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THE DAILY EDGE: 20 March 2024

Airplane Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

Underlying inflation measures remain sticky, which could delay rate cuts.

Source: MRB Partners

Consensus says the #Fed should cut rates. BUT, a host of inflation and liquidity barometers started signaling more not less #inflation around mid-2023. (Source: Richard Bernstein Advisors)

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Canada Inflation Unexpectedly Cools to 2.8% in February Consumer prices rose 2.8% in February from a year earlier, Statistics Canada reported, where economists expected the rate to advance to 3.1%.

It marks a second month running where the consumer-price index has been inside the Bank of Canada’s 1% to 3% target, after it cooled to 2.9% in January.

On a month-over-month basis, inflation climbed 0.3% after no change in the first month of the year. (…)

Excluding food and energy costs, the consumer-price index advanced 2.8% in February from a year earlier.

Two measures of annual core inflation the central bank closely monitors also continued to cool. Weighted median and trimmed mean CPI rose an average 3.15%, the softest level since August 2021 and compared with 3.35% growth in January. (…)

From Goldman Sachs:

(…) Excluding food and energy, CPI inflation declined by 0.3pp to +2.8% yoy, the lowest rate since July 2021. BoC-preferred CPI-Trim and CPI-Median were softer than consensus expectations at +3.2% (vs. +3.4% in January) and +3.1% (vs. +3.3%) on a yoy basis, respectively.

On a three-month average annualized basis, CPI-Trim declined to +2.3% in February from +3.2% in January and CPI-Median edged down to +2.1% from +3.1%. The average of the preferred three-month measures is now at the lowest level since January 2021. On a month-over-month annualized basis, CPI-Trim (+1.2%) and CPI-Median (+1.1%) remained essentially unchanged at low levels in February.

On a seasonally adjusted monthly basis, headline CPI inflation was +0.1% in February, up from -0.1% in January. (…) Seasonally adjusted CPI ex food and energy inflation was unchanged at +0.1% in February.

Sequential core goods inflation remained soft at -0.4% in February (mom GS sa, vs. -0.6% in January) and moderated further for durable goods (-0.3pp to -0.8%). (…)

Monthly inflation for rented accommodation ticked up by one tenth to +0.8%, while sequential inflation for the mortgage interest cost component decelerated further to +1.3%, down from +1.6% last month and a peak of +2.7% in 2023, in line with our expectations. Sequential inflation for most non-shelter wage-sensitive categories—such as food purchased from restaurants, household services, and health care services—was roughly unchanged at moderate levels.

Euro-Area Labor-Cost Growth Slowed at End of 2023

Euro-Area Labor Costs | Growth of hourly employment expenses slowed at end of 2023

China’s Fiscal Stimulus Plan May Be Bigger Than It Appeared

China kept its official budget deficit target unchanged at 3% of gross domestic product, but that underplays government support because it leaves out a large amount of investment spending.

Using the simplest definition of stimulus — the demand injected into the economy by government spending minus the purchasing power removed via taxes and fees levied — the fiscal package in proportion to the size of the economy is the strongest since 2020, when China moved to shore up growth in the face of the pandemic. (…)

The trouble is that it leaves out China’s other fiscal accounts. The largest of those is the “government-managed funds account,” which covers investment in construction projects, as well as income derived mainly from land sales. This account usually has a large deficit, made up by bond issuance. Combining that with the general budget, the shortfall amounts to 11.1 trillion yuan, or almost triple the size of the official fiscal deficit.

National authorities can also unleash leftover funds from prior years, as well as cash transfers from other fiscal accounts, such as profits submitted by state-owned enterprises. Officials have said that most of the roughly 1 trillion yuan raised from October’s additional sovereign bond issuance will be used in 2024.

“The fiscal numbers are pretty decent, a pretty solid additional impulse from last year” overall, said Andrew Polk, a co-founder of the research consultancy Trivium.

Zooming out, the planned 11.1 trillion yuan figure for the augmented fiscal deficit — an estimate of all the main fiscal resources — is equivalent to 8.2% of GDP this year, according to Bloomberg calculations based on Ministry of Finance data. That would represent the highest deficit-to-GDP ratio since 2020.

And the tally could end up representing even more than 8.2%, thanks to deflation. That’s because that figure is measured against nominal GDP, which includes the growth of prices. If price growth is weak or negative, that 11.1 trillion yuan deficit will represent a bigger slice of the pie. (…)

China’s $55 Billion Loan Surge Points to ‘National Team’ Rescue

China’s loans to non-bank financial institutions surged in February by the most in seven years, prompting speculation that lenders provided a big boost of capital to state funds as they bought shares to help stem a multi-trillion dollar market rout.

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Loans to non-bank financial institutions, including brokerages and mutual funds, grew by more than 400 billion yuan ($55.6 billion) last month, according to the latest data from the People’s Bank of China. That was the biggest jump since July 2015, around the last time the so-called national team of state-related bodies bought up equities to stabilize turbulent markets.

“China’s non-bank financial institutions usually don’t have so much borrowing need,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. He attributed the increase to the national team likely borrowing from a commercial bank.

China took various efforts earlier this year to stem a $7 trillion slide in mainland and Hong Kong stock markets, which became the most acute symbol of depressed confidence in the world’s second-largest economy. There is evidence that state institutions, including sovereign wealth fund Central Huijin Investment Ltd., snapped up shares to bolster market confidence.

Several exchange-traded funds in China saw a surge in turnover after the Lunar New Year holiday last month, a likely sign of that support. In recent weeks, Chinese stocks have rallied, with a number of benchmarks surging 20% from earlier lows.

Private estimates of “national team” buying are broadly in line with the PBOC data on non-bank borrowing. State funds poured more than 410 billion yuan into onshore shares this year, according to estimates by UBS Group AG late last month. Purchases in January and February reached nearly 300 billion yuan, Bloomberg Intelligence projections<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> show. (…)

SENTIMENT WATCH

Ed Yardeni

Nvidia was up a measly 1% today despite the exciting presentation, after Monday’s close, by CEO Jensen Huang about the company’s future in the AI ecosystem. He announced a new generation of GPU chips and software for running AI models. The first chips in the new Blackwell platform will be shipped later this year. They are more powerful (with a five-fold increase in petaflops) and consume less energy than the current ones. On CNBC today, Huang estimated that one chip will cost $30,000 to $40,000.

Today’s lackluster gain in Nvidia’s stock price suggests that the stock and the overall stock market have discounted a lot of good news. (…)

Meanwhile, we don’t like what we are seeing in the crude oil pits. The price of a barrel of Brent crude oil is up 19.3% since December 12, 2023 to $87.38 today. It might be on the verge of a breakout to $90.00. There is a channel formation in the chart suggesting that the price could rise to $100.00 during the second half of this year. Such a scenario would be all too reminiscent of the 1970s, posing a threat to our Roaring 2020s outlook. We’ll be monitoring Ukrainian attacks on Russia’s oil infrastructure and the ongoing turmoil in the Middle East. (…)

Or, on a happier note, maybe rising oil prices suggest that the global economy is picking up.

  • Here is Goldman’s sentiment indicator.

Source: Goldman Sachs; @MikeZaccardi

  • Equity fund inflows have been exceptionally strong.

Source: BofA Global Research

THE DAILY EDGE: 14 March 2024

Airplane Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

Retail Sales Indicate Weaker Pace of Spending at Start of Year

Retail sales bounced back in February, but the underlying details of the release were a bit more mixed, and the all-important “control group” measure of sales suggests some modest downside risk to broader Q1 consumer spending.

Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Economics

While retail sales bounced 0.6%, that was slightly weaker than we were anticipating and comes with downward revisions at the start of the year which now show January sales declined 1.1%, rather than by the 0.8% drop reported previously. We got the lift we were anticipating from auto sales and building material stores, but the gain in gasoline sales was a bit more muted than expected given higher retail prices during the month and these retail series are nominal, or not adjusted for inflation. Nine of the 13 types of retailers tallied did report a rise in sales last month, which highlights the widespread nature of February sales growth, a notable difference from January.

When we look through some typically-volatile categories of retail such as auto dealers, gasoline stations, building material stores and restaurants, the “control group” measure of sales was flat in February. That was also weaker than we forecast, though it did come with a slight upward revision to January. The result is somewhat of a wash, and, if anything, suggests some modest downside risk to Q1 consumer spending given this tally of retail is factored into estimates of broader personal spending. Cutting through some monthly volatility, control group sales have been flat on average over the past three months. Consumer spending is moderating.

Source: U.S. Department of Commerce and Wells Fargo Economics

It is increasingly evident that after years of a devil-may-care approach to spending, consumers have at last shown signs of being more reserved at the start of this year. In January, we saw a pivot from discretionary items back to non-discretionary purchases in the broader personal spending release. Today’s retail sales data are a bit more mixed in terms of the drivers, but over the past year we have seen more of a pullback in sales at retailers more likely to sell large durable items like autos, furniture, electronics, sporting goods, which tend to not only come with a higher purchase price but may also require financing. There’s ultimately more competition for consumers dollars today while still-high prices for frequent purchases like food and gasoline may be diverting discretionary funds, just as higher interest payments may also be somewhat crowding out consumption.

Despite recent moderation, we ultimately do not think consumer spending is poised to slow meaningfully. Consumer momentum likely remains intact amid a still-sturdy labor market offering support to spending this year, even if that pace of spending is set to moderate. Separately released data this morning on jobless claims showed a still-low level of people filing initial claims for unemployment insurance, while continuing jobless claims continue to gradually drift higher. While the labor market is still sturdy with layoffs still low, for those who lose their job it appears it’s not quite as easy to find a new one today as it was a couple of years ago.

We’ve long cautioned that it will be personal income that dictates the pace of spending this year. As the labor market moderates we should continue to see income growth slow as well, which will exert downward pressure on spending. The upshot of that moderation should be less demand-pull on inflation, which would be welcome news for the Fed once it more fully materializes in the consumer price estimates.

After super-strong demand last year, retail sales growth slowed in less important January-February. Keep in mind, however, that durable goods prices are still deflating 1.5% YoY. Aggregate weekly payrolls were up 5.3% YoY in February.

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Likely related:

US Producer Prices Jump, Adding to Signs of Persisting Inflation Core and broader measures exceed estimates for modest rises

The producer price index for final demand increased 0.6% from January, Labor Department data showed Thursday. The gauge rose 1.6% from a year earlier, the largest annual advance since September.

The so-called core PPI, which excludes volatile food and energy categories, advanced 0.3% from the prior month, and 2% from a year ago.

The pickup in cost pressures at the wholesale level illustrates an uneven path for Federal Reserve policymakers seeking greater progress in their inflation fight. Consumer-price data earlier this week showed underlying inflation exceeded forecasts for a second month, reaffirming expectations that the Fed will be in no rush to reduce interest rates. (…)

Prices paid to producers for goods jumped 1.2%, the first increase in five months. Nearly 70% of the advance was due to energy costs.

Stripping out food, energy and trade services, which is an even-less-volatile PPI measure, prices increased 0.4% after a 0.6% gain.

Costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, rose for the first time in five months on a jump in energy. Excluding food and energy, processed goods for intermediate demand rose 0.5%, the most since May 2022.

Goldman Sachs: “Based on details in the PPI and CPI reports, we estimate that the core PCE price index rose 0.29% in February (vs. our previous estimate of 0.27%), corresponding to a year-over-year rate of +2.81%. Additionally, we expect that the headline PCE price index increased 0.36% in February, or increased 2.47% from a year earlier.”

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PPI Double Beat Brings Back Memories of Volcker, Jackson Hole

Scorching wholesale inflation data amidst this morning’s lower-than-expected unemployment claims are sending market players back to the drawing board as they reevaluate the path of potential Fed rate cuts. The year has certainly seen monetary policy expectations shift considerably, as investors are now thinking that rate relief may arrive in July rather than June, with expectations now nearing coin flip odds for the earlier month.

Wholesale inflation posted a double beat in February while accelerating for the second-consecutive month, as services, goods and commodities all experienced material price gains. February’s Producer Price Index (PPI) rose 0.6% month over month (m/m) and 1.6% year over year (y/y), shattering expectations of just 0.3% and 1.1% and gaining from January’s rates of 0.3% and 1%. Core figures, which exclude food and energy, also beat projections, rising 0.3% m/m and 2% y/y versus estimates of 0.2% and 1.9% and the previous period’s 0.5% and 2%.

Wholesale price gains were broad, with goods and commodities leading while services gained at more tempered levels. Energy, with a 4.4% increase, climbed the most followed by foods, with a gain of 1%, and the transportation and warehousing category, which jumped 0.9%. The other services category increased 0.5% while trade services experienced price relief of -0.3% during the period.

Wholesale inflation posts a double beat, accelerating at the fastest pace since August

Commodities Helped in ’23, But Hurt in ‘24

Commodities are continuing to provide inflationary pressure with West Texas Intermediate Crude climbing above $81 a barrel today after lumber and copper prices hit 12-month highs yesterday. Oil prices climbed sharply on supply concerns following Ukraine’s two-day drone attack on Russia that included oil facility targets. Ukraine has attacked approximately 25% of Russia’s refinery capacity so far this year and the most recent attack hit a facility that can process 340,000 barrels a day. Meanwhile, demand for lumber and copper is likely to increase as manufacturers and real estate developers pounce on looser financial conditions and firmer animal spirits.

Commodity prices reach the highest levels of the year

Labor Market Pressure Persists

Labor market conditions remained tight this month, with unemployment claims trending lower and pointing to sustainable headcounts across the economy. Initial unemployment claims fell to 209,000 for the week ended March 9, below estimates of 218,000 and the previous week’s 210,000. Continuing claims rose to 1.811 million for the week ended March 2, below projections of 1.9 million but slightly higher than the previous period’s 1.794 million. Continuing unemployment claims benefited greatly from downside revisions, bringing the figure significantly below the pivotal 1.9 million threshold. The four-week moving average for both figures shifted from 209,500 and 1.837 million to 208,500 and 1.799 million.

Unemployment claims trend lower, indicating tight conditions

Will Powell Pitch a Slider or Whip a U-Turn?

August 2022 comes to mind when examining the current trend of inflation amidst animal spirits in markets. At the time, the S&P 500 rose from 3636 to 4324, a 19% rally off of comments from Fed Chair Powell emphasizing that the current posture of the central bank was neutral, even though the Fed funds rate was at a midpoint of just 2.38%. The reignition of commodity prices, a few hotter inflation reports and bullish exuberance in markets led Powell to show up fiercely in Jackson Hole, Wyoming.

Powell threw the ferocious slider pitch that no one was expecting, which led to a 20% S&P 500 drop from August to the October lows of 3491. He even mentioned economic pain. Next week provides another opportunity for Powell to redeem himself against the backdrop of inflation. Will he throw the old-fashioned Jackson Hole slider, or will he pull a Nascar style, Washington D.C. U-Turn. Will he continue to support the interests of Wall Street, or will he acknowledge that accelerating inflation is painfully damaging to Main Street?

The conditions bring to mind an observation from Paul Volcker, the legendary Fed chair that slayed inflation in the 80s, who opinioned “The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end, be what brings it about.

The Ides or March?

China’s Xi Jinping wants market-ready scientific research

(…) China’s conversion rate for scientific and technological achievements in 2021 were a mere 6%, and its invention patent industrialization rate 36.7% (…). In comparison, corresponding figures for the US were 50% and nearly 80% respectively. (…)

Chinese-origin researchers stand out in Apple’s 2024 AI scholarship programme, shining a light on mainland’s brain drain

Researchers of Chinese origin comprised more than half of this year’s recipients of Apple’s annual fellowship programme on artificial intelligence (AI), shining a light on a brain drain that threatens the nation’s ambition to become a global powerhouse in that critical technology.

The 2024 Apple Scholars in AIML PhD fellowship – focused on machine learning, a branch of AI concerned with developing algorithms and statistical models for computer systems – shows that 11 of the 21 admitted to the programme were of Chinese origin, based on their names and academic background that include bachelor’s level studies on the mainland, according to a list published on Tuesday by Apple on its website.

At least seven of the 11 fellowship recipients completed their undergraduate studies on the mainland and pursued further studies overseas, primarily in the United States. (…)

The rising number of Chinese researchers admitted into that programme and other AI-related opportunities in America reflects the mainland’s continuing struggle with brain drain, compared with a brain gain for the US.

A continued talent exodus could put China at a big disadvantage, nearly seven years since Beijing made AI a national priority to establish the country as “the world’s premier artificial intelligence innovation centre” by 2030.

While China has expanded its AI talent pool over the last few years to meet growing domestic demand, the US remains the top destination for top-tier AI researchers to work, according to Chicago-based MacroPolo’s latest AI Talent Tracker report, which compares global movement in 2022 and 2019. MacroPolo operates under the Paulson Institute, an independent think tank focused on US-China relations.

The report found that China and the US are the leading countries of origin of the world’s top-tier AI researchers, which MacroPolo defined as the top 20 per cent of such elite researchers based on undergraduate degrees. China had a dominant 47 per cent share in 2022, up from 29 per cent in 2019. The US reached 18 per cent in 2022, down from 20 per cent in 2019.

The US, however, is still the leading country where top-tier AI researchers work. The US share reached 42 per cent in 2022, compared with 59 per cent in 2019. China managed to grow its share to 28 per cent in 2022, up from 11 per cent in 2019.

MacroPolo data showed that China has become the leading country of origin of top-tier AI researchers working in US institutions, with a 38 per cent share in 2022 from 27 per cent in 2019. The US followed with a 37 per cent share in 2022, up from 2019’s 31 per cent.

Within US institutions, researchers of American and Chinese origin comprised 75 per cent of the top-tier AI talent in 2022, up from 58 per cent in 2019.

The US is home to about 60 per cent of the world’s top AI institutions, according to MacroPolo. These included the likes of Google, Stanford University, the Massachusetts Institute of Technology, Carnegie Mellon University, Microsoft Research and Meta Platforms.

After completing their PhD in the US, a vast majority of non-American AI talent stay in the US, according to MacroPolo. Chinese researchers who opt to work in the US after obtaining their PhD doubled to 8 per cent in 2022 from 4 per cent in 2019.

While the demand for AI talent is high on the mainland, there has been a lack of suitable candidates amid growing opportunities overseas. For every five new jobs in AI in China, there are only two qualified workers in the market, according to a report published late last year by Maimai, a career social network.

TRAVEL NOTES
China EV war: BYD prices a fifth car below 100,000 yuan threshold as it takes offensive in market-share battle Updated e2 compact SUV will start at 89,800 yuan (US$12,507), 12.6 per cent less than the previous price

BYD, the world’s largest electric vehicle (EV) maker, has priced another model under the 100,000 yuan (US$13,912) threshold as a discount war in China’s EV market intensifies.

The Shenzhen-based company, backed by Warren Buffett’s Berkshire Hathaway, announced on Wednesday that the updated fully electric e2 model will start at 89,800 yuan, 12.6 per cent less than the previous price of 102,800 yuan.

The compact sport-utility vehicle, with a range of 405 kilometres, becomes the fifth BYD model available for less than the psychologically important threshold price – viewed as affordable even for low-income wage earners in the mainland China market. (…)

Among the five models, only the budget Seagull hatchback previously sold for less than 100,000 yuan. BYD marked the entry-level edition of the car down by 4,000 yuan to 69,800 yuan [US$ 9700] last Wednesday. Price cuts over the past three weeks pushed the basic editions of the other four models – the e2, Qin Plus DM-i plug-in hybrid, Dolphin and Chaser 05 – below 100,000 yuan.

Since February 18, BYD has been slashing prices for nearly all of its cars to stay ahead of the competition as EV sales in the world’s largest market showed signs of slowing.

Many of BYD’s rivals, including Xpeng, Zeekr and SAIC-GM-Wuling, General Motors’ three-way venture in China, have followed its move to reduce prices of their bestselling models in the cutthroat market.

BYD delivered 3.02 million pure electric and plug-in hybrid vehicles to customers at home and abroad in 2023, a year-on-year increase of 62.3 per cent. Most of its sales were on the mainland, with exports accounting for only 242,765 units, or 8 per cent of the total. But the exports represented a 334 per cent jump over 2022. (…)

In China, about 40 per cent of new cars taking to the streets are now powered by batteries, buoyed by drivers’ increasing penchant for electric cars featuring autonomous driving systems and digital cockpits.

In January, BYD announced it would invest 100 billion yuan in ­developing smart cars, in an apparent effort to challenge Tesla and other mainland rivals such as Nio and Xpeng in the premium EV segment. (…)

My son David and I have been researching the EV market in the past year. I have driven Teslas for several years and considered them outstanding cars. However, our research led us to consider BYD as the best EV car manufacturer in the world. BYD is totally integrated with best in class batteries (with lifelong guarantees, vs Tesla’s 8 years) and superior software (after all, EV cars are giant ipads on wheels).

The cars Suzanne and I saw in a HK dealership last week were very well designed and built, with very comfortable and thoughtful interiors. The BYD sales representative said the “export cars” are better built than the “China cars” to meet all western crash tests.

BYD is quickly invading the world with more affordable cars. Some countries are trying to protect their domestic manufacturers with tariffs and other measures. In the USA, a 27% tariff won’t be sufficient if BYD builds and ships from NAFTA member Mexico, so Congress is mulling banning cars operated with Chinese software for “national security” reasons even if it means Americans paying thousand dollars more for their cars, electric or not.

We shall see if China eventually cuts Tesla from the largest market in the world.

Last January:

Tesla CEO Musk: Chinese EV firms will ‘demolish’ rivals without trade barriers

(…) Chinese car companies were the “most competitive” and “will have significant success outside of China, depending on what kind of tariffs or trade barriers are established,” Musk said on a post-earnings call with analysts on Wednesday.

“If there are no trade barriers established, they will pretty much demolish most other car companies in the world,” he said. “They’re extremely good.” (…)

On Wednesday, Musk warned Tesla was reaching “the natural limit of cost down” with its existing lineup. (…)

President Joe Biden has said China was determined to dominate the EV market and that he “won’t let that happen”. (…)