| USA New-home sales data for July blew past expectations, rising 10.6% over the month and printing in at 739K versus a median economist forecast calling for just a 623K rise. This rise is further contributed to by a revision in last month’s reading, where June data was lifted to 668K from 617K. This month’s release marks the highest in 15 months. Overall, new-home sales have risen above pre-pandemic levels, owing to the complete paralysis of the resale housing market (discussed below) in the current interest rate environment. With a large rise in sales, came a slight drop in the number of homes for sale (to 462K from 467K). As a result, the ratio of inventory to sales ratio dipped to 7.5 from 8.4. The number of listed new homes under construction has grown 4.0% to 267K, and completed homes had a similar increase (4.2%) to 99K. Recall that, faced with severe labour shortages, homebuilders were unable to meet explosions in housing demand that occurred during the pandemic. As a result, construction backlogs swelled. The current context is allowing homebuilders to make up for lost time. Also, unlisted properties grew, with the median months for new homes to list following completion rose to 4.2, making a case for reasonable expectations for increased supply; as will demand, given the FOMC’s promising outlook on rate cuts to finish the year. Prospective buyers will be monitoring these data closely in the coming months, seeking lower mortgage rates Existing-home sales crept up 1.3% (to 3,950K) in July to break a four-month negative streak. The result was perfectly in line with the median economist forecast. Contract closings rose in the single-family segment by 1.4% (to 3,570K from 3,520K), while the condos and co-ops segment remained flat (380K). To gain a better appreciation of these stats, suffice it to know that sales in March were ~25% below their pre-pandemic level and ~38% below their most recent peak of 6,600K, which was struck in January 2021. Since then, data have been relatively weak and this month’s advance was the first since March, when the slimmest of gains was registered. Median prices dropped slightly in both segments, while the number of days that homes were on the market rose from 22 to 24. Median house prices dropped to 422.6K, down from last months all-time high of 426.9K. The inventory-to-sales ratio slipped one tick to 4.0. While this ratio has settled back around its pre-pandemic level, it remains well below its historical average and at a level suggestive of tight supply (<5 indicates a tight market for the National Association of Realtors). This explains the sharp decline in listings, as homeowners were understandably reluctant to put their properties up for sale at a time when moving could entail having to renegotiate a mortgage, which could result in a substantial increase in monthly payments The S&P Global Flash Composite PMI remained well in expansion territory in August despite inching down two ticks to 54.1. The index was pulled down by manufacturing output, which declined at the fastest rate in 14 months, and employment, where “gloomier” prospects led to a slowdown in hiring. Keeping the measure steady, however, was an improvement in goods inflation, as prices recorded the smallest rise since June 2020. Also, the rate of output growth slowed but remained among the highest in two years. As for the sub-indices, services rose from 55.0 to 55.2 instead of slipping to 55.1 as per the consensus forecast. Manufacturing sank further into contraction, going from 49.6 to 48.0, instead of dipping just 0.1 point as per the median forecast. All five components of this sub-index declined The Conference Board’s index of Leading Economic Indicators (LEI) dropped by 0.6% in July to its lowest mark (100.4) since November 2016. Historical analysis shows that an annualized drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. Both conditions were met in July: The LEI index fell by 4.2% annualized over six months and the six-month diffusion index stood at 45%. Five of the ten underlying indicators saw declines, led by ISM New Orders (-0.17 percentage point), interest rate spreads (-0.14 pp), and average consumer expectations (-0.13 pp). The leading credit index (+0.11 pp) and stock prices (+0.9 pp) were up but not enough to fully offset the declines. The LEI has now gone unchanged or has contracted for 29 consecutive months, the longest such streak on record Fed Chair Jerome Powell set the stage for a series of interest rates cuts in his annual address at Jackson Hole, Wyoming. The direction of travel is clear, he said, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks. The Fed doesn’t seek or welcome further cooling in labor market conditions, Powell said, while noting his confidence has grown that inflation is on a sustainable path to 2%. Bond yields fell after Powell’s remarks, and equities rose, while short-term rate markets were little changed, having priced in nearly 100 basis points in cuts before the end of the year, suggesting that markets anticipate further weakening in the labor market Two years ago, Chair Powell delivered a very somber message during his speech at Jackson Hole, stating the Federal Reserve will do “whatever it takes to restore price stability” even if that meant “inflicting some economic pain”. At the time, inflation was sitting at a multi-decade high while the labor market had tightened to a degree not seen in recent history. It had become obvious that policymakers had fallen well behind the curve and were scrambling to play catch-up. While many feared that the FOMC’s swift actions of quickly raising the policy rate risked overtightening and potentially tipping the economy into a recession, the downturn never materialized The minutes of the July meeting of the Federal Open Market Committee, released Wednesday, helped set the stage for Powell’s strong signal on Friday that the time has come to cut rates. The minutes showed that the vast majority of Fed officials saw a September rate cut as appropriate and several saw a case for cutting in July. Almost all expected continued disinflation while some saw a risk of a more serious deterioration in the labor market. The meeting took place before the short-lived bout of market turmoil in early August, and the minutes didn’t hint at an initial cut of larger than 0.25% Budgets proposed by presidents are rarely enacted into law, but they serve as a blueprint of an administration’s policy preferences. Thus, some investors were taken aback when US Vice President Kamala Harris’ campaign this week reiterated her support for President Joe Biden’s most recent budget proposal, which included a minimum tax of 25% on unrealized capital gains for those with wealth greater than $100 million. Critics charge that such a tax would discourage investment and inhibit innovation. The March budget proposal also included an increase in the top marginal rate on long-term capital gains and qualified dividends, to 44.6%. Harris accepted the Democratic Party’s nomination for president on Thursday night in Chicago, vowing to expand economic mobility for the middle class if elected After healthy US retail sales data last week, Goldman Sachs lowered its odds of a US recession to 20% from 25%. The latest data show no signs of recession, Chief Economist Jan Hatzius said. He added that a solid August jobs report would lower the odds to 15% The Dow Jones Industrial Average and S&P 500 Index moved back toward record highs, as investors appeared to celebrate Federal Reserve Chair Jerome Powell’s announcement that interest rate cuts would soon be coming. The gains were also broad-based, with small-caps outperforming large-caps and an equal-weighted version of the S&P 500 Index outpacing its more familiar, capitalization-weighted counterpart. Trading activity was exceptionally light through most of week, which featured some of the lowest daily trading volumes of the summer In terms of data release, durable goods print is out on Monday. Durables demand remains constrained amid restrictive monetary policy and increased economic and political uncertainty. The durables data are also very volatile as orders for large aircraft outlays can dictate overall orders growth. For example, durable goods orders slumped 6.7% in June, but when excluding transportation (aircraft fell around 127%, meaning there were net cancellations in June), orders were up 0.4%. Orders activity has been much more stable when excluding air and defense, these orders have more or less moved sideways over the past two years Personal income and spending is out on Friday. Consumer spending has remained strong despite a weakening job market. Retail sales rose a whopping 1.0% in July, which in dollar terms amounted to 25% of the total gain from the prior two years in a single month. The latest Quarterly Services Report also suggests services consumption was even stronger in Q2 than previously thought. UK Flash PMI figures (flash meaning approximately 75% of responses have been received) add further weight to the view that the UK economy is enjoying a steady recovery after last year’s shallow recession. Composite PMI for August was 53.4, while services came out at 53.3 and manufacturing at 52.5. These numbers reflect solid business activity with employment growing at its fastest rate since June 2023. New order volumes are increasing, while order backlogs have been cleared through a combination of additional staff hiring and efforts to boost capacity and productivity. The positive picture being presented in the UK is also being seen across the Channel. Eurozone PMI rose from 50.2 to 51.2, with services seeing even more optimism coming out at 53.3 (an Olympic boost there), while manufacturing languished at 45.6. EU Eurozone business activity picked up in August after stalling in July, according to S&P Global’s purchasing managers’ index (PMI). A first estimate of the HCOB Eurozone Composite PMI Output Index came in at 51.2 from 50.2, as the Olympic Games in France drove the services sector output to a four-month high. (A PMI reading greater than 50 indicates expansion.) Manufacturing production, however, contracted for the 17th month running The ECB said growth in negotiated wages in the eurozone—a key data point for monetary policymakers—slowed to 3.55% in the second quarter from about 4.74% in the preceding three months. Separately, the Bundesbank said in its August report that “the expected slow recovery in the [German] economy is being delayed further” by weak foreign demand Bank of Finland Governor Olli Rehn and Bank of Italy Governor Fabio Panetta argued that the case for the ECB cutting interest rates in September had strengthened. Martins Kazaks, Latvia’s central bank governor, said that the ECB has room to cut rates possibly twice more this year. The minutes of the ECB’s July meeting—where monetary policy was left unchanged—expressed concerns about restricting economic growth too much and confidence that inflation was declining to the 2% target as predicted In local currency terms, the pan-European STOXX Europe 600 Index ended 1.31% higher amid growing hopes that the Fed and the European Central Bank (ECB) would cut interest rates next month. Major stock indexes also rose. Germany’s DAX tacked on 1.70%, France’s CAC 40 Index gained 1.71%, and Italy’s FTSE MIB added 1.83%. CHINA China’s central bank kept its benchmark lending rates unchanged, reflecting policymakers’ desire to protect profit margins for banks. The People’s Bank of China (PBOC) kept the one-year loan prime rate at 3.35% and the five-year loan prime rate (LPR), a policy rate for mortgages and other long-term loans, at 3.85%. Economists largely expected the PBOC’s decision to stay pat on both LPRs after the bank unexpectedly trimmed several key rates in July. However, many economists see room for further loosening in China this year once the Fed starts cutting rates in the U.S In earnings news, search engine leader Baidu reported its second-quarter revenue came in lower than expected even as earnings beat analysts’ forecasts. The Beijing-based company, often described as China’s Google, said that revenue for the quarter ended June fell 0.4% to RMB 33.9 billion Chinese stocks fell as a light economic calendar and caution ahead of Fed Chair Powell’s Jackson Hole speech kept buyers on the sidelines. Both the Shanghai Composite and CSI 300 Indexes recorded weekly declines, while the benchmark Hang Seng Index in Hong Kong advanced. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, Handelsbanken, TD Economics, M. Cassar Derjavets. |
