Housing Starts Fall, PPI Inflation Moderates Further
Economic news and commentary for February 16, 2023
US Housing Starts & PPI
Housing starts fell -4.5% MoM and -21.4% YoY in January. Higher interest rates continue to have a restrictive effect on homebuilder activity. The number of starts in January 2023, at 1.31 million, is the lowest since the pandemic, 1.27 million in June 2020. Starts fell across both categories with single-family starts down -4.3% MoM and multi-unit starts down -5.4% MoM. In total, single-family starts are down a dismal -27.3% YoY from a year ago. There wasn’t much movement in earlier parts of the pipeline either. Building permits issued grew only 0.1% MoM, and units authorized but not started were up just 0.7% MoM. These readings accurately describe the sluggishness in the housing market at the moment. There was some improvement in the completion of existing projects as it was reported that the number of housing units completed increased 1.0% MoM and 12.8% YoY in January.
Homebuilder confidence is starting out the year at a low point in 2023 according to housing starts data, but there are other signs that this could reverse in the coming months. Notably, the NAHB’s Housing Market Index improved for the second month in a row as a slight pick up in demand was detected. Additionally, mortgage rates appear to have reached their peak, hovering around the 6% level. In terms of home prices, lower starts will be supportive of the mid- and long-term trends of higher prices even if short-term price growth struggles. There has not been a considerable increase in inventories despite the downturn in demand which is troubling from an affordability perspective.
US PPI grew 0.7% MoM to 6.0% YoY in January, down from 6.5% YoY in December. After two months of decline, producer prices of energy goods reversed course (up 5.0% MoM), pushing monthly headline PPI inflation higher. On an annual basis, there has been a slight deceleration thanks to another decrease in food PPI (down -1.0% MoM). However, in general, goods inflation has slowed considerably over the past year. In January 2022, the annual increase of processed and unprocessed goods PPI was 24.8% YoY and 36.4% YoY respectively. In January 2023, it was 3.8% YoY and 2.3% YoY. In fact, manufacturers of core goods have seen their prices fall for seven consecutive months as supply chain pressures ease up and demand for goods recedes in response to higher interest rates. Commodity price trends have also been favorable to firms’ input prices, and it was no different in January, unprocessed goods PPI fell -5.0% MoM. Inflation in services producers’ prices services, on the other hand, has remained a bit stickier. The annual increase of intermediate services PPI fell has bounced in the 5.9% to 7.0% YoY range over the past seven months with it settling at the low end of the range to start 2023. On the month, services PPI increased 0.5% MoM, mostly as a result of loan services prices jumping 6.6% MoM. However, there were also monthly increases in the indexes for services related to securities brokerage and dealing (partial), chemicals and allied products wholesaling, legal services, portfolio management, and U.S. postal services also moved higher.
The problem is the services sector, for both PPI and CPI. Recent economic data has pointed to strong demand for services. Retail sales and job market data for January in particular point to a strong consumer that provides businesses with pricing power. There also seems to be a lingering reopening effect that has kept households spending their accumulated excess savings despite a deterioration in the economic outlook. Because of all of this, the decline in producer prices will be gradual which will put upward pressure on consumer prices. The Fed will remain hawkish.
Still to come…
10:30 am (EST) - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
Morning Reading List
Other Data Releases Today
Japanese machinery orders grew 6.5% MoM in December though private sector orders fell -1.2% MoM. Manufacturing orders grew 2.1% MoM, and non-manufacturing orders fell -2.5% MoM. The forecast for Q1 2023 is for orders to grow 3.2% QoQ.
Japan's trade deficit deepened from -¥1.5 trillion in Dec to -¥3.5 trillion in Jan. Exports fell a sharp -25.4% MoM, and imports fell -1.8% MoM. The decline in exports was strongest in chemicals, manufactured goods, and machinery
Australia's unemployment rate grew 0.2 ppts to 3.7% in January, and the number of unemployed increased 4.4% MoM. The participation rate fell -0.1 ppts to 66.5%. This is the highest unemployment rate since May 2022.
Italy's trade balance fell to €1.1 billion with exports down -1.9% MoM and imports down -1.1% MoM. Exports to the EU fell -1.2% MoM, and exports to non-EU nations fell -2.6% MoM. Energy imports were up 120.3% YoY in 2022.
German export surplus in 2022 at lowest level since 2000.
Jobless claims fell -1,000 to 194,000 last week. The insured unemployment rate was unchanged at 1.2%. Continued claims grew 16k to 1.70 million.
The Philadelphia Fed Manufacturing Survey Business Activity Index fell from -8.9 in January to -24.3 in February. The New Orders index fell -2.7 pts to -13.6, and the Shipments index fell -2.4 pts to 8.7. The Prices Paid index stepped up 2.0 pts to 26.5.
US Retail Sales
US retail sales surge on stark weather contrast (ING) - US retail sales jumped 3% month-on-month in January as warm weather encouraged people to go out and spend after harsh conditions depressed activity in December. Household incomes remain under pressure and with weather patterns normalising a correction is likely in February.
Retail Sales bounce back in January, beating the estimate (TD Bank) - Like the weather, consumers' mood warmed up for shopping in January. The biggest gains were picked up by auto dealers, where demand for cars was at least partially met by improving supply, as production continues to recover. But other categories prints were also very strong, with the three-months trend in real sales turning positive, gaining 2.8% on the month.
US Retail sales: Fireworks to start the New Year (CIBC) - The new year brought fireworks for US retailers, as sales surged by 3.0%, more than making up for a weak end to the holiday shopping season. That was well above the 2.0% expected by the consensus, and the strength was widespread across categories, as the control group of sales, which feeds more directly into non-auto goods consumption in GDP, posted an impressive 1.7% rise.
Back to the Malls (BMO) - A rebound in U.S. retail sales was expected....but not this much. The headline 3.0% jump in January was the biggest monthly increase since March 2021, or since 2001 when excluding pandemic times. The revisions to the prior two months were minimal.
Retail Sales Rose 3.0% in January (First Trust Portfolios) - Retail sales rose 3.0% in January (+2.9% including revisions to prior months), beating the consensus expected increase of 2.0%. Retail sales are up 6.4% versus a year ago. Sales excluding autos increased 2.3% in January, well above the consensus expected 0.9% gain. These sales are up 7.3% in the past year.
Retail sales rebound, but the consumer outlook remains cloudy (EY Parthenon) - After losing significant momentum in the final months of 2022, retail sales rebounded sharply in January with a 3% surge that largely exceeded consensus expectations and was the strongest performance for retailers since March 2021 — when stimulus checks sent shoppers on a spending spree. While the report suggests consumers got their mojo back, seasonal adjustment noise and the milder winter weather in January explain part of the strength.
January Retail Sales Show Consumers Keep Spending (Wells Fargo) - Retail sales bounced back at the start of the year, rising 3% in January after declining in three of the prior four months. The data point to consumer resilience and upside risk to Q1-2023 spending. But, cutting through recent volatility takes some shine off this report.
US Industrial Production
An Early Winter Thaw for Industrial Production (BMO) - The rebound in factory output is likely to raise additional concerns that momentum in the economy may take longer to slow down than the Fed would like.
Industrial Production Was Unchanged in January (First Trust Portfolios) - Manufacturing, which excludes mining/utilities, increased 1.0% in January (+0.4% including revisions to prior months). Auto production rose 0.5%, while non-auto manufacturing increased 1.0%. Auto production is up 4.7% in the past year, while non-auto manufacturing is down 0.1%.
Steady Industrial Production Masks Bounce in Manufacturing (Wells Fargo) - Manufacturing output rose by the most in nearly a year in January, but a record plunge in utilities caused overall industrial production to hold steady. The rebound in manufacturing is positive, but output has rolled over and activity still looks set to face challenges this year.
US Housing Market Index
Cautious Optimism for Builders in February (NAHB) - Two consecutive solid monthly gains for builder confidence, spurred in part by easing mortgage rates, signal that the housing market may be turning a corner even as builders continue to contend with high construction costs and building material supply chain logjams.
Canada Housing
Canadian housing starts pull back in January (TD Bank) - Canadian housing starts came in at 215.4k annualized units in January, marking a steep 13% m/m plunge from December's solid level and coming in well below expectations. Despite the decline, the six-month moving average remained strong at 259.4k units.
Canadian home sales declined in January (TD Bank) - Canadian existing home sales declined 3% month-on-month (m/m) in January, although the level of sales remained near lows last consistently seen in 2002-03.
Canadian Housing: Still More Sellers ... Sella, Sella, Sella (TD Bank) - Hope springs eternal that housing activity may be close to a bottom, but we suspect that the market is still digesting the incredibly aggressive rate hikes of the past year. After all, the Bank of Canada only began raising rates less than a year ago, with the latest volley just three weeks ago. And a persistently robust jobs market raises the risk that the rate-hike cycle is not quite done yet, especially if inflation proves more persistent than expected.
Inflation
High services inflation remains a worry for central banks (Danske Bank) - Inflation drivers continue to paint a mixed picture but inflation is likely to head lower through 2023 in US and the euro area. Price pressures from food and freight rates have clearly eased as has energy and electricity prices in Europe. Labour markets remain tight, but wage pressures have showed tentative signs of easing. Core inflation pressures remained elevated in January both in the euro area and the US, and we expect the ECB and the Fed to react by continuing to hike interest rates in the spring meetings.
January CPI: Still A Long Way from Mission Accomplished (Wells Fargo) - Inflation is not going away quietly. Consumer prices increased 0.5% in January, the biggest monthly move since October. Firmer food inflation and a rebound in energy prices helped boost the headline number. Excluding food and energy, the core CPI increased 0.4% amid a slight pickup in core goods and a solid 0.5% rise in core services prices. Over the past three months, the core CPI rose at a 4.6% annualized pace, an acceleration from the 4.3% run-rate seen over the three-month period ending in December and notably stronger than the 3.1% pace that was originally reported with the December CPI report.
Employment
Immigrants in Construction: Post-Pandemic Trends (NAHB) - According to the most recent 2021 American Community Survey (ACS), the number of immigrant workers in construction, including self-employed, remained close to 2.8 million, on a par with the levels recorded by the ACS before the Covid-19 pandemic wreaked havoc on labor markets. The share of immigrant workers stayed at 24% of the construction workforce, slightly below the 2016 record high share of 24.4% but on a par with the 2019 pre-pandemic reading. The share of immigrants remained higher in construction trades, reaching 30%. The annual flow of new immigrant workers into construction slowed to the lowest levels since 2012 despite ongoing skilled labor shortages exacerbated by a pandemic boost to housing demand.
Productivity
Short-Term Pain for Long-Term Gain (Goldman Sachs) - The relative importance of labor versus capital is greatly influenced by an economy’s secular forces. In the United States, we expect that the Federal Reserve’s focus on bringing down wages along with corporations’ bearish business outlook will continue to weaken wage growth and reduce labor compensation’s contribution to Gross Domestic Product (GDP). Such developments are likely to dampen consumption and hurt growth in the near term. But the redistribution of growth from labor to capital should incentivize firms to boost capital investments, a likely positive factor for risk asset performance over the medium-to-long term.
Trade
Reviewing the Impact of Energy Sanctions on Russia (St Louis Fed) - Over a long period following World War II, Europe became heavily dependent on oil and gas supplies from Russia’s huge reserves. This started during the 1960s, when the Soviet Union supplied its allies in Eastern Europe, and continued in subsequent decades, especially after the downfall of the Soviet Union. The U.S. government unsuccessfully opposed this growing dependence. By 2020, Russia was supplying 24.9% of the fuel needed by the European Union (EU 26), including 38.3% of its natural gas needs, and energy exports constituted 14% of Russia’s gross domestic product in 2021.
Markets
FX Update: Fed terminal rate hits new highs. China recovery story misstep. (Saxo Bank) - The terminal Fed funds rate reached a new cycle high above 5.25% yesterday in the wake of stronger-than-expected CPI data and fresh Fed jawboning, with the USD chopping all over the place before finding new strength overnight, possibly on concerns that the Chinese recovery story has been over-played.
Is There a Bitcoin–Macro Disconnect? (Liberty Street Economics, NY Fed) - Cryptocurrencies’ market capitalization has grown rapidly in recent years. This blog post analyzes the role of macro factors as possible drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on Bitcoin since its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, Bitcoin has not responded significantly to U.S. macro and monetary policy news. This disconnect is puzzling, as unexpected changes in discount rates should, in principle, affect the price of Bitcoin.
Research
FOMC Communication Spillovers: Is There a “Call-Out” Effect? (Kansas City Fed) - The Federal Open Market Committee (FOMC) has a clear domestic mandate: achieving both stable prices and maximum sustainable employment. However, the FOMC’s actions appear to lead to substantial spillover effects for foreign economies. Announcements from the FOMC can spill over to asset prices in foreign markets by altering market participants’ expectations for global growth or the future decisions of their own central banks. To date, research has treated news in U.S. monetary policy announcements as a global shock that produces uniform spillovers. Whether these spillovers sometimes reflect market-specific information has remained an open question.
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