Date: July 17, 2019
U.S. Housing Starts Fell in June on Fewer Multifamily Units
“U.S. new-home construction fell in June for a second month as a drop in apartment building outweighed a pickup in single-family projects. Residential starts declined 0.9% to a 1.25 million annualized rate, the slowest in three months, according to government figures released Wednesday. Permits, a proxy for future construction, dropped 6.1% to a 1.22 million rate, also reflecting a slump in applications to build multifamily units. Single-family starts advanced 3.5% to an annualized rate of 847,000, and permits edged up 0.4% to 813,000. The figures on one-family home construction signals the sector is relatively stable as lower borrowing costs and more subdued price appreciation make homeownership more affordable. Home construction hasn’t contributed to economic growth since the fourth quarter of 2017. A report Tuesday showed homebuilder sentiment increased in July amid solid demand for single- family homes and prospective buyer traffic. Starts of multifamily homes, a category that tends to be volatile and includes apartment buildings and condominiums, slumped 9.2%, and permits plunged 16.8%. Fed Chairman Jerome Powell addressed the issue last week when he told lawmakers homebuilders are being held back by a “series of factors” including higher material costs, a skilled-labor shortage, and President Donald Trump’s tariff and immigration policies in a congressional hearing last week. Two of four regions posted an increase in housing starts last month, led by a 31.3% rise in the Northeast and a 27.1% advance in the Midwest. New construction declined 9.2% in the South and 4.9% in the West. About 165,000 homes were authorized but not yet started, the fewest in a year, indicating builders have less of a backlog. The report, produced jointly by the U.S. Census Bureau and the Department of Housing and Urban Development, has a wide margin of error, with a 90% chance that the headline figure was between an 8.8% decline and 7% gain.”
Pound Could Plunge to Parity Against Dollar on a No-Deal Brexit
“The pound may fall to parity with the dollar on a no-deal Brexit, according to Morgan Stanley. A drop to historic lows would come under the market’s worst-case scenario of the U.K. leaving the European Union without a deal, a risk that the bank says is growing. The pound hit a two-year low below $1.24 Wednesday after both contenders for prime minister hardened their Brexit rhetoric, and for Morgan Stanley it could get much worse with a tumble to $1.00-$1.10 on a crash exit. The only time the pound has dropped below $1.10 was in 1985, when it briefly touched $1.05 after the U.S. devalued its currency to fight a strong dollar. A Bloomberg survey of strategists in March saw the pound falling to $1.20 on a no-deal Brexit, yet the currency has been the world’s worst performer since then to take its drop from the 2016 Brexit referendum to 17%. “The pound has come under intense selling pressure since Prime Minister May withdrew from her party leadership position, leaving markets with increased concern that the U.K. may be heading towards a harder Brexit,” said strategists including global head of currency strategy Hans Redeker. “Should this scenario materialize, pound-dollar could fall into the $1.00-$1.10 range.” A 19% plunge to parity with the dollar would rival the currency’s 25% tumble on Black Wednesday, when the U.K. was forced to withdraw from the European exchange-rate mechanism. The Bank of England also said in November that the pound could fall to below parity with the dollar under a no-deal scenario, an analysis that was decried as too negative at the time.”
China’s Debt Ratio Is Growing as Its Economy Loses Steam
“China’s efforts to shore up sagging economic growth are leading to a resurgence in indebtedness, underlining the challenge President Xi Jinping’s government faces in curbing financial risk. The nation’s total stock of corporate, household and government debt now exceeds 303% of gross domestic product and makes up about 15% of all global debt, according to a report published by the Institute of International Finance. That’s up from just under 297% in the first quarter of 2018. The real growth of the world’s second-largest economy slowed to a record-low pace in the second quarter amid the negative effects of the trade war with the U.S. as well as longer-term factors such as its aging society. In a bid to manage the slowdown, the government has tried to funnel credit to the private sector and encourage domestic consumption — at the price of higher debt. That’s a turnaround from 2018’s sweeping campaign to curb off-balance sheet corporate borrowing from the so-called shadow banking sector, a signature campaign by Xi. While that effort did have some success, borrowing in other sectors offset it, according to the IIF. The marked slowdown in the economy also affects the burden that debt places on the economy. With nominal GDP growth now running at about 8%, far outpaced by the growth in aggregate financing at about 11%, means that the debt-to-GDP ratio is bound to increase, according to Raymond Yeung at Australia & New Zealand Banking Group Ltd. Real gross domestic product rose 6.2% in the April-June period from a year earlier, a further slowdown compared with the 6.4% expansion in the first quarter. For now, accelerated debt growth appears to be a price policy makers are willing to pay in order to brake the slowdown. Policy makers have beefed up fiscal support, including easing the rules for using government debt in some infrastructure projects. The State Council, China’s cabinet, said last month that banks should try to sell more than 180 billion yuan ($26.2 billion) of bonds to fund small firms in 2019 as well as lend more to the manufacturing and services sector.”
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