U.S. Retail Sales Momentum is Lost
Retail and food service sales ticked 0.1% higher last month following a 1.5% March increase, revised from 1.1%. A 0.4% increase had been expected in the Action Economics Forecast Survey. Sales of motor vehicles & parts increased 0.6% (9.8% y/y) in April following outsized gains of 3.6% and 2.6% during the prior two months. Non-auto sales were unchanged (2.7% y/y) after an upwardly revised 1.0% gain. A 0.6% increase had been expected. (Chart from BloombergBriefs)
Non-auto ex gasoline and Building supplies: unchanged M/M in April following +1.0% and +0.4% in previous two months.
Weekly chain store sales are up 2.7% Y/Y during the 4 weeks ended May 10, a sharp jump from +1.3% five weeks ago. May and June 2013 were pretty weak so Y/Y comps will likely improve.
U.S. Import Prices Down 0.4% in April Prices for imported goods fell in April, the latest evidence of stubbornly weak inflation across the U.S. economy.
Prices for foreign petroleum fell 0.7% in April and natural-gas prices tumbled 18.5%. Prices for imported foods and beverages fell 0.7% after spiking 3.4% in March. Excluding the often-volatile categories of food and fuel, import prices rose 0.1% from the prior month and fell 1% from a year earlier. (Chart from Haver Analytics)
U.S. Household Debt Increases
Household debt—including mortgages, credit cards, auto loans and student loans—rose $129 billion between January and March to $11.65 trillion, new figures from the Federal Reserve Bank of New York showed Tuesday. That was the third consecutive quarterly increase.
Behind the uptick: Mortgage balances—which make up the bulk of U.S. household debt—rose $116 billion to $8.2 trillion, thanks in part to fewer people going into foreclosure, which drags down mortgage debt. Auto-loan balances grew $12 billion to $875 billion. Student-loan balances increased $31 billion to $1.1 trillion, maintaining its place as the fastest-growing debt category.
Despite all their progress digging out of the downturn, however, U.S. consumers are displaying a heightened wariness about using credit cards or taking out new mortgages.
The amount of credit-card debt outstanding fell to the lowest levels since 2002. Credit-card balances fell $24 billion to $659 billion from the prior quarter, just slightly below the level from a year earlier. New originations of mortgages dropped for the third straight quarter to $332 billion, the lowest since the third quarter of 2011, possibly due to rising home prices in many markets that have made buying less affordable.
The figures suggest Americans are still playing it safe when it comes to borrowing, a practice that should help protect them from longer-run excesses. But the combination of weak demand for credit and slow real wage growth could bode ill for consumer spending, which accounts for more than two-thirds of economic output. (…)
Some Americans may have changed how they use credit cards in the recession’s wake, in many cases paying off their balances promptly. The share of credit-card debt 90 or more days overdue fell in the first quarter to 8.5% from 9.5%.
Lending standards for mortgages, meanwhile, remain fairly tight when it comes to younger and first-time home buyers and those with tarnished credit.
Indeed, one group shying away from debt may be younger Americans. The growth of student-loan debt, along with limited access to credit, may be preventing those with student loans outstanding from being more active in the nation’s housing and auto markets, New York Fed researchers said Tuesday.
Less borrowing by younger people for things like cars and houses is a worry because it could reduce overall consumption at a time when baby boomers are retiring and likely spending less, too. (…)
From Zerohedge:
Now, the bad news: the increase in total mortgage balances had nothing to do with a surge in mortgage demand. Quite the contrary, as we have been reporting and as bank mortgage origination bankers have felt first hand, for whatever reason mortgage origination as a business has virtually slammed shut. The Fed confirmed as much when it reported just $332 billion in originations in Q1: well below the $452 billion in Q4, and certainly below the $577 billion a year ago.
Which leads to this U.S. U-turn on mortgages:
U.S. Backs Off Tight Mortgage Rules The White House and regulators are shifting course on mortgage lending amid concern tight standards could hurt a housing rebound.
On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae andFreddie Mac said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.
In coming weeks, six agencies, including Mr. Watt’s, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities. (…)
Mr. Watt, the former North Carolina congressman who took over as the director of the Federal Housing Finance Agency in January, used his first public speech on Tuesday to lay out the shift in course for Fannie and Freddie, and pegged executive compensation at the companies to meeting the new goals. (…)
Regulators announced a series of steps Tuesday that they said could help ease standards—abruptly raised by lenders during the financial panic—and make it easier for first-time and other entry-level buyers.
Mr. Watt said that he would direct Fannie and Freddie to provide more clarity to banks about what triggers “put-backs,” in which lenders have been forced to spend billions of dollars buying defective loans sold during the housing boom. To guard against future put-back demands, lenders say they have enacted standards that go beyond what Fannie, Freddie and other federal loan-insurance agencies require.
Mr. Watt said that he hoped that the changes would “substantially reduce” credit barriers, “and that lenders will start operating more inside the credit box that Fannie and Freddie” provide.
Shaun Donovan, the HUD secretary, announced on Tuesday similar changes designed to encourage lenders to reduce similar restrictions on loans insured by the Federal Housing Administration, which is part of his department.
Recession-Baby Millennials Scarred by U.S. Downturn Spurn Stocks for Cash
(…) While investing in equities has dropped across the board since the recession, so-called millennials born after 1980 have continued to forsake the market even as it rebounds, according to a Gallup poll taken April 3 through April 6. Just 27 percent of 18- to 29-year-olds reported owning shares outright or in funds, down from 33 percent in April 2008, the survey found.
The aversion means the group is missing out as major indexes reach records, potentially imperiling their future financial security, especially at a time when these Americans are also shunning investments such as real estate. Instead of plunging into stocks, which can provide better returns over the long run, young people are stashing savings in bank accounts and securities that pay near-zero interest. (…)
About 46 percent of millennials with more than $100,000 to invest say they will never be comfortable in the stock market, MFS, with $423 billion under management globally, found in a survey released in February. About 52 percent of 22- to 32-year-olds said they are “not very confident” or “not at all confident” putting money in equities for retirement, according to a February 2013 survey by Wells Fargo & Co.
Affluent millennials hold 52 percent of their money in cash and 28 percent in stocks, compared with 23 percent and 46 percent for older people, a UBS survey released in the first quarter found. The study focused on 21- to 29-year-olds with $75,000 in income or $50,000 in investable cash, and 30- to 36-year-olds with $100,000 in income or assets. (…)
Among 30- to 49-year-olds, a group that includes most of Generation X and the oldest millennials, about 67 percent hold stocks this year, up from 58 percent in 2013, said Frank Newport, Gallup’s editor-in-chief. For those under 30, comprised solely of millennials, ownership was unchanged at 27 percent.
There is probably more at play than just squeamishness over equities. Unemployment, heavy student-debt loads and the effects of the housing crisis are probably also restraining young people. (…)
Almost 45 percent of 25-year-olds had student debt at the end of 2013, up from 25 percent in 2003, based on New York Fed data. The group’s average student loan balance reached $20,926, Meta Brown, a senior economist with the research and statistics group, wrote in a blog postyesterday. It was about $11,000 a decade ago.
College enrollment is also delaying workforce entry, leaving millennials with less to spend on housing and stocks. (…)
Drop in Food Stamp Enrollment Picks Up Steam The number of Americans receiving food stamps is falling at a faster clip, down more than 1.2 million from October to February, federal data show.
The number of Americans receiving food stamps is now falling at a faster clip, with more than 1.2 million people moving out of the program between October and February, according to federal data.
As of February, the most recent data available, 46.2 million Americans received Supplemental Nutrition Assistance Program benefits. That’s the lowest level since August 2011 and down from the March 2013 peak of 47.7 million people. The $5.8 billion in benefits paid out in February was the lowest level since at least 2010. (…)
THE CHINESE U-TURN ON MORTGAGES:
China Central Bank Calls for Faster Home Lending in Slump
China’s central bank called on the nation’s biggest lenders to accelerate the granting of mortgages, a sign that developers’ prices cuts and incentives alone won’t boost a slumping housing market and economy.
The People’s Bank of China told 15 banks yesterday to “improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers,” according to a statement posted on its website. It also urged lenders to give priority to families buying their first homes and strengthen their monitoring of credit risks.
(…) Home sales fell 18 percent in April from the previous month, according to data from the National Bureau of Statistics.
Developers scaled back housing starts by 25 percent in the first quarter, the biggest reduction ever, according to Nomura. To lure buyers, Vanke dropped prices in Beijing, Hangzhou and Chengdu by as much as 15 percent since March, according to China Real Estate Information Corp. Vanke and Poly Real Estate Group Co. (600048) are allowing buyers to delay making down payments for as long as three years in Changsha, the capital of Hunan province, according to realtor Centaline Group.
The central bank’s request to improve lending efficiency comes as China’s economic slump worsens, with unexpected decelerations in industrial output and investment growth. (…)
More than 10 million homes sit empty in China, and the number could rise to 18 million within two to three years, Nicole Wong, Hong Kong-based head of property research at CLSA Ltd., said on May 12. She cited estimates based on the company’s one-year survey in 12 Chinese cities. (…)
Lan Shen, a Beijing-based economist at Standard Chartered Plc, said the central government will have to provide more support for the housing market to recover.
“The PBOC statement probably still won’t give much incentive for commercial banks to makemortgage loans because this part of their business is not very profitable,” she said. “They might shorten the period of approving mortgage loans as a gesture to respond to the central bank, but not much on lowering the rate.”
Nomura’s Zhang said that he expects further easing of lending, such as the removal of purchase restrictions in second-and third-tier cities. He said the government may also cut banks’ reserve requirements by 50 basis points in the second quarter and a further reduction in the third quarter, making it easier for developers to get financing.
The “Quite Gloomy” Chinese Housing Market Completes “Head And Shoulders” Formation
“Self-fulfilling expectations of falling house prices, financial difficulties among developers on the back of a highly leveraged economy with huge local government debt, and a fragile financial system with a large shadow banking sector, suggest the risks of a disorderly adjustment in the Chinese economy are real and rising,”
This is what Jian Chang, Barclays’ chief China economist, said in a recent report covering the Chinese housing sector and specifically the danger of a hard landing, and judging by the most recent housing data reported by China overnight, the likelihood that the Chinese housing sector, whose problems have been extensively covered here for the past 4 years, is finally coming unglued is higher than at any time since the Lehman collapse.
Here is what China reported overnight via SocGen: New starts contracted 15% yoy (vs. -21.9% yoy in March); property sales fell 14.3% yoy (vs. -7.5% yoy); and land sales (by area) plunged 20.5% yoy (vs. -16.9% yoy previously).
It doesn’t take an Econ PhD to conclude that “the housing market situation has undoubtedly turned quite gloomy. There has been a constant news stream of falling property prices everywhere, even in the 1-tier cities. A number of local governments, as we expected, have started to ease policy locally, especially relaxation of the home-purchase restrictions.”
But nowhere is the contraction in this all important sector for China’s credit-driven bubble more visible than the following chart showing a very distinct, if somewhat mutated, head and shoulder formation in the average 70-city property price index. If and when the blue line intersects the X-axis for only the third time in history, watch out below.
SocGen’s take is less than rosy:
Since 2008, there have been two periods of falling housing prices across the board: H2 2008 and late 2011. Even tier 1 cities were not spared. However, the downturns were brief and shallow. In the midst of the Great Recession, price declines lasted for about six months and 14 out of the 70 cities tracked by the statistic bureau recorded cumulative price declines of over 5%. During the previous downturn between Q2 2011 and Q3 2012, property prices in most cities fell consecutively for no more than 10 months, and only 4 cities saw prices falling by more than 5%. The turning points in both cases coincided with the beginning of credit easing. The logic is simple: most Chinese households, especially first time buyers, still need to borrow to buy, despite the high savings ratio on average. And down-payments and mortgages account for 40% of developers’ investment capital.
Which brings us to the key issue – credit, and rather its sudden lack of availability.
The housing sector is very important to the Chinese economy. Its share in total output is easily 20%, if its pull on related upstream and downstream sectors in included. And its significance to the financial system is far beyond banks’ mortgages and direct lending to developers, which account for 14% (CNY 10.5tn) and 6.5% (CNY 4.9tn) of the loan book respectively. Developers’ borrowing from the shadow banking system could potentially amount to another CNY 5-7tn. Moreover, we estimate that over CNY 10tn of other types of corporate borrowing is collateralised on real estate and another CNY4-6tn borrowing by local governments for infrastructure investment is collateralised on future revenue from sales of land-use rights. Adding everything together, the aggregate exposure of China’s financial system to the property market is likely to be as much as 80% of GDP. Hence, this is not a sector that can go terribly wrong if China wants to avoid a hard landing.
Unfortunately, housing is one of the few sectors that the Chinese government has not mastered its control over. Although policymakers have used many sector-specific means to try to mitigate the cycles of this sector over the past 10 years, it has not been very effective. Even the harshest administrative controls – home-purchase restrictions – are subject to loopholes and implementation issues. Our observation is that the short-term cycles of China’s housing market, like housing markets in many other countries, are first and foremost a credit phenomenon.
And since it is a credit phenomenon, should China continue with its recent initiative to tighten lending and purge credit market pathways, housing is first and foremost in line for a collapse.
So what is China, suddenly facing the all too real prospect of yet another housing downturn to do? Why turn on the credit spigots again, of course. At least according to SocGen:
… we think the only effective measure to ease the housing downturn is to reaccelerate, or at least stabilise, credit growth.Reportedly, the central bank has asked commercial banks to quicken mortgage lending despite the series of defaults and near-defaults of developers. Clearly, policymakers know which lever to pull, but the question is to what extent.
We agree that many Chinese cities are already suffering from over-supply issues. Although further urbanisation will continue to support demand growth, the pace of urban population growth in the next decade will still slow and there is a big affordability gap for rural migrants. Hence, if the authorities decide to use another credit binge to inflate the sector again, they will merely make the structural imbalance between supply and demand worse. There could be a middle ground. Measured and targeted credit easing might avoid a nation-wide crash, but some overly stretched cities – in terms of over-supply and leverage – will still experience severe pain, just likely Wenzhou where property prices have declined non-stop for more than two years by over 20% cumulatively.
Ah yes, being caught between the proverbial rock and a hard place.
For now the market is convinced that the worse the housing data, the more likely that the PBOC will engage in yet another massive stimulus and do what western central banks are so happy to do virtually constantly – kick the can once more. (…)
Euro-Zone Industrial Output Falters
The European Union’s statistics agency Wednesday said output from factories, energy companies and other utilities was down 0.3% from February, and 0.1% from March 2013.
The March figures suggest there was no pickup across industry during the first quarter, though there have been signs of improvement in other parts of the economy, with consumer demand strengthening and exports picking up.
Eurozone IP is down 0.2% in Q1, 0.5% in the last 4 months but up 0.4% in the last 6 months. Energy IP has been particularly weak being down 7.2% in the last 6 months, mainly due to the warm winter in Europe. (Eurostat)
German Inflation Accelerates
In national terms, prices fell 0.2% on month earlier, but rose 1.3% on the year in April, the country’s statistics office said. In European Union harmonized terms, prices fell 0.3% on month and rose 1.1% on the year.