Europe Inflation

House Rents Pop as New Investors Pile In Would-be home buyers priced out of the sales market are finding little consolation when they turn instead to the single-family rental market.

Asking rents for houses rose nearly 13% for the year to date through July, the highest annual increase in the past five years as tracked by real-estate data company Yardi Matrix, which analyzed professionally managed properties. (…)

Price increases are more moderate for single-family tenants renewing their leases, said Haendel St. Juste, a real-estate securities analyst at Mizuho Securities USA. (…)

Apartment asking rents also have risen, but at a slower pace: 8.3% for the year to date through July, Yardi Matrix said. The difference partly reflects weaker demand in downtowns that lost population after Covid-19 hit, although those markets have rebounded in recent months. (…)

Investors purchased $87 billion in homes in the first half of 2021, according to real-estate company Redfin, including a record 68,000 houses in the second quarter. (…)

Deep-pocketed investors may have a hand in would-be buyer woes: one in six home sales went to an investor in the second quarter of 2021, according to Redfin. In Atlanta, Phoenix and Miami, it was one in four. (…)

Since June, Blackstone Group Inc., Invesco Ltd. and Goldman Sachs Group Inc. alone have committed more than $11 billion to the sector. Meanwhile, other companies are building rental homes from scratch. New houses meant to be rented instead of sold account for about 12% of single-family construction in 2021, said Doug Ressler, a researcher at Yardi.

Tricon Residential Inc., a publicly traded house owner, reported new lease rent increases of around 21% in July, a record for the company. The average hike was a more modest 5% for renewal tenants. In an August earnings call, Gary Berman, Tricon’s chief executive, said in some markets the company could fetch close to 10% rent increases for existing tenants if it didn’t intentionally “hold back.” (…)

Unfinished Tractors, Pickup Trucks Pile Up as Components Run Short Supply-chain problems are causing order backlogs and cutting into sales volumes for companies like Cleveland-Cliffs, Honeywell and Illinois Tool Works.

(…) Executives expect the shortages and delivery bottlenecks, exacerbated by overwhelmed transportation networks and a lack of workers, to stretch into the fall. The delays are costing manufacturers sales and pushing some companies to revamp the way they put together their products, executives said. (…)

The backlogs of unfinished products are starting to take a financial toll on some companies, even as they report higher sales and profits.

Honeywell International Inc. said its second-quarter revenue would have been $100 million to $200 million higher if the company’s supply chains weren’t constrained. The industrial conglomerate predicted last month that supply-chain problems will clip that much from revenue again during the current quarter, even as the company raised its sales and profit forecasts for 2021. (…)

Howmet Aerospace Inc., HWM -3.08% which makes aluminum wheels for heavy-duty trucks, said its second-quarter sales volume of wheels dropped 7% from the first quarter, as shortages of chips and other parts led truck manufacturers to scale back truck assembly. John Plant, co-CEO of Howmet, said the truck makers halted wheel orders on short notice, causing stocks of wheels at Howmet to increase unexpectedly.

“We’ve got all these wheels,” Mr. Plant said. “All of us are suffering different degrees of pain.” The company said it offset the sales slowdown by raising prices. (…)

Steelmaker Cleveland-Cliffs Inc. reported that its inventory of steel rose by about $300 million during the second quarter because shipments to automotive customers were 20% less than the company expected. Cliffs said it was able to redirect some of that steel to the spot market, where the company was able to sell it for higher prices than the auto makers typically pay under purchase contracts with the Cleveland-based steelmaker. (…)

Euro zone inflation surges to 10-year high, in big headache for ECB

Consumer prices in the 19 countries sharing the euro rose by 3% this month, after increasing by 2.2% in July, far above expectations for 2.7% and moving well clear of the ECB’s 2% target.

The increase was fuelled energy costs but food prices also surged, while there were also unusually large increases in the prices of industrial goods, said Eurostat, the EU’s statistics agency. (…)

The ECB argues that a slew of one-off factors related to the economy’s reopening after the COVID-19 pandemic account for the bulk of the inflation surge, and that price growth will quickly moderate early next year. (…)

Core inflation, however, also surged in August with inflation excluding volatile food and fuel prices accelerating to 1.6% from 0.9%, while an even narrower measure that also excludes alcohol and tobacco, rose to 1.6% from 0.7%. (…)

ING:

(…) Core inflation was subdued in July due to a shift in the sales period last year and some other, more minor statistical factors. The data is showing its true colours in August with a reading of 1.6%. The change in last year’s sales period and German VAT increase were the main drivers behind the jump in non-energy industrial goods prices from 0.7 to 2.7%. These effects are temporary and the increase in services inflation was much smaller, from 0.9 to 1.1%. Yes, price pressures are increasing, but August’s dramatic move does overstate the underlying inflation developments.

Headline inflation at 3% has not been seen since 2011. The elevated headline rate was due to the higher core rate and continued year-on-year growth in food as well as energy prices. The latter has been somewhat of a surprise in recent months, related to higher gas prices and continued growth in petrol prices despite Brent oil prices starting to level off. This has the potential to push headline inflation higher towards year end.

Despite the jump in core inflation and the further rise in headline inflation, this is not set to sway the ECB towards a more hawkish stance ahead of the September meeting next week. These were widely expected moves, although the magnitude is larger than most would have expected. Remember July though? ECB President Christine Lagarde repeatedly mentioned that the ECB would not act on temporary inflation. Today’s release will cause some sweaty palms but has not given much evidence of more structural high inflation. The macro projections presented at next week’s meeting will likely not have seen too much extra upward pressure yet.

This is not to say that there is no upside risk to the inflation outlook. The one big question mark is around the passthrough of the higher input and transport prices for goods, which has been moderate so far but the price pressures have become abnormal in recent months. The other is whether service sector reopenings will still cause price jumps like we saw for hairdressers after the first wave. We’re starting to see some evidence of that in restaurants and hotels, but not yet in package holidays. There is some evidence that this effect will start to become more prominent towards the end of the year, so hold tight: inflation has the potential to go higher from here.

Experience or senility?

David Rosenberg yesterday:

Age Bias? Without naming names, did you know that the mean and median age of the most vocal inflationists is nearly 70? This is the same group a decade ago lamenting the very same thing (when they were closer to 60). So they were in their 20s and just starting their career during that rare decade-long inflation breakout and clearly that experience is seared in their memory banks. Seems to be an age bias here on the big call of future massive inflation; busy fighting the last war, even if it was five decades ago.

PRODUCTIVITY VS EMPLOYMENT

QR codes replace service staff as pandemic spurs automation in US Shift means many jobs lost during Covid crisis will not return, say experts

Post-Pandemic Productivity Promises

From Andrew Cates:

Many economists are presently doing a lot of head scratching about the prospects for productivity growth. (…) Productivity growth will hold the key to how sustainable global growth is likely to be in the face of post-pandemic economic, policy and financial market pressures.

(…) there are a number of factors that are potentially positive for the productivity outlook in many of the world’s major economies in the immediate years ahead.

Firstly, productivity growth has already picked up pace in a number of major economies in recent months. To be sure there are some cyclical reasons for this that concern shifting sectoral spending patterns as well as the slump and subsequent rebound in economic activity that has unfolded as the COVID crisis began and then matured. Nevertheless, the strength of the current rebound in productivity growth is still impressive. And one reason for this could be that corporate investment activity has also been impressive, particularly in the technology space. Many CEOs and CFOs, moreover, expect to maintain high investment in this space in the period ahead. A survey by the World Economic Forum conducted during the course of 2020 and published last October, for example, indicated that between 85 and 95 percent of firms were accelerating or looking to accelerate the digitization of work processes as a result of COVID-19.

Secondly – and a key driver of this additional capex – the COVID pandemic has generated shifts to behaviour that have necessitated an acceleration in digitization and automation. The modus operandi of many companies (as well as many households) has changed. As a result of this, potential productivity efficiencies that were lurking beneath the surface prior to the pandemic have been uncovered and magnified far more swiftly than might have been expected in the absence of the pandemic. The most obvious example of this is the breakthrough vaccine technology that was uncovered to fend off the virus, technology that may well trigger further efficiencies in health care in the coming months. But examples abound too in other areas of the healthcare sector (via online consultations), in construction (via the adoption of digital construction methods), in information and communications (via increased demand for digital services such as cloud computing and videoconferencing facilities), in retail (via an acceleration of e-commerce activity), and in banking (via a shift to digital channels and contactless payments).

That brings us neatly to the next factor, namely the sheer number of new technologies that could yield a productivity dividend in the period ahead. Sure, there has been much hype about these technologies in recent years with many even suggesting (somewhat prematurely) that they earmark the advent of a fourth industrial revolution. Everything from artificial intelligence and machine learning, biotechnology, nanotechnology, robotics, and 3D printing have been touted as “the next big thing.” Still, the sheer number of these intriguing technologies and the degree to which the pandemic may have now lit their fuse is potentially promising for how productivity growth evolves from here.

It’s important to note here, however, that the absence of a broadly-based productivity revival in the pre-pandemic years may have had little to do with technology. The reason instead could be linked to surplus labour market capacity and low real wages. A growing body of evidence increasingly suggests that low real wages played a significant role in driving productivity growth to weaker levels in the years after the financial crisis and prior to the pandemic. In other words when real wages were low and profit margins were high, firms had few incentives to deploy new technology and/or seek alternative ways of securing cost efficiencies.

The parallel view here is that low labour productivity growth in those years leading up to the pandemic may have simply been a symptom not of weak technology investment but of demand-constrained, cheap labour economies. Equally on this view it may now be no coincidence that labour productivity growth is rebounding as fiscal and monetary policy have been highly stimulative and as wage inflation has started to climb. Indeed with sources of labour supply not now as fertile as they used to be (thanks, for example, to de-globalisation and enduring pandemic-related restrictions) firms are arguably now more actively choosing to invest in and deploy new technologies that have a productivity dividend.

So what does all this mean for productivity trends going forward? (…) the median forecast from the survey of professional forecasters for the 10-year ahead growth rate of labour productivity has lately been lifted from a low of 1.35% in 2019 to 1.75% in the latest survey for 2021. In the view of this scribe, trend productivity growth in most major economies – the US, Euro Area, the UK and Japan – might improve by 0.5 to 1 percentage point over the next several years. That would be in tune with evidence from some academics and from surveys of CEOs and CFOs. It would additionally be sufficient to bring productivity trends in the OECD roughly back to where they stood prior to the financial crisis. (…)

I hope he’s right. However, saying “the strength of the current rebound in productivity growth is still impressive” may be right looking at his 9-year chart above, but it becomes less impressive looked at over a longer period:

Productivity always rebounds post recessions but this year’s growth in output per hour (blue) is well below average, at least so far. Output per employee (red) is more in line with previous post-recession jumps but the unusual gap between the two series means that employees log in many more hours per week, likely unsustainable and not really a sign of improved productivity, especially if these extra hours are paid at premium wage rates.

As to the “acceleration in digitization and automation” and other tech investments, the growth numbers are also not all that impressive when compared to pre-1985 years:

Only to say that the evidence for “Post-Pandemic Productivity Promises” is not compelling just yet.

Delta Variant Pummels China’s Services Sector China’s services sector suffered an unexpectedly severe blow in August as a wave of infections sparked new lockdowns across the country, sending an official gauge of nonmanufacturing activity into contractionary territory.

China’s official nonmanufacturing purchasing managers index, which tracks activity in the construction and services sectors, plummeted to 47.5 in August, from 53.3 the prior month, according to data released Tuesday by the National Bureau of Statistics, breaking through the 50 mark that separates expansion from contraction. (…)

Largely responsible for the drop in the nonmanufacturing measure was a significant fall in the services subindex, which slid to 45.2 in August from July’s 52.5, as the highly infectious Delta coronavirus variant dampened demand for services requiring close human-to-human contact, the statistics bureau said. (…)

Beijing’s manufacturing PMI dropped to 50.1 in August—down from the previous month’s 50.4 reading and falling short of the 50.2 median forecast expected by economists polled earlier by The Wall Street Journal.

(…) the subindex of new orders dropped to 49.6—the first contractionary reading since February 2020. At the same time, the subindex tracking new export orders dropped further to 46.7, for a fourth straight month in contractionary territory. (…)

Subindexes tracking employment in the manufacturing and nonmanufacturing sectors both weakened in August. (…)

ING:

Contraction in non-manufacturing activity comes from Covid and the clampdown on technology and education centres

For manufacturing activity, chip shortages are important, since production capacity for electronics is close to a bottleneck, if not already there. This affects production as well as export orders.

In contrast, the sudden contraction in the non-manufacturing sector comes from several parts of the economy.

• Policies aimed at reforming the technology industry e.g. data privacy, and the clampdown on education centres to reduce the costs of raising children. Both of these have hit non-manufacturing activity.
• The weakness of non-manufacturing activity also came from suspended port operations due to social distancing measures after some Covid cases were found in two ports and one airport in August.
• People have deferred cross-provincial trips as they are worried about being under lockdown away from their home cities in case Covid cases are found in a tourist city.

Localised lockdowns from Covid and the suspension of ports and airports will be short-lived. Covid is subsiding in China and these measures should not affect manufacturing activity in a prolonged way unless new Covid cases are found again at ports.

But the chip shortage could be a problem that lingers on into at least 2022 and perhaps even into 2023 as chip manufacturers install more production lines. This is not going to happen overnight and will continue to affect the manufacturing PMI.

Some changes in the technology industry are happening, especially on data privacy after the clampdown. This could be positive for the industry. But shutting down tuition centres is hurting the jobs market. The most recent policy to cap the time spent on online games for youngsters may also create redundancies.

Consequently, we expect both manufacturing and non-manufacturing PMIs to be lower in the coming months. The contraction in non-manufacturing activity is likely to continue in September as the job market has become shakier and this will affect consumption.

As the government needs to find a way to support economic growth, infrastructure will likely be the first choice. The central bank will keep injecting liquidity into the financial system to suppress market interest rates so that local governments can fund infrastructure projects at a lower cost. This is in contrast to the Fed’s tapering talk. As such, we expect the yuan to weaken to 6.7 against the US dollar by the end of the year.

Delta Variant Threatens Small Businesses as It Slows Return-to-Office Plans Many big employers now intend to keep staffers home after Labor Day, in a new blow to the shops, retailers and restaurants that rely on them

(…) The survival of corner retail stores, coffee shops and restaurants is being watched closely by office-building owners, who are counting on traditional work patterns to resume as Covid-19 subsides. The success of the work-from-home trend threatens their cash flow and property values. (…)

An average of about 35% of the workforce had returned to traditional office space, as of July 21, in the 10 major cities monitored by Kastle Systems, a nationwide security company that monitors access-card swipes. That was up from about 23% in the middle of January.

More recently, though, momentum has stalled. As of Aug. 8, the average return-to-office rate had fallen to 33%, Kastle said. Summer vacations caused part of that decline. But the drop also likely reflects the growing number of businesses delaying return-to-office plans, analysts say. (…)

Many of the largest downtown office-building owners, including Boston Properties Inc. and SL Green Realty Corp. , have been compelled to find new ways to keep tenants viable, such as deals where ailing retailers pay a percentage of their monthly sales in rent rather than a fixed amount to help them survive. (…)

14-day trends:

But the 7-day trends looks better:

(CalculatedRisk)

From NBF:

Economic Surprises Turn Negative, Globally

(…) For the first time in over a year, Citi’s Global Economic Surprise Index turned negative.

Last week’s reading ended the 2nd-longest streak in positive territory in nearly 20 years. The only streak that exceeded the current one, or even came close, was the one following the recovery from the Great Financial Crisis.

The economy does not equal the market, especially when we’re dealing with stocks. But for the MSCI World Index (excluding the U.S.), forward returns were poor after the ends of positive economic surprises, especially over the next 3 months. (…)

Even though the Citi Global Economic Surprise Index just turned negative, the one focused on the U.S. is nearly -50. If we filter the table above to only include those signals when U.S. surprises were lagging the world, then the ratio of the Russell 3000 to the MSCI World Index tended to see losses. (…)

China Reins In Young Gamers The country’s new regulation bans minors from playing online videogames between Monday and Thursday and allows an hour of play on Fridays, weekends and holidays.

China on Monday issued strict new measures aimed at curbing what authorities describe as youth videogame addiction, which they blame for a host of societal ills, including distracting young people from school and family responsibilities. (…)

The government announcement said all online videogames will be required to connect to an “anti-addiction” system operated by the National Press and Publication Administration. The regulation, which takes effect on Wednesday, will require all users to register using their real names and government-issued identification documents.

(…) Tencent Holdings Ltd. , the world’s largest videogame company by revenue, has used a combination of technologies that, for example, automatically boot off players after a certain period and use facial-recognition technology to ensure that registered users are using their proper credentials. (…)

The impact on U.S. game makers from the government’s decision is expected to be somewhat limited, given their indirect exposure to the Chinese market. Beijing treats videogames as publications and imposes its censorship rules on videogames before they can be sold in China. (…)

What’s next? Porn, gaming?

• China Seeks to Cap Rising Home Rents in Latest Equality Move

The housing ministry aims to control growth in urban rents to no more than 5% per year, it said in a statement on Tuesday. It’s seeking to ensure a balanced supply and demand in the rental market.

The announcement underscores one of the top priorities for President Xi Jinping in his pursuit of “common prosperity.” Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry.

The statement also addressed issues including improving public services and infrastructure, building good affordable rental housing, and ensuring urban development projects aren’t excessive or create a sudden surge in housing demand. (…)

Almost 64% of the population now live in cities, said Wang Menghui, minister of housing and urban-rural development. That’s up from 51.3% in 2011 and 10.6% in 1949, according to the statistics bureau.

China will stabilize land and home prices, as well as market expectations, to ensure the healthy development of the property sector, Vice Housing Minister Ni Hong said at the same briefing. (…)

The government recently halted land auctions in some major cities, potentially hurting a key source of cash for local governments. It has also stipulated that the price premium for land should be capped at 15%, Citigroup Inc. analysts including Griffin Chan wrote in an Aug. 11 note after market rumors about the policy change. (…)

The government needs to tread carefully as the real estate sector now accounts for 13% of the economy from just 5% in 1995, according to Marc Rubinstein, a former hedge fund manager who now writes about finance. (…)

• China Threatens to Ban E-Commerce Companies That Flout IP Laws

China plans to tighten oversight of e-commerce companies like Alibaba Group Holding Ltd. and Pinduoduo Inc., including by holding them accountable for intellectual property violations.

E-commerce platforms will be restricted from online business operations or even have their licenses revoked if they fail to deal with serious violations of IP rights by vendors on their platforms, according to a draft revision of the country’s e-commerce law posted by the State Administration for Market Regulation. The market watchdog is seeking opinions on the draft revision until Oct. 14.

Chinese companies have long struggled with allegations that they allowed pirated or counterfeit goods to be trafficked through their websites. In 2019, the U.S. government added PDD to its Notorious Markets list for hosting pirated good, joining Alibaba and other Chinese firms under that label.

PDD and Alibaba’s Taobao were also on the 2020 list, released in January. (…)

Alibaba co-founder Jack Ma once said that it was difficult to root out fake goods on the company’s platforms because they were so high quality.

“The problem is that the fake products today, they make better quality, better prices than the real products, the real names,” he said at the time.

George Soros: Investors in Xi’s China face a rude awakening The leader’s crackdown on private enterprise shows he does not understand the market economy

(…) [Xi] is putting in place an updated version of Mao Zedong’s party. No investor has any experience of that China because there were no stock markets in Mao’s time. Hence the rude awakening that awaits them.

• George Soros and China: What a Difference a Decade Makes

(…) The academic Yi Fuxian goes one step further than Hass. He believes China’s “demographic structure is actually much worse than the authorities would have us believe.” An extensive analysis of the country’s “age structure” suggests that China has considerably fewer citizens than is currently being reported. In fact, China’s population might be as low as “1.28 billion,” which would make India the most populous country in the world. What we view as “a fire-breathing dragon,” writes Fuxian, is little more than “really a sick lizard.”

With a shrinking, rapidly aging population, the Chinese regime appears to be doing everything in its power to hide its gaping wounds. But the charade can’t go on forever. Although the propaganda machine roars on, the world is starting to see China for what it really is. Behind all the five-year plans, huge investments in infrastructure, and bombastic rhetoric lies problems that are existential in nature. Dragons are, after all, a thing of fantasy, much like the Chinese regime’s dreams of world domination.