Econ Mornings (12/20/2022)
Economic news and commentary for December 20, 2022
US Housing Starts
US housing starts fell -0.5% MoM and -16.4% YoY in November, continuing the general decline in homebuilding intentions. Single-family home starts reached the lowest point of the year at 828,000 after a -4.1% MoM drop in November. In total, single-family starts are down -32.1% YoY. Multi-unit starts continued to hold up better and saw a nice bump of 4.8% MoM and were up 24.5% YoY. The leading indicator in new building permits pointed to further weakness in homebuilding in the coming months as the November data point saw a large -11.2% MoM decrease to make for a -22.4% YoY plunge. Higher rates have left their mark on the housing in the last quarter, and a hawkish Fed that does not see a pivot in the near future will likely maintain this pressure. Some better news came in further down the construction pipeline. The number of homes completed jumped 10.8% MoM and was at its highest level in 2022. Easing supply chain constraints thanks to cooling economic conditions are helping builders process these existing projects which should help the near-term housing supply levels.
Bank of Japan Announcement
The Bank of Japan made a surprise adjustment to its monetary policy prescriptions today after a long period of them being unchanged following the COVID-19 pandemic. It decided to relax its 10-year bond yield control from +/- 25 bps its target of 0% to +/- 50 bps in order to "improve market functioning" after volatility in overseas financial and capital markets had increased significantly in the last few months. Its other monetary policy guidelines will remain the same, specifically the Bank of Japan will leave both its short-term policy rate and asset purchase program unchanged. It also steered away from dropping hints that either of those guidelines could change, saying that it expects “short- and long-term policy interest rates to remain at their present or lower levels.” The goal continues to be for core CPI to “exceed 2% and stay above the target in a stable manner.” While inflation has started to rise in Japan, core CPI still has some room to grow until it reaches this target.
Germany PPI
German PPI fell -3.9% MoM to 28.2% YoY in November, down from 34.5% YoY in October and 45.8% in September. Easing energy costs continue to grant German firms some relief on the inflation front. The Energy PPI fell -9.6% MoM with natural gas prices down -11.8% MoM and electricity prices down -9.2% MoM. These movements were the reason for almost all of the decline in headline PPI. The PPI (ex-energy) index was only down -0.2% MoM to 12.7% YoY as non-durable (18.5% YoY) and intermediate goods (13.8% YoY) both kept the core measure from declining. Food producer prices continue to remain elevated, up 24.2% YoY, and the related basic chemicals and fertilizer prices also registered a high rate of inflation, up 26.0% YoY. Both of these categories seem to be stickier thanks to the war in Ukraine. The categories at the low end of the spectrum, durables (11.1% YoY) and capital goods (7.8% YoY), still are seeing some pockets of inflation but, in general, are cooling thanks to weaker aggregate demand for expensive goods. Overall, the decline in the German headline PPI rate is good for inflation developments in the whole of Europe. Even if most of the deflation is caused by falling energy prices, this affects almost every firm, so it can be supportive of business sentiment. The next step is for these declines to pass-through to the CPI readings.
Canada Retail Sales
Canada retail sales (value) grew 1.4% MoM and 6.4% YoY in October; however, the volume of retail sales was unchanged. Core retail sales grew 0.9% MoM. Sales were up in 6 out of 11 subsectors, representing 84.4% of retail trade. The increase was led by higher sales at gasoline stations (+6.8%) and food and beverage stores (+2.2%). Sales at motor vehicle and parts dealers were up 0.3% in October. The increase was led by higher sales at new car dealers (+1.0%), which posted their largest gain in four months. An early estimate of November retail sales points to a -0.5% MoM decline as the economic situation in Canada weakens.
Reserve Bank of Australia Meeting Minutes
The Reserve Bank of Australia released its meeting minutes for the December 2022 meeting where it increased the cash rate by 25 basis points. In general, RBA members wished to remain consistent on hiking rates which is why the size of this hike was chosen: “members also noted the importance of acting consistently, and that shifting to either larger increases or pausing at this point with no clear impetus from the incoming data would create uncertainty about the Board’s reaction function.” Alongside this intention, the members noted that there was “considerable uncertainty” about the outlook in Australia and that they wished to bring down inflation without hurting the economy too much. With that being said, their approach to monetary policy remains data dependent. Importantly, the RBA members do not rule out any action in 2023 as they continue to monitor the developments of inflation, employment, and general growth: "members noted that a range of options for the cash rate could be considered again at upcoming meetings in 2023. The Board did not rule out returning to larger increases if the situation warranted."
Still to come…
8:30 am (EST) - Canada Retail Sales
10:00 am - EU Consumer Confidence
Morning Reading List
Bank of Japan
Bank of Japan shocks markets with yield policy change (ING) - The Bank of Japan shocked markets by widening its target band for the 10Y JGB yield, lifting the upper ceiling to 0.5% from 0.25%. In consequence, the JPY jumped and the Nikkei index plunged. The financial market will try to find fair value for the time being.
BoJ tweaks YCC – Global bond market takes a hit (Danske Bank) - Bank of Japan (BoJ) surprised the market this morning by raising the upper band on its yield curve control (YCC) policy from 0.25% to 0.50%. Bond yields in Japan rose on the news with spillover to global bond markets and the Danish callable bond market. USD/JPY dropped to 132 on the move. We expect a policy rate hike to 0% in Q2 followed by a 25bp increase in the yield target to 0.25% and an increase in the fluctuation band from -0.25% to 0.75%.
Central Banks
Global Rates: Hawks Hold Sway... For Now (BMO) - Let’s begin with the good news. Economic growth for 2022 was not as bad as everyone feared. Now the bad news: The weaker figures will show up in late 2022/early 2023. This uncertainty is making central bankers’ jobs that much more difficult as they navigate the waters of high inflation (both headline and core) and tight job markets, all while growth slows. The year is ending with a notable twist as policymakers are all over the map, with some super hawkish and others less so.
2023 Canada Rates Preview: The Year of Living Steadily (Mostly) (BMO) - It’s going to be hard to top the excitement of 2022, with the Bank of Canada delivering 400 bps of rate hikes, the most in any calendar year on record. Following that aggressive policy path, policymakers have made it clear that the bias for rates remains higher, but that any future hikes will be entirely data dependent.
Historic Year for Central Bank Activity and Rate Hikes (LPL Financial) - The Federal Reserve (Fed) wrapped up its last Federal Open Market Committee (FOMC) meeting of the year last week, where it hiked short-term interest rates for the seventh time in as many meetings, taking the fed funds rate to 4.5% (upper bound). A day later, both the European Central Bank (ECB) and the Bank of England (BoE) also hiked interest rates, taking their respective policy rates to the highest levels since 2008. Over 90% of central banks have hiked interest rates this year, making the (mostly) global coordinated effort unprecedented. The good news? We think we’re close to the end of these rate hiking cycles, which could lessen the headwind we’ve seen on global financial markets this year.
Europe
The euro area current account deficit narrowed significantly to -€0.4 bil in October from -€8 bil in September. The goods balance turned from a -€11 bil deficit to a €12 bil surplus, and the services balance grew to a €9 bil surplus from €6 bil. (ECB)
EU gas consumption down by 20.1% (Eurostat) - The EU consumption of natural gas has dropped by 20.1% in the period August-November 2022, compared with the average gas consumption for the same months (August-November) between 2017 and 2021.
European construction industry under pressure (Saxo Bank) - On Thursday the European Central Bank gave a hawkish outlook by warning of more rate hikes as “the Governing Council judges that interest rates will still have to rise significantly at a steady pace”. Market participants were caught by surprise which resulted in a broad decline in across European equity markets. The construction industry was also affected significantly, as increasing yields as well as higher recession risk is a double whammy for the industry.
EU agrees on gas price cap (ING) - The European Union has reached a deal to cap the TTF natural gas benchmark at 180 euros per megawatt hour to try to contain the economic damage in the bloc as Russia curbs energy supplies.
China
Research China: Renewed focus on growth and the private sector (Danske Bank) - The annual Economic Work Conference in December finished on Friday, and it left little doubt that getting the economy back on track and boosting confidence will be the key priority for 2023.
Housing
Reflecting a Weakening Housing Market, Builder Confidence Declined Every Month in 2022 (NAHB) - High mortgage rates, elevated construction costs running well above the inflation rate, and flagging consumer demand due to deteriorating affordability conditions have dragged builder sentiment down every month in 2022.
The Size of the Housing Shortage: 2021 Data (NAHB) - Reflecting the unprecedented housing shortages across the United States in the post-pandemic market, U.S. vacancy rates hit their lowest readings in decades in 2021. According to NAHB’s analysis of the 2021 American Community Survey (ACS), owner vacancy rates dropped below 0.9% and rental vacancy rates reached a new low of 5.2%, the lowest levels recorded by the ACS since the survey started generating these data in 2005.
Debt
Default, Transition, and Recovery: Global Corporate Defaults Push Past 2021’s Year-End Total (S&P Global) - As of Nov. 30, 2022, the global corporate default tally was at 77, which is five defaults above the year-to-date 2021 tally. Defaults are currently 15% above year-to-date 2021 levels, but well below the comparable five-year average.
Debt Market conditions improve towards year-end (S&P Global) - The latest Institute for International Finance portfolio flows data show a sharp acceleration of portfolio inflows to emerging market securities. These reached $37.4 billion in November with equity and debt flows of $23.0 billion and $14.4 billion respectively, the highest net inflow in 2022 and the strongest positive flow since April 2021. As comparison points, they had totaled $9.2 billion and -$2.9 billion in October and September.
Markets
Market Monitor: Convergence, then Divergence (Goldman Sachs) - We anticipate US yields may peak as we near the end of the current Fed hiking cycle. While the 2-Year US Treasury yield has historically tracked the 10-Year yield around the end of prior hiking cycles, the two have diverged in the periods that followed. This pattern may underscore reinvestment risk, particularly on the shorter end of the yield curve. We believe that extending duration may provide more durable cash flows.
2023: Shifting gears from inflation to recession (TIAA Nuveen) - Expect both more and less of the same in 2023. With 2022 approaching its curtain call, it’s a safe bet there’ll be more “boos” than calls for “encore!” from an audience of dispirited investors. The turning of the calendar signals a time to look ahead to where we think the economy and markets may be headed.
Opportunities and risks in Private Debt – Direct Lending (Wells Fargo) - We believe the Private Debt – Direct Lending market may potentially offer several attractive attributes including higher yields, lower volatility, lower default rates, and bespoke structures aiming to provide investor protections.
Outlook
US Weekly Economic Commentary: Spending, production declines (S&P Global) - IP fell in both October and November, with manufacturing IP down sharply in the latter month, reflecting declines in most industry groups. Retail sales fell in November, both overall and in the "core" measure that informs our estimate for personal consumption expenditures (PCE). November's declines followed increases in October and are still consistent with solid growth of PCE in the fourth quarter.
Energy
Crude Oil Outlook: Rollercoaster Ride Still Not Over (BMO) - Barring a deep and protracted global recession, we think the oil market’s wild rollercoaster ride is set to continue in 2023.
Energy Outlook 2023: Oil, gas and power markets to remain tight (ING) - Both oil and European gas prices may be off those highs we saw earlier in the year, and immediate gas supply worries have eased recently. Demand concerns, however, are weighing on sentiment for oil. We do expect both markets to tighten again in 2023 and that, of course, suggests higher prices.
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