Existing Home Sales Fell for the 11th Month in a Row, Longest Streak Since 2011
Economic news and commentary for January 23, 2023
No major indicator releases today
Still to come…
10:00 am (EST) - Eurozone Consumer Confidence Flash
Morning Reading List
Other Data Releases Today
The euro area deficit was -3.3% of GDP in Q3 2022, up from -2.0% of GDP in Q2 2022. Total revenue fell by -0.3 ppts to 47.2% of GDP, and total expenditure grew 1.0 ppts to 50.5% of GDP.
Total government debt in the euro area fell from 94.2% of GDP in Q2 2022 to 93.0% of GDP in Q3 2022. The highest debt ratios were seen in Greece (178.2%), Italy (147.3%), Portugal (120.1%), Spain (115.6%), and France (113.4%).
US Existing Home Sales
Existing Home Sales End 2022 on Sour Note (TD Bank) - Existing home sales ended 2022 on a sour note, falling to 4.02 million in December – the weakest level since late 2010. As interest rates rose sharply per the Fed's aggressive hiking cycle, activity trended lower through much of the year, with sales falling 38% between January and December. This is steeper than the 28% decline experienced during the onset of the pandemic. The details of the report carried additional signs of weakness, including ongoing moderate price declines and the fact that properties are spending some more time on the market.
Home Sales: No Rush to Sell, No Rush to Buy (BMO) - U.S. existing home sales fell for the 11th consecutive month (the longest stretch since the series began in 1999), though the 1.5% drop in December to 12-year lows of 4.02 mln units annualized was modest compared to 1) expectations; and, 2) the last couple of months. Sales fell everywhere except for the West (flat out there), and for both singles (-1.1%) and condos (-4.5%).
Existing Home Sales Slip in December (Wells Fargo) - The median single-family home price fell 1.6% in December to $372,700 on a not-seasonally adjusted basis. December marks the sixth straight month of falling home prices, declines that are partly influenced by seasonal factors but also driven by sellers adjusting prices lower to better align with lower buyer demand.
Existing Home Sales End 2022 with Weakest Year Since 2014 (NAHB) - As elevated mortgage rates and tight inventory continue to weaken housing demand, the volume of existing home sales declined for an eleventh consecutive month as of December, according to the NAR. This is the longest run of declines since 1999. While mortgage rates have retreated in recent weeks due to recession concerns, they are likely to see another up cycle in early 2023 as the Fed ends its rate tightening cycle. Additionally, home price appreciation slowed for the sixth month after reaching a record high existing home average of $413,800 in June.
Canada Retail Sales
A Nominal Sigh of Relief (BMO) - Retail sales came in better than expected in November, with the headline decrease helped by higher prices as volumes posted a larger drop. Still, a positive flash estimate for December suggests sales recovered in both nominal and real terms to close out the year, as Canadian consumers continue to prove resilient in the face of aggressive rate hikes.
Retail Sales Edged Lower in November but Poised to Increase in December (TD Bank) - Outside of spending more on gas and new cars, consumers took a breather from shopping in November, perhaps waiting for discounts and building up some financial cushion ahead of a spending-heavy December. Indeed, Statistics Canada flash estimate suggests that retail sales have rebounded in December.
Canadian retail (Nov, Dec adv): Taking the good with the bad (CIBC) - Retail sales in volume terms aren't rising, but they are not falling either, suggesting that accumulated savings during the pandemic may be protecting consumption to a certain extent from the impact of higher interest rates. However, with savings no longer as bloated as they once were, particularly in inflation-adjusted terms, and with rates having been raised further, household consumption could still see some modest declines in the first half of 2023.
US
The Pain Is Spreading (Wells Fargo) - The housing sector has borne the brunt of the Fed's efforts to slow the economy, and this week's data showed the industry continues to reel. But pain is now clearly spreading beyond housing with grim reports on retail sales and manufacturing activity this week.
The U.S. economic outlook and monetary policy (Lorie Logan, Dallas Fed) - “The FOMC is committed to delivering a healthier economy, with maximum employment and stable prices. To achieve this, I expect we will need to continue increasing the fed funds rate. In my view, we shouldn’t lock in on a peak interest rate or precise path. Instead, I believe it’s appropriate to gradually raise rates, carefully assess financial conditions and the outlook, and remain flexible to adjust as needed, so we can robustly manage the risks we face.”
Economic Outlook (Patrick Harker, Philadelphia Fed) - “GDP growth will be modest, but I’m not forecasting a recession. The labor markets are simply too hot to indicate a significant downturn at this point. I expect real GDP growth of about 1 percent this year before climbing back up to trend growth of about 2 percent in 2024 and 2025.”
Debt Ceiling Drama (Northern Trust) - The American government reached its borrowing limit this week. That initiated a series of maneuvers that are known as “extraordinary measures.” The major components are suspensions of reinvestment in certain government funds, which would be restored when new debt can finally be issued. Fortunately for the Treasury, we are also heading into the interval where monthly tax receipts exceed expenditures, which reduces the need to borrow.
Bank of Canada
Testing the meaning of data dependence: Stronger vs. strong (CIBC) - Since the Bank of Canada’s last meeting, when interest rates were hiked by 50bps, but policymakers stated that they would only be “considering” further increases, attention has turned towards what is truly meant by being “data dependent”. Next week we will get the answer.
Trade
Confronting Fragmentation Where It Matters Most: Trade, Debt, and Climate Action (IMF) - Fragmentation could make it even more difficult to help many vulnerable emerging and developing economies that have been hard hit by multiple shocks.
From Inflation Reduction To Trade Friction (Northern Trust) - Taken to an extreme, the EU alleges these restrictions may work against the U.S.’ goal of reducing China’s production and export power. The EU suggests that if it becomes more difficult to trade with the U.S, it will do more business with China, already the world’s largest EV market. To counter what they see as unfair industrial practices, European nations are considering support for their own domestic production.
Employment
Why Is Employment Still So Strong? (BMO) - Trying to catch up with elevated demand while facing worker shortages and illnesses, U.S. and Canadian businesses continue to hire in large numbers, raising hopes the recession will be averted or at least be mild. A less sanguine view, however, is that the buoyant labour market might only postpone the downturn, adding stickiness to wage and price growth and more rate hikes to an already aggressive tightening cycle—a situation that would likely not end well.
Energy
Natural Gas Boom: Reaching an End? (BMO) - While downside risks are mounting, thanks in no small part to Europe’s efforts at adaptation in the energy crisis, we think it’s too early to conclude that the natural gas boom is over. We are forecasting Henry Hub to eventually recover from current levels and average $5.00 in 2023 and $4.50 in 2024.
Manufacturing
January flash PMI to shed light on conditions at start of year (S&P Global) - Flash PMI surveys will first and foremost be scoured for indicators of recession risks, notably in the US and Europe. While the latter saw business activity decline at a steepening rate in December, the UK and Eurozone both saw signs of activity stabilising.
Debt
High-Yield and Bank Loan Outlook: Q1 2023 (Guggenheim) - Potentially heading into a downturn this year, we believe borrowers have healthier balance sheets than they did going into the pandemic. As the economic data deteriorate further, however, we expect a decline in corporate earnings, more negative rating migration, and an increase in default activity.
Research
Why European banks adjust their dividend payouts? (ECB) - Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations shown in the paper suggest that, in the absence of supervisory recommendations, banks would likely have reduced the payouts only slightly in the first year of the pandemic.
Labor Force Exiters around Recessions: Who Are They? (St Louis Fed) - This article identifies workers who experienced a job separation during the Great Recession or the pandemic recession and tracks their labor force status in the following year, using the Current Population Survey. Workers are classified as exiters if they leave the labor force shortly after their job loss and non-exiters if they do not.
Supply Chain Disruptions, Trade Costs, and Labor Markets (San Francisco Fed) - Global supply chain disruptions due to the COVID-19 pandemic have increased the costs of trade between countries. Given the interconnectedness of the U.S. economy with the rest of the world, higher trade costs can have important impacts on U.S. labor markets. A model of the U.S. economy that incorporates variation in industry concentrations across regions can help quantify these effects. The analysis suggests that recent global supply disruptions could cause a sizable and persistent reduction in labor force participation.
Tax, transfer programs explain why Western Europeans work less than Americans (Dallas Fed) - Western Europeans work less than Americans, studies have shown. But upon closer inspection, does the result still hold if some of the time spent at home is viewed as household labor rather than purely leisure activity? In such a scenario, households produce home goods that are largely substitutes for market goods.
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