USA
• Housing starts jumped from 1,678K in November to a nine-month high of 1,702K in December, overshooting the 1,650K print expected by analysts. The monthly gain was entirely due to a 10.6% gain in the multi-family segment (to 530K). Starts in the single-family category inched down 2.3% to 1,172K. On a quarterly basis, total starts rose 5.3% in Q4, hinting at a positive contribution to GDP growth from residential construction. For 2021 as a whole, starts totaled 1,598K, marking their best year since 2006
• Building permits, for their part, rose 9.1% to1,873K, closing in on the multi-year high reached back in January (1,883K). Gains were observed in both the single-family category (+2.0% to 1,128K) and the multi-family segment (+21.9% to 749K). After a slowdown in activity in the residential construction sector between June and October, ground breaking bounced back strongly in the tail-end of the year as homebuilders started addressing increasingly large backlogs. There were no less than 1,519K homes under construction in the month (the highest since 1973), while another 270K had been authorized but not yet started (the most in 47 years). Builders are certainly encouraged by resilient demand. However, against this positive backdrop, challenges remain. Supply chain delays, the high cost of building materials, and labour shortages could very well hamper builder capacity to build going forward. High prices may also dampen buyer enthusiasm. In January, a net 59% of respondents to a University of Michigan poll deemed buying conditions for houses bad because prices were too high.
• In this regard, the Case-Shiller 20-City Home Price Index showed that prices rose 18.4% in October. But high prices in themselves need not translate into a collapse in residential construction. What will dictate the extent of the post-pandemic slowdown will be the evolution of interest rates. Although borrowing costs remain extremely low on a historical basis, the downtrend appears to have reversed in the past few weeks
• Existing-home sales retraced 4.6% to 6,180K (seasonally adjusted and annualized), their first retreat in four months. Despite this decline, sales remained 8.4% above their pre-recession peak of 5,700K. Contract closings faded for both single-family dwellings (-4.3%) and condos (-7.0%). Although there were fewer transactions during the month, the inventory-to-sales ratio still fell three ticks to a new all-time low of 1.8, indicating extremely scarce supply. (According to the National Association of Realtors, a ratio <5 indicates a tight market.) Listed properties remained on the market for 19 days on average, a two-day increase from the record low set earlier in the year. In addition to resilient sales, the persistent tightness of the market can be explained also by an extreme shortage of listings. The inventory of properties available for sale totaled just 0.91 million (not seasonally adjusted) in the month. Not only was this down 14.2% from a year earlier, it also represented the lowest December level ever recorded. Lack of supply and low borrowing costs have been the factors that have largely supported prices since the beginning of the COVID-19 crisis. In December, the median price paid for a previously owned home was up 15.8% YoY
• The Empire State Manufacturing Index of general business conditions plunged 32.6 points in January to a 20-month low of -0.7. Excluding the first months of the pandemic, this was the largest monthly decline registered by this indicator since data began to be compiled in 2001. No need to say, this result was also significantly below consensus expectations calling for a 25.0 print. It was also indicative of a marked slowdown in the pace of growth at factories operating in New York State and surrounding areas in the context of a meteoric rise in absenteeism due to surging COVID-19 caseloads. The new orders (from 27.1 to -5.0) and shipments (from 27.1 to 1.0) sub-indices dropped steeply. The number of employees tracker also cooled (from 21.4 to 16.1) but remained comfortably above it s long-term average. Supply chain pressures were still evident in the report although delivery times (from 23.1 to 21.6) lengthen ed at the slowest pace in six months and input price inflation (from 80.2 to 76.7) eased a bit. In an attempt to protect their margins, manufacturers once again raised selling prices (from 44.6 to 37.1), albeit less so than in the prior month. Business optimism for the next six months (from 36.4 to 35.1) softened a bit but remained high on a historical basis. Capex (from 38.0 to 39.7) and technology spending intention (from 31.4 to 31.9) moved further above their long-term averages, with the former even reaching a 16-year high
• The Philly Fed Manufacturing Business Outlook Index painted a much more upbeat picture, as the headline index improved from 15.4 to 23.2. Both the shipments (from 15.3 to 20.8) and the new orders (from 13.7 to 17.9) sub-indices rose. After signaling the strongest pace of hiring in data going back to 1968 (33.9), the number of employees tracker cooled to a still healthy 26.1
• Jobless claims in the United States for the week ended 15 January totaled 286,000, well above the Dow Jones estimate of 225,000 and a substantial gain from the previous week’s 231,000. The number was the highest since the week of 16 October and marks a reversal after claims just a few weeks ago hit their lowest level in more than 50 years
• Fears that the Federal Reserve will need to act aggressively to curb inflation loomed large over sentiment. There is an increasing speculation on Wall Street that the Fed will announce a 50-basis-point (0.50%) increase in the federal funds target rate at its March meeting, instead of the incremental 25-basis-point increases that have characterized Fed action in recent years. According to CME Group data, futures markets are currently pricing in a nearly two-thirds chance of official short-term rates increasing by at least 100 basis points in 2022
• Rising interest rate fears and growth worries pushed the S&P 500 Index to its biggest decline in more than 14 months over the holiday-shortened week. (Markets were closed Monday in observance of the Martin Luther King, Jr., holiday.) The Nasdaq Composite index slumped roughly 7.5%, its biggest weekly drop since the start of the pandemic. Weakness in semiconductor shares weighed on technology stocks, while weakness in automakers and home improvement retailers dragged down the consumer discretionary sector. Declines in financial giants JPMorgan Chase and Goldman Sachs took a toll on financial services shares. A more than 20% decline in Netflix shares following its fourth-quarter earnings report contributed to the indexes’ losses on Friday
• In terms of data release, the FOMC will meet for the first time since its hawkish December meeting in which the Fed accelerated its taper and dropped the reference to transitory inflation in its statement. With uncertainty and volatility already elevated, it is unlikely the Fed will eliminate asset purchases altogether in January as the taper is already on cruise control to finish by March. However, with inflation continuing to surge and uneasiness growing, their stance is likely to remain hawkish. They are expected to prime markets for a policy rate increase as soon as March. There will be no new summary of economic projections published
• The other important reading is the publication of Q4’s GDP by the Bureau of Economic Analysis. COVID-19 caseloads remained relatively low throughout the quarter, something that should have allowed growth to accelerate. Positive contributions are expected from consumption spending, business machinery/equipment investment, residential investment and, to a lesser extent, trade
UK
• UK Inflation (CPIH) for December has come out at 4.8% YoY, up from 4.6% in November, CPI was 0.5% MoM, 5.4% YoY (Consensus 0.3% MoM, 5.2% YoY), Retail prices were up 1.1% MoM 7.5% YoY (consensus 0.7% MoM, 7.1% YoY). These numbers will not come as a surprise to markets who are expecting UK inflation to continue to rise until late spring. The month of April is looking particularly fraught as not only will it contain domestic energy price increases (there are plans by the Government to try and blunt the immediate impact of these) but tax rises as well
• The largest percentage increases to CPIH this month came from food and non-alcoholic beverages, restaurants and hotels, furniture and household goods, and clothing and footwear, although it was of course domestic utility bills and transport (read electricity and gas as well as petrol) which continue to make the largest contribution to the overall inflation rate. The energy regulator reported that the energy price cap had increased by 12% since April 2021 because of “a rise of over 50% in energy costs over the last six months with gas prices hitting a record high as the world emerges from lockdown”. Combined with the April 2021 increases, these latest rises resulted in 12-month inflation rates of 18.8% for electricity and 28.1% for gas in October 2021. These rates were unchanged in November and December, and were the highest annual rates for these classes since early 2009. Altogether, electricity, gas and other fuels contributed 0.59 percentage points to the annual inflation rate. Meanwhile average petrol prices stood at 145.8 pence per litre in December 2021, compared with 114.1 pence per litre a year earlier. Stripping out energy and just looking at core inflation, the rate was 0.5% MoM 4.2% YoY (Consensus 0.2% MoM, 3.9% YoY), although it is notable that even here the rate is well above the Bank of England’s target rate.
EU
• ECB President Christine Lagarde rejected calls for the central bank to raise interest rates more quickly than planned to curb record inflation. She said, on France Inter radio, that the cycle of economic recovery in the U.S. is ahead of that in Europe. Earlier, data showed that surging energy and food costs drove eurozone inflation to a record 5% in December—well above the ECB’s 2% target. Lagarde reiterated that inflation would stabilize and “gradually fall” back below target by the end of the year.
• Deep divisions in the ECB’s rate-setting Governing Council emerged at the December meeting, minutes showed. The majority agreed that “substantial monetary support was still needed” for inflation to stabilize at the central bank’s targeted level in the next three years. However, some members warned that inflation might stay higher for longer and said that they could not support the “overall package” of adjustments to the bank’s asset purchase programs
• Shares in Europe ended lower, as expectations grew that the European Central Bank (ECB) would raise interest rates this year and that the Bank of England (BoE) would also need to tighten its monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index fell 1.40%. Among the major indexes, Germany’s Xetra DAX Index slid 1.76%, Italy’s FTSE MIB Index lost 1.75%, and France’s CAC 40 Index weakened by 1.04%
CHINA
• China’s gross domestic product expanded at better-than-expected 4% in the fourth quarter of 2021, slowing from the third quarter’s 4.9% expansion pace. The data suggest worsening downward pressure, especially in consumption and property trends, though infrastructure investment showed some improvement
• The People’s Bank of China (PBOC) unexpectedly reduced the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85%, the central bank’s first reduction since April 2020. In response, Chinese banks cut their loan prime rates for one- and five-year loans. China’s central bank sets the MLF rate, upon which domestic lenders set their loan prime rates, or the de facto benchmark for new loans.
• Following the rate cut, PBOC Vice Governor Liu Guoqiang said that China will roll out additional policy measures to stabilize the economy and preempt downward pressures. His comments triggered a rally in Chinese government bonds, sending the yield on the 10-year sovereign bond down to 2.736% from last week’s 2.809%
• At the end of the week, the PBOC cut the interest rates on its standing lending facility (SLF) loans—another key monetary policy tool—by 10 basis points for overnight, seven-day, and one-month loans, Reuters reported. The SLF program allows financial institutions to obtain temporary liquidity from the central bank. Additionally, the PBOC is drafting rules to make it easier for cash-strapped property developers to access funds from sales still held in escrow, according to Reuters.
• Regulatory pressure on China’s tech sector continued as ByteDance, the owner of TikTok, said that it was disbanding its group-level strategic investment team. China’s state planning agency, the National Development and Reform Commission, issued a policy document containing opinions targeting monopolies, unfair competition, and user data issues in online platform companies
• Chinese markets posted a weekly gain as the government stepped up monetary easing measures and signaled additional support for the beleaguered property sector. The Shanghai Composite Index edged up 0.1%, and the CSI 300 Index added 1.1%
Sources: T. Rowe Price, National Bank of Canada, MFS Investment Management, Handelsbank Capital Markets, M. Cassar Derjavets