Month: October 2021

CONSUMER WATCH

• Lower-Income Americans Starting to Opt Out of Holiday Spending

This Christmas season will be marked by a growing divide between high and low earners, according to a study from Deloitte LLP.

The survey, released Wednesday, shows that 11.5% of U.S. holiday shoppers say they plan not to spend anything on gifts and services this holiday. That’s up from 4.9% in 2020 and 2.9% the previous year. It’s the highest in at least 10 years, according to Rod Sides, a vice chairman of Deloitte.

For those who don’t plan to spend, almost two-thirds make less than $50,000 a year, according to Deloitte. About one in eight of the non-spenders make $100,000 or more. (…)

Deloitte has forecast 7% to 9% growth in holiday sales this year. The expansion will mostly be fueled by wealthier consumers who have seen their savings rise during the pandemic. Spending among lower-income Americans, meanwhile, is expected to fall 22% compared to last year.

Through Oct. 15, spending remains strong according to the Chase Spending Tracker:

• U.S. Housing Starts Unexpectedly Decline in September

Housing starts fell 1.6% during September (+7.4% y/y) to 1.555 million (SAAR) from 1.580 million in August, revised from 1.615 million. Starts have declined from 1.725 million in March. A September increase to 1.620 million starts was expected in the Action Economics Forecast Survey.

The decline in starts overall in September was due entirely to a 5.0% drop (+38.5% y/y) in multi-family starts to 475,000, reversing half of the August rise. Starts of single-family homes held steady in September at 1.080 million (-2.3% y/y), revised from 1.076 million. Single-family starts fell 2.9% in August and 4.2% in July. Starts last month were 13.9% below the March high.

Building permits fell 7.7% to 1.589 million in September (0.0% y/y) from 1.721 million in August, revised from 1.728 million. Permits to build single-family homes eased 0.9% (-7.1% y/y) to 1.041 million, the fifth decline in six months. Permits to build multi-family homes fell 18.3% (17.1% y/y) in September to 548,000, a decline which reversed all of an outsized August increase.

By region, housing starts fell 27.3% (-4.8% y/y) in the Northeast to 120,000 following a 139.1% August increase. Starts in the South were down 6.3% last month to 835,000 (+9.4% y/y) following a 1.0% decline. Offsetting these shortfalls was a 6.9% gain (3.3% y/y) in the Midwest to 217,000 following a 10.9% increase. Starts in the West surged 19.3% (9.7% y/y) to 383,000 after falling 21.7% in August and 7.0% in July.

  

Waller: If Inflation Doesn’t Cool by Year-End, Fed Could Bring Rate Increases Forward Federal Reserve Gov. Christopher Waller said the central bank could move forward the timeline for raising short-term interest rates to restore price stability if high levels of inflation don’t start cooling soon, adding that he supports the Fed slowing its asset buying stimulus effort starting next month.

• Traders Increasingly Doubt Bank of Canada’s Rate-Hike Timeline

Traders are betting that the Bank of Canada will be forced into raising interest rates earlier than expected, posing one of the stiffest tests yet for Governor Tiff Macklem.

Bets in the overnight swaps market are increasingly tilting toward a move early next year, well ahead of the U.S. Federal Reserve. Traders have now priced in three hikes in Canada by the end of 2022, which would bring the policy rate to 1% from the current 0.25%.

That’s about 50 basis points higher than markets were expecting just a month ago. The shift in pricing is increasingly at odds with Macklem’s guidance that borrowing costs won’t increase until slack is absorbed and inflation returns sustainably to its target range.

The bank has said repeatedly it doesn’t see that happening until the second half of next year. (…)

“If Macklem capitulates around an early rate hike when he thinks spare capacity might still exist then the whole exit framework will turn into a dumpster fire,” Derek Holt, an economist at Bank of Nova Scotia in Toronto, said by email. “It could make forward guidance a very weak tool in future and magnify risks to policy efficacy.” (…)

On Monday, the Bank of Canada’s quarterly business outlook survey revealed a record 45% of respondents expect inflation above 3% over the next two years. More than 85% see prices rising faster than the bank’s 2% target. (…)

The bank’s next decision is due Oct. 27. No move on borrowing costs is expected, but Macklem will likely pare back weekly purchase of Canadian government bonds to C$1 billion ($810 million) from the current pace of C$2 billion. All eyes will be on any changes in language on rate guidance, as well as the inflation outlook in the latest quarterly economic forecasts. (…)

HIGHER FOR LONGER

• ‘They’ll have to pay’: Malaysia chip crunch triggers new era in supply deals

Malaysian electronics firms central to the supply of basic chips that drive the world’s cars, smartphones and home devices say big-name customers are beating on their doors to lock in take-or-pay, longer-term deals – and happy to pay more if need be. (…)

At factories in Malaysia, operators like chip packaging firm Unisem (UNSM.KL) say that drive is leading buyers that sell chips on to auto and electronics manufacturers to become willing to sign up for big price hikes, some even asking for as many assembled chips as plants can produce – whatever the cost.

But Malaysia’s chip assembly industry, accounting for more than a tenth of a global trade worth over $20 billion, warns that shortages – exacerbated by years of under-investment in basic chip production, while high-end semiconductors were favoured – will last at least two years. (…)

Wong Siew Hai, President at the Malaysia Semiconductor Industry Association, warns the shortage is likely to last for years. Some customers are ordering more than they need to lock in supplies, Wong said, while long-term contracts that range from one to three years have now become a new industry norm.

“For the capacity to match demand, (it will take) at least two to three years from now,” Wong told Reuters. (…)

• Wage dispute deepens at German public banks as inflation fears persist

A labour dispute at Germany’s public-sector banks deepened on Wednesday after a third round of talks failed to reach agreement, with inflation fears prompting unions to stand firm over demands for higher wages. (…)

Workers at public-sector banks have staged warning strikes to underscore union demands for a 4.5% wage increase and rights for working outside the office. (…)

Annual inflation in Germany was 4.1% in September, highlighting growing price pressures as Europe’s largest economy recovers from the COVID-19 pandemic and its companies face with supply shortages.

Oliver Popp, spokesperson for the DBV union, said inflation concerns were playing a big role in the union demands. (…) “Salaries are just enough to get by” and energy prices are “crazy”, he said. (…)

Earlier this year, employees at Deutsche Bank call centres, some of whom were paid 12 euros ($13.95) an hour, went on strike for higher wages and eventually reached a pay deal after a months-long dispute.

The deal envisages the gradual introduction of a 13th month of pay [+8.3% implemented gradually], a one-time payment and wage increases that average out to be around 2.7% per year. (…)

Initially, workers sought a 6% pay increase, while the bank offered pay increases of 1.5% in two rounds.

In the USA, the strike at John Deere is the biggest of the pandemic era, with 10,000 workers on the picket line calling for better pay and benefits, Axios’ Courtenay Brown writes. (…)

The agricultural sector is thriving. Farmers are more willing to shell out money for new equipment than they have been in years, so demand is robust.

All of it helps deliver the record profits John Deere executives told Wall Street to expect this year. Workers want a piece of that. (…)

The strike is “part of a broader trend for labor to reclaim some of its lost bargaining power over the past 30 years,” says De Maria, who adds it will help set the tone for unions with contracts up in the near term.

John Deere executives and union leaders are back at the negotiating table as of yesterday, a UAW spokesperson said in an email.

For context, DE’s net margins reached 13% over the last 12 months. Since 1993, their cyclical peak was 9% in 2013 and 2008.

China’s New Home Prices Fall for First Time in Six Years as Rules Bite Average prices in 70 major cities edged down 0.08% in September from August, the first such month-on-month decline since 2015

(…) In all, 27 of the 70 cities recorded a month-on-month price increase in September, according to the statistics bureau—down from 46 cities in August and the lowest such number since February 2020, when the Covid-19 pandemic froze activity across the country.

Prices of new homes in China’s so-called third-tier cities fell 0.2% from the previous month, after remaining unchanged in August, the statistics bureau said. (…)

Compared with a year earlier, average new home prices rose 3.26% in September, slowing from August’s 3.70%. New home prices rose in 59 of 70 cities in September from a year earlier, the same as in August. (…)

• Xi Faces Pushback on China’s Bid to Tax Property Chinese President Xi Jinping is facing strong resistance over a nationwide property-tax plan meant to help curb housing speculation, and he is now settling for a more limited rollout, people familiar with the matter said.

(…) Many officials contend that such a levy could crush housing prices, cause consumer spending to plunge and severely harm the overall economy. (…)

More than 90% of urban Chinese families own their homes, and property-related industries account for nearly a third of the country’s output. Meanwhile, up to 80% of China’s household wealth is tied up in real estate; a drop in property values could make homeowners feel poorer and less willing to spend. (…)

Some retired senior party members also petitioned against imposing the new tax, saying they themselves couldn’t afford to pay any additional taxes. “So many people, including party members, own more than one property,” said one of the people familiar with the deliberations. “The tax proposal is becoming a potential social-stability issue.” (…)

One idea under discussion is to gradually test the tax plan in big cities, including Shanghai and the sprawling municipality of Chongqing in central China, which both have levied an annual charge on second homes or high-priced ones since 2011. Other places under discussion include the southern boomtown of Shenzhen and the province of Hainan, both designated by Mr. Xi as the testing ground for building a socialist market economy. (…)

Meanwhile, local governments, which get roughly a third of their revenue from selling land to property developers, worry that a property tax would cause demand for land to drop and hurt their revenues, which amounted to more than $1 trillion last year. (…)

Based on transactions data from 100 cities, Rhodium’s analysis shows that land sales plunged 43% in the first three weeks of September from a year earlier. The drop is adding to the financial strains on many localities across the country. (…)

• What Is Xi Jinping Thinking? In this issue of Sinology, we explain why it is unlikely that the recent regulatory crackdown is Chinese Party chief Xi Jinping’s attempt to roll back China’s private sector.

SENTIMENT WATCH

Resistance to Buying Stocks Is Becoming Evermore Futile Fund managers’ equity allocations are higher than they were during the dot-com boom, even as economic growth fades.

(…) The latest GDPNow index from the Atlanta Federal Reserve suggests that the U.S. economy is now growing at an annualized rate of barely 0.5%. The “reflation trade” and “post-pandemic boom” that we were all looking forward to have been deferred:

(…) A few months ago, fund managers were expecting an “inflationary boom,” with both growth and inflation well above average. They still expect the inflation, but are no longer so optimistic about the growth:

(…) The question is now all about the old-fashioned issue of how far interest rates will rise and how quickly (…).

With yields low and inflation on the horizon, bonds are regarded as unbuyable. The BofA survey finds that more asset allocators are underweight bonds than at any time since they started asking the question some 20 years ago:

It’s worth looking at how some of the previous extremes of pessimism toward bonds worked out. None were justified, as the steady historic fall in bond yields continued throughout. (…) So it may not be safe to assume that bond yields are heading upward, but fund managers are more convinced that the trend is about to turn than they have ever been before. (…)

This chart smooshes together holdings by households and foreign investors with those of U.S.-based institutions, and finds equity allocations have recently overtaken the all-time high set just before the dot-com bubble burst in 2000:

(As with the numbers on bond pessimism, it’s worth noting what happened after the last such peak in equity weightings; it’s not necessarily a healthy sign.) That demonstrates the steady shifting of the tectonic plates in favor of the optimism that accompanies equities. For a more current number that demonstrates serious risk appetite, there’s bitcoin. (…)

What is strange about this, and disconcerting, is that the optimism is reaching these peaks in a situation where confidence in growth has declined, and fears of rising inflation and rates are back. Bonds indeed don’t look like a buy — but a lot is being built on the notion that they leave us no alternative but to buy something more risky.

Fearless

VIX is approaching post corona lows, but note the 2/8 futures spread collapsing in a much more extreme fashion. Nobody wants short term protection. (The Market Ear)

We’re almost through dangerous October, about to enter the seasonally strong period…

Auto Supply-Chain Constraints Weighed on September’s Industrial Production Disruptions from Hurricane Ida also contributed to last month’s 1.3% decline

(…) In August, industrial output fell by a revised 0.1% from a 0.4% rise previously estimated.

Manufacturing output, the biggest component of industrial production, fell 0.7% in September compared with August. Motor vehicle and parts production decreased 7.2% amid the shortage of semiconductors.

The lingering effects of Hurricane Ida also contributed to the drop in manufacturing, by 0.3 percentage point, the Fed said.

Despite last month’s drop, industrial production rose at an annual rate of 4.3% in the third quarter, marking the fifth consecutive quarter with a gain of more than 4%.

Actually, the whole manufacturing sector is impacted by shortages as this Haver table shows:

U.S. Home Builder Index Strengthened in October

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo rose 5.3% m/m in October (-5.9% y/y) to 80, following a rise of 1.3% m/m (-8.4% y/y) to 76 in September. An unchanged level of 76 was expected in the INFORMA Global Markets survey. The seasonally-adjusted index was 11.1% below the record high reached in November 2020.

All three HMI components gained this month. The index of present sales conditions rose 6.1% m/m (-3.3% y/y) to 87 in October, after the 1.2% (-6.8% y/y) rise to 82 in September. The index measuring traffic of prospective buyers increased 6.6% m/m (-12.2% y/y) to 65 this month, following a 3.4% rise (-17.6% y/y) to 61 in September, the second monthly gain in five months, after reaching a low of 59 in August. The index is still 15.6% below the cycle high of 77 in November 2020. The index of expected sales over the next six months rose 3.7% m/m (-4.5% y/y) to 84 in October, up from 81 (-4.7% y/y) in September.

Performance was brisk in all four regions of the country. The strongest gain was in the Northeast, where the index rose 9.0% m/m (-16.0% y/y) to 73 in October after an 11.8% m/m (-17.3% y/y) decline in September to 67. The index for the West rose 6.3% m/m (-10.5% y/y) to 85 this month, following a decline of 5.9% m/m (-9.1% y/y) last month. The Midwest posted a rise of 5.8% m/m (-3.9% y/y) to 73, after a 7.8% m/m rise (-11.5% y/y) to 69 in September. The South posted a rise of 5.0% m/m (+1.2% y/y) to 84, after a rise of 3.9% m/m (-5.9% y/y) to 80 in September. These regional series begin in December 2004.

WEATHER OR NOT

• Nordea:

The recent energy price surge have taken markets with a storm and is unlikely to pass by before we have made it through the cold winter season. The situation is contained in the US while prices are snowballing in Europe and China. While the energy situation in Europe has deteriorated throughout much of 2021 it markedly worsened when China’s coal prices went rampage – and it is likely to continue to depend on the situation in China. (…)

Europe (and the EUR) has more to lose from a sticky energy price crisis than the US, while China is placed somewhere in the middle. Especially German key figures will likely take a substantial beating on the combination of higher energy prices and lagged spill-overs from a slowing activity in China.

Chinas slowing economy a bigger issue for Germany than for the US

• Goldman Sachs:

In our commodity strategists’ baseline, US natural gas prices will move down over the next three months from $5.50/mmBtu to $3.65/mmBtu and oil prices should move only moderately higher (from $82/bbl to $87/bbl). But if winter is one standard deviation colder than usual, tight energy supplies could cause US natural gas prices to more than double and oil prices to rise an additional 5%.

Amazon Seeks to Hire 150,000 Seasonal U.S. Workers The push to increase workforce comes as U.S. labor market remains tight ahead of holidays.

The number of seasonal hires is more than the 100,000 Amazon announced last year and matches the number that rival Walmart Inc. said it would add this year.

The additions build on Amazon’s plans, unveiled in September, to increase its ranks of permanent employees by 125,000. The e-commerce company is also adding 40,000 people to its tech and corporate staff. (…)

Amazon had 950,000 U.S. employees and 1.3 million permanent workers world-wide as of July. (…)

Walmart said last month it is aiming to add 150,000 people to its U.S. workforce of about 1.6 million. Target Corp. wants to hire 100,000 seasonal workers and around 30,000 warehouse employees.

Shippers, whose role in holiday shopping has leapt with the rise of e-commerce, are growing, too. United Parcel Service Inc. and FedEx Corp. are planning to bring on a combined 200,000 package handlers and other workers.

In September, there were 7.7 million officially unemployed Americans, 2 million more than in February 2020. The 5 companies mentioned above seek to hire almost 800k people in the next 2 months or 40% of the apparent slack.

Vietnam Electronics, Apparel Sectors Facing 50% Worker Shortages

Electronics manufacturers nationwide are operating with a shortage of nearly 56% of workers and garment makers are facing a lack of 49.2% of employees, according to the government website, which cited labor ministry data. The leather and footwear sector reported a 51.7% worker shortage. (…)

Tens of thousands of workers began fleeing the nation’s commercial hub of Ho Chi Minh City and nearby industrial provinces of Binh Duong, Dong Nai and Long An after tough lockdowns began easing, the government said earlier this month. As many as 2.1 million workers in the industrial belt want to return to their home provinces, the government reported, citing data from the public security ministry.

The electrical equipment manufacturing sector is reporting a 44.5% shortage of employees while the textile sector says it is lacking 39.5% of needed workers, the government said. 

Xi Dials Back China’s Economic Overhaul as Masses Feel Pain

(…) In recent weeks Chinese authorities have moved to soften sweeping policies designed to make the economy less dependent on debt, monopolies and fossil fuels. While Beijing’s edicts chastened China’s corporate elites, they also began showing signs of hitting ordinary citizens with higher power bills, lost savings and — if the economy continues to struggle — potentially fewer jobs.

Premier Li Keqiang expressed caution a week ago, saying China needed to rethink the pace of the country’s energy transition as a power crisis threatened to keep factories in the dark and homes without heat during the winter. (…)

The Communist Party’s Qiushi Journal on Friday published a more complete version of one of Xi’s speeches in August, which emphasized the need for “gradual and orderly progress” in achieving “common prosperity.” (…)

• China Evergrande makes onshore coupon payment – sources

China Evergrande Group (3333.HK) has paid an onshore bond coupon due on Tuesday, four people with knowledge of the matter said, amid concerns about a possible offshore default by the cash-strapped developer later this week.

Hengda Real Estate Group Co, Evergrande’s flagship unit, has remitted funds to pay an onshore bond coupon of 121.8 million yuan ($19 million), the people said.

One of the people said Evergrande, China’s No. 2 developer, needs to prioritises its limited funds towards domestic market where the stakes are much higher for the country’s financial system. (…)

Sunac China (1918.HK), which has a $27.14 million payment due Tuesday, has paid its bondholders, a source with direct knowledge of the matter said. (…)

Kaisa Group (1638.HK) said on Monday it has paid a coupon due Oct. 16 and it plans to transfer funds for a coupon worth $35.85 million due Oct. 22 on Thursday. (…)

On Monday, smaller developer Sinic Holdings (2103.HK) defaulted on $246 million in bonds as expected. It had warned of the default last week, saying it did not have sufficient financial resources.

SURVEYS SAY:

• Canadian Firms See Inflation Staying High Amid Record Confidence

An easing of Covid-19 restrictions has driven a sharp improvement in business confidence, with executives in the quarterly survey citing a strong outlook for domestic and foreign sales. A broad gauge of business sentiment reached its highest level in records going back to 2003.

Other highlights in the reports include:

• Businesses expect the supply chain issues to last until the second half of 2022
• Companies say they are likely to raise wages to address labor shortages
• Capacity pressures are widespread with a large portion of firms saying they would have difficulty meeting an unexpected spike in demand
• Canadians who accumulated savings during the pandemic expect to spend about one-third of the funds by end of 2022
• Consumer have more confidence in the labor market, with an increase in the likelihood of leaving a job voluntarily versus before the pandemic (…)

• Deloitte U.K. CFO Survey: 2021 Q3

(…) CFOs rate labour shortages, the pandemic and inflation as the top risks facing their businesses. Amid growing wage and price pressures, CFO expectations for a rise in operating costs have hit a record high, with a majority of respondents also expecting a margin squeeze over the next 12 months. CFOs expect inflation to run higher for longer, with 54% expecting it to exceed 2.5% in two years’ time, well above the Bank of England’s 2.0% target rate. (…)

CFOs are also placing greater emphasis on increasing capital expenditure now than at any time in the history of the survey. The post-financial crisis period was characterised by corporate caution, with cost control and cash conservation CFOs’ primary response to economic shocks. Today, amid excess demand, and with the pandemic, the energy transition and Brexit driving change, corporates are focussing on investment, particularly in new technology. (…)

Almost six in ten CFOs reported that their businesses experienced some, significant or severe supply chain disruption over the last three months. Almost the same
proportion expect similar levels of disruption in one year’s time and meaningful improvement only in two years. (…)

CFO expectations for a rise in operating costs have hit a record high. Expectations for margin growth have fallen, with CFOs, on balance, expecting margins to decrease over the next 12 months. (…)

In response to the increase in uncertainty, CFOs have sharpened their focus on defensive strategies – increasing cashflow, reducing costs and reducing leverage. (…)

If margins are contracting…who will care?

The Russell 3000 Growth Index was up 84% cumulatively over the last two years through August (more than double the return of its Value counterpart). So investors are making money on companies that make no money – never a good sign when it is done this pervasively and at these valuations. And while not common, it is also not unique. We all witnessed the same speculative behavior in the late 1990s and in the 2008 speculative bubble.

% of Russell 3000 Growth Stocks with Negative Earnings

Data through 9/30/2021 | Source: Source: GMO

Covid Cases Are Soaring in Britain Again. Why? The country’s full-speed approach to lifting restrictions has certainly contributed to a spike in infections. But that’s only part of the picture.

Once again Britain has one of the highest rates of Covid infection anywhere. The U.K. just reported its biggest single day Covid case increase in three months and a 16% increase in confirmed cases in the week to Oct. 18. The government has warned of a bad winter. (…)

Rates of hospitalization and even death are several times higher in the U.K. than in comparable European countries.

Part of the answer seems obvious: Britain reopened in July without guard rails in place. Prime Minister Boris Johnson encouraged the public to get off the pause button and hit “play.” The response was robust. During a recent commute on the London Underground during rush hour, I entered a packed rail car where hardly anyone wore a mask. Ditto for a trip to a full cinema. In Berlin, it’s routine to wear a medical grade N95 equivalent mask. You see them only seldom in London. (…)

And yet it’s too simplistic to say that Britain’s case numbers are entirely due to the government’s approach in lifting lockdown restrictions. Other countries with lax policies (Scandinavian ones, for example) didn’t experience such a spike in cases. Scotland kept a mask mandate in many indoor settings (including schools) and still struggled with a higher infection rate than England in September. This doesn’t mean masks don’t help, but it suggests they aren’t sufficient. Like in England, Scots did a lot of mixing in large groups in crowded places; Scotland saw a spike in cases when its team was still playing the Euro 2020 soccer championship and a drop when they were knocked out, while the revelry continued in England all the way to the finals. 

(…) there is also the new delta variant subtype, known as AY.4.2., which began showing up around July and now accounts for about 8% of genomically sequenced cases in the U.K. Scott Gottlieb, head of the U.S. Food and Drug Administration, tweeted about the need for “urgent research” into the subtype, which is not common in the U.S. at present and is considered about 10% more transmissible than delta. (…)

Charts from NBF:

  

Tether’s bitcoin-backed lending clashes with dollar promise Stablecoin operator accepts crypto in return for some loans, big customer says

Alibaba Unveils One of China’s Most Advanced Chips

Alibaba Group Holding Ltd. unveiled a new server chip that’s based on advanced 5-nanometer technology, marking a milestone in China’s pursuit of semiconductor self-sufficiency.

The Chinese tech giant’s newest chip is based on micro-architecture provided by the SoftBank Group Corp.-owned Arm Ltd., according to a statement Tuesday. Alibaba, which is holding its annual cloud summit in Hangzhou, said the silicon will be put to use in its own data centers in the “near future” and will not be sold commercially, at least for now. (…)

Alibaba’s server chip is one of the most advanced by a Chinese firm yet, as it joins global rivals like Amazon.com Inc. and Google in gradually replacing silicon from traditional chipmakers like Intel Corp. and Advanced Micro Devices Inc. with products custom-designed for their data centers and workloads.  

The development signals how China’s effort to build a homegrown semiconductor industry is bearing fruit. Xi Jinping’s government has made tech self-sufficiency a top national priority, setting aside billions in government funding and offering a wide range of policy support to help local firms overcome U.S. sanctions on the industry. 

Alibaba is one of a number of Chinese firms that has answered Beijing’s call to invest in the development of cutting-edge technologies and manufacturing capacities. Known as Yitian 710, the Arm-based server chip is the third semiconductor introduced by the e-commerce giant since 2019, following an artificial intelligence chip as well as one used for internet-of-things. (…)

California Has Driest Year Since 1924 Most of the state is experiencing extreme or exceptional drought amid warmer temperatures, reduced snowmelt and population growth.