Expectations that the ECB will provide more monetary stimulus next Thursday continue to push bond yields lower in the Eurozone. That’s been pushing US bond yields down as well, especially since ECB President Mario Draghi has said he will do whatever it takes to weaken the euro. That’s made US government bond yields especially attractive relative to yields available on comparable bonds in the Eurozone.
Draghi hopes to boost the region’s CPI inflation rate, which is only 0.7%, by weakening the euro. I’m not convinced that doing so will boost inflation in the Eurozone. The problem is that the region’s banks aren’t lending, which is also depressing monetary growth. Here’s the most recent key developments:
(1) Slow money. M2 growth was only 2.0% y/y during April. That’s down from a recent peak of 4.8% last April, and the lowest since December 2011. The recent slowdown coincides with the decline in the CPI inflation rate.
(2) Weak lending. Banks are starting to lend in the Eurozone, but to each other rather than to nonfinancial businesses. Over the past three months through April, Eurozone lenders provided a measly €13.6 billion (saar) in credit, with €142.8 billion extended mostly to financial institutions. Lending to nonfinancial corporations declined by €169.6 billion over this same period.
(3) Bad loans. The 5/13 FT reported that, according to Fitch, bad loans at Europe’s banks rose 8.1% in 2013 to slightly more than €1 trillion compared with the year before. Fitch surveyed a hundred banks due to be assessed by the European Banking Authority. Twenty-nine saw the number of impaired loans rise by more than 20% as their asset quality deteriorated, while one-third of banks saw their bad loan volumes fall or stay the same. European regulators are preparing a strict classification system, which should eliminate national differences over what constitutes a problem loan.
So European monetary and banking authorities are stepping on the monetary accelerator and the regulatory brakes at the same time. They are providing ultra-easy monetary policy hoping that banks will increase their lending. At the same time, they are toughening loan standards and subjecting the banks to stress tests. As a result, they are driving global bond yields into the ditch.
The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index increased 1.5% in April, after rising 0.6% the previous month. Compared with April 2013, the SA index increased 4.8%, which is the largest year-over-year gain of 2014. Year-to-date, compared with the same period last year, tonnage is up 2.9%.
“April was the third straight gain in tonnage totaling 4%,” said ATA Chief Economist Bob Costello. Tonnage is off 1.4% from the all-time high in November.
“I’m pleased that tonnage has been making solid progress after falling a total of 5.2% in December and January,” he said. “And April’s nice gain was better than the contraction in industrial production and the lackluster retail sales during the same month.”
Trucking serves as a barometer of the U.S. economy, representing 68.5% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.
The U.S. has a minimum wage of $7.25 an hour for most types of work. Another, lesser known minimum-wage threshold is $23,660 a year. That’s the minimum an employer can pay workers and avoid requirements to pay them overtime.
- Perhaps not coincidentally, 7.08 million Americans earned between $23,000 to $25,000 in 2013. That’s the red bar in the chart above using data from the Tax Policy Center, a nonpartisan research organization. That’s more than any other $2,000 bucket.
In March President Barack Obama issued an executive order calling for Labor Secretary Thomas Perez to update the regulations that define eligibility for overtime pay. That could affect wages for a large number of the 7 million Americans whose earnings are right around that wage threshold, and means the regulatory effort may bear watching because of the huge number of workers who could be affected.
If each of those workers earning between $23,000 and $25,000 received a mere $2,000 wage increase, it would boost national income by $14.2 billion. [1% of the total] (…)
(…) Season Joy City offers a party bag of bonuses to lure potential buyers. The development’s original selling point was “buy one floor, get one free.” When China Real Time visited last week, helpful sales assistants also offered to throw in kitchen fittings and four air conditioning units for nothing.
But the biggest draw is a “zero down payment” scheme, available for a two-and-a-half-week period only. At first sight this seems to go against government regulations, brought in to keep house prices under control, which stipulate a minimum 30% down payment on ordinary residential purchases.
Zero down payment schemes have popped up around China as developers go to ever greater lengths to shift apartments, but Season Joy City may have the distinction of being the first to try it in Beijing, said Tang Li, an analyst at North Square Blue Oak, an investment bank.
“They will help homebuyers to apply for this consumer loan that they can use as a down payment,” said Mr. Tang. “It’s very difficult to judge whether this is in line with the regulations or not. So far there’s been no punishment from the government.”
All this is to avoid cutting prices, which developers could fear could tank public faith in the housing market and ultimately pummel sales further. Instead, they resort to ingenious “promotions,” throwing in freebies worth thousands of dollars and even whole free rooms rather than slashing prices outright.
At Season Joy City, the price remains unchanged at 14,800 yuan per square meter (the second floor isn’t included in the calculation.) That means a 90 square meter apartment would clock in at 1.3 million yuan ($208,000). [$215/sq.f.] (…)
The zero-down payment promotion has attracted plenty of attention. About 100 buyers signed up in the first two days, Ms. Li said, although the rush soon faded.
Only a handful of prospective buyers were at the showroom when China Real Time visited, a striking shift from last year, when mobs of eager customers around the country routinely entered lotteries just for the chance to buy similar apartments. (…)
Many analysts believe that China’s largest cities will hold up relatively well in the slowdown sweeping the property market. But developments like Season Joy City, 12 kilometers from downtown Beijing, may still suffer. (…)
There is always a sell-side analyst to tell you not to worry. Here’s Nicole Wong, the Hong Kong-based head of property research at CLSA Ltd.(from BloombergBriefs)
Doomsday Scenario Overplayed for China’s Property Bubble
China’s property market is haunted by second-hand statistics. Anecdotal accounts of widespread vacant project developments and “ghost cities” have fueled dire conclusions about the industry. Based on a study across 12 cities, CLSA’s research suggests that while excess in some cities exists, such scenarios are greatly exaggerated.
The sample cities in the study represent the core China property market. The pockets of oversupply come from years of rapid development, which had been fueled by the government’s desire for growth, developers’ eagerness to produce and buyers’ expectations of capital gains.
China’s property bubble may deflate gently. The answer to the elevated vacancies will be a contraction and adjustment in supply. This is a possible solution because while vacancy is high, so is growth in take up. Hence, China has an option to deflate and let demand absorb the excess. The vacancy rate for property completed in the past five years is 15 percent, which is high by international standards.
This is equivalent to 10.2 million empty units, or 22 percent of China’s household savings locked into unproductive assets. As a basis for comparison, the average vacancies for 75 cities in the U.S. stand at 10 percent. For Chinese vacancies to drop from 15 percent to a healthier 10 percent will require take-up of 4.6 million completed vacant units.
Oversupply tends to be uneven and concentrated in second- and third-tier cities, where vacancies are about 16 percent or more. Of greater concern is the 17 percent vacancy rate in remote, low-value properties. Core markets have only moderate excess, which can be absorbed given still strong demand.
In 2013, China’s primary residential sales as a percentage of GDP hit a record high of 11.9 percent. China has enjoyed a decade of loose credit and high growth.
As these are now decelerating, the level of sales is unsustainable and we expect sales by gross floor area to drop 36 percent by 2020. Third-tier cities are likely to
bear the brunt with sales shrinking by 60 percent, while sales in first- and second tier cities will grow by 6 percent and 13 percent, respectively.
One bright spot is that completion has exceeded take-up by only 14 percent in the past five years, which is milder than expected. Also, housing stock older than
five years, units smaller than 90 square meters and tier-one city housing stocks all have occupancy exceeding 88 percent.
Based on CLSA research, the estimated take-up growth rate was 10 percent per year between 2009 and 2012. Where does this demand come from? Results from a China Reality Research study suggest 60 percent of middle income households have no outstanding mortgage, 57 percent live in a flat smaller than 100 square meters and 28 percent have immediate interest in upgrading.
Affordability does not seem to be an issue for either upgraders or first-time buyers. Outside of tier-one cities, the ratio of home prices to income typically ranges between four and eight times.
Beijing has a strong tendency to smooth out shocks to the housing market, especially because the real estate sector is critical to local-government income and to the banking system’s safety. With tightening measures in place — such as the Home Purchase Restriction and the 60 percent to 70 percent down-payment requirements for second homes — China’s policy makers have a few levers to pull.
If I read this well, the oversupply problem is indeed significant but will be worked out smoothly simply through supply management over several years. Never mind the developers carrying the oversupply and the banks carrying the developers…
Here’s a worried developer, however:
China’s largest property developer warns that China’s property bubble is bursting… (via Bloomberg)
The “golden era” for China’s property market has passed, according to China Vanke Co., the nation’s biggest developer, which is shifting its focus to homes for owner occupiers rather than investors.
“The period in which everybody makes money out of property is gone,” President Yu Liang told reporters May 26 in Dongguan, a southern city in Guangdong province. “Vanke will take a cautiously optimistic approach to face the slowdown and target those buyers who need homes for self-use.” (…)
…“a cautiously optimistic approach to face the slowdown”…
Japan’s higher sales tax began taking a bite out of consumption in April, as retail sales dived 13.7% on-month, the biggest fall under the current data series that began in 2002.
Declines were broad-based but were starkest for consumer durables such as automobiles, televisions, refrigerators and air-conditioners, government data Thursday showed.
Sales also fell sharply for expensive items such as designer-brand clothing and for semi-durable items such as shampoo and cosmetics. Sales of long-lasting and non-perishable food and beverages also suffered sharp falls. (…)
Compared to a year earlier, April retail sales fell just 4.4%, indicating that the overall level of consumption isn’t so bad. The monthly fall appears severe becauseconsumers had gone on a shopping spree ahead of the sales-tax move. (…)
Profit Engines for Banks Falter Two of the biggest profit machines for U.S. banks are sputtering, raising expectations that lenders will accelerate plans to sharply cut expenses in the second half of the year.
A steep drop in mortgage lending and a slowdown in securities trading fueled a 7.6% drop in net income in the first quarter from the same period a year ago at the nation’s 6,730 commercial banks and savings institutions, according to data released by the Federal Deposit Insurance Corp.
It was just the second time in 19 quarters that financial firms reported a year-over-year profit fall, the FDIC said. The industry also posted lower net income for last year’s third quarter. (…)
Interest rates are at their lowest point this year and remain near historic lows. The recent decline hasn’t been significant enough to stimulate demand for mortgage refinancings.
“Without this demand, mortgage originations have fallen sharply and mortgage revenue has declined by almost one-half,” said the FDIC in its quarterly banking report.
William Demchak, PNC’s chief executive, said mortgage originations in 2014 could clock in at the lowest rate since 1997. (…)
The FDIC said trading revenue from fixed-income, currencies, commodities and equities among its regulated banks fell 18% in the first quarter to $6.1 billion, the lowest first-quarter level in at least five years. (…)
Bond-trading volume is especially weak this year. Through April, it was down 13% from the same period in 2013, the Securities Industry and Financial Markets Association said. (…)
Meanwhile, Canadian banks keep growing nicely.
Emerging Markets Bounce Back Investors are pouring money into markets from Brazil to South Africa that suffered big losses as recently as this past winter.
(…) The speed with which investors appear to have forgotten losses of up to 30% in some markets has been startling. Money is flowing back into emerging markets at the fastest pace in more than a year.
Mutual and exchange-traded funds focused on emerging markets added a net $13.2 billion in April and May, according to data from EPFR Global through May 26. That is the biggest two-month rise since February and March 2013, and follows 10 straight months of net selling. (…)
Emerging-market countries have been happy to satisfy investor demand by going on a bond-issuing spree. Their governments have issued $63 billion in debt, on pace to tie the previous record, set in 2012, according to Dealogic. (…)
Since launching this blog in 2009, I have ventured to make a small number of bolder predictions, other than on equity markets: 3D printing, the renaissance of U.S. manufacturing and the U.S. energy game changer.
None of these will be more significant than the combination of electric vehicles, Amazon Fresh and Google’s driverless car. Tough to say when each of these will begin to hit us but I will begin monitoring them closely from now on.
Leaders of eight large, coastal U.S. states, including California and New York, are expected to roll out Thursday more details of a plan aimed at spurring sales of 3.3 million “zero emission vehicles” by 2025 through a combination of consumer incentives and regulatory action.
The plan will be light on specific details, which will be worked out by the individual states in the alliance—California, Connecticut, Maryland, Massachusetts, New York, Oregon, Rhode Island and Vermont. Together these states account for about 28% of the U.S. auto market, according to a draft of the plan.
The sales goal is ambitious in light of current slack demand for electric vehicles. Currently, there are about 200,000 battery electric cars, plug-in hybrids, and hydrogen fuel cell vehicles on the road in the U.S. About half of those cars are on the road in the eight states allied behind the “ZEV Action Plan.”
A Morgan Stanley report Wednesday said that demand for electric and plug-in hybrid vehicles other than those sold by Tesla Motors Inc. is sliding. Global market share for electric vehicles of 1% “would be respectable,” but well below prior forecasts of 5-10% share by 2020, Morgan Stanley said.
Among the actions outlined in the eight-state alliance’s plan are efforts to promote installation of recharging stations at workplaces, expanding both cash and noncash incentives for consumers to buy electric cars; push dealers to more aggressively promote electric cars; and remove regulatory barriers to installation of charging stations. (…)
And another prediction of a coming accident:
BlackRock Inc Chief Executive Officer Larry Fink said on Wednesday that leveraged exchange-traded funds contain structural problems that could “blow up” the whole industry one day. (…)
Leveraged ETFs account for 1.2 percent of the $2.5 trillion in global ETF assets under management. At the end of April, there were nearly 270 leveraged ETF funds with $30.3 billion in assets, said Deborah Fuhr, managing partner of ETF research firm ETFGI LLP. A leveraged ETF uses financial derivatives and debt to amplify the returns of an underlying index. Some leveraged ETFs have become more aggressive, ramping up risk and potential returns, as the ETF industry gains popularity with individual and institutional investors.
Leveraged ETFs have attracted $1.8 billion in net new assets during the first four months of 2014, Fuhr said.
This equals to 6.3% of 2013 yearend assets, growing at a 28% annualized rate!
They are showing up more as buy-and-hold investments in the portfolios of retail investors, as financial advisers grow more comfortable recommending them, and first gained a foothold among traders who wanted an investment vehicle to make fast and enhanced bets on big index moves or the direction of gold prices, for example. (…)
U.S. Securities and Exchange Commission staffers have issued warnings about leveraged ETFs, though no action has been taken to curb their availability. Regulators say individual investors may not realize that the investment products are designed to achieve their performance objectives on a daily basis rather than over the long term.
Let’s also hope investors are not borrowing to buy these funds…