unchanged QoQ. Looking at annual price gains, The mountain region is up +7.5% YoY, followed by East and West South Central at +6.6 and +6.8% YoY. Again New England was the laggard, gaining only +1.1% YoY. The Middle Atlantic has gained +4.2% YoY, and +.5% QoQ, based on the OFHEO data.
Interestingly, today's data show cash-out refis rising to a new high of 48.5% of all mortgages, up from 30-40% in 2003-04. At current house price levels, it is estimated that California it now requires about 70% of income for marginal buyer to cover their mortgage, this is up from 45% of income in 2003.
Over the last 30 years, the historical average of repeat home sales growth has been +6.2% annually. This compares to an average CPI gain over the same period of +4.4% YoY.
Many economists view the OFHEO data as some of the highest quality available because it involves repeat transactions and adjusts for a changing mix of existing homes sold across the entire country, and not just major metropolitan regions, such as Case-Shiller. The OFHEO index focuses on conforming mortgages, not jumbos.
Regionally there were some states that saw declines, but they were all less than 1%. Only two states have seen YoY declines - Massachusetts and Michigan at -.6% YoY each. In the quarterly data, areas of weakness include FL, WV, ME, CA, NV, MA, and MI. Regionally, the strongest quarterly price increases were in the Mountain and West South Central regions, each up +1.1% YoY. The weakest quarterly price gains were in New England, where they were unchanged QoQ. Looking at annual price gains, The mountain region is up +7.5% YoY, followed by East and West South Central at +6.6 and +6.8% YoY. Again New England was the laggard, gaining only +1.1% YoY. The Middle Atlantic has gained +4.2% YoY, and +.5% QoQ, based on the OFHEO data.
Interestingly, today's data show cash-out refis rising to a new high of 48.5% of all mortgages, up from 30-40% in 2003-04. At current house price levels, it is estimated that California it now requires about 70% of income for marginal buyer to cover their mortgage, this is up from 45% of income in 2003.
Over the last 30 years, the historical average of repeat home sales growth has been +6.2% annually. This compares to an average CPI gain over the same period of +4.4% YoY.
Many economists view the OFHEO data as some of the highest quality available because it involves repeat transactions and adjusts for a changing mix of existing homes sold across the entire country, and not just major metropolitan regions, such as Case-Shiller. The OFHEO index focuses on conforming mortgages, not jumbos.
Surprising Strength in Chicago PMI, Improvement in Construction Spending
The May Chicago Purchasing Managers' Index leapt higher this morning to 61.7 (consensus 54), nine points above the 52.9 level of the prior month, and an indication that the manufacturing sector is expanding again. Manufacturing currently accounts for about 12% of the total economy in the U.S. The weaker dollar should help fuel demand for U.S. exports.
Production rose to 69.8, the highest level in over two years, and new orders rose 15 points to 71.1. Order backlogs and inventories also rose, each moving back above 50, indicating growth. Demand for employees also rose by 7 points to 57 in May.
Higher energy and general commodity prices elevated prices paid to 70.2.
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Construction spending was slightly positive for the last two months on improved demand for non-residential properties such as hotels and factories. Total demand grew +.1% in April, and was revised higher to +.6% in March from +.2% originally reported. Residential spending fell -.9% while non-residential rose +1% MoM.
Private spending fell -.1% MoM in April while public spending rose +.7%, mainly in residential developments. This trend plays out in the annual data as well, with private investment falling -5.2% YoY and public demand rising +9.4% YoY. Over the past year, total construction spending has fallen 2% YoY, with residential declining by -14.1% YoY and non-residential rising by +12.7% YoY.
Homebuilding remains in a slump, falling to the lowest level in three years. Private residential construction spending fell 1% in April, for the second month in a row. Weak home construction has subtracted from GDP for the past six quarters.
Production rose to 69.8, the highest level in over two years, and new orders rose 15 points to 71.1. Order backlogs and inventories also rose, each moving back above 50, indicating growth. Demand for employees also rose by 7 points to 57 in May.
Higher energy and general commodity prices elevated prices paid to 70.2.
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Construction spending was slightly positive for the last two months on improved demand for non-residential properties such as hotels and factories. Total demand grew +.1% in April, and was revised higher to +.6% in March from +.2% originally reported. Residential spending fell -.9% while non-residential rose +1% MoM.
Private spending fell -.1% MoM in April while public spending rose +.7%, mainly in residential developments. This trend plays out in the annual data as well, with private investment falling -5.2% YoY and public demand rising +9.4% YoY. Over the past year, total construction spending has fallen 2% YoY, with residential declining by -14.1% YoY and non-residential rising by +12.7% YoY.
Homebuilding remains in a slump, falling to the lowest level in three years. Private residential construction spending fell 1% in April, for the second month in a row. Weak home construction has subtracted from GDP for the past six quarters.
1st Quarter GDP Revised Substantially Lower, But 2nd Quarter Estimates See Strong Rebound
GDP expanded only +.6% annualized in the first quarter, the slowest pace since 2002. This was below expectations of +.8%, and less than half of the original advance estimate of +1.3% annualized. A widening trade deficit, inventory reductions, and a softer housing market all hurt growth in the first quarter. Recent reports are showing some rebounds in manufacturing and inventories, which are likely to help second quarter growth rebound to 2-3% annualized.
Personal consumption was revised higher to +4.4% annualized from +3.8% originally reported. As this represents about 70% of GDP, this improvement was the largest positive contributor for the change in GDP in the first quarter. Domestic demand grew more strongly than expected at +2.5% annualized, probably helped by declining gasoline prices during the quarter. Final sales were unrevised at +1.6%. Consumption is anticipated to slow notably in the second quarter as real wage gains slow and gasoline prices rise.
Other data included in today's revised GDP report includes a first look at corporate profits, which appear to be continuing to grow, but at a much slower pace of +1.2% QoQ. Year-over-year profit growth has fallen to +6.3%. Profit growth likely peaked in the third quarter of 2006 at 30.6% YoY. Income growth was revised higher in the fourth quarter, which was expected based on the strong tax income tax payment growth for 2006.
Digging into the fourth quarter preliminary data, we see that residential investment fell -15.4% annualized (previously estimated at -17%), but still a significant drag to growth. In contrast, non-residential investment grew a stronger +2.9% annualized (+2% previously), with the majority of the increase coming from structures at +5.1% annualized. Durable goods orders grew +8.8% annualized, non-durable goods rose +3.5% annualized, and services expanded +4% annualized - all three were revised higher from their advance estimates.
Exports fell -.6% annualized while imports rose +5.7% annualized in the first quarter. This was a notable reversal from the fourth quarter when exports grew +10.6% annualized and imports fell -2.6% annualized. National defense spending fell -7.3% annualized in the first quarter, after rising +12.3% annualized in the fourth quarter. Overall government expenditure growth held steady around +1% annualized.
Inventories saw a substantial revision, going from an increase of $14.8 billion in the advance estimate to a decline of -$4.5 billion in the newer preliminary estimate.
Price measures remained unchanged from the advance report, with the GDP price index holding steady at 4%, and core PCE at +2.2% QoQ.
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Initial claims were as expected at 310k (consensus 311k), with the four week average at 305k. Most economists are indicating the risk for tomorrow's payroll number is to see a higher than expected print. Many are looking for over 200k versus the consensus of +135k.
Personal consumption was revised higher to +4.4% annualized from +3.8% originally reported. As this represents about 70% of GDP, this improvement was the largest positive contributor for the change in GDP in the first quarter. Domestic demand grew more strongly than expected at +2.5% annualized, probably helped by declining gasoline prices during the quarter. Final sales were unrevised at +1.6%. Consumption is anticipated to slow notably in the second quarter as real wage gains slow and gasoline prices rise.
Other data included in today's revised GDP report includes a first look at corporate profits, which appear to be continuing to grow, but at a much slower pace of +1.2% QoQ. Year-over-year profit growth has fallen to +6.3%. Profit growth likely peaked in the third quarter of 2006 at 30.6% YoY. Income growth was revised higher in the fourth quarter, which was expected based on the strong tax income tax payment growth for 2006.
Digging into the fourth quarter preliminary data, we see that residential investment fell -15.4% annualized (previously estimated at -17%), but still a significant drag to growth. In contrast, non-residential investment grew a stronger +2.9% annualized (+2% previously), with the majority of the increase coming from structures at +5.1% annualized. Durable goods orders grew +8.8% annualized, non-durable goods rose +3.5% annualized, and services expanded +4% annualized - all three were revised higher from their advance estimates.
Exports fell -.6% annualized while imports rose +5.7% annualized in the first quarter. This was a notable reversal from the fourth quarter when exports grew +10.6% annualized and imports fell -2.6% annualized. National defense spending fell -7.3% annualized in the first quarter, after rising +12.3% annualized in the fourth quarter. Overall government expenditure growth held steady around +1% annualized.
Inventories saw a substantial revision, going from an increase of $14.8 billion in the advance estimate to a decline of -$4.5 billion in the newer preliminary estimate.
Price measures remained unchanged from the advance report, with the GDP price index holding steady at 4%, and core PCE at +2.2% QoQ.
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Initial claims were as expected at 310k (consensus 311k), with the four week average at 305k. Most economists are indicating the risk for tomorrow's payroll number is to see a higher than expected print. Many are looking for over 200k versus the consensus of +135k.
Tuesday, May 29, 2007
Today's Tidbits
S&P Case Shiller Index Shows House Price Declines in First Quarter
From MarketWatch: “U.S. home prices dropped 1.4% in the first quarter compared with a year earlier, the first year-over-year decline in national home prices since 1991, according to the S&P/Case-Shiller index released Tuesday. A year ago, home prices were rising at an 11.5% pace. Prices have been falling for the past three quarters.
The Case-Shiller indexes cover three geographical areas. The national index is released quarterly, while the 10-city and 20-city indexes are released each month. The 10-city Case-Shiller price index fell 1.9% year-on-year through March, while the 20-city index dropped 1.4%. The 10-city index has fallen nine months in a row, while the 20-city index has fallen for eight straight months.”
From JP Morgan: “The moderation in home prices continues to be particularly dramatic among expensive cities along the coasts and in the southwest—regions that saw rapid price appreciation during the boom and, in many cases, are experiencing price
declines at this time. The Case-Shiller house price indexes, like the OFHEO, track price changes for constant-quality homes and also control for regional shifts in the mix of homes sold. However, unlike the OFHEO, the Case-Shiller indexes include non-conforming mortgages—mortgages over $417,000 in 2006 and 2007—thereby
capturing the upper-end of the housing market and coastal markets where the median home price is high. This difference, in part, explains greater appreciation in the national Case-Shiller index during the boom but also more rapid deceleration subsequently. In addition, subprime activity is underrepresented in the OFHEO, but likely not in the Case-Shiller national sample.”
From HSBC: “Unsurprisingly, a drop in Q1 national house prices according to the Case-Shiller index, falling 2.9% annualized in Q1 (and -1.4% Y/Y), or about -7% annualized in real terms. This suggests that the OFHEO index will soon be showing declines too, although it could still take a couple of quarters to show through. There are still pockets of strength, including areas such as Portland (7% yy), Charlotte (7.4% yy) and Seattle (10%), while anecdotal evidence suggests the Manhattan condo market also remains strong, partly thanks to a cheap dollar attracting foreign buyers. Overall, though, there is little doubt that national prices in aggregate are exerting a negative wealth effect on consumption, offset to a lesser or greater extent by the rally in stock prices. Areas of weakness include Washington DC (-4.8% yy), Phoenix (-3% yy), Tampa (-3% yy), Detroit (-8.4% yy) and San Diego (-6% yy). Real national house prices are likely to keep falling for the next few years as valuations remain too rich in about half of the housing market…”
From LEHC: “In the first quarter, 11 of the 20 metro areas experienced annualized home price declines in excess of 5%... It’s also worth noting that the recent home price indexes reflect transactions from January through March, and as such would only have been slightly impacted by the subprime mortgage market debacle, and the recent tightening in mortgage credit by most lenders – and not just in the “subprime” market. This tightening has depressed the “effective” demand for housing, while at the same time inventories of unsold homes have soared. These developments strongly suggest that home prices will be under even more downward pressure over the next several quarters, and there is virtually no doubt that home prices will show a record yearly decline in 2007. Our own forecast – which we have not revised, as the recent data came in “as expected” – calls for a decline in the S&P/Case-Shiller national home price index of 7% from Q4/06 to Q4/07.”
From Lehman: “The 10-city composite is heavily weighted by “bubble” regions and is therefore more volatile than the other aggregates. As such, it showed bigger price increases during the boom and is likely to continue to show bigger price declines during the correction. On a regional level, home prices in 13 out of the 20 cities fell on a y-o-y basis, with Detroit and San Diego witnessing the biggest declines of 8.4% and 6.0% respectively …We continue to look for OFHEO home prices, which are to be released on Thursday, to increase 0.5% q-o-q or 4% y-o-y in Q1. OFHEO uses the same weighted repeat sales methodology as Case-Shiller but has a broader sample with a loan conforming limit, making the series less volatile and more likely to report higher prices during the downturn.”
From Goldman Sachs: “This more timely data indicates that house prices do not appear to have bottomed with, if anything, the pace of the decline increasing slightly. We remain comfortable with our forecast of house prices falling by 5% over 2007.”
Government Statistics Subject to Revisions and Assumptions/ Use With Caution
From Gartman: “…we shall go on record noting that when we have our own ‘guess-timate’ prepared for our clients we shall strongly urge them not to pay anything other than academic interest in those figures, or in the figures of others, and certainly we shall not recommend predicating any trading decisions upon them, for these figures have proven worthless over time given the enormity of the revisions made to them from one month to the next…and of their revisions made a year later!”
From LEHC: “…“demographic” data available in terms of household formations, headship rates, and homeownership rates are of highly dubious quality. There are numerous and often conflicting data available from Census on household growth over time, and researchers have had a devil of a time dealing with such conflicting data.
Another reason is that projections of population by “age cohort” are heavily dependent on assumptions about immigration, and it’s pretty clear that any such assumptions in the current environment are at best just “guesses”.”
MISC
From Dow Jones: “Treasury prices continued to trade modestly lower…The dollar staged a modest recovery against its European rivals…Stocks struggled [to close slightly higher]…”
From AP: “Oil prices plunged by more than $2 a barrel Tuesday on hopes that the inauguration of a new president in OPEC member Nigeria would contribute to a stable supply from the Niger Delta region. A formal meeting over the weekend between U.S. and Iran officials also soothed traders' concerns about a potential conflict between the two… gasoline futures fell 6.46 cents to $2.3391 a gallon after several refineries restarted on Tuesday.”
From Gartman: “2006 was the first time ever that exports of oil from Africa to the US surpassed shipments of oil from the Middle East. The trend continues this year for thus far, Nigeria, Angola, and Algeria account for just over 25% of the US’ oil imports, while Saudi Arabia, Iraq and Kuwait account for only 23%!”
From Lehman: “After China and the United States, few countries will have a greater effect on future oil demand than India. We expect Indian demand to grow 140k b/d (5.2%) in 2007, representing 8% of global demand growth of 1.7m b/d.”
From Bloomberg: “Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high… The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931… The S&P 500 has climbed 6.9 percent this year, extending four years of gains that pushed it up 95 percent.”
From Bank of America: “Open-end mutual funds focused on US equities continue to suffer net outflows, though the pace of selling has slowed to nearly zero in the latest week. Investors continue to prefer funds investing in international stocks, which collected an additional +$1.5B in the latest week, bringing the average weekly take over the past month to +$1.9B/week. This pace is a good deal slower than the +$4B/week rate of inflows that prevailed before the global market swoon in February, but it is still a lot better than the -$500 million/week net redemptions that domestic funds are seeing.”
From RBSGC: “Cheapest OAS numbers in a year are attracting new investors to MBS, including crossover corporate bond buyers worried about credit risk. Agency debenture curve OAS at 18 bp is close to the wide of 20 bp seen last July and could prompt the GSEs to buy MBS in size versus issuing debt. They could also buy swaptions to hedge.”
From Dow Jones: “The riskiest portion of the benchmark credit derivative index based on subprime mortgages came under pressure Tuesday after closely-watched loan data showed borrowers continuing to buckle under the weight of their home loans in May.”
From AP: “China’s former top drug regulator was sentenced to death Tuesday for taking bribes to approve untested medicines, as the country’s main quality control agency announced its first recall system targeting unsafe food products. The developments are among the most dramatic steps Beijing has publicly taken to address domestic and international alarm over shoddy and unsafe Chinese goods — from pet-food ingredients and toothpaste mixed with industrial chemicals to tainted antibiotics.”
From MarketNews: “Chinese companies appear to be reining in their expectations for future growth and business conditions as rising input costs and government measures to slow the economy take hold, suggest the results of the May Xinhua Finance/MNI China Business Sentiment Survey.”
From Lehman: “Chinese investors still have 95% of financial assets in cash…”
From The Washington Post: “China has embarked on a nuclear-plant construction binge…Under plans already announced, China intends to spend $50 billion to build 32 nuclear plants by 2020…China’s plans have already been felt in world markets. Chinese Premier Wen Jiabao has been traveling the work to secure contracts for the uranium needed to power nuclear reactors…Higher worldwide demand and fear of future shortages have driven the price of processed uranium ore from $10 a pound in 2003 to $120 this month.”
From The Financial Times: “A disease killing millions of pigs in China… Pork prices have risen as much as 30 per cent in Chinese cities over the last week. According to the agriculture ministry, wholesale prices for pigs have gone up even more, rising 71.3 per cent since April. China's 500m-odd pigs are the country's most important source of affordable meat, and any sustained interruption in supply would be a big political problem for the government… The government has a "strategic pork reserve", established in the late 1990s, including both frozen stocks and access to pig farms, which could provide a buffer.”
From Merrill Lynch: “…producer prices for farm products have not risen this rapidly since 1974.”
From Dow Jones: “Brazil’s leading beef processor and exporter has purchased Swift Foods Co., the third largest U.S. processor of beef and port, for $1.4 billion.”
From Bloomberg: “A tax-cut war is spreading across Europe as leaders of the continent’s biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead…The EU’s average corporate tax rate at the end of 2006 was a record-low 26 percent and is falling even more.”
From The Financial Times: “Recruiting at business schools reached its peak in 1999, but after the technology boom subsided, recruiting and hiring was lacklustre for several years. It has recently started to pick up, and this spring, it is "the healthiest in years"… While big banks and consultancies conduct most recruiting at business schools, boutique investment management groups and real estate companies have recently become a strong presence. In addition, … consumer packaged goods companies such as Pepsi, as well as information technology companies such as Google and Microsoft, had also ratcheted up management recruiting…an MBA recruiter for Goldman Sachs, described this year's recruiting season as "extremely competitive" with "more students getting multiple offers".”
From Dow Jones: “Texas-area manufacturing activity continued to grow at a solid clip in May… Manufacturing activity in the Midwestern U.S. expanded in April, registering its third straight monthly increase in the heavy industrialized region, the Federal Reserve Bank of Chicago reported.”
From MarketWatch: “U.S. home prices dropped 1.4% in the first quarter compared with a year earlier, the first year-over-year decline in national home prices since 1991, according to the S&P/Case-Shiller index released Tuesday. A year ago, home prices were rising at an 11.5% pace. Prices have been falling for the past three quarters.
The Case-Shiller indexes cover three geographical areas. The national index is released quarterly, while the 10-city and 20-city indexes are released each month. The 10-city Case-Shiller price index fell 1.9% year-on-year through March, while the 20-city index dropped 1.4%. The 10-city index has fallen nine months in a row, while the 20-city index has fallen for eight straight months.”
From JP Morgan: “The moderation in home prices continues to be particularly dramatic among expensive cities along the coasts and in the southwest—regions that saw rapid price appreciation during the boom and, in many cases, are experiencing price
declines at this time. The Case-Shiller house price indexes, like the OFHEO, track price changes for constant-quality homes and also control for regional shifts in the mix of homes sold. However, unlike the OFHEO, the Case-Shiller indexes include non-conforming mortgages—mortgages over $417,000 in 2006 and 2007—thereby
capturing the upper-end of the housing market and coastal markets where the median home price is high. This difference, in part, explains greater appreciation in the national Case-Shiller index during the boom but also more rapid deceleration subsequently. In addition, subprime activity is underrepresented in the OFHEO, but likely not in the Case-Shiller national sample.”
From HSBC: “Unsurprisingly, a drop in Q1 national house prices according to the Case-Shiller index, falling 2.9% annualized in Q1 (and -1.4% Y/Y), or about -7% annualized in real terms. This suggests that the OFHEO index will soon be showing declines too, although it could still take a couple of quarters to show through. There are still pockets of strength, including areas such as Portland (7% yy), Charlotte (7.4% yy) and Seattle (10%), while anecdotal evidence suggests the Manhattan condo market also remains strong, partly thanks to a cheap dollar attracting foreign buyers. Overall, though, there is little doubt that national prices in aggregate are exerting a negative wealth effect on consumption, offset to a lesser or greater extent by the rally in stock prices. Areas of weakness include Washington DC (-4.8% yy), Phoenix (-3% yy), Tampa (-3% yy), Detroit (-8.4% yy) and San Diego (-6% yy). Real national house prices are likely to keep falling for the next few years as valuations remain too rich in about half of the housing market…”
From LEHC: “In the first quarter, 11 of the 20 metro areas experienced annualized home price declines in excess of 5%... It’s also worth noting that the recent home price indexes reflect transactions from January through March, and as such would only have been slightly impacted by the subprime mortgage market debacle, and the recent tightening in mortgage credit by most lenders – and not just in the “subprime” market. This tightening has depressed the “effective” demand for housing, while at the same time inventories of unsold homes have soared. These developments strongly suggest that home prices will be under even more downward pressure over the next several quarters, and there is virtually no doubt that home prices will show a record yearly decline in 2007. Our own forecast – which we have not revised, as the recent data came in “as expected” – calls for a decline in the S&P/Case-Shiller national home price index of 7% from Q4/06 to Q4/07.”
From Lehman: “The 10-city composite is heavily weighted by “bubble” regions and is therefore more volatile than the other aggregates. As such, it showed bigger price increases during the boom and is likely to continue to show bigger price declines during the correction. On a regional level, home prices in 13 out of the 20 cities fell on a y-o-y basis, with Detroit and San Diego witnessing the biggest declines of 8.4% and 6.0% respectively …We continue to look for OFHEO home prices, which are to be released on Thursday, to increase 0.5% q-o-q or 4% y-o-y in Q1. OFHEO uses the same weighted repeat sales methodology as Case-Shiller but has a broader sample with a loan conforming limit, making the series less volatile and more likely to report higher prices during the downturn.”
From Goldman Sachs: “This more timely data indicates that house prices do not appear to have bottomed with, if anything, the pace of the decline increasing slightly. We remain comfortable with our forecast of house prices falling by 5% over 2007.”
Government Statistics Subject to Revisions and Assumptions/ Use With Caution
From Gartman: “…we shall go on record noting that when we have our own ‘guess-timate’ prepared for our clients we shall strongly urge them not to pay anything other than academic interest in those figures, or in the figures of others, and certainly we shall not recommend predicating any trading decisions upon them, for these figures have proven worthless over time given the enormity of the revisions made to them from one month to the next…and of their revisions made a year later!”
From LEHC: “…“demographic” data available in terms of household formations, headship rates, and homeownership rates are of highly dubious quality. There are numerous and often conflicting data available from Census on household growth over time, and researchers have had a devil of a time dealing with such conflicting data.
Another reason is that projections of population by “age cohort” are heavily dependent on assumptions about immigration, and it’s pretty clear that any such assumptions in the current environment are at best just “guesses”.”
MISC
From Dow Jones: “Treasury prices continued to trade modestly lower…The dollar staged a modest recovery against its European rivals…Stocks struggled [to close slightly higher]…”
From AP: “Oil prices plunged by more than $2 a barrel Tuesday on hopes that the inauguration of a new president in OPEC member Nigeria would contribute to a stable supply from the Niger Delta region. A formal meeting over the weekend between U.S. and Iran officials also soothed traders' concerns about a potential conflict between the two… gasoline futures fell 6.46 cents to $2.3391 a gallon after several refineries restarted on Tuesday.”
From Gartman: “2006 was the first time ever that exports of oil from Africa to the US surpassed shipments of oil from the Middle East. The trend continues this year for thus far, Nigeria, Angola, and Algeria account for just over 25% of the US’ oil imports, while Saudi Arabia, Iraq and Kuwait account for only 23%!”
From Lehman: “After China and the United States, few countries will have a greater effect on future oil demand than India. We expect Indian demand to grow 140k b/d (5.2%) in 2007, representing 8% of global demand growth of 1.7m b/d.”
From Bloomberg: “Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high… The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931… The S&P 500 has climbed 6.9 percent this year, extending four years of gains that pushed it up 95 percent.”
From Bank of America: “Open-end mutual funds focused on US equities continue to suffer net outflows, though the pace of selling has slowed to nearly zero in the latest week. Investors continue to prefer funds investing in international stocks, which collected an additional +$1.5B in the latest week, bringing the average weekly take over the past month to +$1.9B/week. This pace is a good deal slower than the +$4B/week rate of inflows that prevailed before the global market swoon in February, but it is still a lot better than the -$500 million/week net redemptions that domestic funds are seeing.”
From RBSGC: “Cheapest OAS numbers in a year are attracting new investors to MBS, including crossover corporate bond buyers worried about credit risk. Agency debenture curve OAS at 18 bp is close to the wide of 20 bp seen last July and could prompt the GSEs to buy MBS in size versus issuing debt. They could also buy swaptions to hedge.”
From Dow Jones: “The riskiest portion of the benchmark credit derivative index based on subprime mortgages came under pressure Tuesday after closely-watched loan data showed borrowers continuing to buckle under the weight of their home loans in May.”
From AP: “China’s former top drug regulator was sentenced to death Tuesday for taking bribes to approve untested medicines, as the country’s main quality control agency announced its first recall system targeting unsafe food products. The developments are among the most dramatic steps Beijing has publicly taken to address domestic and international alarm over shoddy and unsafe Chinese goods — from pet-food ingredients and toothpaste mixed with industrial chemicals to tainted antibiotics.”
From MarketNews: “Chinese companies appear to be reining in their expectations for future growth and business conditions as rising input costs and government measures to slow the economy take hold, suggest the results of the May Xinhua Finance/MNI China Business Sentiment Survey.”
From Lehman: “Chinese investors still have 95% of financial assets in cash…”
From The Washington Post: “China has embarked on a nuclear-plant construction binge…Under plans already announced, China intends to spend $50 billion to build 32 nuclear plants by 2020…China’s plans have already been felt in world markets. Chinese Premier Wen Jiabao has been traveling the work to secure contracts for the uranium needed to power nuclear reactors…Higher worldwide demand and fear of future shortages have driven the price of processed uranium ore from $10 a pound in 2003 to $120 this month.”
From The Financial Times: “A disease killing millions of pigs in China… Pork prices have risen as much as 30 per cent in Chinese cities over the last week. According to the agriculture ministry, wholesale prices for pigs have gone up even more, rising 71.3 per cent since April. China's 500m-odd pigs are the country's most important source of affordable meat, and any sustained interruption in supply would be a big political problem for the government… The government has a "strategic pork reserve", established in the late 1990s, including both frozen stocks and access to pig farms, which could provide a buffer.”
From Merrill Lynch: “…producer prices for farm products have not risen this rapidly since 1974.”
From Dow Jones: “Brazil’s leading beef processor and exporter has purchased Swift Foods Co., the third largest U.S. processor of beef and port, for $1.4 billion.”
From Bloomberg: “A tax-cut war is spreading across Europe as leaders of the continent’s biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead…The EU’s average corporate tax rate at the end of 2006 was a record-low 26 percent and is falling even more.”
From The Financial Times: “Recruiting at business schools reached its peak in 1999, but after the technology boom subsided, recruiting and hiring was lacklustre for several years. It has recently started to pick up, and this spring, it is "the healthiest in years"… While big banks and consultancies conduct most recruiting at business schools, boutique investment management groups and real estate companies have recently become a strong presence. In addition, … consumer packaged goods companies such as Pepsi, as well as information technology companies such as Google and Microsoft, had also ratcheted up management recruiting…an MBA recruiter for Goldman Sachs, described this year's recruiting season as "extremely competitive" with "more students getting multiple offers".”
From Dow Jones: “Texas-area manufacturing activity continued to grow at a solid clip in May… Manufacturing activity in the Midwestern U.S. expanded in April, registering its third straight monthly increase in the heavy industrialized region, the Federal Reserve Bank of Chicago reported.”
May Consumer Confidence Stronger than Expected, But Inflation Expectations Rising
Consumer confidence increased to 108 in May (consensus 105). Over the past six months the level has ranged between 111.2 and the revised higher 106.3 for April (from 104). The Conference Board surveys 5,000 households monthly for this survey.
Expectations for both present and future conditions rose in May. Stock price gains were an obvious positive for present situation section of the index, but the expectations, though improved, remain near recent lows.
Consumers reported a decline in jobs hard to get. The proportion of participants looking for incomes to rise, or drop, over the next six months each declined.
Business conditions are anticipated to improve over the next six months, and present business conditions rose to the highest level since 2001.
Historically gas price changes have had less impact on this consumer confidence survey than on other surveys, but the higher prices are a concern for inflation. The one year inflation expectations rose +.4% to 5.5%, just shy of the 5.6% peak of last summer, and up sharply from 4.6% in February.
Home buying intentions dropped again, falling to 2.9% of participants looking to buy in the next six months.
The improvement in confidence is tied more to an improved perception of the current conditions, while the outlook remains cautiously optimistic, and the gap between the two continues to widen. The view of the labor market was neutral to slightly improved, and is unlikely to support rising consumption, as real income growth stagnates. The net is an expectation of slow growth, with concerns persisting about inflation and higher gasoline prices.
Expectations for both present and future conditions rose in May. Stock price gains were an obvious positive for present situation section of the index, but the expectations, though improved, remain near recent lows.
Consumers reported a decline in jobs hard to get. The proportion of participants looking for incomes to rise, or drop, over the next six months each declined.
Business conditions are anticipated to improve over the next six months, and present business conditions rose to the highest level since 2001.
Historically gas price changes have had less impact on this consumer confidence survey than on other surveys, but the higher prices are a concern for inflation. The one year inflation expectations rose +.4% to 5.5%, just shy of the 5.6% peak of last summer, and up sharply from 4.6% in February.
Home buying intentions dropped again, falling to 2.9% of participants looking to buy in the next six months.
The improvement in confidence is tied more to an improved perception of the current conditions, while the outlook remains cautiously optimistic, and the gap between the two continues to widen. The view of the labor market was neutral to slightly improved, and is unlikely to support rising consumption, as real income growth stagnates. The net is an expectation of slow growth, with concerns persisting about inflation and higher gasoline prices.
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