Month: November 2022

Black Friday Lured Shoppers Back, in Holiday Spending Test Stores on average welcomed more consumers compared with last year, industry data show.

(…) Store traffic rose 7% this Black Friday compared with last, said RetailNext, a firm that tracks shopper counts in thousands of stores with cameras and sensors. In-store sales rose 0.1%, and the average shopper spent less per visit than last year, according to the firm. Sensormatic Solutions, another firm that analyzes store traffic, said Black Friday traffic rose 2.9% compared with 2021. (…)

Sales on Black Friday rose 12% from last year, according to Mastercard SpendingPulse, which measures in-store and online retail sales across all forms of payment. (…) “Apparel, electronics and restaurants were strong-performing sectors as consumers turned holiday shopping into a full-day experience,” he said. (…)

It has been “kind of a lukewarm Black Friday,” said David Bassuk, global co-leader of the retail practice at AlixPartners, a consulting firm. “It’s more of an experience than it is a purchasing moment,” he added. (…)

Online sales on Black Friday rose 2.3% to $9.12 billion from last year, according to Adobe Analytics, which tracks spending on websites. On Thanksgiving people spent $5.3 billion online, up 2.9% from the holiday last year, according to Adobe. (…)

• Restaurants, Grocery Stores Battle Over Consumers’ Stretched Dollars Supermarket chains are carrying more low-price staples and promoting prepared food while restaurants including Wendy’s and Papa John’s are offering discounts.
• Inflationary pressures continue to weigh on consumer wallets in the U.S., with 46% of people saying they plan to spend less this holiday season, according to a recent Goldman Sachs Research. Nearly 80% of survey respondents expect to adjust their behavior as a result of higher prices. Roughly 55% of respondents plan to buy fewer items this year, with some also planning to trade down to cheaper price points and quality levels.

Protests Spread Over China’s Covid Restrictions People took to the streets in Beijing, Shanghai and other cities amid the growing economic and social costs of lockdowns and other restrictions.

Axios:

“Down with the Chinese Communist Party! Down with Xi Jinping!”

• Those chants — reported today in Shanghai, China’s most populous city — are very rare public protests against the country’s leadership.
• Protests are flaring across China, including in Beijing, against arduous COVID restrictions.

The wave of civil disobedience is unprecedented in mainland China since Xi Jinping assumed power a decade ago, Reuters reports. (…)

Frustration boiled over after a fire Thursday that killed 10 people in a high-rise building in Urumqi, capital of the Xinjiang region, where some residents have been locked down for 100 days. Internet messages assert residents weren’t able to escape because the building was partially locked down. City officials deny that.

@Sino_Market

• Apple to Lose 6 Million iPhone Pros From Tumult at China Plant
• Oil Plunges to Lowest Since 2021 as China Unrest Rattles Market

The S&P 500 is Not the Economy

My old friend Freddy linked me to a last Friday post by Ben Carlson discussing a point I made a few weeks ago.

(…) Sam Ro shared a great chart this past week on his Substack that shows the difference in composition between the S&P 500 and the U.S. economy in the form of earnings and economic growth:

Sam notes, “The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.”

The stock market is mostly corporations that make and sell things.

The economy is mostly the stuff we do with those things.

Most of the time the stock market and the economy are moving in the same direction but they also diverge on occasion.

The S&P 500 also receives roughly 40% of revenues from overseas. For technology stocks, that number is closer to 60%. (…)

True, the S&P 500 is not the economy, being more than twice more heavily weighted to goods vs services.

Correlation between S&P 500 revenues, earnings and index prices with manufacturing data is indeed very high:

So, should investors care about the service economy, 60% of GDP, when assessing the outlook for the S&P 500 index or simply focus on the goods side?

Probably not so much when looking at S&P 500 earnings…

…but very much so when rising inflation is impacting the multiple these earnings carry on the index.

The S&P 500 index is earnings x earnings multiple and the multiple is highly sensitive to inflation/interest rates, themselves being highly sensitive to wage trends, themselves being very sensitive to the services economy which supplies 86% of all jobs in the USA.

All Ed Yardeni charts above cover the period 1995 to 2022 when inflation (blue below), for all 25 years, was never really a factor, remaining below 2.5% (average: 2.1%) with wages (red) never growing more than 4% yearly (average: 3.0%).

Quite a difference with the previous 30 years when inflation very rarely dipped below 4% (average: 5.4%, wages: 5.1%).

Sustained high inflation rates destroyed earnings multiples between 1972 and 1990.

S&P 500 EPS almost quadrupled between 1972 and 1989 but real equity prices cratered 60% to July 1982 and only returned to their 1972 level in September 1989, seventeen years later.

S&P 500 Inflation Adjusted

(Nasdaq Data)

Inflation can therefore matter a lot. It so happens that inflation has a lot more to do with the service economy than with the goods economy.

Over the last 25 years, the correlation between Core-CPI and CPI-Services was 71%. With CPI-Durables: -7%, with CPI-Nondurables: 10%.

As we know, correlation is not causation. The cause here is wages, the largest cost component for most service providers. Services inflation (black line below) is intimately correlated with wage trends (red). Services are 73% of Core CPI.

The recent widening gap between equity prices and the manufacturing PMI reflects a downward multiples revision, happening when inflation is accelerating owing to rising services inflation owing to rising wages owing to tight employment.

Historically, rising wage trends were only broken by recessions…

…which generally happen because consumers retrench. Hence the current hope that Americans will spend more on services to offset the likely decline in goods consumption.

Until inflation is back under control, the S&P 500 is the economy.

BTW, from the November Flash U.S. PMI:

• “increasingly steep downturns in demand”
• “the decrease in total new sales was the sharpest since 2009”
• “new export orders contracted at a sharper pace”

FYI:

PC heavyweight HP is slashing its workforce by up to 10%, saying it expects a sharp slump in demand to stretch into next year. The WSJ’s Denny Jacob reports the payroll reduction of up to 6,000 employees is part of a broader overhaul aimed at achieving $1.4 billion in annualized cost savings. It came after rival Dell Technologies reported sales in its unit that includes laptops and desktops fell 17% last quarter and said the decline would accelerate this quarter. The slump in PC sales, along with declining demand for related high-value goods like semiconductors, is hitting transportation demand. The International Air Transport Association says global airfreight traffic fell 10.6% in September. Gartner says global PC shipments fell at the fastest pace in more than two decades, and the manufacturers’ outlooks suggest things are getting worse.

• Freight forwarder DB Schenker is reducing its chartered flights because of declining airfreight demand. (Air Cargo World)

Powell to Set Stage for Slowing Fed Rate Hikes Amid Hawkish Tone Powell is scheduled to deliver a speech, nominally focused on the labor market, at an event on Wednesday hosted by the Brookings Institution in Washington. It will be one of the last from policymakers before the start of a quiet period ahead of their Dec. 13-14 gathering.

EARNINGS WATCH

From Refinitiv/IBES:

Through Nov. 25, 485 companies in the S&P 500 Index have reported earnings for Q3 2022. Of these companies, 70.7% reported earnings above analyst expectations and 24.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 3.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 7.0%.

Of these companies, 70.1% reported revenue above analyst expectations and 29.9% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.

In aggregate, companies are reporting revenues that are 2.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 2.7%.

The estimated earnings growth rate for the S&P 500 for 22Q3 is 4.3%. If the energy sector is excluded, the growth rate declines to -3.5%.

The estimated revenue growth rate for the S&P 500 for 22Q3 is 11.7%. If the energy sector is excluded, the growth rate declines to 8.4%.

The estimated earnings growth rate for the S&P 500 for 22Q4 is -0.4%. If the energy sector is excluded, the growth rate declines to -5.4%.

Some other facts:

• The +3.4% earnings surprise factor is boosted by Energy (+10.9%) and Health Care (+8.2%). Five of the 11 sectors show negative surprises with Consumer Discretionary at -2.8% and Industrials at -4.7%.
• Trailing EPS are now $222.39. Full year 2022: $220.32e. Forward 12-m: $224.98e. Full year 2023: $231.23e.

TECHNICALS WATCH

@Callum_Thomas

U.S. Expands Chinese Telecom, Surveillance Bans The Federal Communications Commission voted to ban sales of new telecom and surveillance equipment made by several Chinese companies, arguing that their ownership and practices threaten U.S. national security.

The rule change affects 10 companies already subject to other restrictions and prohibits them from marketing or importing new products. They include security-camera makers Hangzhou Hikvision Digital Technology Co., 002415 -0.96%decrease; red down pointing triangle Hytera Communications Corp. 002583 -1.43%decrease; red down pointing triangle and Zhejiang Dahua Technology Co. 002236 -0.42%decrease; red down pointing triangle and telecom equipment makers Huawei Technologies Co. and ZTE Corp.  000063 0.66%increase; green up pointing triangle

The FCC made its order public Friday. The latest order stops short of requiring U.S. equipment buyers to remove items they have previously purchased or stripping authorizations for electronics models that already exist. (…)

Russian security software maker Kaspersky Lab is also on the list of tech companies covered by the sanctions. (…)

Hikvision is the top worldwide seller of professional security equipment by revenue and ranks No. 5 in the U.S., according to market researcher Omdia. (…)

Miami clubs miss crypto high-rollers

Crypto entrepreneurs who began frequenting Miami’s clubs out of the blue have “completely disappeared,” Andrea Vimercati, director of food and beverage at Moxy Hotel group, tells the Financial Times (subscription).

“They wanted to show that they didn’t have any limits,” Vimercati recalled. “They were ordering 12 or 24 bottles of the most expensive champagne and just showering themselves without even drinking.”

On the dance floor, crypto kids acted as if there was no tomorrow, the FT notes. Turns out, they were right.

•   Leverage means contagion

The financialization of crypto made it vulnerable to the kind of contagion we’re now seeing, Axios’ Felix Salmon writes.

The big change in crypto between 2018 and today is the introduction of large-scale lending to the sector. And with lending comes a new kind of risk — counterparty risk — that crypto still hasn’t found a good way of dealing with. (…)

At the heart of the crypto project is a technological feat: The ability to create digital objects that exist only in one place and can’t be copied. If I send you a bitcoin, I can’t send that same bitcoin to someone else.

As a result, if I own a bitcoin, that bitcoin can go down in value, or even be stolen, but those losses are mine alone.

Crypto lending changes the dynamic. Companies like Celsius Network and FTX — both now in bankruptcy — paid interest on crypto deposits, and lent out crypto assets to borrowers.

• Instead of one person owning a simple asset of one coin, a depositor is owed a coin by the exchange. The borrower owns the coin, and the exchange is owed money from the borrower while also owing money to the depositor.
• Effectively, an asset of one coin has become an asset of one coin (in the hands of the borrower) plus two liabilities of one coin (at the borrower and the exchange) plus two receivables of one coin (at the exchange and the depositor).
• There are now three assets worth 1 bitcoin. If the actual coin is lost and the borrower defaults, then the borrower and the exchange and possibly even the depositor can all lend up losing 1 bitcoin.

Crypto losses have rippled across companies that engaged in such borrowing and lending activity, from Luna to 3 Arrows Capital to Celsius to Voyager Digital to Alameda Research to FTX to Genesis to Gemini.

• None of them adequately managed their counterparty risk — the risk that the trading venue you’re dealing with will go bust and not be able to pay you what you’re owed.
• In traditional finance, central banks can step in to prevent such contagion. In crypto, however, there are no such macroprudential overseers.

Iran’s Supreme Leader Orders Militias to Deal With Rioters

BLACK FRIDAY SALE AT EDGE AND ODDS (Last call!)

I receive so many Black Friday discount offers from content providers, I feel bad not doing the same for my readers. So here it is:

• All new or past donators will now have free access to Edge and Odds and be allowed to double their donation, free of charge, yearly!
• Readers who subscribe to the Daily Edge will receive it daily in their mailbox, free of charge!
• That’s nearly 250 deliveries per year! There surely is something useful once in a while.
• And readers who recommend Edge and Odds to a friend will see their subscription extended indefinitely.
• That could be 2500 Daily Edges, maybe even more…who knows? It’s been 14 years already.

I know, not that big a deal, but that’s all I can do

What’s a big deal to me is readers supporting the blog with donations. Lately, I have been very bad at taking the time to thank them personally.

Please forgive me Richard T., John M., Constantin Z., Richard B., Robert K., Joseph T., Joshua F., Jasec, Donald M., David M., Massimo B., Lawrence M., Stephen C.. I hope I forgot nobody. You are truly helping this blog survive during this not so transitory inflation period.

P.S. I hereby officially thank recent donators: Bill C., Jack H. and long time reader and donator Richard T.. Your support is very much appreciated.

Back to regular programming!

 

MAYBE YOU MISSED YESTERDAY’S IMPORTANT DAILY EDGE: “Very Weak U.S. Flash PMI”. You should read it…

Recession Watch: identifying recessions with uncertain data

Economists are not very good at forecasting recessions. In a blog post published almost four years ago, ‘The economist who cried wolf’, I analysed the IMF’s forecasting track record. I found that, of the 469 recessions that had taken place since 1988 across 194 countries, only 13 were correctly anticipated in the World Economic Outlook (WEO) published in the October of the preceding year.

Worse still, fewer than half were identified even by the October of the year in which the fall in GDP took place.

Moreover, economists were prone to cry wolf, just like the boy in Aesop’s fable, with the IMF predicting recessions in the following year where none subsequently occurred 24 times in the Spring WEO and 23 times in the Fall WEO. Research from the IMF, published in the same year as my blog post, finds that private-sector forecasts are no better. The authors summarise the problem in the following way: ‘Recessions are not rare: economies are in a state of recession 10-12 per cent of the time. What is rare is a recession that is forecast in advance.’

In its World Economic Outlook, October 2022: Countering the cost-of-living crisis, the IMF warned that global economic activity was experiencing ‘a broad-based and sharper-than-expected slowdown’. The global financial crisis and the COVID-19 pandemic aside, the IMF described its forecast for global growth as the weakest since 2001.

The consensus among private sector forecasters is now for a recession across much of Europe, with the euro area as a whole suffering two consecutive quarters of contraction, beginning this year, and the UK five consecutive quarters.

For the US, it is a close call, with the median projection in the latest Reuters Poll being for near-stagnation through the first half of next year, rather than outright contraction.

In our Global Outlook, Autumn 2022, finalised in early September, our central scenario saw a period of recession across all the major economies. The historical precedents for us were compelling. Falling real wages had pushed levels of consumer confidence in the US, the EA and the UK down to levels that in the past had always signalled recession.

If that were not enough, rates of inflation in the US and the UK had reached levels from which recession had been avoided only once – in 1952. Rates of inflation in the euro area, available over a shorter time period, had reached levels from which recession had never been avoided. As a net exporter of energy, the US terms of trade had improved over the past year. That put it in a fundamentally stronger position than the EA or the UK.

Put together with the fact that pandemic savings offered some protection against falling real wages, and with the Fed acting more decisively than either the ECB or the Bank of England to get inflation under control, we felt that the US stood the best chance of avoiding recession – though we gave it no more than a 1-in-3 chance.

The conventional wisdom has been that data revisions tend to be pro-cyclical: in a boom, initial estimates of growth tend to get revised up, and in a slump they tend to get revised down. There is a logic to this. Statistical agencies base early estimates of GDP at least in part on a survey of firms. They then need to scale up estimates of gross value added in their sample to match the number of firms in the country as a whole.

In a boom, the total number of firms will tend to be growing faster than the statistical agency’s working assumption, giving a downward bias to initial estimates of growth. In a slump, the number of firms nationwide will tend to be growing more slowly than the statistical agency’s working assumption, or perhaps falling outright, giving an upward bias to initial estimates of growth.

In our own analysis, we find evidence of pro-cyclical revisions to initial estimates of growth in the UK, but only up until the global financial crisis. Before 2010, there was a strong, positive correlation between the final estimate of the change in GDP growth from one quarter to the next, and the revision to the initial estimate of GDP growth. But since 2010 that correlation has gone away.

In the US and the EA, by contrast, we find that pro-cyclical revisions to initial estimates of GDP growth have persisted, at least until the eve of the pandemic.

More specifically, using all available data from 2010 up to 2019, we find that the economic cycle can explain 55% of the revisions to US GDP growth and 61% of the revisions to EA GDP growth. For what it’s worth, if we take our model of EA revisions at face value, then in a world where true EA GDP growth was actually zero in Q3, then given the pace of the implied slowdown, our best guess is that the initial estimate of GDP growth would have an upward bias of 0.2 percentage points. The initial estimate of EA GDP growth in Q3 was, of course, 0.2%.

In our Global Outlook, Autumn 2022, we argued that, while non-farm payrolls data were a lagging indicator of economic activity, their timeliness meant they might still provide a useful cross-check on whether the US had entered recession. As the chart shows, the monthly change in non-farm payrolls tends to flip from around +240,000 in the month when activity peaks, to around ‒210,000 in the first month of recession.

But our next chart, which shows a smoothed measure of revisions to the initial estimate, casts some doubt on the usefulness even of non-farm payrolls as an arbiter of recession, at least in the short term. In the period following the dotcom bust, and again during the global financial crisis, initial estimates of the change in non-farm payrolls were revised down significantly.

The yield curve is thought by many to provide a useful leading indicator of the macroeconomic outlook. As our final chart shows, the slope of the US yield curve tends to turn negative some six to nine months before the peak in economic activity. As the green line in our chart shows, the US yield curve has flattened dramatically since the summer, with the ten-year yield lying some 15 basis points below the three-month bill rate on average through November to date. That would be consistent with the USentering recession early next year.

Where does this leave us, in terms of the current outlook? For now, we persist in our judgment that a recession in the European single currency bloc is almost inevitable, despite the stronger-than-expected initial estimate of EA growth. Indeed, given the tendency for early estimates of EA growth to be revised pro-cyclically, it may well have entered recession in Q3. Nevertheless, signs that EA economies have managed to substitute away from Russian gas to a greater degree than we had imagined, means the recession may be less severe than we had at first imagined.

We had always assigned a greater weight to the notion that the US might escape recession, and we may raise the weight we attach to that scenario in our Global Outlook, Winter 2022, due to be finalised on 2 December. As for the UK, initial estimates suggest the economy contracted in Q3, and we expect it will do so again in Q4.

Global Growth to Be as Weak Next Year as 2009, IIF Forecasts

Global growth is expected to slow to 1.2% in 2023, economists including Robin Brooks and Jonathan Fortun wrote in a note Thursday. When adjusted for base effects, that’s as weak as it was in 2009.

“The severity of the coming hit to global GDP depends principally on the trajectory of the war in Ukraine,” the analysts wrote. “Our base case is that fighting drags on into 2024, given that the conflict is ‘existential’ for Putin.”

The slowdown will be led by Europe, which is impacted most by the war, according to the IIF. The Eurozone economy will shrink by 2% following sharp declines in consumer and business confidence. In the US, the IIF expects gross domestic product to rise 1%, while Latin America is the “positive standout,” expanding 1.2%, as commodity exporters reap the benefits of high food and energy prices.

The single biggest driver for the global economy next year will be China, where loosening Covid restrictions are likely, according to the Washington-based IIF. (…)

Chinese Banks’ $178 Billion ‘Medicine’ for Developers Won’t Cure All Ills China’s state-owned banks are showering the country’s real-estate developers with loans and other promises of financial support, moves that will prevent the beleaguered industry from spiraling into a full-blown crisis.

The fresh commitments from state-owned banks, coupled with a recent expansion of a government-sponsored bond guarantee program, are designed to help developers remain in business and finish construction on their projects. The actions would help resolve real-estate companies’ near-term liquidity pressures, but the much bigger challenge is regaining the trust of ordinary Chinese citizens and home buyers. (…)

To achieve that, homes that were presold first need to be delivered to buyers. The heightened concerns about developers defaulting—which created a negative feedback loop—also have to be alleviated, he added. (…)

“The real bottleneck now is the current pandemic situation in China and the zero-Covid strategy,” said Ting Lu, chief China economist at Nomura in Hong Kong. “As long as that policy exists, the financing-side supporting measures are medicines that can alleviate symptoms, but cannot cure the disease,” Mr. Lu said. (…)

So far, more than 30 developers have defaulted on their dollar-denominated bonds. (…) The yield on an ICE BofA index of noninvestment grade dollar bonds issued by Chinese companies was recently at 29% versus around 32% before the property-easing measures were unveiled. (…)

Just before the downturn, Chinese developers were selling around 14 million apartments annually—but a chunk of those were a result of speculative buying, he said.

Mr. Xing said he expects sales to eventually settle at around 10 million units a year, which he said would reflect the natural pace of people joining together to make up households and urbanization in China. (…)

@Sino_Market

• China Local Governments Face Debt Squeeze Worth $2 Trillion

Signs are growing in China that local government debt burdens are becoming unsustainable.

China’s 31 provincial governments have a stockpile of outstanding bonds that’s close to the Ministry of Finance’s risk threshold of 120% of income. Breaching that line could mean regions will face more regulatory hurdles to borrow, hampering their ability to drive up economic growth.

In addition, local authorities will face a massive maturity wall over the next five years as bonds worth almost 15 trillion yuan ($2.1 trillion) — more than 40% of their outstanding debt — fall due.

While there’s little risk of provincial governments defaulting, they will run into increasing difficulty in repaying their debts. More and more bonds will need to be sold to roll over maturing ones rather than to finance new spending and as a result, investment growth may suffer.

A major cause of the financial squeeze is the property crisis. Revenue from land sales — which in the past made up about 30% of local governments’ income — has plummeted. On top of that, trillions of yuan in tax breaks were doled out to businesses to help them cope with the economy’s slowdown over the past few years.

The central government recently acknowledged for the first time concerns about special local bond repayment risks, urging Shenzhen, the technology hub that neighbors Hong Kong, to consider setting up a provision fund to prevent debt payment risks. Shenzhen’s finances are in better shape than many other cities or provinces, and it’s a sort of test area for fiscal reforms. (…)

China set the risk threshold for provincial debt at 120% of their “comprehensive financial resources” — widely regarded as the combined income from the general public budget and the government fund budget, as well as transfer payments from the central government. (…)

Provincial debt jumped to 118% of income by the end of September from 83% in 2019, according to Bloomberg calculations based on official data. (…)

To bring overall borrowing below the threshold, high-risk regions will be required to curb the size of their investment projects, cut public spending, and dispose of assets, according to a report by the Ministry of Finance. Some provinces, such as Anhui in central China, have already moved to ban risky areas from adding new debt. (…)

If the central government issues more general bonds to fund infrastructure projects, it would have to let the official fiscal deficit balloon from its current levels of about 3% of gross domestic product. The official deficit has been kept low because the government is cautious about expanding general bond sales, preferring to allow provinces to issue more and more special notes.

Standard Chartered’s Ding estimates the broad fiscal deficit will reach 7.3% of GDP this year if special local bonds are included.

“Such a high ratio is unsustainable,” he said.

• China’s Daily Covid Tally Tops 30,000 for First Time as Curbs Spread

There were 31,987 new infections reported for Thursday, up from Wednesday’s record of 29,754. The southern city of Guangzhou reported more than 7,500, while cases in the metropolis of Chongqing topped 6,000. The capital, Beijing, saw daily infections exceed 1,800 with the record tally and lockdown-like restrictions sparking panic buying in parts of the capital. (…)

In Beijing supermarket delivery apps are being overwhelmed after residents across Chaoyang, its biggest district, were told not to leave their homes unless necessary. Grocery outlets in the district are also no longer taking orders. (…)

This controlled economy seems to be out of control…