News Round-Up, August 18, 2023
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U.S. Mortgage Rates Jump to Highest Level Since 2002
The average 30-year fixed-rate mortgage has climbed above 7 percent, making it harder for buyers to afford homes, which are already in short supply.
NYT by Gregory Schmidt, Aug. 17, 2023Hawaiian Electric/wildfires: old business models are no longer viable
Climate disasters were previously events utilities could withstand
Financial Times, TodayPutin fails again as Europe’s gas storage hits 90 percent
The EU has met its gas storage targets more than three months ahead of schedule. But that might not mean lower prices.
POLITICO EU BY GABRIEL GAVIN, AUGUST 17, 2023
Extreme fires caused by ancient humans wiped out Californian megafauna
A series of catastrophic fires killed off many large mammals in southern California by 13,000 years ago, and they were largely due to the arrival of humans
NEW Scientist by Michael Le Page, 17 August 2023Unrealistic' global offshore wind expansion target would require $27 billion by 2026, says Wood Mackenzie
Reuters TodayWill the rest of the world feel China’s deflation pain?
Falling prices will lower cost of importe but are unlikely to have a dramatic impact elsewhere
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Source: NYT U.S. Mortgage Rates Jump to Highest Level Since 2002
The average 30-year fixed-rate mortgage has climbed above 7 percent, making it harder for buyers to afford homes, which are already in short supply.
NYT by Gregory Schmidt, Aug. 17, 2023Mortgage rates surged to a 21-year high this week, a jump that will make it even harder for buyers to afford homes in a market hampered by high prices and low inventory.
The average 30-year fixed-rate mortgage — the most popular home loan in the United States — was 7.09 percent, up from 6.96 percent last week, Freddie Mac said on Thursday. A year earlier, the 30-year rate was 5.13 percent.
Analysts say they expect mortgage rates to remain lofty in the near term, and to start cooling only gradually by the end of the year. The current rate is the highest since April 2002. Since then, home buyers enjoyed years of falling rates, which even dipped below 3 percent at the beginning of the pandemic.
But as mortgage rates began abruptly rising last year, when the Federal Reserve started lifting interest rates to rein in rapid inflation, the housing market has stagnated, as owners with low mortgage rates have been unwilling to put their homes up for sale.
In June, sales of existing homes fell nearly 19 percent from the year before, according to the National Association of Realtors. The scarcity of listings has kept housing prices elevated: The median price of an existing home was $410,200 in June, the second-highest since the organization began tracking the data in 1999, down only marginally from a high of $413,800 a year ago.
And experts do not think the housing market will cool off anytime soon. On Tuesday, Goldman Sachs revised upward its forecast for home prices, predicting a 1.8 percent rise in prices this year and 3.5 percent jump in 2024. “Affordability remains burdensome,” analysts at the bank said in a report, citing a tighter housing supply and a steady demand for homes.
The scarcity of existing homes for sale has pushed buyers to consider new construction.Credit...Gene J. Puskar/Associated Press
That’s bad news for would-be home buyers like Kathleen Schmidt, who rents a house in Toms River, N.J., with her husband and two teenage children. She said that they were trying to save for a 20 percent down payment on a townhome nearby, and that the jump in mortgage rates was discouraging.
“I just felt in the pit of my stomach: We are never going to be able to buy a home,” said Ms. Schmidt, who owns KMSPR, a public relations firm for authors and publishers.
“My dream forever was to own a home someday because it’s something my parents never did,” she added. “We want something left for our kids.”
Affordability is a persistent challenge for home buyers, said Jeff Ostrowski, an analyst at the personal finance company Bankrate, who predicted that rates would remain elevated for some time.
“I think buyers are going to have to buckle their chin straps and figure out how to make it work,” he said.
The scarcity of existing homes for sale has pushed buyers to consider new construction. The sale of new homes climbed nearly 24 percent in June from the same period a year earlier, the Census Bureau reported. Housing starts, a measure of the construction of new homes, increased about 6 percent in July from the previous year.
“The builders are making profits, and their stock margins have increased from a year ago,” said Lawrence Yun, the chief economist at the National Association of Realtors. He added that national builders like KB Home, Lennar and Toll Brothers would continue to add inventory to make Wall Street happy, but that they were focused more on higher-priced homes.
For home buyers, finding affordable options remains difficult. The Federal Reserve has lifted its policy interest rate, which underpins borrowing costs across the economy, to the highest level in 22 years as it tries to slow inflation by cooling the economy. Although price pressures have abated, with the annual rate of inflation moderating from nearly 9 percent last year to just above 3 percent last month, a recent uptick in gasoline prices could prop up inflation figures.
Officials at the central bank have suggested that further rate adjustments could be possible this year. They expect to cut rates in 2024, but they think it could be several years before rates return to the lower levels that were common before the pandemic.
Mortgage rates generally track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to it all. On Thursday, the 10-year yield rose above 4.3 percent for the first time since 2007.
For home buyers and market watchers, the question remains, how long will mortgage rates remain high?
Mr. Yun predicted that rates would slowly start to ease by next spring or even by the year’s end, coming down to 6.5 percent, which is still more than double the rate in 2021. But he said the Fed’s fight against inflation and the recent downgrade in the nation’s credit rating continued to put pressure on mortgage rates.
“The housing market is in a tough spot,” he said.
Image by Germán & CoHawaiian Electric/wildfires: old business models are no longer viable
Climate disasters were previously events utilities could withstand
Financial Times, TodayClimate disasters were previously events utilities could withstand Investors fear electricity transmission equipment may be implicated in the deadly wildfires in Hawaii © Patrick T. Fallon/AFP/Getty Images
The securities of US energy utilities are supposed to be safe investments. Consumer prices for power are set by regulators with the aim of producing solid returns. In parts of the US, climate change has upended that bargain.
Shares of Hawaiian Electric Industries have fallen nearly 70 per cent this month. Investors fear electricity transmission equipment may be implicated in wildfires claiming more than a hundred lives and causing property damage running into billions of dollars.
For the moment, the focus should be on how to best help survivors. Soon enough, questions about the viability of old business models will need answering.
Serious litigation could result in a settlement that leaves alleged victims as shareholders in Hawaiian Electric. Just such an equitisation happened a few years back when northern Californian utility PG&E settled a $13.5bn liability for wildfires. Half was in the form of shares handed to a victims’ trust.
PacifiCorp, a utility owned by investor Berkshire Hathaway, recently lost a lawsuit over a 2020 wildfire. It could be on the hook for several billions of dollars in claims. Colorado utility Xcel Energy is in the same boat.
Climate disasters were previously events utilities could withstand. They now risk becoming annual events that dictate expensive remediation and retrofitting. These may be beyond the capacity of any private business.
Northern California is prosperous. Multiple investors, including private equity, were interested in funding the restructuring of PG&E. The state of California itself supported the creation of a specialised insurance fund to socialise risk.
Claims against Hawaiian Electric may be trickier to resolve. The population is smaller. Rebuilding costs will be exorbitant. The Hawaiian average price for electricity is already steep, at 44 cents per kilowatt hour.
Hawaii’s wildfires may therefore prove a tipping point in how the US apportions the costs of an increasingly unstable climate.
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Gas Infrastructure Europe said Thursday that member countries' gas stores are now at more than 90 percent capacity | Attila Kisbenedek/AFP Putin fails again as Europe’s gas storage hits 90 percent
The EU has met its gas storage targets more than three months ahead of schedule. But that might not mean lower prices.
POLITICO EU BY GABRIEL GAVIN, AUGUST 17, 2023 The EU's reserves of natural gas hit a historic high Thursday, filling up well in advance of the winter heating season as the bloc continues its dash away from Russian energy dependence.
That leaves the Kremlin scrambling to plug a gaping hole in its finances left by its decision to cut off European customers in the wake of its full-scale invasion of Ukraine last year.
But less Russian gas also opens the EU to the bigger price fluctuations of the global market for liquefied natural gas (LNG).
Gas Infrastructure Europe said Thursday that member countries' gas stores are now at 90.12 percent capacity — breezing past the 90 percent filling target that Brussels is legally required to meet by November.
"Today’s confirmation that we have met our gas storage requirements so far ahead of schedule underlines that the EU is well-prepared for winter and this will help to further stabilize markets in the coming months," the bloc's Energy Commissioner Kadri Simson told POLITICO.
"The EU energy market is in a much more stable position than it was this time last year," she added, while acknowledging "we have seen in recent weeks that the gas market remains sensitive" and that the Commission will continue to monitor it as the Continent heads toward chillier weather.
The news underlines the EU's success in shedding its dependence on Russian pipeline gas, which before the war supplied about 40 percent of the bloc's demand.
Moscow steadily cut off its EU customers, slashing and then ultimately cutting off deliveries through its Yamal-Europe and Nord Stream pipelines, while also reducing the volumes reaching the EU via Ukraine.
EUROPE STOCKS UP ON GAS
*Europe's gas stores are filling faster than in previous years. *EU gas storage levels, in terawatt-hours and in share of total storage capacity.*Storage data for some dates listed is estimatedSOURCE: Gas Infrastructure Europe by Lucia Mackenzie and Giovanna Coi.The EU responded by shifting to other suppliers and slashing demand.
Russian gas fell to 23.6 percent of EU imports in the first 32 weeks of 2022, and so far this year it's down to just 8.4 percent. That puts the EU's commitment to end purchases of Russian gas by 2027 within reach.
"This is definitely a success story," said Giovanni Sgaravatti, a research analyst at Brussels think tank Bruegel, "for the Commission, for the energy market, but even more so for the governments of member states that responded fairly well to replace 1,000 terawatt hours of missing Russian gas in the space of a year."
Russian gas has largely been replaced by imports from the U.S., Norway, Azerbaijan and others, bringing prices dramatically down from their 2022 peak. The Dutch TTF gas pricing index hit €320 per megawatt hour last August; it hovered around €38 this week.
IMPORTS OF GAS FROM RUSSIA HAVE HIT HISTORIC LOWS
*The EU27's dependence on Russian gas imports has decreased over the past three years.*EU natural gas imports from Russia and other trading partners, in share of total imports and millions of cubic meters for the first 32 weeks of each year.
SOURCE: Bruege by Lucia Mackenzie and Giovanna Coi However, the cost of gas still remains higher than before the war, when it fluctuated around €20 per megawatt hour, meaning bigger bills for households and lower productivity for European industry.
"Wholesale gas prices may be significantly lower than a year ago when the market was gripped by Nord Stream coming offline, but they remain still noticeably more expensive than historic gas prices over the last decade," said Tom Marzec-Manser, head of gas analytics at market analysis firm ICIS, warning that traders are still anxious about supply.
"The fact European storages are nearly full earlier than normal — typically they reach this level around October — doesn't necessarily mean the price will come down further, unfortunately. Stored gas can only get you so far through a winter and if that winter is cold there's a certain amount of risk, and that's what keeps gas price elevated for the time being," he added.
Analysts expect this to be the last winter where shortages are a serious concern, given that increased LNG production capacity from suppliers like Qatar and the U.S. is due to come online midway through 2024.
However, a number of Central European countries, in particular Austria, are still reliant on Russian imports sent through pipelines running across Ukraine. Kyiv has indicated it does not intend to renegotiate the transit deal, which is set to expire at the end of next year. That creates a hard deadline for those still depending on Moscow's fossil fuels.
The loss of its most dependable European customers has been a big blow for the Kremlin; revenues from energy exports were down 41 percent to $43.4 billion in the first seven months of this year, the Russian finance ministry said. Meanwhile, the ruble hit a 16-month low, and this week crashed through a symbolic benchmark of more than 100 to the dollar.
That makes it harder for Russia to continue to prop up its isolated economy, pay its soldiers' wages and purchase weapons from abroad. According to Natasha Kuhrt, a senior lecturer at King's College London's Department of War Studies, "in the end, the government will prioritize military spending," while economic woes are mainly "going to mean hardship" for many ordinary Russians.
Meanwhile, Moscow-based research firm Romir on Wednesday published a poll of 3,500 Russians that found almost one in five is having to reduce their spending on food and essential goods to save money, up three percent from the month before.
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A sabre-toothed cat skull in the Page Museum at the La Brea tar pits, California/ Robert LandauExtreme fires caused by ancient humans wiped out Californian megafauna
A series of catastrophic fires killed off many large mammals in southern California by 13,000 years ago, and they were largely due to the arrival of humans
NEW Scientist by Michael Le Page, 17 August 2023A series of catastrophic fires was the immediate cause of the extinction of many large mammals in southern California 13,000 years ago, according to a study of fossils from the La Brea tar pits. The findings suggest these extreme fires were probably a result of humans abruptly changing the ecosystem by killing off herbivores – meaning there was more vegetation to burn – and deliberately starting fires.
“It’s a synergy of the drying climate and the humans, and the fact that they are killing herbivores and increasing fuel loads, and all of those things go together to make a feedback loop that takes the ecosystem to a chaotic state,” says Robin O’Keefe at Marshall University in West Virginia. “The fire event is really catastrophic.”
The tar pits at La Brea in Los Angeles have trapped numerous animals over the past 50,000 years and preserved their bones, providing an extraordinary window into the past. Many of the bones have never been precisely dated because radiocarbon dating was more expensive in the past and required destroying large chunks of bone, and also because results were skewed by the tar inside the bones.
Now, costs have fallen, only tiny quantities of bone are needed and the tar contamination problem can be solved by extracting preserved collagen and dating only this material. As a result, O’Keefe and his colleagues were able to precisely date 172 bones from eight species.
Seven of these species are extinct, including the sabre-toothed cat (Smilodon fatalis), the dire wolf (Aenocyon dirus), the western camel (Camelops hesternus) and the ancient bison (Bison antiquus), which was even larger than surviving bison. The team also dated coyote (Canis latrans) bones as a control.
The dating shows that the seven species were all gone from the La Brea area by 13,000 years ago, though some survived elsewhere in North America for another millennium or so. Their disappearance from La Brea coincides with massive spikes in the number of charcoal particles in lake sediments, which are deposited during wildfires.
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“Some of those spikes for those fires are just enormous, orders of magnitude more than has ever happened before,” says O’Keefe.
Pollen in lake sediments shows that the vegetation had begun changing from woodland to a more open landscape around 16,000 years ago, as the area became drier due to the retreat of the ice sheets. But there was a sudden shift to fire-resistant vegetation around 13,000 years ago.
“The results of this study are consistent with humans increasing fire both directly though ignitions and indirectly through hunting of herbivores,” says Allison Karp at Yale University, who wasn’t involved in the study.
If the tiny number of people alive at the time could do this, the much greater number of people alive now can have a much bigger impact, says O’Keefe. “It’s super relevant to today,” he says.
More extreme wildfires are happening in many parts of the world as it warms, and O’Keefe says his findings show there is a risk this could lead to ecosystems flipping into another state, resulting in many species going extinct. “Hopefully, by learning these things about what happened at La Brea, maybe we can change our trajectory,” he says.
Earlier research had suggested that the development of the Clovis stone tool technology, whose distinctive feature is finely crafted large spear points for tackling big animals, enabled people in North America to wipe out the continent’s megafauna. However, these findings show that some large mammals were going extinct in places before Clovis tools appeared. O’Keefe and his colleagues think Clovis tools were instead a response to the loss of some megafauna.
“The things that seem to get hunted out first are the things that are easier to catch, like camels and horses and bison,” says O’Keefe. “It’s only when you start running out of those that we think that the Clovis technology evolves, because you have to do this really dangerous thing and try to take on a mastodon because all the easier to kill animals are gone.”
“Clovis wasn’t a driver of extinction. It evolves because the extinction was already under way,” he says.
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Image by Germán & Co'Unrealistic' global offshore wind expansion target would require $27 billion by 2026, says Wood Mackenzie
Reuters, August 18, 2023Aug 17 (Reuters) - Government targets to increase wind power installations would see annual capacity additions reach 80 gigawatts (GW) per year by 2030, requiring $100 billion in secured investment in the supply chain by 2026, Wood Mackenzie said in a report.
The research and consultancy firm forecast annual capacity is more likely to increase by 30 gigawatts (GW) a year by 2030, which would require $27 billion of secured investment by 2026.
"The supply chain is struggling to scale up and will be an impediment to achieving decarbonisation targets if change does not happen," said Chris Seiple, vice chair, power and renewables at Wood Mackenzie.
"Nearly 80 GW of annual installations to meet all government targets is not realistic, even achieving our forecasted 30 GW in additions will prove unrealistic if there isn't immediate investment in the supply chain," Seiple said.
Wood Mackenzie noted that the low profit margins on offshore wind production and uncertainty about project timings resulting in very different supply-chain needs are making it hard to drum up investment in the sector.
According to the Statistical Review of World Energy report in June, global wind and solar power grew to a record share of 12% of power generation last year, surpassing nuclear.
Target setting and plans for power market infrastructure to support offshore wind need to extend beyond 2030 to scale up the offshore wind supply chain, analysts at Wood Mackenzie said.
Illustrations by Germán & Co.Will the rest of the world feel China’s deflation pain?
Falling prices will lower cost of imports but are unlikely to have a dramatic impact elsewhere
Financial Times by Chris Giles in London YESTERDAYBeijing’s economic woes worsened last week after it emerged China had fallen into deflation. The news highlights how the country is struggling to live up to expectations of a strong recovery after emerging from extended Covid lockdowns.
But will falling prices have an impact beyond China’s borders, in places where the bigger risk is still that an extended period of high inflation will endure?
For now, economists say there is little reason for concern, as:
Chinese deflation is likely to prove temporary
Deflation is primarily a concern when it is pervasive and caused by companies desperate to sell to consumers who are unwilling or unable to buy because they have fallen on hard times.
This describes neither China’s economy nor its price movements.
The economic recovery following the reopening has disappointed — the property sector remains a serious concern — but output is still growing and an expansion of close to 5 per cent this year is still on the cards.
“China’s consumption recovery remains soft and uneven, but this a far cry from Japan-style deflation,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics, referring to the country’s decades-long experience with falling prices.
While Chinese consumer prices fell 0.3 per cent in the year to July, a small fall in costs also occurred in 2021. Now as then, the deflation appears temporary — more the result of base effects than any deep problems.
A rise in core inflation signals Chinese deflation is unlikely to linger
In July alone, prices rose by 0.2 per cent and they have increased 0.5 per cent in the first seven months of 2023. The measured deflation arose because prices — particularly of pork, which has fallen in price by 26 per cent over the past 12 months — did not rise at the pace seen during 2022, when China endured several major lockdowns.
Neil Shearing, chief economist of Capital Economics, said the rise in core inflation — which excludes food and energy, and is seen as a better measure of underlying price pressures — from 0.4 per cent in June to 0.8 per cent in July demonstrated the lack of entrenched deflation in China. “To the extent that chronic demand weakness shows up in the inflation data, it will do so in the core numbers,” he said.
Inflation is seldom as contagious as it seems
The world — bar China — has appeared to suffer an inflation boom during the past couple of years. While the pace of price rises has been high in most countries, the reasons why differ markedly.
Price rises triggered by snarl-ups in global supply chains may have been universal. But they were amplified in the US by extremely strong consumer demand growth. The surge in demand followed a huge fiscal expansion in 2020 and 2021, when the Trump and Biden administrations sent large cheques to households to combat the Covid-19 crisis.
The US's economic recovery has been far stronger than elsewhere
Change in GDP between Q4 2019 and Q1 2023
Strong demand was much less an issue in Europe and in emerging economies. These suffered much more from Russia’s invasion of Ukraine. In Europe, the pinch came from soaring natural gas prices. In poorer countries, higher food prices and energy costs sparked a wider rise in the price level.
Paul Donovan, chief economist of UBS, said in the case of Chinese deflation, price pressures were as likely to prove “intensely local”.
While the price of Chinese imports was likely to fall as a result of the country’s economic woes, Donovan noted that “an awful lot happens” to exports before they reach their final destination. “Generally most of the price of something made in China and sold in the US will be paid to US workers — in transport or advertising costs, and so on,” he said.
Chinese deflation can help in Europe
The big inflation problem, especially in Europe and emerging economies, has been the higher cost of imports, lowering living standards and sparking a process in which domestic companies try to defend their profit margins by raising prices and workers struggle to catch up.
Chinese factory goods prices were 4.4 per cent lower in July than a year earlier. To a minor extent, this has an effect abroad.
European countries will benefit from a weaker Chinese economy that places less competition on supplies of natural gas as it adjusts to weaning itself off from Russian supplies.
It would be wrong, of course, to suggest that everyone else benefits (at least a little) from a weak Chinese economy.
Recommended Unhedged podcast19 min listen China slows down China has contributed 40 per cent to global growth rates over the past 10 years, according to Dhaval Joshi, chief strategist at BCA Research. Any economic troubles in Beijing will weigh on world output.
But at the moment, the fallout from Chinese deflation looks manageable both for the country itself and the rest of the world.