New Home Sales Plummet 11.3% in May

The May release for new home sales from the Census Bureau came in at a seasonally adjusted annual rate of 619,000 units, lower than the 636,000 forecast. New home sales are down 11.3% month-over-month from a revised rate of 698,000 in April and are down 16.5% from one year ago. (…)

Dollar Soars to Fresh 2024 High as Fed Diverges From Major Peers Greenback’s gain pressures yen, which hits lowest since 1986

The dollar rose to its highest level since November amid speculation that the Federal Reserve will break with other central banks by keeping interest rates elevated, giving global investors an incentive to shift cash to the US to capture higher bond yields. (…)

“The US economy remains resilient, and the case for an imminent rate cut isn’t clear unless the data soften, meanwhile, central banks elsewhere are cutting,” said Kit Juckes, chief FX strategist at Societe Generale SA. (…)

Revival Gathers Speed Except in Europe: Bloomberg Trade Tracker

A string of indicators suggest a recovery in trade is taking hold almost everywhere outside of Europe, whose biggest economy is beset by a grim business outlook.

Bloomberg’s Trade Tracker showed the best reading in years, with nine of the 10 key measures of global commerce back in “normal” territory in June. Shipping volumes bounced back in Hong Kong’s ports, while export orders out of the US increased. An upturn in the tech sector, driven by the swift expansion of AI, ensured chips and electronics makers like Singapore, Taiwan and South Korea maintained their momentum.

The only one left in the red was Germany, where business expectations worsened anew. Factories reported weak order books, while consumers remained cautious despite rising incomes and cooling inflation. Reports of company insolvencies and restructuring could also hit the labor market in Europe’s largest economy. (…)

The Goldman Sachs Analyst Index (GSAI) is a monthly economic indicator based on a survey of Goldman Sachs equity analysts to assess business conditions in the industries they follow.

The GSAI jumped 17.7pt to 64.1 in June, its highest level since May 2022. The composition was strong, as the shipments, new orders, and employment components all increased notably. (…)

GSAI Reaches Two-Year High in June

Source: Institute for Supply Management, Goldman Sachs Global Investment Research

The GSAI’s activity components were strong in June. The sales (+15.9pt to 65.0) and new orders (+20.7pt to 68.3) components both increased notably to their highest levels since December 2023. The exports component decreased (-10.0pt to 50.0). Both the inventories component (+17.7pt to 75.2) and the orders less inventories gap (+3.0pt to -6.9) increased. (…)

The GSAI’s labor market components rose, as both the employment (+11.6pt to 55.6) and wages (+17.8pt to 63.3) components increased. (…)

Biggest Banks Can Withstand Severe Downturn, $685 Billion in Losses, Fed Says The latest stress tests found banks remained above minimum capital requirements.

This year’s exercise measured the 31 biggest banks’ ability to maintain strong capital levels in a hypothetical recession marked by double-digit unemployment and a severe stock-market decline.

The banks would collectively lose nearly $685 billion in the Fed’s imaginary worst-case recession, the Fed said. That would be more than last year, but all the banks would still remain above their minimum capital requirements.

The banks were expected to lose more in this year’s test because they faced higher projected credit-card losses, riskier corporate loans and lower projected income, the Fed said. (…)

The annual exercise aims to project confidence about the health of the banking system. If banks do poorly, they could face automatic restrictions on shareholder distributions and discretionary bonus payments. None of the banks face those limits after this round of tests.

Wednesday’s results could give banks and their lobbyists more ammunition to push back against large increases in capital requirements, which the Fed and other regulators have floated. Supporters of the plan say it will improve the overall resilience of the financial system after a spate of regional bank failures last year.

This year’s stress test included a severe global recession in which the U.S. unemployment rate jumps to 10%, housing prices crash by 36% and commercial real-estate prices drop by 40%.

Another wrinkle in this year’s tests, an “exploratory analysis” of the system suggests banks could withstand a repeat of the deposit crisis of 2023 or a potential catastrophe in hedge funds. The biggest banks could in the aggregate lose up to $85 billion if five big hedge funds failed, the Fed found.

Those scenarios have no impact on bank capital requirements. (…)

AI CORNER

OpenAI’s China Block to Reshape AI Scene as Big Players Pounce

OpenAI’s abrupt move to ban access to its services in China is setting the scene for an industry shakeup, as local AI leaders from Baidu Inc. to Alibaba Group Holding Ltd. move to grab more of the field.

The ChatGPT creator this week sent memos to Chinese users warning it will cut off access to its widely used AI development software and tools from July, triggering a scramble to fill the void. Since Tuesday, at least a half-dozen companies and startups including Tencent Holdings Ltd. and Zhipu AI began offering incentives to developers making the switch.

OpenAI’s shift will accentuate the divide between China and the US, which is trying to curb Beijing’s AI and chip efforts. While the startup’s exit offers an opportunity for sector leaders to grow their user base, it also deprives entrepreneurs and cash-strapped startups of some of the best tools available to fine-tune or get their AI applications off the ground.

For China, that could help usher out many smaller startups created during the “battle of a hundred models,” in the wake of ChatGPT’s late 2022 debut. And a bigger concern may be whether open-source models like Meta Platforms Inc.’s Llama also cut off access, said Bernard Leong, chief executive officer of Singapore-based Dorje AI. (…)

US firms such as OpenAI, Meta and Alphabet Inc. have led the world in generative AI, which spits out text, images and video from simple commands. Underpinning those models are application programming interfaces that developers use to build up and refine their own platforms to integrate services either with the likes of ChatGPT, or their own proprietary models.

That was a boon to Chinese developers starting from scratch, who accessed OpenAI’s tools through virtual private networks or other ways around the country’s Great Firewall. Many local developers — particularly those without deep pockets — favored training AI systems and applications via OpenAI’s tools, because they were regarded as industry benchmarks.

OpenAI is now threatening to sever the connection.

“(…) it will make it harder for Chinese developers to use the most advanced global AI algorithms.” (…)

OpenAI’s move coincides with rising pressure from Washington to curb Chinese access to the most advanced artificial intelligence and semiconductor technology. The US Treasury Department advanced plans over the weekend to further restrict investments by US individuals and companies into China, with a focus on curtailing next-generation technologies.

In the long run, industry experts say a lack of access to global tools may further impede Chinese AI players in general as they play catch-up to the US. Alibaba Chairman Joe Tsai has said it would take at least two years for homegrown AI models to match US ones.

It could also accelerate a migration overseas by Chinese tech startups seeking faster-growing markets with less political uncertainty. (…)

I’m not so sure where exactly there is more or less political uncertainty in the world.

Let’s also not sell Chinese tech short.

FYI, (from my son David):

“What’s this you ask? This is the paper announcing the new leader in LLM coding performance – and the list of engineers who achieved this. It surpasses the big three (Google, OpenAI and Claude) AND it is open source. The company DeepSeek was launched… in 2023 in Hangzhou, China.”

• Can China’s AI Technology Compete With the US?  https://www.youtube.com/watch?v=UitJxc9LE60
• China’s Xiaomi just showed Apple how a smartphone maker actually can make an EV

(…) For Lei Jun, Xiaomi’s billionaire cofounder and CEO, the launch marks an extraordinary feat: his EV managed to go on sale just three years after his company said it was venturing beyond consumer electronics into EVs. (…)

Like Apple, Xiaomi is best known for selling smartphones. Data from Counterpoint Research found that in the first six weeks of the year, Xiaomi has a 13.8% share of the smartphone market in China, putting it just behind Apple’s 15.7%. (…)

Xiaomi has managed to pull off something Apple dreamed about for 10 years. Tim Cook might have to look on from Cupertino to see what could have been.

That was in March 2024.

In May:

Xiaomi SU7 Reviewed: Yes, China’s Apple Car Is That Good

Within 24 hours of the Xiaomi SU7 making its grand debut in China earlier this year, about 100,000 people put down a deposit for an electric vehicle from a company that had never made a single car before. Even by the standards of some of the EV startups that have come and gone over the years, that’s a mind-blowing statistic. How did that happen, exactly?

To understand that, you have to understand Xiaomi. And you may just start to understand just how far ahead China’s EV industry has become. (…)

Xiaomi’s SU7 (pronounced “Soo-Seven”) has been described as China’s Apple Car, and for good reason. As Ethan explains, Xiaomi is a household name in China (and much of the rest of the world) for manufacturing TVs, battery packs, smartphones, washing machines… well, basically everything in the world of smart devices. It’s as robust as any consumer goods company with advanced software shared across most of those gadgets.

So naturally, if you’re in the Xiaomi device ecosystem already, a car built around that makes sense; we see the same appeal with Apple CarPlay and Android Automotive here. But Xiaomi’s approach goes deeper, and as an added bonus, the car looks kind of like a budget Porsche Taycan. (…)

Even if you’re not a fan of China or its EVs, you can start to see the appeal. Even more so when you get inside, when you can tell your car to turn on your Xiaomi smart home air conditioner, your Xiaomi smart lights, or check on your dog with your Xiaomi home camera… you get the idea. It executes on the idea Apple had, something that’s tied more directly to your other devices than ever before. (…)

Labor, including wages, are the most crucial stats to gauge at this point.

Confidence Survey Shows Jobs Are Still Relatively Plentiful

The first available monthly indicator of the labor market is the “jobs plentiful” series in the Consumer Confidence Index (CCI) survey. Today, June’s reading showed that 38.1% of respondents said so. That’s a slight uptick from May, and a relatively high reading. The “jobs hard to get response” ticked down to 14.1%, which is a very low reading.

The latter series is highly correlated with weekly initial unemployment claims and continuing claims. These two weekly series edged up a bit in June raising concerns that the unemployment rate may be heading higher. However, the CCI survey data suggest that the unemployment rate probably remained at 4.0% during June.

The jobs plentiful series is highly correlated with the more widely followed job openings series. Fed Chair Jerome Powell has alluded to it in some of his pressers over the past couple of years. Job openings probably remained above their pre-pandemic level during both May and June. We expect initial unemployment claims to remain below 250,000 over the remainder of this year.

Bottom line: There’s no recession in the labor market, nor is one looming.

Indeed Job Postings through June 21 are down 5.1% since the latest JOLTS data (April).  That could take Job Openings down to the 7.6M range, only 7% above January 2020.

But May’s BLS job report was strong and last Friday’s S&P Global’s Flash PMI survey said that employment recorded its largest gain for 9 months.

Do Firms Expect Growth in Prices to Persist

In the most recent CFO Survey, we explore expectations for price growth by asking financial leaders nationwide for their anticipated growth in prices in 2024 and how this anticipated growth compares to prepandemic growth rates. We find that most CFOs expect price growth to remain above normal through at least 2024.

The combination of higher input costs and wages in the aftermath of the COVID-19 pandemic led to higher price growth. While growth in unit costs, wages, and prices has moderated from their peaks in 2021 and 2022, price growth expectations among surveyed financial leaders have not returned to their prepandemic levels, suggesting that elevated price growth may be more persistent than initially thought despite a restrictive stance of monetary policy.

In the second quarter CFO Survey, monetary policy was listed as the top concern among CFOs, though nearly as many cited cost pressures and inflation, as well as hiring and retaining qualified employees. The fact that concerns about cost pressures and inflation remain so prominent—and these concerns even increased in the most recent quarter—supports the notion that despite more moderate inflation, price growth remains a foremost concern among CFOs.

To better understand whether CFOs expect growth in pricing to return closer to normal during 2024, the CFO Survey asked firms to compare their 2024 expected annual growth in prices—specifically, the price of the product/product line or service responsible for the largest share of their firm’s domestic revenue—to growth rates prior to the COVID-19 pandemic. For the past three quarters, nearly 60 percent of respondents expect growth in prices during 2024 to remain higher than prepandemic price growth

CONSUMER WATCH

Sunday was a new all-time daily high at 3 million travelers. The 7-day average is also a new all-time high. — Nothing is more discretionary than personal travel. When things turn down, it is the first thing to be cut. So, what does this say about the economy? (@biancoresearch)

Chicago Fed: Economic Growth Increased in May

The Chicago Fed’s National Activity Index is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed’s website. (…) The CFNAI rose to +0.18 in May from -0.26 in April. Three of the four broad categories of indicators used to construct the index increased from April and two categories made positive contributions in May. (…)

RENTFLATION

KKR Makes Its Biggest Foray Into Apartments, Betting on Rising Rents Private-equity firm pays $2.1 billion for more than 5,200 apartment units across the country

KKR has completed its largest-ever purchase of apartment buildings, the latest in a string of big-ticket deals, signaling that some of the most prominent investment firms are betting on a broad rebound for multifamily housing.

The New York-based private-equity firm paid $2.1 billion for more than 5,200 apartment units across the country, from California and Texas to New Jersey, KKR said. The deal for the multifamily properties, which are 18 new mid- and high-rise buildings, closed Tuesday. (…)

KKR’s acquisition and other recent major purchases could indicate a growing confidence among large investors that rents and values for apartments will soon begin rising again. Rent is already starting to pick up in several Midwest and Northeast cities.

In April, Blackstone agreed to pay $10 billion for the landlord Apartment Income REIT, while last month Brookfield bought a portfolio of 7,000 apartments for $1.55 billion.

Investors say they are encouraged by the falling number of construction starts for new apartment buildings, portending lower levels of new supply and faster-moving rents by 2026. (…)

David Rosenberg:

We keep hearing about how booming demand for apartment units has begun to cause a reversal in rental rates. Funny how narratives today are more believed than the actual data. The U.S. rental vacancy rate has climbed to 6.7% from 6.0% a year ago and the highest since August 2020 (the pre-COVID-19 level was 6.2% when nobody was lamenting over rental inflation). Rent measures in the multi-family space have begun to flatten out and the YoY trend has been negative now for twelve months running.

While rental demand is running well over 400k annually, the problem is multi-family units that are under construction and about to be completed are double that number at 898k (more than double the historical norm). If the absorption rates were rising at or ahead of the supply, then we wouldn’t be seeing the vacancy rate continue to trend higher. We are not buyers of this newly-found view that we are on the precipice of seeing a revival in rental rate inflation. Not a bit.

Rosie’s chart stops in 2017. Here’s one going back to 1957. In reality, rental vacancies are merely back to 2019 which was historically low.

Wells Fargo:

• Adverse single-family affordability has helped boost multifamily demand, but multifamily development remains on the downswing as robust incoming supply and high interest rates have prompted developers to hold off on starting new projects.
  

• To that effect, multifamily permits fell 5.6% in May to a 437K-unit pace, the lowest level since April 2020. Multifamily starts, which are more volatile month-to-month, fell 6.6% to a 295K-unit pace.
  

• The long downdraft in apartment construction is more apparent when looking at the annual growth numbers. Multifamily starts are running nearly 50% below their year-ago pace, and permits are down 29% over the year.
  

• We expect multifamily construction will likely weaken further in the back half of this year. Longer term, better balance in the apartment market, lower financing costs and easier access to credit should help multifamily development rebound.

  

Canada Inflation Picks Up in May, Rising 2.9% The surprise spike in Canadian inflation last month throws up a possible hurdle for the central bank to offer up back-to-back rate cuts

The consumer-price index, a measure of goods and services prices across the economy, rose 2.9% in May from a year earlier, Statistics Canada said Tuesday, faster than the 2.6% advance economists had forecast and after inflation eased to 2.7% in April.

While it marks a fifth straight month that the index has been inside the 1% to 3% window the Bank of Canada targets, the quickening pace of inflation casts doubts on what many economists have expected would be a second round of rate relief late next month. The Canadian dollar and domestic bond yields both rose after the data was released, suggesting traders are less confident in a July cut.

Gains in core prices excluding volatile food and energy matched the headline CPI pace for the month and annually, while key indicators of underlying inflation preferred by the central bank also picked up. On a monthly basis, headline inflation rose 0.6% in May, double the pace economists anticipated. (…)

What is expected to stand out for policymakers is the speeding up in May of two measures of underlying inflation the central bank closely monitors. Weighted median and trimmed mean CPI rose an average 2.85% last month from a year earlier compared with 2.70% growth in April, though that is still cooler than March’s 2.95% pace. (…)

The biggest drivers of consumer price growth in Canada last month remained mortgage-interest costs and rent in the higher rate environment. (…)

Overall, prices for services in Canada rose 4.6% in May after a 4.2% boost the prior month, while prices for goods for a second straight month grew 1.0%.

• Excluding food and energy, the index rose 2.9 per cent from a year ago, up from 2.7 per cent.
• Seasonally adjusted core cpi increased +0.4% from +0.2% in April (revised from +0.1%).
• Rent inflation was 8.9% YoY in May, its highest level since the early 1980’s.
• Excluding shelter costs, the consumer price index rose 1.5 per cent from a year ago, versus 1.2 per cent in April.
• On a month-over-month annualized basis, CPI-Trim and CPI-Median were both at +4.1%.

Reuters Graphics

NBF:

Does this morning’s data suggest that the Bank of Canada acted prematurely in cutting rates in June? We don’t think so. (…) On a 6-month horizon, both the CPI-trim (2.5%) and the CPI-median (2.3%) are rising at annualized rates just above the Bank of Canada’s target with only 24 categories running above target. This slight overshoot would be worrisome if the economy were showing strength, but it’s quite the opposite at the moment. GDP per capita continued to fall in the first quarter and should continue to do so, given high inventories and the ongoing interest payment shock.

Unemployment already rose sharply and we expect it to rise further. The decline in corporate profits in the first quarter could be a harbinger of further deterioration. Businesses claim they are no longer experiencing labor shortages and may have too many workers relative to economic activity, as evidenced by the declining trend in output per worker since 2022. Given the current restrictive monetary policy and the lag in the transmission, we continue to believe that the Canadian economy needs further rate cuts.

Economists Raise China Growth Forecasts as Exports Improve Economists upgrade forecasts for 2024 exports and GDP growth

Exports are expected to climb 4.3% this year from a year ago, according to the median forecast of 22 economists surveyed over June 17-24. That’s a jump from the 2.8% gain forecast in a May survey. China’s economy may expand 5%, up from the 4.9% projected in May, according to the median of 68 estimates. (…)

China’s exports beat expectations in April and May, reflecting strong demand from overseas and the increasing competitiveness of Chinese producers. While this supports Beijing’s strategy of relying on exports to spur growth and offset weak spending by Chinese households, risks are mounting as its companies start to face more trade barriers from the US and Europe. (…)

Economists have pared back their expectations for retail sales growth — a key gauge of consumer spending — as well as consumer and factory-gate price inflation this year, reflecting pessimism over demand as a sharp housing contraction continues, according to the Bloomberg survey. (…)

China is unlikely to shake off deflationary pressures this year, with economists becoming more downbeat about the prospects. They expect consumer price index to rise only 0.6% this year, while producer price index is forecast to drop 1%, both weakening from the estimates in May.

This reflects consumers’ reluctance to spend money amid concerns about their job security, income prospects and falling property values. (…)