US Retail Sales Barely Increase In Sign of Consumer Strain Value of purchases rose 0.1% in May after downward revisions

The value of retail purchases, unadjusted for inflation, increased 0.1% after an downwardly revised 0.2% drop in the prior month, Commerce Department data showed Tuesday. Excluding gasoline, sales rose 0.3%. (…)

The figures underscore a notable downshift in consumer spending after stronger readings earlier in the year. Economists expect a moderate pace of spending going forward as Americans exercise greater prudence given persistent inflation, a gradually cooling job market and emerging signs of financial stress. (…)

The retail report showed so-called control-group sales — which are used to calculate gross domestic product — climbed 0.4% in May. It fell 0.5% in the prior month, which was the most in about a year. The measure excludes food services, auto dealers, building materials stores and gasoline stations. (…)

Spending at restaurants and bars, the only service-sector category of Tuesday’s report, declined 0.4%, the most since January.

The challenge with retail sales is to properly assess real sales because there is no official deflator for that important series. My formula is (0.35 x CPI-Durables + 0.65 x CPI-Nondurables) which roughly reflects the actual sales breakdown.

By this measure, retail prices declined 0.45% MoM in May which would mean that retail sales, up 0.09% MoM in nominal terms , were up 0.54% in real terms, a solid month after –0.36% in April.

On a YoY basis, nominal sales are up 2.3% while real sales are up 1.6%, down from 2.3% on average in the previous 12 months, but still respectable demand considering the pandemic splurge on goods.

Wells Fargo:

Overall, the May retail sales data are consistent with a consumer that is only gradually losing its swagger. Broader control group sales, which excludes autos, gasoline, building material and food services store sales and feeds directly into the BEA’s calculation of real goods spending in the national accounts, rose a stronger 0.4% in May.

Volatility is now part of the retail scene. Labor income is slowing, excess savings are depleted (in real terms), the savings rate is historically low and interest rates still very high. Luckily, goods import prices are depressed by Chinese overcapacity and the strong dollar and energy prices are quiet.

The bars below show how each of the steps down in average nominal control sales growth rates since mid-2021 was also accompanied by large declines in average goods inflation (black lines), from 11.3% in the first period to 0.1% in the most recent period. Goods have deflated, but demand remains solid.

In reality, goods consumption remains strong, fueled by labor income growth above 5.0%, slowing overall inflation and the continued impact of the wealth defect. It is ironic that, attempting to undo the wealth its own policies created, the Fed keeps adding to the “problem” as Apollo’s Torsten Slok illustrates:

As Goldman Sachs illustrates, Americans are not squeezed by debt and interest rates:

Nor is the economy highly vulnerable to slower consumer demand:

US Sales Managers Survey

Next week we will get S&P Global’s Flash PMI survey results for June. This is from World Economics’ Sales Managers survey:

The US Sales Managers Survey Results for June reflect a likely acceleration of GDP growth levels seen in previous months of this year. All growth-related Indexes suggest an expectation of continuing modest-to-rapid economic expansion.

Real GDP year-on-year growth in excess of 2% is likely to continue into the second half of 2024.

The evidence presented by the June Sales Managers Survey suggests that the Federal Reserve’s interest rate hikes have had at best a very modest restraining impact on economic activity levels to date. However, the Fed’s efforts at simultaneously cutting price inflation appear to be working less well. The Sales Managers Price Index continues to register relatively high monthly readings, suggesting that the dragon of Price Inflation has not yet been slain, and big cuts in interest rates are not likely to feature in the run up to the November election.

US Homebuilder Confidence Slides to Lowest Level This Year Measures of current sales, outlook and buyer traffic retreated

A measure of the sales outlook over the next six months dropped 4 points to 47 this month. That followed a 9-point decline in May that was the largest since October 2022. The prospective-buyer traffic gauge and the NAHB index of current sales both dropped to the lowest level this year. (…)

This month, 29% of builders reported cutting home prices, the largest share since January, according to the NAHB survey. The average price reduction held steady at 6% for the 12th straight month. The share using sales incentives increased to 61% from a May reading of 59%.

CBO Jacks Up US 2024 Budget Gap Forecast by 27% to Nearly $2 Trillion

The nonpartisan Congressional Budget Office ramped up its estimate for this year’s US budget deficit by 27% to almost $2 trillion, sounding a fresh alarm about an unprecedented trajectory for federal borrowing.

The CBO sees the deficit reaching $1.92 trillion in 2024, up from $1.69 trillion in 2023, according to updated projections<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> released in Washington Tuesday. The new estimate is more than $400 billion larger than what the CBO anticipated in February — in part reflecting additional spending, including aid for Ukraine, enacted since then, along with Biden administration student-loan relief measures. (…)

As a share of gross domestic product, the US deficit is now seen widening, not shrinking, for the 2024 fiscal year, which runs through September. The ratio is estimated at 6.7%, compared with the February forecast of 5.3% and the 6.3% logged for 2023.

By comparison, European Union nations have a guideline of keeping shortfalls at 3% or less. The US averaged 3.7% over the past half-century, according to the CBO.

“Total deficits equal or exceed 5.5% of GDP in every year from 2024 to 2034,” in the new forecasts, the CBO said. “Since at least 1930, deficits have not remained that large for more than five years in a row.”

Tuesday’s projections continued to show the US heading for record levels of debt relative to GDP, and escalating interest costs — which for this year will exceed defense spending. Over the coming decade, the CBO sees US deficits totalling $22.1 trillion, up more than $2 trillion from February’s report. (…)

The office now expects a 2% increase in GDP in the fourth quarter of calendar 2024 over the same period of 2023 — up from February’s 1.5%.

Inflation, as measured by the Fed’s preferred PCE price gauge, is seen at 2.7%, compared with the 2.1% forecast in February. (…)

Fed policymakers are expected to start lowering rates next year, with their benchmark falling to 3% by late 2028, holding steady from there on, the CBO said. (…)

The outsize US deficits also come despite an acceleration in immigration that has helped to boost growth and revenues. The CBO sees the surge continuing through 2026. The office estimates that this dynamic lowers total deficits by some $900 billion over a decade.

CBO projections are based on current legislation. That includes an assumption that the $95 billion foreign-aid package enacted in April will now add $95 billion, plus inflation each year, in discretionary spending going forward.

It also includes an expectation for many of former President Donald Trump’s tax cuts to expire as scheduled at the end of next year. The CBO has separately estimated that extending those provisions could add $4.6 trillion more in red ink. (…)

But nobody cares … until they do …

The WSJ:

Neither Mr. Biden nor Donald Trump talks about the national debt, perhaps because they might then have to do something about it. But a moment of tax truth at least will arrive at the end of 2025 when most of the 2017 Trump individual tax cuts expire.

Mr. Biden’s plan is to raise taxes by $5 trillion or more, which would put the overall federal tax burden above 20% of GDP, which is close to the highest in peacetime. That still won’t finance Mr. Biden’s spending ambitions, which will continue to cost trillions in future years even if he loses the election.

Mr. Trump says he wants to renew and maybe expand the Trump tax cuts, and the best way to finance that is by repealing the Biden spending blowouts in the Inflation Reduction Act, student-loan write-offs and pandemic-era welfare expansions. Failing to take on that challenge means either a monumental tax increase or a debt panic down the road.

The WSJ omits Mr. Trump’s new idea: raise tariffs on imports, potentially even replacing the entire income tax system with tariffs.

IMMIGRATION ISSUES

• The foreign-born labor force has grown 11% since February 2020, and the native-born labor force has remained unchanged over the same period. (Torsten Slok)

Rather important when scare labor pushes wage rates upwards. Wells Fargo:

• Labor force growth has strengthened considerably in the past two years, due primarily to robust immigration flows and a post-pandemic rebound in the labor force participation rate (LFPR)
• Foreign-born nationals, who currently represent about 20% of the labor force, have accounted for more than one-half of its growth over the past two years.
• Looking forward, it does not seem likely that the labor force will continue to grow at the same robust rate that it has over the past two years. Although it is difficult to predict the path of immigration in coming years—yet-to-be-determined policy choices and economic conditions in the United States as well as in foreign countries will affect immigration flows—the aging of the population and marked drop in the U.S. fertility rate in recent years means that the “natural” growth rate of the workforce will slow.

Goldman Sachs attempts to predict:

• Net US immigration averaged around 1 million per year in the two decades prior to the pandemic. We estimate it surged to roughly 2.5 million last year, boosting labor force growth and GDP growth and helping to dampen wage pressures. This year, we expect net immigration of around 2 million, twice the trend rate.

• With immigration still a key focal point heading into the election and little prospect for legislative changes this year, our 2024 net immigration estimates assumed the Biden administration would tighten policy in this area.
• Next year, we expect that a second Biden administration would leave immigration policy mostly unchanged. A second Trump administration would likely tighten policy substantially further, but there is a wide distribution of potential outcomes.
• At the high end of the range, in which courts block major asylum changes and the impact of deportation is limited, net immigration might decline to around 1.5 million in 2025, still roughly double the 2017-2019 averages reported by CBO.
• At the low end of the potential range, in which a Trump White House mostly cuts off asylum claims and humanitarian parole, and implements a more substantial deportation program, net immigration would likely fall below the 2017-2019 average of 0.7 million per year and could approach zero temporarily. That said, it seems unlikely that net immigration would be negative on an annual basis even in that scenario.

China’s key plenum aims to fix decades-old tax revenue imbalance Long-touted changes to China’s tax system will focus on allowing local governments to retain more fiscal revenues

Measures that redistribute income from central authorities to municipalities, curbing an addiction to land sales laid bare by China’s property crisis, will top the agenda of a leadership gathering in July, known as the third plenum, they said. (…)

Policy advisers said the main changes are likely to revolve around how much revenue local governments retain, rather than adding or hiking taxes.

Municipalities currently get half of value-added tax revenue and 40% of personal income tax, while the central government gets most corporate income tax and all of what China calls a consumption tax, currently levied on producers and importers.

The advisers did not give figures on the future division of tax income between central and local governments.

But they said local governments may be allowed to keep most of the consumption tax – which accounts for almost a tenth of China’s total tax revenues – and more of the value-added tax – which accounts for more than a third.

Proposals also include Beijing taking over growing commitments on pensions and healthcare as the population ages.

The aim is to stop municipal debt accumulation by balancing revenues with expenditure, the advisers said.

“Local governments’ spending should be based on their fiscal capacity,” said a second adviser. “A mature society no longer needs to find special ways to build more infrastructure.” (…)

The International Monetary Fund calculates China’s tax-to-GDP ratio at 14%, versus a 23% average for the Group of Seven developed economies.

This makes social spending difficult to fund without raising taxes on capital or businesses. Taxing households more is a difficult proposition as China’s upper personal income tax band is among the world’s steepest, at 45%. (…)

Chinese media said policymakers may shift the point of charging the consumption tax to wholesalers and retailers.

This tax currently only applies to 15 types of goods, from alcohol and tobacco, to luxury cars, jewellery and yachts. Domestic demand for these items has limited impact on China’s productivity.

Goldman Sachs analysts say charging consumers shifts incentives for local officials from growing their manufacturing base to growing their consumer base. (…)

EARNINGS VS VALUATIONS

Ed Yardeni:

The rally in the S&P 500 Semiconductor industry has been both earnings-led and valuation-led. Its forward P/E is currently 35.5. During the previous decade, its multiple was always below 20.0 and usually around 15.0. Since early 2023, the industry’s forward earnings rose more than 100% as analysts turned more bullish on the prospects for this industry.

Earnings-led meltups should be more sustainable than valuation-led ones. The current meltup is a combination of both. Will that make it more sustainable than the meltup at the end of the 1990s? Not necessarily since the tech rally of the second half of the 1990s was also led by both rising earnings expectations and valuations. Back then, the Tech Bubble was followed by a Tech Wreck as both earnings expectations and forward P/Es dropped sharply.

That could happen again this time. However, we are counting on the stock market rally to broaden as the customers of tech companies use technology to boost their productivity. We also believe that the earnings expectations for tech are more realizable than they were in the late 1990s. That’s especially so since we aren’t expecting a recession any time soon.

Goldman Sachs also sees profit growth broadening amid “reasonable” equal-weight P/E multiples:

In Q2’24, only 3 sectors had better earnings growth than the S&P 500 ex-Energy. This is expected to rise to 4 in Q3, 6 in Q4, 5 in Q1’25 and all of 2025.

CHARGE!

From Fortune:

TDK Corporation’s new solid-state battery, with an energy density that’s 100 times greater than what now powers everything from hearing aids to smartwatches, is further proof that battery makers are on the front lines of innovation. Breakthroughs in one category often spur new developments in another, and the Japanese Apple supplier’s new all-ceramic product could spur innovation in other areas.

Batteries are the workhorse of the energy transformation. The speed of innovation reflects how much energy they can store, how quickly they charge, how much they cost to produce, their environmental impact, and how easily we can access the raw materials to make them. Where they are located also matters, of course, as the world’s biggest battery manufacturers, BYD and CATL, happen to be based in China. Both are expected to ship lithium-iron-phosphate (LFP) battery cells that charge from zero to 100% in 10 minutes this year, with CATL’s Shenxing Plus boasting it will give electric vehicles a range of more than 620 miles on a single charge.

In addition to being on the front lines of innovation, Chinese battery makers are also on the front lines of politics. Republicans in Congress have urged Biden to ban CATL imports, for example, arguing that it uses forced labor—a charge CATL denies. (CATL is working with automakers like Tesla and Ford.)

Construction Caught in the Cross Currents Fiscal Policy Helping Construction Cut Through Interest Rate Headwinds

The construction sector seems to be defying restrictive monetary policy. Total construction spending ended April up 10% on a year-over-year basis. To be sure, the recent rise in financing costs and tighter lending standards have weighed on project outlays, in particular residential and commercial development. A downdraft in new project starts for these types of construction suggests a drop in activity is ahead in the near-term.

That noted, several segments of construction have performed considerably better, thanks in large part to fiscal policy. Notably, there has been a boom in manufacturing project spending directed toward the build-out of electric vehicle and semiconductor supply chains following the passage of the CHIPS and Science Act. The Inflation Reduction Act and Bipartisan Infrastructure Law have been a boon for investment in energy and infrastructure projects.

Looking ahead, the fiscal tailwinds look set to only intensify over the next few years as more funding from these federal programs is distributed. Meanwhile, the drags imposed by restrictive monetary policy should begin to fade as the Federal Reserve gradually lowers the federal funds target rate. (…)

The rise in residential structures investment largely has been driven by new single-family construction. The rebound in single-family development over the past year reflects home builders’ ability to offset increased borrowing costs with mortgage rate buydowns and other pricing incentives to support sales. Low supply in the resale market and a growing “build-to-rent” market have been other factors which have given home builders greater confidence in the ability to sell the homes that are produced.

Looking ahead, home builders’ ability to use incentives, low supply in the existing market and sturdy economic growth are factors which should support a steady pace of single-family construction over the next few years. Growth should remain fairly limited, however, considering new home inventory levels remain elevated and the prospect of a “higher-for-longer” rate environment continues to weigh on home builder confidence. The NAHB Housing Market Index (HMI), which is a measure of builder sentiment, has shown signs of improvement this year but is still hovering at a depressed level well below historical averages. The low reading suggests that mortgage rates, which remain around 7% as of this writing, are still restraining buyer activity and looming over the future plans of home builders. Against this backdrop, single-family permits have weakened over the past several months, which suggests that builders are beginning to reassess production plans in light of this year’s spurt higher in interest rates.

That noted, we still believe that the Fed will initiate a rate cutting cycle later this year, which should enliven single-family activity. A structural shortfall of housing, both from sluggish new construction over the past two decades and the mortgage rate lock-in effect, should also continue as tailwinds for the new home market, where supply is relatively more abundant. All told, easier monetary policy should help single family construction maintain a positive trajectory.

Similarly, lower rates will likely help lift home improvement spending out of its current lull. Renovation and remodel spending shot up after the pandemic and subsequent home buying frenzy, but the rise in interest rates has since moderated the pace of spending. Given how levels of homeowner equity remain highly elevated as a result of the rapid run-up in home values in recent years, lower interest rates should bring about a faster pace of home improvement spending in the years ahead.

Multifamily construction is another category that will be helped by less restrictive monetary policy. Since the start of the 2022, multifamily development has contracted sharply. As shown in the below chart, the three-month moving average pace of multifamily starts fell to the slowest rate since the spring of 2020 during April. The recent pull-back is partially explained by tighter credit conditions for developers. Not only has credit become more expensive, it has also become more difficult to access as lenders have taken a more selective approach to lending amid increased market uncertainty.

Deteriorating apartment market fundamentals are another reason multifamily development is shifting into a lower gear. The apartment vacancy rate rose to 7.8% in Q1-2024, the highest since 2009 in the wake of the Global Financial Crisis. The increase has occurred largely as a result of new supply far outpacing demand. During Q1, there were nearly 153K multifamily units completed, a lofty level on par with the record high set in late 2023.

A potential supply overhang in some markets remains a concern, but adverse affordability and availability in the single family market will likely continue to bolster rental demand. Apartment net absorption picked up notably in the first three months of 2024, and absorption is tracking to be even stronger in Q2. Still, demand is likely to fall short of new supply in the medium-term, and tight monetary policy remains a significant constraint. As such, multifamily construction will likely weaken further this year. Longer-term, better balance in the apartment market, lower financing costs and easier credit conditions should eventually help bring a turnaround in construction.

  

(…) commercial starts for industrial, retail and office projects have declined considerably since the second half of 2022, most recently falling to the lowest levels since 2012. The fall in starts indicates that commercial development activity is set to remain weak in the near-term. Higher interest rates have not only made financing commercial projects more expensive but also slowed demand for the goods and services which ultimately drive real estate needs. For example, industrial and retail construction has cooled alongside a slower pace of consumer spending and moderating demand for warehouses and brick-and-mortar retail establishments. In addition to making commercial projects more viable from a financial standpoint, lower borrowing costs should help the economy maintain a sturdy pace of growth, and by extension, buoy demand for the more cyclically sensitive segments of commercial real estate.

Of course, factors besides interest rates are behind the drop in commercial development, especially when it comes to office construction. New office starts slipped to just 4.6 million square feet in Q1-2024, the lowest on records dating back to 2000. Even though newly built “trophy” office space has been relatively resilient to the negative effects of hybrid work, the office market remains awash with available space, which has pressured vacancy rates upward and applied downward pressure on rents. The rash of supply and highly uncertain prospects for future office demand in wake of hybrid work means new office construction should remain depressed for the foreseeable future.

On the other hand, the downward pressure on office demand from rising remote work prevalence is a reminder that digital transformation is underway and likely still in the early stages. To accommodate surging new investment in Artificial Intelligence (AI), cloud services and other digitalization services, there has been a marked rise in data center construction over the past few years. The influx of capital into expanding digital capacity from a wide array of investors and industries only appears to be accelerating, and demand for data centers is widely expected to fall short of supply for the foreseeable future. As such, data center development seems likely to remain a source of growth over the next several years.

  

Similarly, the need to fortify and expand the nation’s digital infrastructure appears to be one of the drivers behind the profound rise in manufacturing project spending. Since the final quarter of 2019, real spending on manufacturing structures has expanded by over 106% through Q1-2024. As displayed in the charts below, growth in most other segments of real private nonresidential structures investment has been tepid since 2020 with most categories still at or below the levels registered before the pandemic. Healthcare and education investment has improved recently alongside the need to update and improve existing buildings with new technologies, boost energy efficiency and accommodate demographic shifts. Despite the recent up-shift in these categories, manufacturing continues as a major driver of total structures investment.

The robust gain in factory construction appears largely as the result of new investment directed toward boosting domestic electric vehicle and semiconductor production. Although some moderation has occurred recently, the pace of activity should remain strong given the support from federal industrial policy. In 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act included $53 billion in subsidies for semiconductor production in the United States. A significant increase in private sector investment looks to be following the statute. Firms spanning the entire semiconductor value chain have announced nearly $450 billion in private investments since the passage of CHIPS, including over 80 new projects across 25 states, according to the Semiconductor Industry Association.

Infrastructure construction is another segment that appears poised to benefit from increased federal spending. While it has been roughly 2.5 years since the passage of the Bipartisan Infrastructure Law (BIL), the $550 billion in new federal spending originated by the bill has yet to fully roll out. As displayed in the chart below, the Congressional Budget Office recently projected BIL spending rates to pick up significantly over the next several years. The BIL provide funds for roads, bridges, mass transit, water and other infrastructure construction. What’s more is the Inflation Reduction Act (IRA) directing nearly $400 billion in federal funding toward clean energy projects such as electricity, transmission and transportation. The funding is delivered through tax incentives, grants and loan guarantees.

All together, the CHIPS Act, BIL and IRA stand to directly and indirectly boost a wide array of construction segments across the nation for the next decade. As shown in the map below, publicly announced state allocations for projects range from $1.6 billion in Delaware to over $45 billion in California. Using Arizona as an example, approximately $7.9 billion in BIL funding has been announced to date, including $4.7 billion for transportation projects, $1.6 billion for high-speed internet and $585 million for clean water projects. Similar to many other states, Arizona has also been a beneficiary of CHIPS and IRA, with $6.6 billion and $830 million, respectively, in public funding announced for a variety of manufacturing and clean energy projects. The state has also received approximately $115 billion in private commitments alongside the increase in public funding.

  

The construction sector appears to be navigating restrictive monetary policy relatively well. Despite higher interest rates, total construction spending has risen solidly over the past year, in both nominal and real terms. More recently, a decline in multifamily and commercial starts suggests the elevated rate environment is starting to significantly constrain activity. A thinning project pipeline of these types of projects suggests a weaker trend in overall nonresidential spending, which is likely to set in over the next few years. Elsewhere, fiscal policy appears to be boosting several segments of construction, namely manufacturing, clean energy and infrastructure projects. Looking ahead, the fiscal tailwinds are set to only intensify over the next few years as more funding from these federal programs is delivered. Meanwhile, the segments of construction most impacted by higher interest rates should start to improve as the Federal Reserve eventually reduces the federal funds target rate.

As a result, construction employment and high construction wages, normally highly interest rate sensitive, have yet to show any softness:

Rent Hikes Loom, Posing Threat to Inflation Fight Rising rents complicate the inflation picture and could make it challenging for the Fed to ease interest rates.

(…) While asking rents for new leases nationally are running nearly flat over the past 12 months, those figures are heavily influenced by the Sunbelt, where record-high supply has turned rent growth negative in some cities, according to most property data and brokerage companies that track them.

The least affordable home-sales market in decades is compelling more renters to stay put. Large apartment owners say fewer renters are moving out to buy homes than ever before, put off by record home prices, limited inventory and higher mortgage rates.

“Rental demand is definitely rebounding,” said Igor Popov, chief economist at the listings website Apartment List. “We’re past the bottom.”

Strong job growth has also opened the door for landlords to raise rents. “That gives them pricing power,” said Linda Tsai, a real-estate equities analyst at Jefferies. (…)

Shelter inflation, mostly a measure of rents that lags behind real market conditions by many months, was still running hot in May, with an annual rate of 5.4%, according to the Bureau of Labor Statistics.

“The housing situation is a complicated one,” Fed Chairman Jerome Powell said at a Wednesday press conference. “The best thing we can do for the housing market is to bring inflation down so that we can bring rates down.”

While most analysts say the pace of shelter inflation should decline further this year, some apartment landlords are signaling that the worst of the rent slowdown is already behind them.

“We believe we have likely already seen the maximum impact to new lease pricing,” said Tim Argo, an executive at the publicly traded building owner Mid-America Apartment Communities, on a May earnings call.

The Sunbelt landlord has been cutting prices for new leases. But the company said apartment absorption in the first quarter was at its highest for that quarter in two decades. (…)

In recent months, apartment buildings aren’t losing as many residents as they once were, market reports show, and available units are leasing fast. (…)

Big landlords are increasing rents on renewed leases by about 4% or more, according to their recent earnings statements. That is in line with recent historical averages and higher than general inflation. (…)

Despite the bounce off the bottom, most analysts don’t think big rent increases will return nationally this year. Commercial-property brokerage Newmark forecasts asking rents for new leases to rise 2% nationwide in 2024, well below the double-digit rates of the pandemic years. (…)

Chair Powell on his June 12 presser acknowledged that they misread the rent market:

(…) when market base rents go up sharply, as they did at the beginning of the of when the economy reopened, they really went up sharply. Those play into rollover rents much more slowly for existing tenants than they do for new tenants. And so, we’ve so we’ve found now that there are big lags. So, there’s sort of a bulge of high past increases in market rents. It has to get worked off and that may take, you know, several years.

“Market rents” (rents on new leases) overall never really declined as many pundits thought (many using narrower databases). Zillow’s data showed a bizarre sudden flattening in new rents this time last year but only for 3 months. Recent data show a more credible slowdown from +0.4% monthly between October 2023 and March 2024 to +0.26 in April and +0.20% in May.

On a YoY basis, Zillow rent growth rate has flattened to the 3.5% range. The BLS measure, still at +5.3% YoY is slowly catching up…

… but remains 10% below market. That “has to get worked off and that may take, you know, several years”.

• With the PPI and import price data in hand for May, the inflation modelers who map the CPI/PPI into the PCE now expect the core PCE index rose around 0.08%-0.13% in May That would translate to a 2.6% year-on-year core PCE inflation rate, down from 2.8% in April (@NickTimiraos)

U.S.: Core services inflation remains above 5% for 24th consecutive month

Global financial markets cheered last week’s weaker-than-expected US CPI data for May, with both the headline (+0.0%) and core (+0.2%) measures coming in a tick below consensus expectations. As today’s Hot Chart shows, the real question going forward is whether the ongoing deflation in core goods will be enough to offset the persistent inflationary pressures in core services, where 12-month inflation has been above 5% for 24 consecutive months – the longest such streak since the early 1990s.

Note that there is no precedent in modern US history for core services inflation to be above 5% while core goods are deflating. As US tariffs on Chinese goods ramp up, the possibility of disinflation stalling in the coming months remains. Keep in mind that the average base effect on core CPI from now to December will be only +0.17%, which means that, for the 12- month core rate to continue to fall, monthly results from now to the end of the year will have to be consistently below this figure. It’s possible, but it’s a tall order.

China’s property measures give sales a boost, but only in big cities

China’s latest property support measures have boosted transactions in its biggest cities, but activity in smaller localities is struggling to get off the ground, pointing to more pain ahead for most of the country’s real estate market.

On May 17, China cut minimum mortgage rates and downpayments and instructed municipalities to buy unsold apartments to turn them into social housing, sparking dozens of announcements from cities easing policies under the new guidelines.

Small samples of transactions data and interviews with 10 real estate agents across China show the measures had an uneven impact throughout the country, reviving demand in mega-cities such as Beijing and Shanghai, but not in smaller places.

This adds to concerns fuelled by poor home prices data on Monday that the downturn may have further to run, especially in the smaller cities where the quantum of excess supply is far greater than in larger cities, keeping pressure on policymakers to extend more support. (…)

Data from real estate research firm China Index Academy showed the average daily transactions for second-hand homes between May 18 and June 5 was 27.7% higher than the April average in Shanghai and 8.10% higher in Beijing. Transactions for new homes were down 0.2% and 6.4% respectively, with agents saying older apartments in Beijing and Shanghai typically sell faster because they are in better areas.

In Shanghai, one agent said inquiries for apartments have tripled since the city relaxed downpayment requirements on May 27, and noted 700-900 sales a day versus 500 previously. Another agent said home viewings increased 60%.

One agent in Beijing said viewings in the capital also increased “a lot.”

“Basically all agents are booked up,” said the agent in the capital, who only gave his surname Chen.

China Index Academy did not publish data for smaller cities, but separately released transactions data for the June 8-10 period showing a decline of 16% year-on-year for a group of 30 cities, including the largest ones.

This suggests sales in smaller cities are still weak and buyers are still wary cash-strapped developers may not be able to complete the projects.

“Smaller cities are doing a lot to incentivise people to buy more homes and it’s simply not working,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics.

“Something is broken. I think that something is the developers: you can’t have a property market turnaround without persuading homebuyers that they will receive presold units from developers.” (…)

Smaller cities have lowered mortgage rates and minimum downpayments more than the bigger ones, but even the most aggressive cities have so far struggled to revive demand, agents said. (…)

It will be a slow grind but it has to start somewhere, somehow. These data on big cities are the first signs of a bottoming out process.

FYI:

• U.S. households currently own the largest share of the US equity market. Foreign investors are second. Both fickle… (GS via Isabel.net)

• FOMO Driving the Market

It is obvious that enthusiasm for all things related to artificial intelligence (AI) is the key factor in the market’s recent advance.  The move is driven by momentum investors pushing names like Nvidia (NVDA) and Broadcom (AVGO) ever higher.  That in turn leads to FOMO (fear of missing out) among institutional and individual investors alike.  Remember, FOMO is a very important factor among institutional investors.  No portfolio manager wants to substantially underperform their benchmark or peers, and since the performance is increasingly being driven by a relatively small cadre of mega cap tech stocks, they have no choice but to join the fray. (Steve Sosnick, Chief Strategist Interactive Brokers)