Housing Starts

There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.

This week brings policy decisions in Taiwan and Thailand. The CBC decision will be very interesting to watch. The December statement at the time was surprisingly hawkish, only to be followed by a large upside surprise in inflation, and the TWD was subsequently allowed to appreciate. Given that the bank continues to view inflation as a major problem, according to quotes from Reuters, it will be very interesting to see how the bank weighs up concerns about hot money inflows vs the need to contain inflation risks. In particular, in the face of imported inflation pressures via higher commodity prices, many central banks may shift towards accepting the need for more currency strength. The week also brings some important central bank commentary. The RBA governor has an opportunity to opine on the recent slew of weak Australian data, as well as developments in the A$. There is quite a bit of commentary from Fed officials on the docket, including from Bernanke, which we will dissect for information on the further direction of policy. More dovish commentary than that of the FOMC last week, would arguably be a surprise and potentially dampen, if not reverse some of the moves of last week.

Back in early February, Zero Hedge was among the first to suggest that abnormally warm temperatures and a record hot winter, were among the primary causes for various employment trackers to indicate a better than expected trendline (even as many other components of the economy were declining), in "Is It The Weather, Stupid? David Rosenberg On What "April In January" Means For Seasonal Adjustments." It is rather logical: after all the market is the first to forgive companies that excuse poor performance, or economies that report a data miss due to "inclement" weather. So why should the direction of exculpation only be valid when it serves to justify underperformance? Naturally, the permabullish bias of the media and the commentariat will ignore this critical variable, and attribute "strength" to other factors, when instead all that abnormally warm weather has done is to pull demand forward - whether it is for construction and repair, for part-time jobs, or for retail (and even so retail numbers had been abysmal until the just released expectations meet). Ironically, while everyone else continues to ignore this glaringly obvious observation, it is Bank of America, who as already noted before are desperate to validate a QE as soon as possible (even if their stock has factored in not only the NEW QE, but the NEW QE HD), that expounds on the topic of the impact of record warm weather. In fact, not only that, but BofA makes sense of the fact why GDP growth continues to be in the mid 1% range while various other indicators are representative of much higher growth. The culprit? Global Warming.

Very busy day today with personal lack of savings, an ISM number which will likely beat consensus so much it will be above the highest Wall Street estimate, construction lack of outlays, Ben Bernanke speech day two, GM channel stuffing, and many Fed speakers.

Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?

While one can discuss seasonal factors, such as abnormally warm weather, as a driver of today's beat in Housing Starts, a far less noted number for headline purposes is the other side of the equation - Housing Completions. Because after all, every house that is started has to be completed at some point. One look at the chart below, shows why completions is quietly ignored, as it presents a far less optimistic picture about the housing market. Indeed, printing at 530k seasonally adjusted annualized units, the completions number was just the second lowest in decades, better only than the 509K from January 2011. And where this becomes rather glaring is when looking at the relative, or percentage, spread between Starts and Completions: at 31.9%, this was the highest in, well, as far as our data series goes back to. Does this mean that homebuilders are merely "breaking ground" for book keeping purposes, just to "paint the tape" and then quietly fading away into the night? We will know for sure in February when we get at least one more data print to validate or deny the recent troubling trend, but for the time being, to paraphrase a famous Bill Murray movie, is there something here being "lost in construction?" Or, far more simply, is this merely the latest ploy to paint not the tape so much as the economy in an election year with the latest incarnation of "cash for clunking construction"?

The onslaught of 'favorable' jobs numbers continues with the latest initial claims printing at 348K, down from an upward revised 361K, on expectations of a rise to 365K. This was the lowest number since March 2008. As a reminder, the abnormally warm January and February weather as discussed previously by David Rosenberg is a key reason in the ongoing favorable impression of the economy that this data skew creates. Granted the self-delusion of employers is just as palpable as that of market participants: claims went from sub 400K in the days before Lehman to nearly 600K in the weeks after. Continuing claims printed at 3.426MM down from 3.526MM, on expectations of 3.495K. Those seeing the 99-week expire increased as 23K people dropped out of EUCs and Extended Claims. Expect to see this "favorable" trend reverse within weeks, as the groundwork for more easing has to be set (more on that shortly). Elsewhere, the headline PPI came below expectations of 0.4%, printing at 0.1%, up from -0.1% previously, while Core PPI, paradoxically, beat this time, rising from 0.3% to 0.4%, on consensus of a decline to 0.2%. Finally Housing Starts was a meaningless and noisy 699K on expectations of 675K, where it has been crawling along the bottom for years. Permits Missed Expectations of 680K coming at 676K.

Busy day in the economic headlines arena, with Housing Start, Claims PPI and Philly Fed all on deck. Goldman summarizes the expectations and the upwardly biased consensus.

Last week, there were relatively few US data releases, but Initial Jobless Claims continued to surprise on the positive side, while U of Michigan Consumer Sentiment saw a small decline. This week, the FOMC minutes on Wednesday with guidance on the Fed's balance sheet will be the key event. Aside from the Fed, there will be many key releases in the US with IP, CPI, and the regional business surveys. The market expects an increase of 0.6%mom in IP, 0.3%mom in CPI, and small gains in the surveys. ?In Greece, negative headlines over the new austerity package on Friday caused some reversal of the rally in the first part of the week, and as a result, we were stopped out of our short $/CAD recommendation (for a small potential gain). However, the Greek cabinet agreed on the new austerity measures late on Friday, and parliament appears to be on track for a positive vote. The Eurogroup meeting scheduled this coming week will be important to watch as well, and Greek GDP will give a sense of the cyclical damage caused by austerity.

Remember last year when the tiniest snowfall was reason for everyone and their grandmother to miss every possible estimate, always blaming it on the weather? Or rainfall in the spring? Or warm weather during the summer? Oddly enough one never hears about the opposite: the beneficial, and one-time, impact to trendline due to countertrend weather, such as the fact that we just had April weather in January. Granted, nobody in the programmed MSM will touch this topic, which is why we go to the most trustworthy filter of real economic data - David Rosenberg. "...Be careful in assessing the seasonally adjusted data when January weather feels like April. It was four to five degrees warmer than usual and the third fewest snowflakes to hit the ground in the past 50 years. On top of that, let's not lose sight of what real GDP did in Q4 — considerably below consensus view from last summer and sub-1% at an annual rate once inventories are stripped out. The only variable preventing real GDP from stagnating completely was the fact the price deflator collapsed to just 0.4% at an annual rate. If it had averaged to what it was in the previous three quarters, real GDP growth would have come in close to a 0.7% annual rate. Strip out the inventory build-up and real sales would have contracted at a 1.3% annual rate and recession would be dripping off everybody's tongue right now."

First, Initial Claims - the new yoyo.Initial claims drop from revised 402K (as expected) in last week, to 352K this week, 50K swing in one week, on expectations of 384K. All in the seasonal adjustment, which tries to compensate for the 124K drop in Non Seasonally Adjusted claims. Fired bankers and everyone else no longer registers to the B(L)S. This number was below the lowest Wall Street estimate of 363K. Continuing claims: 3.432MM, below expectations of 3.590MM, previous revised naturally higher from 3.628MM to 3.647MM. The reason? People on EUC and Extended benefits in last week: +105,000. More and more people move away from 6 month support to extended 99 week cliff.  Housing Starts and Permits: Largely irrelevant, as crawling at a bottom, but starts at 657K, below expectations of 680K, and down from 685K previously; Permits in line with expectations at 679K, down from 680K before. Fed “clearly concerned with the return of disinflation;” watch for “talk of further central bank action to support the economy” at next week’s FOMC meeting, says Brusuelas

CPI, housing starts, jobless claims - last week will almost certainly to be revised to over 400k for the first time in months, and the Philadelphia Fed index.

Construction trends may be good for incumbents, but for homeowners, banks, and taxpayers, they're costly....

Once again the US Department of Truth succeeds in fooling the algos: today's November Housing Starts number was a blockbuster: at 685K annualized units, it came higher than the highest estimate (range was 600K to 655K), and certainly higher than the average estimate of 635K. It was obviously higher than the downward revised previous number of 627K. All great: housing soaring, employment must be back. Right? Wrong. One peek under the covers shows where all the "growth" comes from - the entirety of the surge was due to the absolutely hollow 5+ multi-family units which jumped by a whopping 25% sequentially, and which as everyone in the industry knows are nothing but inventory padding by homebuilders who "build just to build." Unfortunately, as the all important 1 Unit structure trendline shows, there is absolutely no improvement in this critical series. But hey - it fooled the robots. And now it will take at least 12-24 hours before vacuum tubes process the reality of this latest spin. By then, however, we may well have had our Christmas rally.

Unlike yesterday's PPI which surged past even the highest expectations, the September CPI came right in line, rising by 0.3%, just as predicted, and down from 0.4% in August. The index for all items less food and energy increased 0.1 percent in September, its smallest increase since March. The index for apparel declined in September after a series of sharp increases, and the indexes for used cars and recreation turned down as well. The indexes for new  vehicles and household furnishings and operations were both flat. The shelter index rose, but posted its smallest increase since April, while the indexes for medical care, airline fares, and tobacco all increased. And in crawling along the bottom news, Housing Starts soared by 15% to 625,000 from a revised 572K and well above expectations of 590K. That this number was not as strong as headlined, is that it was driven exclusively by multi-family units (5+) which came at 227K, a surge from the 148K in August. Since these numbers have been crawling at the bottom for years, and all moves are merely kneejerk reactions, in this case to accrued buildup following a weak summer season, it should be largely ignored (or else interpreted as a build up of unnecessary inventory: remember that whole foreclosure halt?), especially since Housing Permits of 594K missed expectations of 610K, and declined from a revised August print of 625K. Lastly completions were basically unchanged at 647K compared to 634K in August. Summarizing it all? Noise.