Month: August 2023

China’s Economy Shows Fresh Weakness Signs Gauges of activity in China’s economy showed signs of weakness in August, heaping extra pressure on policy makers to revive crumbling growth.

(…) Official purchasing managers’ indexes for China’s economy, published by the National Bureau of Statistics Thursday, showed manufacturing activity shrank for the sixth straight month in August, albeit at a slower pace than a month earlier. Activity in the services sector slowed again, data showed, a sign that consumers cut spending more over the summer.

The official purchasing managers index for manufacturing posted a reading of 49.7 in August, an improvement from the 49.3 registered in July but still below the 50 mark that separates an expansion in activity from a contraction, the statistics bureau said.

A similar index for services declined to 50.5 from 51.5 a month earlier, marking the sixth consecutive month of weakening activity.

(…) Chinese consumers have trimmed outlays and saved more, reflecting anxiety over jobs, earnings and a weak housing market. China expanded just 0.8% in the second quarter compared with the first, and many economists now expect China will just about meet the government’s growth goal of 5% for the year. (…)

One brighter spot was construction, where an index of activity rose in August, signaling an expansion as government spending on infrastructure picked up.  (…)

Bloomberg’s take:

• China’s Factory Activity Sparks Hope Slump Is Bottoming Out Manufacturing is still in contraction, but PMI beat estimates.

China’s manufacturing contraction eased slightly in August and a gauge of new orders improved, providing some hope that the worst of the sector’s slump may be ending. (…)

The manufacturing PMI “looks as if activity will be flatlining in the near term,” said Robert Carnell, chief economist for Asia Pacific at ING Groep NV. “It could be worse. Flatlining is not plunging.” (…)

• A sub-index measuring new orders expanded for the first time since March, reaching 50.2
• Employment weakened to 48 in August from the prior month
• New export orders improved slightly to 46.7 but remained in contraction for a fifth straight month

Tomorrow we get S&P Global’s PMIs.

Country Garden Posts Record Loss, Warns of Possible Default

Country Garden Holdings Co. warned that it may default on its debt and raised concerns about staying in business after the embattled Chinese developer posted a record first-half loss of almost $7 billion.

The Foshan-based company said that if its financial performance continues to deteriorate, the group might not be able to meet its debt obligations, “which may result in default,” according to a filing Wednesday. It also cited “material uncertainties” that may cast “significant doubt on the group’s ability to continue as a going concern.” (…)

“The avoidance of a default is dependent on additional financing support from regulators in coming weeks,” Morgan Stanley analysts including Stephen Cheung wrote in a note. “But we see a decreasing chance for this to happen.” (…)

Signs of contagion from the property woes have grown in recent weeks, from missed payments by one of China’s biggest shadow banks to a bond rout among Hong Kong developers. (…)

“With or without an official default, Country Garden will no longer be able to grow, and we have doubt on its ability as a going concern,” JPMorgan Chase & Co. analysts including Karl Chan wrote in a note. “Going forward, the company’s priority will be solely on ‘ensuring home delivery’ until it depletes its land bank.” (…)

“The profundity and persistence of the market’s downtrend still caught the company off guard,” Country Garden said. (…)

• China Builder Sino-Ocean Wins Vote to Extend Yuan Bond

Representatives of closely watched state-backed Chinese developer Sino-Ocean Group Holding Ltd. told some holders of a yuan note it has secured enough bondholder support to extend repayment.

That would help the firm, among the biggest homebuilders last year in locales including Beijing and nearby Tianjin, as it tries to avert a potential first default. (…)

The company, whose two biggest shareholders are state-owned insurers, has been among the primary sources of recent concern in China’s credit market. Once one of the stronger names in the sector, debt struggles for Sino-Ocean and larger peer Country Garden Holdings Co. have been emblematic of the ongoing cash crunch constraints for many of the country’s private-sector developers. (…)

Euro-Zone Inflation Stops Slowing in Alarm Signal for ECB

Consumer prices rose 5.3% from a year earlier, stuck more than 2 1/2 times above the goal sought by policymakers, because of energy. Economists had anticipated weakening. An underlying measure stripping out volatile items slowed as expected to reach exactly the same level as the headline gauge. (…)

Traders continued to pare bets on further increases in ECB borrowing costs after the data, pricing in a 30% chance of such a move next month. (…)

A slight hint of encouragement for policymakers was evidence of slowing services inflation in the overall regional numbers. That’s now at 5.5%, down from 5.6% in July. (…)

Apartment List National Rent Report

Note: keep in mind that Apartment List data is for new leases. Renewals account for some 90% of leases.

(…) monthly rent growth turned negative this month [August], marking the beginning of the rental market’s slow season. Our national rent index decreased 0.1 percent in August, flipping negative one month earlier than it did last year.

Rent swings are largely driven by the balance between the number of vacant apartments available and the number of renters looking to move into them. A massive shortage of vacant units helped drive tremendous rent growth in 2021 and 2022, and today the opposite is true. Our vacancy index has increased for 22 consecutive months and now sits at 6.4 percent, slightly above the pre-pandemic average. Additionally, with a record number of apartments under construction, we expect vacancies to remain strong in the coming months.

On a local level, rents fell month-over-month in August in 53 of the nation’s 100 largest cities, but thanks to sluggish rent growth throughout the past 12 months, prices are down year-over-year in 72 of these 100 cities.

But here’s a longer term perspective of the vacancy rate:

Charts featuring the blue line below, multi-family units under construction, are merrily displayed by rent deflationists as proof of a coming tsunami of rental supply.

But builders can only complete what they start, even if construction gets disrupted or delayed by shortages (lumber, appliances, labor) which all boosted units under construction, but only temporarily, and do not increase the ultimate number of completions.

The reality is that monthly multi-family starts averaged 480k between January 2020 and July 2023. While that is 180k more than between 2016 and 2019, it is less than half the number of units under construction in July.

Completions (black) will rise in coming months but the actual supply of multi-family units will not exceed the numbers of starts.

The other reality is that since 2016, 12.5 million new households were formed but only 8.7 million new housing units (single + multi) have been completed. This during a period of unusually low interest rates.

Average rent on new leases is up 23% from its pre-pandemic level. Flat since August 2022.

CPI-Rent is up 18% from its pre-pandemic level. Up 7.2% since August 2022.

Interesting to see how the new leases trend line mimics that of house prices, and how house prices and CPI-Rent were correlated between 2017 and 2020.

Actually, that relationship holds quite well over the longer term, with house prices turning back up this year.

Notice also that CPI-Rent kept rising during the GFC while house prices collapsed 20% and vacancy rates rose from 9.6% (!) to 11.1%. Still a long way from 6.4%.

Rent deflation? Not a slam dunk.

NAR: Pending Home Sales Up 0.9% in July; Down 14.0% Year-over-year

Private employers added 177,000 jobs in August (ADP)

Q2 GDP Revised Modestly Lower and Profits Under Pressure

The second estimate of Q2 GDP showed the economy expanded at a 2.1% annualized pace. While still strong, this is a slightly slower pace of growth than first estimated [2.4%]. Data on the income side of the economy suggest a much slower pace of expansion in H1-2023, though real GDP and GDI are diverging at an unusual rate. (…)

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

Gross domestic income (GDI), which was released for the first time for the second quarter, signals a slower pace of growth through the first half of the year having risen at just a 0.5% annualized pace after contracting for two consecutive quarters. Real GDP and GDI should be equivalent in theory, but usually somewhat differ. On a year-ago basis, the measures have diverged further and signal the widest gap between the two measures on record. This unusually wide gap suggests the two may converge in subsequent data releases.

GDI was held back by corporate profits. Pre-tax profits were a bit worse than anticipated, slipping 0.4% (not annualized), or by $10.6 billion, in Q2. Profits have rolled over–they have now slipped for the fourth consecutive quarter and are about 6.5% off where they stood a year ago. That said, the details paint a somewhat better picture of Q2 profitability.

The pullback can be traced to the domestic financial industry specifically, which saw profits slide by nearly $50 billion during the quarter. Nonfinancial domestic profits actually rose $17.1 billion after stumbling the past two quarters. We will get the underlying nonfinancial industries’ data in the next estimate of GDP, but these high-level figures suggest some stabilization in underlying profits amid a still resilient pace of spending.

More traditionally recognized measures of profits, like earnings of the S&P 500, have also held up better. Economy-wide profits differ from that of the S&P 500 in accounting methodology and scope, but the two tend to track over time.

After-tax profits, without inventory valuation or capital adjustment, tends to follow operating earnings of the S&P 500 most closely. By this measure, economy-wide margins improved in Q2 as did the S&P operating margins. The two measures remain elevated compared to pre-pandemic levels.

The gradual slowdown in profits signals the still resilient pace of underlying activity. But we continue to anticipate the economy will moderate over the second half of the year under the weight of tighter policy, which should weigh further on firms’ profitability and thus their ability to invest and hire. Recession in the first half of next year is still more likely than not in our view.

• Profits for all U.S. corporations — not just the large, publicly traded firms on the stock market — were down 6.5% from Q2 of 2022, the Commerce Department reported.

  • A 25% profit downturn at financial firms hammered by interest rate increases over the last year helped drive the downturn.
  • Other companies did a bit better, with profits down just 4.5% compared to a year earlier. (Axios)

Data: FactSet, U.S. Bureau of Economic Analysis; Chart: Axios Visuals

The Nifty Seven

The S&P 7 [META, AMZN, AAPL,
MSFT, GOOGL, TSLA, NVDA], a handful of technology stocks, are now up an incredible 54% this year. 3 weeks ago, the S&P 7 was up a massive 70%. Meanwhile, the remaining S&P 493 is up just 4%. These same stocks have accounted for 75% of the ENTIRE Nasdaq’s gain this year. (@KobeissiLetter)

AI is ruining the internet AI bots and AI-generated content are flooding the internet with spam, scams, and misinformation. And it’s making it a nightmare to be online.

Patrick S., a long time reader (BTW, thank you very much Pat for your continued financial support ), sent me this link to an interesting Business Insider piece.

A teaser:

Though these AI-generated news websites don’t have a significant audience yet, their rapid rise is a precursor to how easily AI-generated content will distort information on social media. In his research, Filippo Menczer, a computer science professor and director of Indiana University’s Observatory on Social Media, has already found networks of bots that are posting large volumes of ChatGPT-generated content to social-media sites like X (formerly Twitter) and Facebook. And while AI bots have telltale signs now, experts indicate that they will soon get better at mimicking humans and evading the detection systems developed by Menczer and social networks.

Demand for Workers Cools, but Remains Elevated July job openings hit the lowest point since March 2021, but stayed well above prepandemic levels.

Job openings declined by 338,000 to a seasonally adjusted 8.8 million in July from the prior month, the Labor Department reported Tuesday. That was the lowest level since March 2021, but it was still well above prepandemic levels and the 5.8 million unemployed people in July. (…)

The number of layoffs was unchanged at 1.6 million last month. (…)

Speaking at the Kansas City Fed’s annual symposium last week in Jackson Hole, Wyo., Powell noted that while job openings have fallen, U.S. unemployment hasn’t risen, which he called “a highly welcome but historically unusual result that appears to reflect large excess demand for labor.”

Job openings in July increased in the information and transportation and warehousing industries, while declining in the professional and business services, healthcare and government sectors, the Labor Department said. (…)

The quits rate—or the number of job resignations as a share of total employment—edged lower to 2.3% in July from 2.4% the prior month. The rate averaged 2.3% in 2019, just before the Covid-19 pandemic hit the U.S. economy.

Economists see a high quits rate as a sign workers feel confident about their ability to find another job at equal or more pay. The rate hit a recent high of 3% in April 2022. (…)

U.S. employers added 187,000 jobs in July, reflecting a labor market that has slowed this summer but remains on solid footing. The Labor Department will release its August employment report on Friday. Economists estimate the economy added 170,000 jobs and the unemployment rate held at 3.5%. (…)

The WSJ’s Justin Lahart adds in Job Market Cools but Is Far From Freezing:

The Labor Department on Tuesday reported that there were a seasonally adjusted 8.8 million unfilled job openings on the last day of July, down from 9.2 million in June and 11.4 million a year earlier. That is still a ton of openings: 1.5 for each person counted as unemployed, in comparison with an average in 2019—a good year for jobs—of 1.2. But it still counts as a fresh sign that the job market is, in fact, cooling. (…)

The decline in quits should be especially cheering for the Federal Reserve, since quits might actually be the better reading on job-market tightness than openings. When people quit their job, it is usually because they have found a better one elsewhere, often at higher pay.

(…) the layoff rate—layoffs as a share of employment—was unchanged from a year earlier at 1%.

This is worth noting, since some high-profile layoffs, centered in the tech sector, that started making headlines last fall sparked worries that widespread job losses were on the way. But neither the Labor Department’s layoff figures, nor weekly unemployment claims, jumped higher. And lately, those big layoff announcements have subsided, too: Outplacement firm Challenger, Gray & Christmas reported that its monthly count of announced layoffs came to 23,697 in July, compared with 25,810 a year earlier. (…)

• Over past 3 months, 2.55 million job openings have been shed, which is largest 3-month decline on record (@LizAnnSonders)

And it has only happened during recessions.

Ed Yardeni:

The rallies in both stocks and bonds received a bullish jolt from June’s JOLTS report today showing fewer job openings and quits than expected during the month. These are bullish developments because they suggest that the labor market is “rebalancing” with demand for labor easing. Powell has stressed the importance of these two variable for the setting of monetary policy. They are both heading in the right direction, i.e., the one increasing the likelihood that the Fed is done raising interest rate. (…)

In previous recent remarks on the labor market, Powell noted that the quit rate (which is reported along with job openings in the JOLTS report) is highly correlated with measures of wage inflation. He has been rooting for the quit rate to decline to reduce wage inflation. That seems to be happening. The rate fell from 2.4% during June to 2.3% during July, the lowest since January 2021. It tends to lead wage inflation by about six months.

A recession also helped…

The BLS Job Openings remain 1.8 million (25%) above their pre-pandemic levels in July. Indeed’s Job Postings have stopped declining since the end of July (through Aug. 18).

From the August U.S. flash PMI:

August data indicated only a fractional rise in employment. (…) the pace of increase was the slowest over [the last 3 years]. (…) weak demand and lower new orders resulted in job shedding at some firms, with mounting wage costs compounding decisions to cut staff.

Services providers reined in hiring activity as employment in the sector was broadly unchanged on the month. A lack of new business and some instances of difficulties retaining staff dragged on jobs growth.

The rate of [manufacturing] job creation was the slowest since January, however, as voluntary leavers were often not replaced.

Strain on capacity dissipated further, as backlogs of work contracted at the sharpest rate since May 2020. Decreases in incomplete work at both manufacturers and service providers quickened from July.

Upward pressure on operating expenses from greater wage bills, increased raw material prices and higher fuel costs led to a reacceleration in the pace of input price inflation in August. The rate of increase in costs was sharper than the long-run series average, as manufacturers and service providers recorded faster upticks. Although much slower than those seen through the last two years, the pace of increase in cost burdens at goods producers was the steepest since April.

• The Dallas Fed’s manufacturing survey shows that businesses boosted wages this month. (The Daily Shot)

August Job Growth Among Small Businesses Unchanged from July

According to the Paychex | IHS Markit Small Business Employment Watch, the national Small Business Jobs Index — which measures the rate of small business job growth in the U.S. — is essentially flat at 99.10, a decrease of 0.04% in August. Meanwhile, an hourly earnings growth rate of 3.98% among U.S. small businesses is unchanged in August from July and below four percent for the second consecutive month.

“The Small Business Jobs Index moderated for the fifth consecutive month and the flattening of earnings growth both align with a stabilizing U.S. labor market,” said James Diffley, chief regional economist, S&P Global Market Intelligence.

“Our data indicates America’s small businesses are adding workers at a sustained and modest rate,” said John Gibson, Paychex president and CEO. “Regarding hourly earnings, last month we reported a growth rate below four percent for the first time since 2021. Seeing that trend continue this month is an encouraging sign that wages are normalizing along with overall inflation.”

Note that the 3.98% growth in hourly earnings is YoY. The one-month annualized growth increased from 3.1% in June to 4.2% in July and to 4.7% in August. The 3-month annualized growth is 4.0%, up from 3.5% in July.

Claudia Sahm: Sure, Consumers’ Savings Are Down, But So Is Their Debt If the Federal Reserve fails to account for the drop in household liabilities, it risks making a mistake the wrong call on interest rates.

(…) it’s a mistake to think of excess savings as just more money sitting in the bank; it is also about having less debt. And those with a lot of debt are more interest-rate sensitive. That’s who the Fed should keep a closer eye on.

There are several signs that households hold less debt than the pre-pandemic trend, including some very high-interest debt. Payday loans declined 65% during the first year of the pandemic, according to the Consumer Financial Protection Bureau. The growth in credit-card balances also fell early in the pandemic, according to the Federal Reserve Bank of New York. That lowered debt servicing costs, freed up money for spending and made many consumers less sensitive to increases in interest rates.

Delinquency rates are another sign that consumers have been managing their debt better even as interest rates rise. During the pandemic, delinquencies on credit cards fell to their lowest in the 20 years of the series. That was true of all consumer loans. Even now, with the Fed’s target federal funds rate and consumer interest rates notably higher, the delinquency rate on credit cards has only just returned to its pre-pandemic level. (…)

Adding the three rounds of stimulus checks together, an eligible family of four received $11,400, which would have allowed for a substantial debt reduction. (…)

So, what does this mean for the Fed? The effects of its rate hikes have been muted so far, in part, because households with less debt have had a cushion, unlike prior recessions, to buffer higher borrowing costs. People who, instead, put their excess savings in the bank have a cushion too, but interest rates matter less to them than those who paid down debt. Both are running out and should lead to reduced spending. But if the Fed doesn’t track the debt separately, it could underestimate the effects of excess savings running out on demand and make a policy mistake.

And someone faced with cutting spending or taking on more debt must consider the 20% interest rate that comes with credit-card debt these says. Debt balances rising back to the pre-pandemic trend would make those households responsive to the Fed hikes. The day “excess savings” overall run out is less important than when “less debt” ends.

This chart plots consumer debt against labor income all indexed to February 2020 = 100. Consumer loans are up 17.5% from their pre-pandemic level but labor income (black) is up 21.6%. Credit card debt is now rising fast but Other Loans (mainly cars) are falling.

Meanwhile, home (+45%) and equity values (+35%) are significantly above their pre-pandemic levels.

Lessons from Germany?

From the latest Germany PMI:

• German business activity suffered the steepest decline for more than three years in August, according to latest HCOB ‘flash’ PMI® survey compiled by S&P Global, as a deepening downturn in manufacturing output was accompanied by a renewed contraction in services activity.
• Manufacturing recorded a decrease in production for the fourth month running, with the rate of decline accelerating to the quickest for more than three years (index at 39.7). It was joined in contraction by the service sector, where business activity fell for the first time eight months and to the greatest extent since November 2022 (index at 47.3).
• August saw a further broad-based reduction in backlogs of work, reflecting a lack of incoming new orders to replace completed projects. Furthermore, the rate of depletion of total outstanding business quickened for the fifth month in a row to the fastest for more than three years.
• Work-in-hand at manufacturers fell particularly sharply, which in turn dampened their willingness to take on new staff and resulted in another slight decrease in factory workforce numbers. At the same time, service sector job creation virtually stalled, which meant that total employment was broadly unchanged on the month.
• Private sector firms in Germany remained pessimistic about the year-ahead outlook for activity in August.

Yet: German wages rise at record pace in second quarter – FT

China Moves to Stabilize Finances of Troubled Shadow Bank Defaults in trust sector raise financial stability concerns

China has asked two of the nation’s biggest financial firms to examine the books of Zhongrong International Trust Co., potentially paving the way for a state-led rescue of the troubled shadow lender, according to people familiar with the matter.

Citic Trust Co., a unit of conglomerate Citic Group Corp., and CCB Trust Co., backed by China Construction Bank Corp., will lead the effort to stabilize operations at Zhongrong, said the people, who asked not to be identified discussing a private matter. It couldn’t immediately be determined what might result from their involvement, though a similar examination by Citic of Huarong Asset Management Co. led to a $6.6 billion bailout of the bad-debt manager in 2021.

The plan underscores growing concern among policymakers about the $2.9 trillion trust sector’s impact on financial stability amid disappointing economic growth and a worsening property slump. (…)

The sector could face losses of the equivalent of $38 billion, according to a Goldman Sachs Group Inc. estimate. (…)

The trust sector has already seen several state rescues. In 2020, the government was involved in Shanghai-listed Anxin Trust Co.’s restructuring plan to avoid triggering “systemic financial risks.” The banking regulator also assumed control of New Times Trust Co. and New China Trust Co., along with seven other financial firms linked to Tomorrow Group.

Late that year, authorities took over Sichuan Trust Co. to maintain social and financial stability after the Chengdu-based company failed to pay at least 40 million yuan of products and hundreds of investors gathered at its headquarters to demand their money back.

New China Trust was declared bankrupt this year after three years of rescue efforts failed, becoming the first player in the industry to go under since the Trust Law was enacted in 2001.

Trust firms have billions of payments due to investors. Zhongrong alone has 270 products totaling 39.5 billion yuan due this year, according to data provider Use Trust.

Citic Trust had 1.5 trillion yuan of assets under management while CCB Trust oversaw about 1.4 trillion yuan.

Trying to keep Chinese trusting trusts, the government tells its largest trust companies to bail out the smaller private trusts. In Xi we trust!

• Chinese banks to cut existing mortgage rates as property crisis deepens

Some Chinese state-owned banks will soon lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, as Beijing ramps up efforts to revive the debt crisis-hit property sector and bolster a sputtering economy. (…)

The reduction could be as much as 20 basis points in some cases, said the sources, who declined to be named as they were not authorized to speak to the media. (…)

Zhu Qibing, chief macro analyst at BOC International China, estimates the weighted average rate of new mortgages is 4.11%, while the average rate on all existing mortgages is at least 100 basis points higher. (…)

To soften the hit on the margins, the three sources said that major state banks would also lower interest rates on some fixed-term deposits, and the quantum of cuts would range from 10 basis points to 25 basis points. (…)