U.S. Producer Prices Decline Unexpectedly in June; Food Prices Fall Sharply
Pricing power remains weak in the industrial sector. The Producer Price Index for final demand fell 0.2% (-0.8% y/y) during June following a 0.4% May increase. It was the fourth decline in five months. A 0.4% increase had been expected in the Action Economics Forecast Survey. Underlying pricing pressure remained weak. Producer prices excluding food & energy eased 0.3% (+0.1% y/y), the third consecutive monthly decline. A 0.1% rise had been expected. Another measure of underlying pricing power is the PPI excluding food, beverages and trade services. It improved 0.3% last month (-0.1% y/y) after edging 0.1% higher in May.
A 5.2% decline in food prices held back the change in the PPI overall, almost reversing a 6.0% rise in May. (…) A 7.7% strengthening in energy prices countered the decline last month. (…)
Final demand goods prices less food & energy edged 0.1% higher last month after holding steady in May. Prices for finished consumer goods less food & energy were unchanged (1.1% y/y). Core nondurable goods prices also held steady (+1.5% y/y) following years of strength. (…) Durable consumer product prices improved 0.4% y/y while household appliance prices rose 1.1% y/y. (…) (Haver Analytics)
Major Tax Increases Are About To Slam America As Cities & States Want You To Pay For COVID Fallout
Where pricing power exists is at the public level as Waling Times’ Isaac Davis found out:
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Nashville Mayor John Cooper is openly proposing raising property taxes by 32% in order to correct an estimated $250 million budget shortfall. “There is no choice but to have a significant increase in property taxes,” he said. “Measured in a percent, it’s going to be on the order of more than 20 percent to be sure.” [Source]
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Dallas, TX is looking at a proposed 8% increase in property taxes, and is having to work a loophole that allows them to ignore state law which would prevent them from raising taxes more than 3.5%. [Source]
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Expecting a $700 million shortfall, Chicago’s Mayor Lightfoot has said that a property tax increase is ‘on the table.’ [Source]
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California is considering a partial reversal of Proposition 13, which would allow government to assess commercial properties differently, creating an increase in property tax revenue without actually increasing the property tax rate. [Source]
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Other initiatives include “Arizona, where taxes would be raised on incomes above $250,000 to boost teacher salaries; Colorado, which is targeting corporations for at least $151 million in taxes to fund out-of-school learning; and North Carolina, which would issue bonds worth $1.9 billion in part to pay for school capital improvements.” [Source]
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New York is pitching the idea of tax increases for wealthier people. [Source]
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New Jersey is expected to see an unknown increase in taxes as the governor moves to borrow billions of dollars to cover budget gaps. [Source]
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CNBC reports that many states across the nation will be looking at tax increases in many areas, including corporate income taxes, online purchases, excise and sales taxes, property taxes, and gross receipts taxes. [Source]
More to come, testing people’s paying power…
US leveraged loan defaults total $23B in Q2, the most since 2009
Second-quarter default activity in institutional loans — the kind purchased by CLOs — though rapidly rising and topping prior milestones, was dominated for the most part by pre-pandemic situations, however.
A record 11 defaults in April totaling $6.90 billion, followed by a six-year monthly high of $10.54 billion of defaults in May, helped finally push the S&P/LSTA Leveraged Loan Index past its 2.85% historical default average for the first time since 2015.
June’s $5.70 billion of defaults brought the second-quarter total to $23.1 billion across 27 Index issuers, the highest quarterly volume since 2009’s first quarter. (…)
While the crisis might not yet show significant loan default activity, as a leading indicator, the impact of a record few months of ratings damage is expected to unfold in rising default rates.
Through June, 35% of the loan market by par amount outstanding (at the facility level) had received a ratings downgrade, representing $411.1 billion of the $1.169 trillion of rated loans at the end of 2019. (…)
Perhaps most important, as previously mentioned, rising downgrades typically precede a period of rising defaults. (…)
The fallout from this massive onslaught of downgrades is multifaceted. CLOs are exceeding their structural limits for lower-rated debt at eye-watering numbers. The repricing of downgraded companies’ debt, and the increasing challenge for lower-quality loans to find a home, will undoubtedly make traditional funding more prohibitive for these issuers, while the ratings quality mix of the leveraged loan market continues to worsen. (…)
This downgrade cycle has also further worsened the ratings mix of the leveraged loan market, with the share of issuers in the S&P/LSTA Leveraged Loan Index rated B- or lower climbing to 33.8% as of June 26, the highest reading ever.
Loans whose issuers are rated CCC, CC or C, a particular problem for collateralized loan obligations, make up a record 11% of the index, significantly higher than the 2.9% of the market five years ago. (…)
Bankruptcy Is Better Option for Small Businesses With New Law Lawyers expect a surge in small-business failures in the coming months. A new law, they say, will make many business owners realize that filing for bankruptcy might be a better option than struggling for years.
(…) The new law could force more creditors like suppliers and landlords to the negotiating table sooner. Under the old rules, most struggling small businesses liquidated without invoking bankruptcy, using the cash to pay their creditors, according to a 2008 analysis of credit records by Edward R. Morrison, a Columbia Law School professor.
The new rules give small businesses options that make it easier to file for chapter 11, providing them more leverage to renegotiate leases and debts while continuing to operate, often under the same ownership.
Big companies have long used chapter 11, but the law was too costly and complicated for many small businesses. Congress voted to change that last year when it passed the Small Business Reorganization Act, which was designed in part to preserve jobs. The law took effect in February, and in March the coronavirus stimulus law known as the Cares Act temporarily expanded eligibility to businesses with $7.5 million or less in liabilities. (…)
More than 500 companies filed for bankruptcy under the small-business bankruptcy rules since February, according to the American Bankruptcy Institute. June was the top month for filings with 131 cases; many were filed in states hit hard by the pandemic like Florida, Texas, California, New York and Illinois. (…)
CHARTS FOR YOU
From Ed Yardeni:
The S&P 500 is moving sideways with a slightly upward 200dma:
But its equal-weighted clone is weaker:
Same with small caps:
And the broad Value Line index:
The world ex-U.S. sits on the fence:
EFA shares are also weakish:
Like Canadian equities:
While Chinese stocks are clearly exuberant:
So are Nasdaq equities:
JPMORGAN: “A Democratic sweep election is potentially neutral-to-positive for markets”
Blank-Check Boom Gets Boost From Coronavirus With the IPO market rattled by Covid-19 and wild volatility, using a blank-check company has become a more attractive way to go public. So far in 2020, new listings of such vehicles have raised $12.1 billion.
Blank-check companies are essentially big pools of cash, listed on an exchange, whose sole purpose is to do an acquisition. When a blank-check company buys a target firm, the firm gets its spot on the exchange. For the target firm, it is a backdoor way of doing an initial public offering—and with the IPO market rattled by Covid-19 and wild volatility, it has become a more attractive way to go public. (…)
The latest is hedge-fund billionaire William Ackman. The $3 billion IPO of his Pershing Square Tontine Holdings Ltd., expected this week, is set to be the largest IPO of a special-purpose acquisition company, or SPAC, in history. With additional commitments from its backers, the vehicle could have up to $6.5 billion in funding, potentially letting it take public a private firm worth tens of billions of dollars.
SPACs, as blank-check companies are often called, have no operating history when they go public. Within a specified time, typically two years, they must use the proceeds of the IPO to acquire or merge with a target firm. (…)
Even individual investors have grown more interested in the once-obscure vehicles. A forum devoted to SPACs was created on the online platform Reddit in May and now has more than 10,000 members. (…)
PANDEMONIUM
Trump Dims Hopes for New China Trade Deal President Trump said he is no longer thinking about negotiating a phase-two trade deal with China, saying the relationship between the countries has been badly damaged by the coronavirus pandemic.
(…) “They could have stopped the plague, they could have stopped it, they didn’t stop it.” (…)
In Beijing, officials were always cool to the idea of a phase-two deal—believing they had little to gain from U.S. demands that China cut government subsidies to domestic companies, downsize state-owned firms and ease the government’s grip on the economy.
Chinese leaders believe the state-directed model is responsible for the nation’s rise from poverty, and will be important going forward as it moves toward developing its own technology industry and cutting its dependence on the U.S. (…)
The president’s announcement that phase-two talks are on the back burner also means that U.S. tariffs on imports from China are unlikely to be removed soon. The U.S. has imposed tariffs on about $360 billion a year worth of goods from China. As part of the deal struck in January, the administration cut the rate from 15% to 7.5% on about $110 billion worth of goods, while leaving tariffs on the rest at 25%. (…)
U.S. slaps French goods with 25% duties in digital tax row, but delays effective date
The Trump administration on Friday announced additional duties of 25% on French cosmetics, handbags and other imports valued at $1.3 billion in response to France’s digital services tax, but would hold off on implementing the move for up to 180 days.
The U.S. Trade Representative’s office said delaying the start of the tariffs would allow further time to resolve the issue, including through discussions in the Organisation for Economic Co-operation and Development (OECD). The decision also reflected France’s agreement to defer collection of its 3% tax on digital services. (…)
Also posted today:
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