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U.S. housing: Building permits near 13-year high

U.S. homebuilding fell less than expected in January while permits surged to a near 13-year high, pointing to sustained housing market strength that could help keep the longest economic expansion in history on track.

Other data on Wednesday showed producer prices increasing by the most in more than a year last month, boosted by rises in the cost of services such as healthcare and hotel accommodation. The reports could support the Federal Reserve’s desire to keep interest rates unchanged at least through this year after lowering borrowing costs three times in 2019.

“The economy looks good with residential home building activity beating expectations and a little more producer price inflation, even if the data overstate how well the country is doing in terms of generating the growth and inflation the Federal Reserve wants to see,” said Chris Rupkey, chief economist at MUFG in New York.Housing starts dropped 3.6% to a seasonally adjusted annual rate of 1.567 million units last month, the Commerce Department said. That followed three straight monthly increases.

Data for December was revised up to show homebuilding rising to a pace of 1.626 million units, the highest level since December 2006, instead of surging to a rate of 1.608 million units as previously reported.

Economists polled by Reuters had forecast housing starts falling to a pace of 1.425 million units in January. Housing starts jumped 21.4% on a year-on-year basis in January. An estimated 1.291 million housing units were started in 2019, up 3.3% compared to 2018.

Building permits soared 9.2% to a rate of 1.551 million units in January, the highest level since March 2007, lifted by gains in both single- and multi-family housing segments.

The housing market remains on solid footing, supported by the lowest mortgage rates in more than three years. Though housing accounts for about 3.1% of gross domestic product, it has a giant footprint on the economy. Housing market stability could help to keep the economic expansion, now in its 11th year, on course, amid risks from the coronavirus, slowing consumer spending and weak business investment.

Minutes of the Fed’s Jan. 28-29 meeting published on Wednesday showed policymakers “expected economic growth to continue at a moderate pace.”

The 30-year fixed mortgage rate is at an average of 3.47%, the lowest since October 2016, according to data from mortgage finance agency Freddie Mac.

“Housing is proving to be a solid link in a cooling economy,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.

Stocks on Wall Street were trading higher, with the S&P 500 and the Nasdaq hitting all-time highs as hopes that China would take more measures to prop up its economy eased worries about the impact of the coronavirus epidemic. The dollar rose against a basket of currencies, while U.S. Treasury prices slipped.

PRODUCER PRICES RISE

A separate report from the Labor Department on Wednesday showed the producer price index for final demand jumped 0.5% last month, the largest gain since October 2018, after climbing 0.2% in December. In the 12 months through January, the PPI advanced 2.1%, the biggest increase since May, after rising 1.3% in December. Economists had forecast the PPI gaining 0.1% in January and rising 1.6% on a year-on-year basis.

Data last week showed consumer prices excluding the volatile energy and food components picking up in January. That together with the firmer producer price readings led economists to expect a rise in the inflation measure tracked by the Fed for its 2% inflation target. Economists are forecasting that the core personal consumption expenditures (PCE) price index gained 0.2% in January, which would lift the annual increase to 1.7%.

The core PCE price index rose 1.6% on a year-on-year basis in December. It undershot its target in 2019. January PCE price data will be published next Friday.

“This should raise Fed official confidence that underlying core PCE is running around 2.0%, limiting the potential for (rate) cuts on a low inflation concern,” said Andrew Hollenhorst, an economist at Citigroup in New York. “Still, any ‘significant, persistent’ overshoot of 2.0% remains very unlikely, meaning rate hikes in 2020 are all-but-ruled-out.”

The housing report from the Commerce Department showed single-family homebuilding, which accounts for the largest share of the housing market, fell 5.9% to a rate of 1.010 million units in January. Single-family starts raced to a 1.073 million-unit pace in December, the highest level since June 2007. Single-family housing starts accelerated in the Northeast and West, but tumbled in the Midwest and the populous South.

Single-family housing building permits rose 6.4% to a rate of 987,000 units in January, the highest level since June 2007.

Starts for the volatile multi-family housing segment rose 0.7% to a rate of 557,000 units last month, with those for buildings with five or more units at levels last seen in July 1986. Permits for the construction of multi-family homes vaulted 14.6% to a rate of 564,000 units, and those for buildings with five or more units hit their highest level since June 2015.

While housing completions dropped 3.3% to a rate of 1.280 million units last month, the stock of homes under construction rose 1.3% to 1.203 million units, the highest level since February 2007. This could help alleviate a shortage of homes for sale that is keeping home prices elevated.

Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap.

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Fed calls the coronavirus a ‘new risk to global growth outlook’

Though the coronavirus had just taken hold when the Federal Reserve met in January, officials already expressed concern about its potential economic impacts.

“The threat of the coronavirus, in addition to its human toll, had emerged as a new risk to the global growth outlook, which participants agreed warranted close watching,” minutes released Wednesday from the Federal Open Market Committee’s Jan. 28-29 meeting said.

Central bank policymakers said, for instance, that if the virus spread it could hit what appeared to be an improving growth picture in China.

The minutes noted that “early GDP releases showed a pickup in growth in China and some other Asian economies, though news of the coronavirus outbreak raised questions about the sustainability of that pickup.”

Officials also cited the potential impact on stocks, though the market has been performing well. Negative headlines about the virus have caused some volatility.

“Late in the period, concerns about the spread of the coronavirus and uncertainty about its potential economic effect weighed negatively on investor sentiment and led to moderate declines in the prices of risky assets,” the minutes said.

Officials also commented on the impact the disease had on China’s currency, which had been appreciating but tailed off as the news cycle intensified.

Those statements come amid continuing concern about the virus not only as a health threat but also as an economic one to a global growth picture that has been wobbly.

International Monetary Fund Managing Director Kristalina Georgieva called the COVID-19, outbreak the “most pressing uncertainty” in the world now.

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Coming Soon: Airline Wi-Fi That Actually Works

Air travel and glitch-free internet access are often considered mutually exclusive, thanks to the technical difficulties associated with making Wi-Fi work at 40,000 feet.

For the airlines, a satisfying online experience is even more elusive. The hardware, software, maintenance and inability to easily switch service providers combine for a very expensive headache.

But there may be some good news on the horizon—a new era of ground-quality internet connectivity that could save carriers billions of dollars. The Seamless Air Alliance, a nonprofit group of 30 companies, says its new tech architecture will make in-flight connectivity systems modular, with open interfaces and components that can easily be swapped out.

The alliance includes Airbus SE and Delta Air Lines Inc., with such equipment makers and satellite companies as Panasonic Avionics, Intelsat SA, Nokia Oyj and Vodafone Group Plc. Together, they want to introduce a global standard, using protocols derived from the cellular and Wi-Fi industries.

Jack Mandala, the alliance’s chief executive officer, said that airlines now “have equipment that only works with the provider they’ve chosen.” Universal adoption of the framework, he predicted, could change that.

For passengers, this alliance may change the entire airport experience. Your mobile connection would migrate from one system to another, from the terminal onto the jet bridge and down the aisle to your seat—without the need to log in or pay. No longer would you be restricted to airline movies you’ve already seen, television episodes you’ve already skipped or video games you never wanted to play.

“Today, that experience can be a brand-damaging event for the airline,” Mandala said of onboard internet access. “Passengers are out there on social media, complaining when they can’t get service, and they don’t blame the service provider—they blame the airline.”

He said new internet companies will enter the market, attracted by the unified standards. This will boost competition and quality in an industry that often enrages travelers. “For inflight connectivity,” he said, “the high cost of capacity has been the Achilles heel.”

These new protocols might also save airlines billions of dollars, allowing for “rapid adoption of new technologies in a surgical manner,” the group said Tuesday in a statement. This means that airlines would be able to manage their Wi-Fi offerings more efficiently, easily changing providers as a new generation of low-Earth-orbit satellite networks come online. These could include offerings from Elon Musk’s Starlink; Softbank Group Corp.-backed OneWeb; and Amazon.com’s Project Kuiper.

A 5% improvement in these areas—based on an analysis conducted over 10 years, with a fleet of 10,000 internet-connected aircraft increasing to 25,500 by 2028—would boost the value of the inflight connectivity market by $11.4 billion, according to a 2019 white paper the alliance commissioned. This would increase to almost $37 billion if customer use rates were to double, along with a 5% improvement in the three other metrics, the study found.

“There are market forces at work that are ready to drive down costs.”

Before you start dreaming of bandwidth, however, here’s a buzzkill: Plenty of key industry players have yet to get involved—including American Airlines Group Inc., Boeing Co., Gogo Inc., and Verizon Communications Inc. Still, Mandala contends that it’s only a matter of time before the industry coalesces around standards that lower costs for airlines.

To become compliant with the standards, most equipment makers will need to modify software, something Mandala, a former Qualcomm Inc. executive, contends is “not a big deal,” financially.

“There are market forces at work that are ready to drive down costs, given the capacity that’s coming online,” he said. “Going to these standards will knock down these artificial barriers that’s holding back this big growth in the market.”

Among them: high prices, spotty service caused by bandwidth bottlenecks, the dodgy nature of typing in your credit-card number with a snoopy seatmate five inches away, and the general milieu of glitch behavior encountered when trying to connect on different networks with different devices.

On those flights that offer Wi-Fi access, this friction-filled scenario leaves customer purchase rates well below 10%. Most passengers simply connect to the streaming entertainment delivered wirelessly from servers on the plane. A few even engage in that old fashioned hobby called reading.

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Europe floors it in the race to dominate electric vehicle batteries

Asia has had a good head start, but the EU is determined to catch up.

Outside the German town of Arnstadt, workers for China’s Contemporary Amperex Technology Co. Ltd. (CATL) are hustling to build Europe’s biggest electric-car battery plant.

The site, which covers an area equivalent to about 100 football fields, previously housed one of the continent’s largest solar-panel factories. During a visit in October, wooden crates filled with surplus equipment were stacked up outside the metal-clad structure to make way for car-battery-making equipment. Roaring bulldozers swarmed a nearby lot to prep for construction of a new building.

The $2 billion project—one of about a half dozen battery factories under construction in Germany alone—worries European policymakers, who are desperate to ensure their auto industry doesn’t lose competitiveness in the transition to electric vehicles. EV sales in Europe are expected to jump to 7.7 million in 2030 from just under half a million in 2019, according to forecasts from BloombergNEF. Those vehicles will mainly be powered by batteries from Asian manufacturers like CATL, unless European companies fight back and build a local supply chain.

EVs and clean transportation are at the heart of the European Union’s Green Deal, a more than €1 trillion ($1.1 trillion) European Commission policy initiative aimed at making the EU carbon neutral by 2050. The plan includes replacing large power plants with smaller, more local, renewable energy sources while eliminating combustion engines in buses, cars, and trucks. After betting on dirty diesel for too long, European politicians and the heads of Volkswagen, Daimler, and BMW are vowing to build a greener supply chain for all of those vehicles.

“If we let China own the battery, then we lose out on the centerpiece of electric cars,” says German Deputy Economy Minister Thomas Bareiss. “I’m not sure that’s the best approach for our auto industry.”

Europe has only a patchwork of small battery players. The biggest chunk of the value of a European-made electric car belongs to Asia—China, Korea, and Japan account for more than 80% of the world’s EV battery production, and companies such as CATL, LG Chem, and Samsung SDI control Europe’s biggest battery factories.

To change that, the European Commission set up the Battery Alliance initiative. In December it approved €3.2 billion in aid for projects approved or currently under way at 17 companies, including BASF, BMW, and Fortum. The measure is meant to encourage greater investment in factories by these and other European companies.

National governments are also committing large sums to battery efforts, especially in Germany. In early February its economy minister, Peter Altmaier, announced a €5 billion project for battery cells in Germany and France. Altmaier has been a leading proponent of developing a local battery sector. The goal, as he sees it, is to build “the best and most sustainable batteries in Germany and Europe.” There is no other option, he has said, if its carmakers are to succeed.

European players, including Belgian materials technology company Umicore N.V. and German chemical company BASF SE, make battery materials from catalysts to cathodes. But there is little mining of key ingredients like lithium, and no capacity to turn those resources into high quality vehicle batteries. A desire to bring lithium and other materials closer to the production line is partly driving the efforts. “Lithium hydroxide doesn’t travel well,” say Andreas Scherer of AMG Advanced Metallurgical Group NV. “It doesn’t like to sit in a bag in the belly of a ship for six weeks—that’s bad for quality.”

Stringent environmental rules and community opposition to more mines could slow the momentum. Land owners and environmental groups fear the resulting emissions and pollution. Finland’s Keliber Oy in November postponed its planned initial public offering and the construction of a lithium mine on appeals against its environmental permit.

Some countries are pushing ahead. Support from the European Commission to mine battery metals—and the potential riches—motivated Dietrich Wanke to trade a career in Australian mining for the green hills of the Lavant valley in Wolfsberg, Austria. Wanke is the Chief Executive Officer of European Lithium, a startup mining company that aims to become a supplier of raw material for batteries. It operates from an abandoned test tunnel in Austria, where government geologists looking for uranium in the 1980s found lithium instead.

“We won’t be able to produce the absolute cheapest material. It is clearly a commodity mined in Europe, according to European laws and environmental standards,” Wanke says. “It must be seen as a unique product, contributing to the reduction in carbon dioxide emissions in Europe.”

The Wolfsberg project is traditional hard-rock mining, with the ensuing environmental consequences. Another startup, or junior, miner, Vulcan Energy Resources Ltd., claims it will produce the material with no CO₂ emissions by adding lithium-extraction facilities to existing geothermal power plants feeding on underground reservoirs in southern Germany. The method is similar to what Warren Buffett’s Berkshire Hathaway Inc. is researching in California’s Salton Sea. “By 2028, forecasters see Europe alone needing more lithium than is being produced in the entire world today,” says Vulcan Energy’s managing director, Francis Wedin. 

Still, the efforts now could be too little, too late. “European manufacturers have dragged their feet,” says Jose Lazuen, senior automotive practice analyst at Roskill. “Asian producers started taking positions in Europe two or three years ago, because they knew Europeans would need batteries.”

While others are talking, the Chinese are busy building out capacity in Arnstadt for what’s shaping up to be another clean energy fight. The battleground is a former solar panel factory where two previous German owners failed to compete against low-price competition from China. As Germany’s deputy economy minister, Bareiss, says, “It’s about staying in the game and playing a role in a critical technology.”

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Fed Doesn’t Want Another Repo Crisis, But Treasury Isn’t Helping

The Federal Reserve has doled out tens of billions to calm the short-term lending markets after they went haywire in September.

But initiatives by the U.S. Treasury Department — to ensure it always has enough cash to pay its bills as the deficit soars to a trillion dollars — could make it harder for the Fed to prevent a repeat.

As the department copes with higher spending, large swings in the amount of money it has on deposit with the central bank have already undercut the Fed’s ability to keep bank reserves stable. Last year, one particularly big shift helped to drain so much liquidity from the banking system that it contributed to a spike in overnight lending rates.

Now, as Treasury considers setting aside even more money, market watchers say the swings are bound to get worse. That could lead to more disruptions and upend the Fed’s goal of scaling back its involvement in the repo market.

Treasury’s cash needs “have created dislocations that are putting greater strains on the Fed’s reserve management and funding markets,” said Ward McCarthy, chief financial economist at Jefferies & Co. and a former senior economist at the Richmond Fed. “But the Treasury needs to fund the government, so the Fed has to work around around that.”

The situation also underscores how America’s fiscal imbalance, which has been exacerbated by the combination of tax cuts and spending increases under the Trump administration, is putting strains on the financial system.

Though arcane even in finance circles, repurchase agreements — or repos for short — are what keep the global capital markets spinning. And that includes the $16.7 trillion market for U.S. government debt.

Big Swings

The Treasury General Account, as it’s officially known, operates like the government’s checking account at the Fed. Money comes in when taxes are paid out of bank accounts of individuals and corporations (which drains banks’ reserves held at the New York Fed) and money goes out when the government pays its bills (which does the opposite).

While the Fed has had to deal with fluctuations before, the sheer size and swings of the account in recent years stand out. Under the Obama administration, Treasury in 2015 instituted a policy of keeping at least five days’ worth of expenditures, or a minimum of $150 billion, in case unexpected disruptions from natural disasters or cyber attacks locked it out of the debt markets. Prior to the change, Treasury had enough cash for just two days.

But that cushion has grown and become more volatile as deficit spending rose and cash flows in and out of the account increased. And the fluctuations have at times been exacerbated when Congress dragged its heels on the debt limit.

Since the start of 2019, the account balance has averaged $303 billion, versus about $240 billion in the prior four years. It has also swung as high as $451 billion and dropped as low as $112 billion.

All that money flowing in and out of Treasury’s account has made it harder for the Fed to keep reserves in the banking system stable, and crucially, to manage monetary policy. That’s contributed to abrupt swings in repo rates, which spiked to 10% in mid-September.

The turmoil forced the Fed to step in with tens of billions of dollars in emergency repo financing. It also began to purchase $60 billion a month in T-bills to permanently lift reserves. The central bank has continued to backstop the repo market — in various amounts and over various terms — so it doesn’t seize up again. It has said it will continue its repo operations at least through April, but ultimately wants to step back from active involvement once reserves rise enough to ensure ample liquidity in the banking system.

Of course, one way Treasury could help is by keeping most of its cash in accounts of the nation’s commercial banks instead, as it did before the financial crisis. That would keep the Fed from having to manage the daily swings in Treasury’s cash cushion to prevent liquidity from drying up.

Treasury Secretary Steven Mnuchin isn’t convinced. In fact, he suggested such a shift could lead to even bigger financial-stability problems.

“If you’re a regulator, you wouldn’t want a major bank’s balance sheet to go up and down based upon what could be very, very large cash movements,” he told Bloomberg News in an interview last month. “It shouldn’t impact the market one way or another whether we put money at the Fed or at a bank.”

Fed Chairman Jerome Powell said in December that bank officials had yet to discuss the topic with their Treasury counterparts. Nevertheless, he added that “there may come a time when we talk about that.”

Even if there’s some kind of agreement between the two, some analysts say the best, and perhaps only, option for the Fed is to simply accept the fact that its repo operations have become a fact of life — and to stand ready to provide more cash whenever it’s needed.

“The Fed should just plan to do repos, beyond just as an emergency tool, as needed,” said Wrightson ICAP’s Lou Crandall.

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