FIRM, BUT FLEXIBLE!
High Interest Rates Are Working, Fed’s Williams Says Expects inflation will resume easing in second half of 2024
(…) “With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year,” Williams said Thursday in prepared remarks at the Economic Club of New York.
“The behavior of the economy over the past year provides ample evidence that monetary policy is restrictive in a way that helps us achieve our goals,” he said, adding later that a rate increase is unlikely. (…)
“I don’t feel any urgency or need that we have to make a decision now,” he said.
Williams said he didn’t view recent price data as a sign that inflation is no longer heading lower. Williams said earlier this month that monetary policy is in a good place and he wants to see more evidence to be confident inflation is falling to the central bank’s target.
Data out earlier Thursday showed the US economy grew at a slower pace in the first quarter than initially reported, underscoring a loss of momentum at the start of the year. (…)
Williams said he sees inflation — as measured by the personal consumption expenditures price index — falling to about 2.5% by the end of this year before moving closer to 2% next year. He sees the unemployment rate reaching about 4% at the end of this year then falling toward 3.75%.
“How I think about it is, monetary policy is currently well positioned but we have also the time, and ability, given where the economy is, to collect more data,” Williams told reporters following the event, adding the US is on a “reasonably good track” to taming inflation without an economic downturn. (…)
“The policy that we put in place is working,” Williams said. “But, the view on what is the appropriate path for policy is adjusting with the change in the outlook.” (…)
“The data we have through the first part of this year, there’s no sign of the neutral rate yet having risen,” he said. “Doesn’t mean it won’t.”
Speaking with reporters after the event, Williams added that the factors that have held interest rates down over the last decade are still in play, pointing to things like demographics and a willingness to hold US Treasuries.
Atlanta Fed President Raphael Bostic indicated last week that officials are rethinking their estimates of neutral and “there may be reasons to think the baseline steady state” is higher. Williams’ predecessor at the New York Fed, Bill Dudley, wrote earlier on Thursday he believed the neutral rate had risen substantially.
By contrast, Fed Governor Christopher Waller said he still thinks the neutral rate is relatively low. (…)
(…) “It also may be that policy is just not as restrictive as we think it might have been relative to the level of interest rates before the pandemic,” Logan said Thursday at an event in El Paso, Texas. “It’s really important to keep all options on the table and that we continue to be flexible.” (…)
Logan also said the so-called neutral interest rate — the level of rates that neither stimulates nor weighs on the economy — has probably risen, adding to a broader debate on the topic. Logan cited increased demand for investment — from the energy transition, nearshoring and AI — as potentially shifting the neutral rate higher.
“There’s some good reasons to believe it’s higher than it was before the pandemic,” she said. (…)
The FOMC meetings must be very lively!
US Pending Home Sales Gauge Slumps to a Four-Year Low on Rates
The monthly decline was steeper than all estimates in a Bloomberg survey of economists and the worst since February 2021. All US regions saw decreases from a month earlier.
“The impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market,” NAR Chief Economist Lawrence Yun said in a statement. (…)
New data suggest buyers aren’t getting any relief on costs, either. Prices in 20 major US cities actually picked up the pace in March, rising 7.4% from a year ago, according to a S&P CoreLogic Case-Shiller index.
Price increases should finally taper off when more inventory hits the market, Yun said in a release Thursday, although for now, the 1.2 million homes on the market are well below prepandemic levels.
“The prospect of measurable home price declines appears minimal,” Yun said. “The few markets experiencing price declines will be viewed as second-chance opportunities for buyers to enter the market if those regions continue to add jobs.” (…)
(…) For April, Realtor.com reported inventory was up 30.4% YoY, but still down almost 36% compared to April 2017 to 2019 levels. (…)
According to Zillow’s research, new listings were up 15.5% YoY in April but still 24.7% below pre-pandemic levels. Total inventory levels were 35.7% lower than typical pre-pandemic levels for the month.
BTW, Zillow also says that asking rents rose 0.6% MoM in April and are up 3.6% YoY. These are new rents. The BLS’ All-Tenent-Rent-Index was up 5.5% QoQ annualized in Q1’24 (+5.3% YoY, unchanged from Q4’23).
China Factory Activity Shrinks in Surprise Hit to Growth Outlook
The official manufacturing purchasing manager index fell to 49.5 in May, the National Bureau of Statistics said on Friday. That compares with a reading of 50.4 in April, and a forecast of 50.5 in Bloomberg’s economist survey. Any number above 50 points to an expansion. (…) China’s exports posted solid growth in the first four months of the year. But the PMI sub-index for new export orders contracted in May for the first time in three months. A measure of input prices climbed to the highest in eight months, reflecting rising commodity costs. (…)
In a statement accompanying the data release, NBS analyst Zhao Qinghe pointed to “a high base of comparison led by previous fast expansion in the industry” and “insufficient effective demand” as reasons for the May slowdown. (…)
There are signs that the policy may be having an impact. Production in the general equipment and computer and telecommunications industries expanded for a third straight month while new orders placed for railway, shipping and aviation devices and electric machines continued to increase in May, according to NBS data.
The non-manufacturing measure of activity in construction and services came in at 51.1, the statistics office said. That compares with a forecast of 51.5, and an April reading of 51.2.
The sub-gauge of construction activity fell to 54.4 from 56.3. That slowdown came after a strong rebound the previous month, said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. (…)
China’s 60 Million Homes Are Hard to Sell Even in Big Cities Housing inventory is at a historic high, S&P analyst says
The country has the equivalent of 60 million unsold apartments, which will take more than four years to sell without government aid, according to Bloomberg Economics. The oversupply is dragging down prices at the fastest rate in a decade, giving people less reason to buy a home. The situation is worst in the capital city. (…)
As of April, about 80% of China’s cities had an inventory absorption pace that was worse than a “warning line” of 18 months, according to CRIC. That’s even after developers refrained from offering new projects amid lackluster sales, leading new supply to shrink 20% from March.
The challenge looks just as daunting when measured by floor space. Residences completed by developers but unsold expanded to 391 million square meters nationwide as of April, the highest since 2017, official data show. Including properties that are almost finished and approved for presale, the stock is much larger at about 1.8 billion square meters, JPMorgan Chase & Co. estimates. Most of the excess sits in lower-tier cities, according to S&P. (…)
US Is Slowing AI Chip Exports to Middle East by Nvidia, AMD US is worried about the technology getting diverted to China
US officials have slowed the issuing of licenses to chipmakers such as Nvidia Corp. and Advanced Micro Devices Inc. for large-scale AI accelerator shipments to the Middle East, according to people familiar with the matter, while officials conduct a national security review of AI development in the region.
It’s unclear how long the review will take, nor is there a concrete definition of what constitutes a large shipment, said the people, who asked not to be identified because the discussions are private. Officials are particularly focused on high-volume sales, the people said, as countries including the United Arab Emirates and Saudi Arabia look to import massive quantities of the chips used in AI data centers.
AI accelerators — a category pioneered by Nvidia — help data centers process the flood of information needed to develop artificial intelligence chatbots and other tools. They’ve become essential equipment for companies and governments seeking to build an AI infrastructure. (…)
Eurozone Inflation Rises as ECB Considers Rate-Cut Path The pickup in inflation is unlikely to mark the beginning of a sustained acceleration in the pace of price rises since it partly reflects a change in German public transport charges
Consumer prices were 2.6% higher in May than a year earlier, an increase in the inflation rate from the 2.4% recorded in April, the European Union’s statistics agency said Friday. That was slightly above expectations from a consensus of economists polled by The Wall Street Journal.
The pickup in inflation is unlikely to mark the beginning of a sustained acceleration in price rises since it partly reflects a 2023 change in German public transport charges. However, inflation also picked up in Spain and France, an indication that the expected return to the ECB’s 2% target is likely to be uneven. (…)
With energy prices having fallen over recent months, and food prices also cooling, ECB policymakers are increasingly confident that inflation will settle around their target from the middle of next year, and have indicated that they will lower their key interest rate to 3.75% from 4% on June 6. (…)
Annual services inflation climbed to 4.1% in May from 3.7% the prior month, and concerns over pressures in the sector have been underlined by a series of recent data releases. (…)
Layoffs, Pricing Power Driving S&P 500 Profits to Highest In 16 Years Net margin beats at highest level in at least two years
S&P 500 companies are on track to be more profitable than they have been in over a decade, boosted by layoffs, lower commodity prices and continued pricing power.
The index’s average net income margin is projected to surpass 13% in the second half of the year, according to analyst estimates compiled by Bloomberg Intelligence, and then continue to rise into next year to almost the best on record since 2009.
Firms have largely opted not to pass on savings from falling commodity costs. To further lower expenses, many are also cutting their workforce and turning to artificial intelligence. (…)
Tech companies have outstripped the broader index in terms of profitability — the so-called Magnificent Seven companies enjoyed an average profit margin of 24% in the first quarter, double the S&P 500’s 12% average. Apple Inc. and Amazon.com Inc. have undertaken significant headcount reductions in recent months, reversing years of aggressive hiring. (…)
Among 481 S&P 500 companies that have reported this quarter, 72% posted net income margins that came in above analyst estimates. (…)
I added Bloomberg’s 14% margin estimate for Q2 on the Yardeni chart. Profit margins have almost tripled since the 1990s (charts courtesy of Ed Yardeni).
For a sense of how this happened, IT margins almost tripled since 2004:
Significantly outperforming other industries:
Hmmm…
U.S. Allows Ukraine to Carry Out Limited Strikes Inside Russia With American Weapons Washington still rules out use of long-range ATACMS missiles beyond Ukraine’s borders.
France’s Macron Prepares Plan to Send Military Instructors to Ukraine Initiative risks running up against red lines set by U.S. and Germany at the start of the war to prevent the conflict from escalating.
(…) Macron is pushing the envelope in other areas. He recently cleared the way for Ukrainians to use powerful cruise missiles supplied by France to strike inside Russia on the condition that the weapons are only used to take out military sites that have fired on Ukraine.
The U.S. on Thursday revised its policy prohibiting the use of American-provided weapons against targets inside Russia. Under the new policy, Washington will allow Ukrainian forces to use artillery and fire short-range rockets from Himars launchers against command posts and arms depots and other assets just across the border in Russia that are being used by Russian forces to carry out their attack on Kharkiv in northeastern Ukraine.
But the new U.S. policy doesn’t give Ukraine permission to use longer-range ATACMS surface-to-surface missiles against targets in Russia.
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Thanksgiving Week
Memorial Day reminds me to thank donators to Edge and Odds, something I too often neglect to do, buried in my rather busy schedule, which includes self-imposed leisure time away from the laptop to keep some level of sanity.
I am embarrassed to say that this neglect seems to go back to the spring of 2022. Sincere apologies. Time does fly, even more than we think. My late mother-in-law used to say “the slower I get, the faster time goes by”. So true.
I know I will not be able to find time to personally thank all of you, so here’s my public thank you to (in no particular order):
Hopefully, I did not forget anybody for whom I have the basic info. Others I will need to contact directly (or you send me your full names to edgeandodds [at] gmail.com).
Sincere thanks.
Denis