Outlook

Asia shares up on Fed outlook, Aussie dollar seesaws after jobs data

NEW YORK (Reuters) - Wall Street stocks fell on Thursday due to a deteriorating economic outlook that was only partially offset by signs of trade progress between China and the United States, while gold and oil prices retreated from their recent peaks.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 30, 2019. REUTERS/Brendan McDermid/File Photo

The dollar held steady against most major currencies, while the Australian dollar tumbled on jitters about a ban on that country’s coal by a Chinese port.

Signs of positive developments in U.S.-Sino trade talks and a possible Brexit compromise between Britain and the European Union spurred selling of U.S. and core European government debt, pushing their yields higher.

The U.S. Commerce Department said on Thursday domestic orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.7 percent.

Moreover, the U.S. Mid-Atlantic factory sector fell into contraction territory in February for the first time since May 2016, data from the Philadelphia Federal Reserve showed.

“Overall, it is showing that the economy is not as strong as it was in the summer of 2018,” aid Robert Pavlik, chief investment strategist and senior portfolio manager at SlateStone Wealth LLC in New York.

The grim economic data was offset by signs of progress in trade talks between Beijing and Washington.

The world’s two biggest economies have started to outline commitments in principle on the most contentious issues in their trade dispute, marking the most significant progress yet toward ending a seven-month trade war, according to sources familiar with the negotiations.

At 12:04 p.m. EST (1704 GMT), the Dow Jones Industrial Average fell 63.4 points, or 0.24 percent, to 25,891.04, the S&P 500 lost 11.67 points, or 0.42 percent, to 2,773.03 and the Nasdaq Composite dropped 35.47 points, or 0.47 percent, to 7,453.60.

The pan-European STOXX 600 index lost 0.35 percent and MSCI’s gauge of stocks across the globe gained 0.47 percent.

The benchmark 10-year Treasury yield was up 4 basis points at 2.690 percent, while the German 10-year Bund yield rose 3 basis points to 0.13 percent.

Safe-haven demand for bonds cooled a bit as diplomats said Britain and the EU were moving closer to a legal compromise that Prime Minister Theresa May hopes will gain approval from the British parliament.

In the currency market, an index that tracks the dollar against a basket of currencies rose 0.1 percent, while the Aussie dollar was down 1.17 percent at $0.7080.

China’s northern Dalian port has put an indefinite ban on coal imports from Australia since the start of February, a port official told Reuters on Thursday.

In the commodity market, crude prices pulled back from their highest levels of 2019 on hopes that oil supplies will balance later this year. [O/R]

U.S. crude fell 0.73 percent to $56.74 per barrel and Brent was last at $66.81, down 0.4 percent on the day.

Spot gold prices was down 0.61 percent at $1,330.30 having scaled a 10-month peak of $1,346.70 on Wednesday.

Additional reporting by Kate Duguid, Gertrude Chavez-Dreyfuss in New York; Shreyashi Sanyal, K. Sathya Narayana in Bengaluru and Marc Jones in London; Daniel Leussink in Tokyo; Editing by Alison Williams and Dan Grebler

Purplebricks shares dive on sales outlook shock

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Shares in estate agents Purplebricks plunged after it slashed its sales forecast and announced the departure of two senior executives.

The company expects sales for the current financial year of between £130m and £140m. Its previous forecast was between £165m and £175m.

Purplebricks blamed a "challenging" UK housing market and "headwinds" for its Australian business.

The chief executives of the UK and US business will both be leaving.

UK boss Lee Wainwright is leaving for "personal reasons". No reason was given for the departure of Eric Eckardt, the chief executive of the US business.

Shares in Purplebricks dropped sharply on the news, falling as much as 40%, before recovering to close 24% lower on the day..

Purplebricks was launched by founder and chief executive Michael Bruce in April 2014. The idea was to create a lower cost, more flexible estate agent.

It charges a fixed fee of £1,399 in London and surrounding areas to market a property. Elsewhere in the country it charges £899.

Its agents, which Purplebricks calls local property experts, receive £200 when given a property to sell and £50 when the sale is completed.

They also receive viewing fees of £399 in London and £300 outside.

Agents can also win commissions for referring buyers to conveyancers and mortgage firms.

The company has been expanding rapidly, but has seen losses grow as well.

In the financial year which ended in April of last year it reported a loss of £26m, up from £6m in the previous year.

In today's statement Mr Bruce said the company was in a good position to take advantage of growth potential in the UK, US and Australia, but added "albeit not entirely as we would have wanted before our year end".

'Huge embarrassment'

The problems at Purplebricks are a "classic case of trying to do too much, too fast", according to Russ Mould, investment director at AJ Bell.

"Success in the UK gave management confidence they could take over the world. Alas, that has proved nothing more than a pipe dream.

"Efforts to crack the US and Australia haven't resulted in the expected revenues and so the company has been forced to issue a profit warning.

"The overseas setbacks will be a huge embarrassment for the company, which has tried to be a pioneering force in the real estate sector."

UK housing gloom

Most experts expect the UK housing market to be sluggish this year.

Uncertainty around Brexit is making buyers and sellers cautious, and there is also a shortage of new, affordable homes.

In its most recent figures the Nationwide Building Society said house price growth had almost ground to a halt.

In January, house prices were just 0.1% higher than the same period last year, Nationwide said.

It said uncertainty over the economic outlook was affecting the confidence of buyers.

Multifamily Outlook And The Interest Rate Conundrum In 2019

The volatility seen in equity markets during the last few trading sessions of 2018 made it clear that investors are beginning to contemplate a pullback. However, the real economy continues to exhibit strength by many accounts as we head into 2019. The labor market tightened throughout 2018, and the unemployment rate is at historical lows. Wage growth (registration required) reached 3% for the first time in a decade. Consumer confidence is at an all-time high, and private consumption expanded at its strongest pace since 2015. Against this backdrop, the Fed raised its target rate four times in 2018.

The multifamily business is in an unusual predicament. I've been working in the industry for over a decade, and have been following it for much longer. This current cycle is unique, as the economy shows neither signs of overheating nor imminent contraction. Multifamily real estate has been riding high for some time, and everyone is trying to figure out whether 2019 will be more of the same. The answer depends largely on the market segment and location: Real estate professionals tend to agree that there is no such thing as a national housing market. Each metro and underlying submarket is different.

The Elephant In The Room

Undoubtedly, interest rates significantly influence real estate profitability, and opinions vary widely on near-term projections. Several colleagues have even suggested the return of 1990s-era rates. I am not in that camp; I would argue that the Fed may raise its overnight lending rate another 25-50 basis points (0.25-0.50%). With strong competition among lenders continuing to support multifamily transactions, volume and stable NOI growth, I do not believe the Fed's increases will weigh heavily on returns for the asset class.

For decades, interest rates have closely mirrored inflation, with the highest rates occurring during times of significant population growth that, in turn, stimulated consumption growth and drove up the price level. The result was a persistent cycle of high inflation and high interest rates. The 1970s through 1990s were marked by geopolitical turmoil and soaring inflation. When the 9/11 attacks occurred in 2001, the Fed cut rates to unprecedented levels, and did so again in 2007. These rate cuts began a downward trajectory that coincided with the aging of the baby boomers. With this 20% segment of the population producing, contributing and spending less, I believe it is unlikely that we will see interest rates rise to pre-2000 levels.

Demographics in the developed world greatly influence global interest rates. With much of the developed world struggling to keep population growth at replacement levels, economic growth has waned. Several institutions have conducted studies highlighting the inverse relationship between life expectancies and interest rates. One such study was performed by the San Francisco Federal Reserve, which found that the trend toward longer life spans and a decline in population growth rates has resulted in increased household saving at the expense of current consumption. These trends place downward pressure on interest rates, which I expect to continue. Therefore, I do not contend that rate increases pose a strong threat to commercial real estate profitability and cap rates.

What To Expect In Multifamily

That said, multifamily markets across the U.S. will vary in profitability during the next few years for several key reasons.

First, the national rental market is still benefitting from tight borrower guidelines for single-family homebuyers put in place after 2008. Appreciation in single-family home values has outpaced wage increases across most professions, and as the spread between the median mortgage payment and average monthly rent widens, many would-be homebuyers are poised to remain in the rental cohort. In 2018, sales of single-family homes slid by 5%, and the homeownership rate for people under age 35 fell from a peak of 43% in 2007 to 37% today. Millennials continue to rent in unprecedented numbers, placing greater value on mobility, flexibility and the community aspects afforded by renting than any preceding generation.

Rent growth, after remaining flat in many markets last year, has shown signs of rebound across the country. Average rent growth as of Q4 2018 inched up to 2.8%, while nationwide vacancy fell to a low of 4.5%, according to CBRE. Rental markets across the Sun Belt, in particular in places like Texas, Florida and Arizona, capitalized on outsized population and employment growth. Migration from the northern markets into the southern markets has fueled demand for apartments, which is a trend I expect to continue.

We’ve also seen compression in the spread between cap rates for suburban markets and the urban core, currently at 40 basis points, its lowest since 2010. Signs of overbuilding are evident in high-end multifamily projects in the urban core markets. Cap rates have hovered around 5% in the urban core for the past four years, while suburban rates have dropped to 5.4% as of mid-2018.

There was widespread speculation that vacancy rates would increase significantly after an influx of new supply last year, but absorption has been healthy. Occupancies have remained stable with vacancies in most metros below historical averages. The northern and coastal markets are the notable exception, however, as markets like Washington, D.C., and New York City continue to experience vacancies well above historical averages. According to Freddie Mac, Fort Lauderdale, Los Angeles and Orange County are all expected to fall in this category in 2019.

Final Comments

The reality is that multifamily remains a flight to safety for most real estate investors. While significant volatility plagued most asset classes throughout 2018, multifamily acquisitions actually increased by 12.1% to $173 billion, according to CBRE’s fourth-quarter report.

The real question for 2019 is whether the record rent growth and healthy absorption rates persist. According to Freddie Mac, the double-digit growth rates that multifamily investors have grown accustomed to will contract to single-digits, and I tend to agree. Ultimately, prospects for multifamily, as with any asset class, are predicated on the basic economic principles of supply and demand. While new housing starts have increased nationally, development of owner-occupied and rental housing has significantly lagged past cycles. My thesis for 2019 is that continuous rent growth and tight vacancies will endure across the Sun Belt, with some stagnation in the high-end coastal markets, save for San Francisco.