Month: July 2023

CPI for all items rises 0.2% in June; shelter up

The U.S. labor market continues to cool, but only at a gradual pace

According to one of the Federal Reserve’s key indicators, the ratio of job openings to unemployment, the labor market has begun to show signs of easing. LinkedIn’s measure of labor market tightness, which has a slightly different definition than government data (includes all job seekers, not just the unemployed), indicates more slack than government data implies. In June, there was 1 job opening for every 2 active applicants on the platform, marking a significant slowdown compared to the previous peak of 1 job opening per applicant observed in the last months of 2022.

June 2023 witnessed a 2% decline in hiring across all industries in the U.S. compared to the previous month of May 2023. Furthermore, national hiring in June 2023 experienced a significant 20.9% drop compared to the same period in the previous year, June 2022. However, there are signs that the decline in hiring is starting to stabilize.

The most impacted industry in terms of hiring continues to be the Technology, Information, and Media sector, which saw a staggering 42% decrease in hiring compared to the same period last year. Retail and Wholesale sectors also faced substantial challenges, with YoY hiring rates dropping by 32% each. Real Estate and Equipment Rental Services experienced a 27% decline in hiring, closely followed by Professional Services at 24%. Other industries also faced significant declines, such as Manufacturing and Transportation, Logistics, Supply Chain, and Storage, which both saw a 22% reduction in hiring. Financial Services and Accommodation and Food Services also experienced notable declines at 21% and 19%, respectively.

The short tenure rate, or STR, which measures the fraction of positions that end after being held for less than a year, has decreased across industries over the past year.

Short tenures started a growth spell in August 2021 that peaked in March 2022 when the STR was up 10.25% year-over-year. However, due to the current slowdown in the labor market, workers are now staying in their positions for longer durations compared to the previous year, resulting in a year-over-year decrease of -5.46% in STR as of June 2023. This suggests that workers’ confidence in the labor market is waning and their expectation to land jobs elsewhere is declining. After all, there are less jobs available for every active job seeker today compared to the trend of the last two years.

Some industries are seeing a more prevalent decline in quick quitting than others, as shown in the chart below above. The STR in the technology, information, and media industry, for example, declined 12.6% year-over-year in June, meaning workers are leaving their jobs at a much slower rate this year compared to last year. (…)

The Accountant Shortage Is Showing Up in Financial Statements Advance Auto Parts and others have cited a lack of skilled accounting personnel for material weaknesses in their financial-reporting controls, a key predictor of restatements

(…) The company said it wasn’t able to attract and retain enough qualified people to fulfill internal-control responsibilities. (…)

The disclosures come as fewer people are pursuing degrees in accounting and entering the field, resulting in more positions open and for longer periods of time. What’s more, academics say, the shortage will likely be compounded as more accountants retire without a robust pipeline of replacements. (…)

Nearly 600 U.S.-listed companies of a total 7,359 reported material weaknesses related to personnel, typically in accounting or information technology, this year through June, down 5.2% from the prior-year period, but up 40.6% from the 2019 period, according to a review of filings by research firm Bedrock AI.

Of these companies, 21% were based outside the U.S., a jurisdiction whose reporting requirements can be knotty for companies with complex operations and corporate structures. (…)

The number of foreign U.S.-listed companies reporting personnel-related material weaknesses this year through June grew 5% to 125, compared with the prior-year period, Bedrock said. That is nearly triple that of the 2019 period. The 125 companies included 16 with at least a $1 billion market capitalization, up from 15 in the prior-year period and six in the 2019 period. (…)

“Higher salaries are coming for in-house accountants whether management likes it or not,” he said.

Is China Mired in a ‘Balance Sheet Recession’? Warning signs are adding up that China might face a slow, post-2008 style U.S. recovery—absent a much bigger fiscal push

(…) The value of contracted sales for China’s top 100 property developers fell 28% from a year earlier in June, compared with 7% growth in May, according to industry tracker CRIC. A higher base from last June—when Shanghai emerged from its Covid-19 lockdown—probably contributed to that decline. But sales were lackluster by any reasonable measure: They only reached around a third of June 2020 and 2021 levels, according to Nomura.

China probably won’t slip back into a formal recession. But, like the U.S. after the 2008 financial crisis, it may be facing a scenario where households and companies refuse new borrowing due to existing heavy debts—and a lack of confidence about the future. Instead, they use new income to pay down existing obligations. That in turn makes it difficult for policy makers to goose the economy with lower interest rates, because the pass-through to actual new investment and consumption is marginal.

That is certainly playing out in the real-estate market. Households, which levered up rapidly over the past decade, are worried about the economy and the fact that housing prices no longer seem destined to keep going up—to say nothing of the small problem that many buyers who bought the rights to future apartments from developers have yet to actually receive their homes. Investors have become less willing to put savings into new apartments.

That spells troubles for developers too. Bond defaults have picked up. The default rate of Chinese property junk bonds is around 16% so far in 2023, according to Goldman Sachs. The bank raised its full-year default rate forecast to 28% earlier this month, after lowering it in February—a sign of how quickly and dramatically the mood has darkened again in financial markets. (…)

More stimulus of some kind is almost certainly in the pipeline this year. But repairing the confidence of home buyers looks increasingly like a long-term battle—one that poor demographics and heavy household debts will make difficult indeed.

• China’s Hidden-Debt Problem Laid Bare in Zunyi City’s Half-Finished Roads, Empty Flats A city in one of China’s poorest provinces is awash in half-built roads and apartment blocks, symbolic of the mounting debt crisis facing municipalities around the country after years of stimulus-fueled growth.

(…) The Fengxin Expressway, still partially closed after construction stalled four years ago, is one of the many unfinished infrastructure projects in Zunyi, a city of 6.6 million people in mountainous Guizhou province. In addition to highways, housing projects and tourist attractions also stand incomplete, symbolic of the stark debt crisis that many local governments in China are facing after years of credit-fueled stimulus to juice growth. (…)

Now, the provincial government is struggling to pay its debts, small businesses are not getting paid for construction projects and displaced residents are demanding overdue compensation and new housing be delivered. (…)

At the heart of China’s debt crisis are so-called local-government financing vehicles, which were created to fund infrastructure by skirting limits on municipal authorities selling bonds in the market. However, LGFVs rarely generate enough returns to cover their obligations, meaning most rely on methods including refinancing and injections of municipal funds to stay solvent, which are now drying up. Rolling over debt is also getting harder as investors are more cautious.

Money owed by LGFVs is known as “hidden debt” because it doesn’t appear on governments’ balance sheets. The issue has grown into a major risk for the Chinese economy and is also a big concern for investors who have bought bonds sold by such firms. (…)

While there is no official figure, the International Monetary Fund estimated in February that there was 66 trillion yuan of such debt outstanding in China at the end of 2022, up from 40 trillion yuan in 2019. (…)

Kicking the can down the road seems to be the main way LGFVs are trying to delay a full-blown credit crisis. China’s biggest state banks are meanwhile offering the vehicles loans with ultra-long maturities and temporary interest relief to prevent a credit crunch in the market. (…)

•   Xi Calls for More Economic Opening, Trade as Recovery Falters China’s attempts to encourage foreign investors have ramped up in recent weeks as it’s become clear that the economy’s recovery following the end of Beijing’s Covid Zero policies is starting to flag.
• Mexico is now the top U.S. trade partner (Axios)

Mexico supplanted China this year as the United States’ top trading partner, Emily writes.

The milestone reflects a real shift in the dynamics of the global economy — away from prioritizing low prices and greater efficiency (via super fragile supply chains) to something more nuanced. (…)

The auto industry accounts for nearly a quarter of the total manufacturing trade activity between the U.S. and Mexico.

• China exports more to the U.S. than the U.S. sends to China, but trade with Mexico is more balanced between imports and exports.
• For example, in some industries, products are started in U.S. plants, and finished in Mexican factories before coming back into the U.S. “We complement each other,” Torres tells Axios.

Data: U.S. Census; Chart: Axios Visuals

For the record, YtD in 2023:

• U.S. imports from China total $168.6B. From Mexico: $194.9B. From Canada: $175.5B.
• U.S. exports to China total $62.4B. To Mexico: $133.2B. To Canada: $146.2B.
• U.S. trade balance with China: $-106.4B. With Mexico: $-61.8B. With Canada: $-29.3B.

EARNINGS WATCH

A repeat performance? (Refinitiv)

Heading into the Q1 earnings season, we were expecting an ‘earnings recession’ based on a negative Q4 actual growth rate along with analyst estimates forecasting a negative growth rate for both Q1 and Q2.  However, Q1 marked a resilient (and suspenseful) quarter which threw water on the earnings recession narrative as the growth rate finished at +0.1% from a starting point of -5.1% at the beginning of the quarter.  It was a suspenseful ending to earnings season as many readers waited to see if the Q1 growth rate would turn to positive territory and eventually did at the last minute.  This was a remarkable feat as we have only seen the growth rate start negative and end positive on eight occasions since 2002.

Looking at Q2, the backdrop heading into the quarter looks remarkably similar to Q1 which raises the question – will we see ‘A Repeat Performance’ of last quarter?

Surprisingly, the upbeat Q1 did not translate into upward Q2 growth expectations. Instead, analysts  have set the bar lower heading into earnings season by downgrading Q2 estimates, albeit at a slower pace compared to the prior three quarters.  From a guidance perspective, we have seen 62 negative Q2 EPS pre-announcements compared to 39 positives, resulting in a negative/positive ratio of 1.6, which is below the long-term average of 2.5 and the prior four-quarter average of 2.0.

Over the last three-months, the Q2 EPS estimate has declined from $54.24 to $52.81 per share, resulting in analysts downgrading y/y growth expectations by 2.5 ppt heading into earnings season. Interestingly, the majority of Q2 downgrades finished by the beginning of May and remained unchanged throughout the month of May and June.  Finally, Q2 has seen a slower pace of revisions compared to the prior three quarters where estimates were revised downwards by an average of 6.8 ppt.

(…) ex-energy earnings growth is currently forecasted to be negative for the fifth consecutive quarter, surpassing the three quarters of negative ex-energy growth seen in 2020.

(…) The S&P 500 forward 12-month P/E ratio is 19.2x, which ranks in the 84^th percentile (since 1985) and a 9.2% premium to its 10-year average (17.5x). For reference, the trough forward P/E during the last four recessions were as followed: 10.1x (Oct 1990), 17.3x (Sept 2001), 8.9x (Nov 2008), and 13.0x (March 2020).

Furthermore, the S&P 500 ‘PEG’ ratio is currently 1.99x which ranks in the 98^th percentile (since 1985) and a 42.3% premium to its 10-year average (1.3x).  The PEG ratio is expensive as the forward P/E continues to rise since the October low, while the long-term EPS growth rate expectations have sharply declined 2021. (…)

(…) The ‘Magnificent-7’ group comprising of Apple Inc, Amazon.com Inc, Alphabet Inc, Meta Platforms Inc, Microsoft Corp, NVIDIA Corp, and Tesla Inc has a market cap weight of 27.9% compared to an earnings and revenue weight of 14.0% and 9.3% respectively. The ‘Magnificent-7’ group has an aggregate forward P/E of 33.2x, a 73.0% premium to the overall index. (…)

CIBC Capital Markets has this chart showing that the P/E of the equal-weight S&P 500 index is just below its 25-year median:

BofA data reveals that only 23% of individual equities have outperformed the S&P 500 during Q2, the lowest share on record going back to 1986.

• The top 10 holdings in the S&P 500 now make up over 30% of the index, the highest concentration we’ve seen with data going back to 1980. (@charliebilello)

• Technology’s percentage of S&P 500 at 23-year high (NDR)

• Technology’s relative forward P/E highest since 2004 (NDR)

• Ed Yardeni (my green dashed line):

• IT revenue growth is not materially different than that of S&P 500 companies:

• IT Earnings are growing faster long-term (my dashed lines):

• How high can IT margins go?

• Investors are betting higher:

• Analysts also see continued margins expansion, in spite of slowing revenue growth (my dashed lines):

WSJ investigation finds that AT&T and Verizon knew about toxic lead cables in their networks — and did little. (WSJ) (Remember leaded gasoline…)

Yesterday, Howard Marks, always a must read for me, posted a new memo: Taking the Temperature. This one discusses market calls and “how one can make useful observations regarding the status of the markets”. I reproduce part of it here but encourage you to read it in its entirety. (Howard’s emphasis)

(…) So, one key is to avoid making macro calls too often.  I wouldn’t want to try to make a living predicting the outcome of coin tosses or figuring out whether the favorite will cover the point spread in every football game over the course of a season.  You have to pick your spots – as Warren Buffett puts it, wait for a fat pitch.  Most of the time, you have nothing to lose by abstaining from trying to adroitly get in and out of the markets: you merely participate in their long-term trends, and those have been very favorable.

My readers know I don’t think consistently profitable market calls can be manufactured out of macroeconomic forecasts.  Nor do I believe you can beat the market simply by analyzing company reports. (…)

When markets are at extreme highs or lows, the essential requirement for achieving a superior view of their future performance lies in understanding what’s responsible for the current conditions.  Everyone can study economics, finance, and accounting and learn how the markets are supposed to work.  But superior investment results come from exploiting the differences between how things are supposed to work and how they actually do work in the real world. To do that, the essential inputs aren’t economic data or financial statement analysis. The key lies in understanding prevailing investor psychology.

For me, the things one must do fall under the general heading of “taking the temperature of the market.”  I’ll itemize the most essential components here:

• Engage in pattern recognition.  Study market history in order to better understand the implications of today’s events.  Ironically, when viewed over the long term, investor psychology and thus market cycles – which seem flighty and unpredictable – fluctuate in ways that approach dependability (if you’re willing to overlook their highly variable causality, timing, and amplitude).

• Understand that cycles stem from what I call “excesses and corrections” and that a strong movement in one direction is more likely to be followed – sooner or later – by a correction in the opposite direction than by a trend that “grows to the sky.”

• Watch for moments when most people are so optimistic that they think things can only get better, an expression that usually serves to justify the dangerous view that “there’s no price too high.”  Likewise, recognize when people are so depressed that they conclude things can only get worse, as this often means they think a sale at any price is a good sale.  When the herd’s thinking is either Pollyannaish or apocalyptic, the odds increase that the current price level and direction are unsustainable.

• Remember that in extreme times, because of the above, the secret to making money lies in contrarianism, not conformity.  When emotional investors take an extreme view of an asset’s future and, as a result, take the price to unjustified levels, the “easy money” is usually made by doing the opposite.  This is, however, very different from simply diverging from the consensus all the time.  Indeed, most of the time, the consensus is as close to right as most individuals can get.  So to be successful at contrarianism, you have to understand (a) what the herd is doing, (b) why it’s doing it, (c) what’s wrong with it, and (d) what should be done instead and why.

• Bear in mind that much of what happens in economies and markets doesn’t result from a mechanical process, but from the to and fro of investors’ emotions.  Take note of the swings and capitalize whenever possible.

• Resist your own emotionality.  Stand apart from the crowd and its psychology; don’t join in!

• Be on the lookout for illogical propositions (such as “stocks have fallen so far that no one will be interested in them”).  When you come across a widely accepted proposition that doesn’t make sense or one you find too good to be true (or too bad to be true), take appropriate action.  See something; do something.

Obviously, there’s a lot to grapple with when taking the temperature of the market.  In my opinion, it has more to do with clear-eyed observations and assessments of the implications of what you see than with computers, financial data, or calculations.

I’ll go into additional depth on a couple of points:

On pattern recognition: You may have noticed that the first of the five calls described above was made in 2000, when I had already been working in the investment industry for more than 30 years.  Does this mean there were no highs and lows to remark on in those earlier years?  No, I think it means it took me that long to gain the insight and experience needed to detect the market’s excesses.

Most notably, whereas I spent two pages above describing the profound error in “The Death of Equities,” you may have noticed that I didn’t say anything about my having called out the article when it appeared in Businessweek in 1979.  The reason is simple: I didn’t.  I had only been in this business for about a decade at that point, so (a) I didn’t have the experience needed to recognize the article’s error and (b) I had yet to develop the unemotional stance and contrarian approach needed to depart from the herd and rebel against its thesis.  The best I can say is that my eventual development of those attributes enabled me to catch the same error when it arose again 33 years later. Pattern recognition is an important part of what we do, but it seems to require time in the field – and some scars – rather than just book learning.

On cycles: In my book Mastering the Market Cycle, I defined cycles not as a series of up and down movements, each of which regularly precedes the next – which I believe is the usual definition – but as a series of events, each of which causes the next.  This causality holds the key to understanding cycles.  In particular, I think economies, investor psychology, and thus markets eventually go too far in one direction or another – they become too positive or too negative – and afterward they eventually swing back toward moderation (and then usually toward excess in the opposite direction).  Thus, in my opinion, these cycles are best understood as stemming from “excesses and corrections.”  Overlooking the details of the individual episodes, it’s clear from the descriptions of these five calls that the greatest opportunities for bargain purchases result from overly negative prevailing psychology and the greatest opportunities to sell at too-high prices arise from excessive optimism. (…)

It’s easy to say you don’t invest on the basis of macro forecasts, and I’ve been saying this for decades.  But the truth is, if you’re a bottom-up investor, you make estimates regarding future earnings and/or asset values, and those estimates have to be predicated on assumptions regarding the macro environment.  Certainly, you can’t predict a business’s results in a given period without considering what’ll be going on in the economy at that point.  So, then, what does avoiding macro forecasting mean to us?  My answer is as follows:

• We generally assume the macro environment of the future will resemble past norms.

• We then make allowance for the possibility that things will be worse than normal.  Ensuring our investments have a generous “margin of safety” makes it more likely they’ll do okay even if future macro developments disappoint somewhat.

• What we never do is project that the macro environment will be distinctly better than normal in some way, making winners out of particular investments.  Doing so can lead to profits if one is right, but it’s hard to consistently make such forecasts correctly.  Further, investments reliant on favorable macro developments can expose investors to the possibility of disappointment, leading to loss.  It’s our goal to construct portfolios where the surprises will be on the upside.  Relying on optimistic underlying assumptions is rarely part of such a process.  We prefer to make assumptions I would describe as “neutral.”

So we do base our modeling on macro assumptions – by necessity – but rarely are those assumptions boldly idiosyncratic or optimistic.  We never base our investment decisions on the mistaken belief that we (or anyone else) can predict the future.  Thus, we recognize that the above average results we seek must arise from our ground-up insights and not from our ability to do a superior job of forecasting unusual macro events.

You might ask here, “What about the memo Sea Change and its assertion that we may be seeing a shift toward a wholly different environment?”  My answer is that I feel good about this memo because (a) it’s mostly a review of recent history and (b) the important observations surround the unusual nature of the 2009-21 period, its effect on investment outcomes, and the improbability of it repeating.  (I’m particularly comfortable saying interest rates aren’t going to decline by another 2,000 basis points from here.)  While it’s important to stick to guiding principles, it’s also essential to recognize and respond to real change when it happens.  Thus, I stand by Sea Change (my only expression of an opinion of this kind in my entire working life) as an acceptable deviation from my standard practice.  For me, the case for a sea change has more to do with observing and inferring than it does with predicting.

And what about market timing?  As I’ve written numerous times since developing my risk-posture framework a few years ago, every investor should operate most of the time in the context of their normal risk posture, by which I mean the balance between aggressiveness and defensiveness that’s right for them.  It makes perfect sense to try to vary that balance when circumstances dictate compellingly that you should do so and your judgments have a high probability of being correct, like in the case of the five calls I’ve discussed.  But such occasions are rare.

So, we stay in our normal balance – which in Oaktree’s case implies a bias toward defensiveness – unless compelled to do otherwise.  But we are willing to make changes in our balance between aggressiveness and defensiveness, and we have done so successfully in the past.  In fact, I consider one of my principal responsibilities to be thinking about the proper balance for Oaktree at any given time.

If we’re happy to vary our risk posture, then what does it mean when we say, “we’re not market timers”?  For me, it means the following:

• We don’t sell things we consider attractive long-term holdings to raise cash in expectation of a market decline.  We usually sell because (a) a holding has reached our target price, (b) the investment case has deteriorated, or (c) we’ve found something better.  Our open-end portfolios are almost always fully invested; that way we avoid the risk of missing out on positive returns.  It also means buying usually necessitates some selling.

• We don’t say, “It’s cheap today, but it’ll be cheaper in six months, so we’ll wait.”  If it’s cheap, we buy.  If it gets cheaper and we conclude the thesis is still intact, we buy more.  We’re much more afraid of missing a bargain-priced opportunity than we are of starting to buy a good thing too early.  No one really knows whether something will get cheaper in the days and weeks ahead – that’s a matter of predicting investor psychology, which is somewhere between challenging and impossible.  We feel we’re much more likely to correctly gauge the value of individual assets.

While on the subject of buying too soon, I want to spend a minute on an interesting question: Which is worse, buying at the top or selling at the bottom?  For me the answer is easy: the latter.  If you buy at what later turns out to have been a market top, you’ll suffer a downward fluctuation.  But that isn’t cause for concern if the long-term thesis remains intact.  And, anyway, the next top is usually higher than the last top, meaning you’re likely to be ahead eventually.  But if you sell at a market bottom, you render that downward fluctuation permanent, and, even more importantly, you get off the escalator of a rising economy and rising markets that has made so many long-term investors rich.  This is why I describe selling at the bottom as the cardinal sin in investing.

The “margin of safety”, first introduced by Ben Graham in The Intelligent Investor, is a key investment concept: risk vs reward. Assess, measure if possible, the downside risk before committing.

• It holds for macro analysis: how solid is the economy? Are the monetary and fiscal authorities reasonably in control and investor friendly?
• For equity markets: how cheap are equity markets, relatively and absolutely?
• For sectors: how cheap? how solid are the growth prospects? Macro dependent or mainly self-sustainable?
• For individual stocks: how cheap, relatively and absolutely? Management: proven, involved, personally invested? Prudent or aggressive? Indebted?

We can’t forecast the future, the potential rewards, but we can control the downside. It does not mean to only buy absolute value, it means to understand risk, assess and measure it when possible, and properly balance risk and reward.

Personally, I have often been tagged a “GARP” investor: growth at a reasonable price. In my younger days, I put more weight on the growth side of the equation (time was on my side). The relative weights have shifted as I grew older…

Fed Officials Say Higher Rates Needed to Reach 2% Inflation Goal Mester and Daly say tighter policy is needed to curb price pressures.

(…) “We’re likely to need a couple more rate hikes over the course of this year to really bring inflation back into a path that’s along a sustainable 2% path,” San Francisco Fed President Mary Daly said at the Brookings Institution in Washington.

Cleveland Fed chief Loretta Mester, speaking at an event hosted by the University of California, San Diego, said her own view also “accords with” Fed officials’ median forecast for two more rate increases.

“In order to ensure that inflation is on a sustainable and timely path back to 2%, my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more information on how the economy is evolving,” she said. (…)

Daly said the risks of doing too little to curb inflation still outweigh the risks of doing too much, though the gap between those two is narrowing. (…)

“How quickly we moved from expansionary policy to restrictive policy, and now we’ve indicated through our projections and our communications that we think we still have some ways to go to get the policy to this sufficiently restrictive stance to get inflation to 2%, all of those reflect a commitment to get price stability not in over 10 years, but over a few years,” [New York Fed President John] Williams said. (…)

Atlanta Fed President Raphael Bostic said that while the rate of inflation is too high, policymakers can be patient for now amid evidence of an economic slowdown — a stance at odds with many of his colleagues.

“I have the view that we can be patient — our policy right now is clearly in the restrictive territory,” Bostic told the Cobb County Chamber of Commerce in Atlanta. “We continue to see signs that the economy is slowing down, which tells me the restrictiveness is working.”

Fed officials will also receive new inflation data this week, with the Wednesday release of a monthly BLS report on consumer prices. Forecasters surveyed by Bloomberg expect it to show prices excluding food and energy advanced 0.3% last month, with the year-over-year rate of increase moderating to 5%, according to the median estimate.

Goldman Sachs expects a 0.22% increase in June core CPI, half the Cleveland Fed’s Inflation Nowcast at +0.43% in June after +0.44% in May. As of July 10, July core CPI is seen up 0.42%, still in the 5% range.

On shelter inflation. GS

expect shelter inflation to moderate somewhat (we forecast both rent and OER to increase by 0.47%), as the gap between rents for new and continuing leases continues to close. We estimate that the gap between new- and continuing-lease rents is currently around 3¼%, down from a peak gap of 7½%. Going forward, we expect shelter inflation to slow to a +5% annualized rate by December 2023 (or +0.41% not annualized) and +3¾% (or +0.30% not annualized) by December 2024, as growing multifamily supply keeps new-lease rent growth subdued and the gap between new- and continuing-lease rents closes further.

RealPage’s June report shows that new lease growth decelerated to +4.3% while renewal lease growth experienced a slowdown to +6.2%.

• Manhattan Luxury Real-Estate Market Heats Up New York City’s luxury residential market is gaining momentum, another sign that pockets of the U.S. housing market are stirring to life despite high interest rates.

Second-Quarter GDP Growth Estimate Increases On July 10, the GDPNow model estimate for real GDP growth in the second quarter of 2023 is 2.3 percent, up from 2.1 percent on July 6.

The influential Evercore ISI economist Ed Hyman just lifted his GDP estimates from +1.0% to +2.0% in Q2 and from -1.0% to +1.0% in Q3. He still believes a recession is coming and holds his Q4 GDP at -2.0%.

NFIB: Small Businesses Raising Prices Falls to Lowest Level Since March 2021

NFIB’s Small Business Optimism Index increased 1.6 points in June to 91.0, however, it is the 18th consecutive month below the 49-year average of 98. Inflation and labor quality are tied as the top small business concerns with 24% of owners reporting each as their single most important problem.

The net percent of owners raising average selling prices decreased three points to a net 29% seasonally adjusted, still a very inflationary level but trending down. This is the lowest reading since March 2021.

Unadjusted, 12% of owners reported lower average selling prices and 43% reported higher average prices. Price hikes were the most frequent in retail (52% higher, 10% lower), construction (49% higher, 4% lower), finance (48% higher, 3% lower), and wholesale (47% higher, 19% lower). Seasonally adjusted, a net 31% of owners plan price hikes.

China Signals More Economic Aid After Property Debt Relief

(…) Top state-run financial newspapers ran reports Tuesday flagging the likely adoption of more property supportive policies, along with measures to boost business confidence.

Earlier, financial regulators stepped up pressure on banks to ease terms for property companies by encouraging negotiations to extend outstanding loans. The People’s Bank of China and National Financial Regulatory Administration said in a joint statement Monday that the aim is to ensure the delivery of homes that are under construction.

Some outstanding loans — including trust loans due by the end of 2024 — will be given a one-year repayment extension, it said. Previously, the more-generous loan terms were to be applied only for loans that were due by late May 2023, as part of a 16-point plan unveiled late last year. (…)

Loans due by the end of 2024 account for about 30% to 40% of developers’ total debts, according to Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities, adding the measures may help ease developers’ liquidity in the short term if implemented. (…)

China Securities Journal, the country’s flagship securities newspaper, said Tuesday that China is expected to “accelerate” policy roll-out in order to promote the stable and healthy development of its real estate market. In a separate report, it also said the government may introduce measures to boost business confidence among private, state-owned and foreign firms following officials’ recent meetings with company executives.

Meanwhile, Shanghai Securities News cited Wang Qing, chief macro analyst at Golden Credit Rating, as saying that policymakers may take further measures such as relaxing property purchase and mortgage rules as well as cutting home loan rates to achieve a soft landing of the real estate market. (…)

In the statement, the PBOC and NFRA said project-based special loans provided by commercial banks to developers before the end of 2024 would not be classified as higher risk. They also urged financial institutions to ramp up support to ensure the delivery of construction projects. (…)

Currently, developers have outstanding bonds of about 2.9 trillion yuan ($401 billion) on their balance sheet, with nearly 1 trillion yuan of the debts due within the next 12 months and a maturity wall expected in the third quarter. (…)

Chinese authorities are trying to prevent an implosion of the industry, putting flimsy band-aids on the credit side. What is needed is boosting demand for housing. Tall order when confidence has disappeared.

• China’s $77 Billion Bank Rout Shows Who Pays Price for Rescues

While on banking, the last 4 weeks show declining total bank loans, particularly at large banks (black). Smaller bank loans are still rising. This while deposits keep rising across the board. Lagged SVB effect?