Month: August 2023

CB Leading Economic Index Continues Decline as Uncertainty Grows

(…) “The US LEI—which tracks where the economy is heading—fell for the sixteenth consecutive month in July, signaling the outlook remains highly uncertain” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “On the other hand, the coincident index (CEI)—which tracks where economic activity stands right now—has continued to grow slowly but inconsistently, with three of the past six months not changing and the rest increasing.

As such, the CEI is signaling that we are currently still in a favorable growth environment. However, in July, weak new orders, high interest rates, a dip in consumer perceptions of the outlook for business conditions, and decreasing hours worked in manufacturing fueled the leading indicator’s 0.4 percent decline.

The leading index continues to suggest that economic activity is likely to decelerate and descend into mild contraction in the months ahead. The Conference Board now forecasts a short and shallow recession in the Q4 2023 to Q1 2024 timespan.” (…)

As explained before, the CB LEI is goods-sensitive with 4 of its 7 non-financial components being measures of new manufacturing orders (3) and manufacturing hours worked (1). What used to be a reliable indicator has been “fooled” by the post pandemic switch from goods to services.

Actually, the recent LEI trend has better reflected the manufacturing softness in China which experienced America’s pandemic boom-bust cycle on goods.

The sharp acceleration in U.S. retail sales since May is likely helping clear the inventory overhang throughout the system (manufacturing, wholesaling, retailing) and we can expect new orders to turn positive in coming months. S&P Global’s July U.S. Manufacturing PMI indicated that “the rate of decline [in new manufacturing orders] softened to the
slowest in the current three-month sequence of contraction.”

The August and September PMI surveys (flash PMI on Aug. 23) could offer the first indications that the global manufacturing contraction is coming to an end. The CB LEI will likely benefit but this would primarily help China.

• Jeremy Grantham Says Fed Is Kidding Itself on Avoiding a Recession Fed ‘almost guaranteed to be wrong’

The slow-moving influence of rising interest rates will end up torpedoing the economy, dashing Federal Reserve expectations that a recession can be avoided, according to renowned Wall Street curmudgeon Jeremy Grantham. (…)

“The Fed’s record on these things is wonderful. It’s almost guaranteed to be wrong,” said the co-founder of the Boston-based investment firm Grantham Mayo Van Otterloo, in response to a question about Chair Jerome Powell’s view that a downturn is avoidable. “They have never called a recession, and particularly not the ones following the great bubbles.” (…)

He called the post-pandemic surge in equities “in many ways about equal to the 2000 tech bubble,” but said its deflation has been interrupted by speculation on artificial intelligence and economic stimulus that he linked to next year’s presidential election. (…)

Personally I think AI is very important,” he said. “But I think it’s perhaps too little too late to save us from a recession.” (…)

The deflationary impact of last year’s fall in tech stocks is “too big,” he said. As higher rates continue to depress other corners of the market, particularly real estate, the US economy will see “a recession running perhaps deep into next year and an accompanying decline in stock prices.” (…)

Jeremy is right about the Fed’s poor forecasting record. On the other hand, the bite that rising interest rates usually take on the economy is mitigated this time by two unusual factors:

• the housing market has bifurcated with existing home sales dropping 20% since June 2022 while new home sales, normally hard hit by rising rates,  jumped 28%. Homeowners with low mortgage rates (courtesy of the Fed’s QE) cannot afford to sell their homes so people needing homes turned to new houses helped by builder incentives. YtD, new permits for single-family houses are up 24%.
• Rising rates are boosting savers interest income following years of financial repression (Fed’s QE again!). Since March 2022, personal interest income is up 10.0%. At the margin, boomers are revenge spending on entertainment, dining out and travels.

As a result, employment and wages in sectors generally most sensitive to interest rates remain strong. For example, since the Fed embarked on its tightening journey, construction jobs are up 3.6% with wages up 7.4%. Manufacturing jobs are up 2.1% with wages up 6.4%. Trucking: +2.7% with +6.1%.

Meanwhile, service-providing employees, representing 86% of all non-farm employment and which numbers have declined only in major crisis, grew 3.3% with wages up 5.7% YoY on average in the last 3 months.

In all, aggregate weekly private payrolls rose 8.2% since March 2022 and are up 5.2% annualized in the last 3 months.

Headline CPI inflation is up 5.8% since March 2022 but moderated to +3.3% YoY in July. Core inflation, up 6.9% since March 2022, was +4.7% in July.

Slower inflation pushed real labor income up 3.4% in June from the 2.0-2-3% range, buoying the American consumer right when excess savings are almost depleted and just in time for the important back-to-school and holidays seasons.

But the glass-half-empty view says that inflation has moderated but not because the Fed succeeded in slowing demand or even slowing the components of demand, employment and real wages. The unemployment rate is right where it was in March 2022 and the composition-adjusted Atlanta Fed Wage Growth Tracker, at +5.7% on average in the last 3 months, is just shy of its +6.0% March 2022 reading.

There seem to be only 2 scenarios from here:

1. Goldilocks, where the immaculate disinflation sustains the economy at a moderate enough pace that would allow a gradually easier Fed;
2. Stubborn inflation fueled by steady demand, … until inflation and interest rates rise enough to really strangle consumers.

Everybody is focusing on core inflation (black below) given the FOMC’s 2% inflation target but the big unknown for the economy is inflation on essentials, food, energy and shelter prices, which together account for 55% of the CPI.

Over the past year, all the major components of the CPI index have moderated but “essentials” prices have slowed the most, from +10.3% to +4.5%, significantly contributing to lower headline CPI inflation but also to higher discretionary income.

• Energy inflation swung from +41.3% in June 2022 to -12.3% in July.
• Food inflation slowed from 10.4% to 4.9%.
• Shelter inflation rose from 5.6% to 7.7%.

Good luck forecasting energy prices from here but it looks like the oil benefit is behind us. Oil prices troughed at $67.12 (WTI) on June 12, they are now $81, 21% higher.

The also elusive food inflation seems to have run its disinflationary course this summer. Grocery prices declined 1.9% a.r. between February and June but rose 2.0% a.r. in July.

Rent inflation is widely expected to decline significantly as the lags in the BLS methodology work their way to the CPI. Very significant given rent is 33% of the CPI and 41% of core CPI. This expectation is essentially based on private measures of new leases, some 10% of all leases.

I am far from convinced that this strong consensus will prove right (see Rent Rant).  So far, the BLS measure continues to run at a 5.0-5.5% annualized rate, in line with wages which have a 99.8% correlation with CPI-Rent since 1985.

If you look closely at the first chart above, you see how inflation on essentials took off in 2007-08, doubling total CPI inflation while core-CPI remained stable at 2.5%.

Move to the second chart above and notice how rising inflation on essentials dragged down real labor income and then real spending in 2007-08, even though core inflation stayed under control.

So there is a smart humility in Larry Summers’ comment last week that the economy “looks very strong right now to me, and I don’t think in the next few months we’re going to have a recession. What happens beyond that is less clear from the statistics.”

Everybody rolls with their fingers crossed
That’s how it goes
Everybody knows

(Leonard Cohen)

 All by myself
Let the rain hit me
I’m going insane
Nobody knows

(Russ)

• NABE Survey Shows More Confidence Fed Can Pull Off Soft Landing Seven in 10 economists have confidence US can avoid recession

That marks a big reversal in sentiment since NABE’s March survey, which showed a similar share indicating they were skeptical of avoiding a downturn.

Nearly three in four respondents said current monetary policy is about right, up from nearly 60% in the March survey.

Almost three-fourths of respondents see inflation above 3% by the end of the year.

The July 28-Aug. 7 survey included responses from 167 NABE members.

Bloomberg:

(…) Over the past two years, consumers have drawn down the more than $2 trillion in extra savings they accumulated during the pandemic in order to keep spending in the face of sky-high inflation. That’s enabled the economy to push ahead even as the Federal Reserve jacked up interest rates at the fastest pace in four decades.

But as the cash cushion shrinks, consumers are becoming more dependent on their paychecks to maintain their standard of living. (…)

Economists are divided over how worried to be. Some see that strain paired with other looming hurdles – like the resumption of student loan payments in October for millions of borrowers – leading to a recession. With credit costly and hard to get due to the Fed’s actions, consumers will be prompted to curtail their outlays, pushing the economy into a contraction, they contend. (…)

Other economists are more optimistic. They see falling inflation and a still resilient job market providing consumers with the wherewithal to keep on spending, even as their cash stash shrinks. (…)

INFLATION WATCH

The Cleveland Fed’s Inflation Nowcasting:

Goldman Sachs’ analysis of inflation trends was spot on in recent months.

However, the June and July CPI reports and the June PCE report overstate the slowing in the core and especially in the heavily scrutinized core services ex-housing aggregate, which Fed officials have highlighted as the last piece of the inflation puzzle where more proof of improvement is still needed.

One reason that the latest data exaggerate the slowing is that residual seasonality has biased the inflation numbers lower in the summer. (…) we think the seasonal factors currently imply overly large price increases, which biased seasonally-adjusted core inflation lower in each of June and July by 10-15bp. Even apart from this bias, airfares declined at a pace that is unlikely to be sustained in coming months. Over the remainder of the year, the seasonal bias is likely to instead boost monthly core CPI inflation. (…)

Another reason that the recent softness is unlikely to be fully sustained is that the CPI’s health insurance component is due to reset sharply higher in October, when the CPI will use new data on health insurer profitability to determine the rate of monthly health insurance inflation for the next twelve months. We expect a large turnaround from -4% to +1%, which would be worth about 4bp per month on core CPI and 12bp per month on core CPI services ex-shelter.

Beyond the disappearance of these temporary downward pressures, we also expect upward pressure on core services ex-housing from health care and education services, where prices tend to lag the cost environment because both government-administered and private prices are reset infrequently. (…)

We expect shelter inflation to slow to just over 0.4% per month in 2023Q4 and to continuing falling through 2024, ending the year at around 4% year-on-year. (…)

In combination, these pressures are likely to boost core services ex-housing meaningfully in the months ahead. In CPI terms, we expect it to accelerate from a three-month average of 14bp to a 46bp average over the next six months. In PCE terms, we expect it to jump to 36bp in July but then slow slightly on average in the following months. While Fed officials likely put more weight on the PCE version, where the increase will be more moderate, the CPI version attracts attention in markets and the media because it is released earlier in the month.

Car Prices Might Be Unsustainable for Buyers Surging loan delinquencies signal that many consumers can’t afford their auto loans.

(…) For the average American, paying off a new car at current prices demands 42 weeks of income, according to data from Cox Automotive, up from around 33 before the pandemic. 

Bargains have been hard to come by on the used-car lot as well, where the average vehicle listed for about $27,000—up more than 30% from prepandemic levels, according to Cox’s data. 

Higher interest rates have made the situation more difficult for buyers. Today’s average new car loan has a monthly payment north of $750, with an interest rate of 9.5%. For used cars, the average rate is above 13.7%, according to Cox. The average term for loans issued over the past three years is nearly six years, according to data from Experian.

These numbers could explain a mystery bedeviling auto lending. Seasonalized rates of severe delinquency for auto loans are the highest since at least 2006, but the jobs market is strong. (…)

So far, higher prices have been a positive for automakers and dealers. Share prices for public dealership groups have surged this year. (…)

This chart indexes CPI-New Vehicles, CPI-Used Vehicles and vehicle sales at Feb. 2020 = 100. Respectively: +21.6%, +41.6% and -5.2%.

• Historic credit tightening (Axios)

An analysis from Evercore ISI finds that the shift in bank lending standards has been the swiftest, and most dramatic, of any recent episodes of monetary policy tightening.

“This sort of tightening in credit standards is something that the U.S. economy has not experienced during the past monetary tightening cycles of the last few decades,” Marco Casiraghi, a policy and macro strategist at Evercore ISI, tells Axios. “It’s reasonable to expect this will eventually bite, to some extent.”

In previous periods when banks tightened credit, the Fed lowered rates to encourage bank lending to grease the wheels of the economy.

“This is what makes this cycle different from others. In the past decades, conditions at some point became very tight, but it was not because of the Fed,” says Casiraghi.

Then, “the Fed was trying to undo that, in some sense, because they were cutting rates to try to make credit flow to the economy. Here, we have the opposite.”

Data: Evercore ISI; Chart: Will Chase/Axios

(…) “the tightening in credit standards observed now is twice as large as what it was” compared to the 2004-2006 tightening cycle, Casiraghi says.

Demand for loans has plummeted more than in previous tightening cycles, too, Evercore found — likely as a result of credit becoming more costly and difficult to get.

“The current magnitude of impact seems to be suggesting the passthrough to the bank lending channel in the US so far may be … more timely and stronger than in the past,” Casiraghi wrote in a note.

EARNINGS WATCH

From Refinitiv/IBES

Through August. 18, 472 companies in the S&P 500 Index have reported earnings for Q2 2023. Of these companies, 79.0% reported earnings above analyst expectations and 15.9% 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, 73% of companies beat the estimates and 22% missed estimates.

In aggregate, companies are reporting earnings that are 7.8% 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 4.2%.

Of these companies, 63.5% reported revenue above analyst expectations and 36.5% 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, 71% of companies beat the estimates and 29% missed estimates.

In aggregate, companies are reporting revenues that are 1.7% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.2%.

The estimated earnings growth rate for the S&P 500 for 23Q2 is -3.4%. If the energy sector is excluded, the growth rate improves to 3.0%.

The estimated revenue growth rate for the S&P 500 for 23Q2 is 0.4%. If the energy sector is excluded, the growth rate improves to 4.3%.

The estimated earnings growth rate for the S&P 500 for 23Q3 is 1.3%. If the energy sector is excluded, the growth rate improves to 6.9%.

Trailing EPS are now $216.46. Full year EPS: $220.48e. Forward EPS: $231.73e. Full year 2024: $246.42e.

In an otherwise good earnings season, guidance has been negative:

In the last week, 6 of the 12 additional pre-announcements were positive and 5 negative.

Q2 was a resilient quarter on the earnings front (again) which saw both a beat rate and an earnings surprise rate reaching a multi-quarter high. Q/Q earnings growth was also positive for the second consecutive quarter. Ex-energy year-over-year (y/y) growth also turned positive after four quarters of negative growth, highlighting improved breadth in earnings growth. All in all, earnings growth in the first half of the year turned out better than originally forecasted.

The largest contributors to the earnings surprise rate are as followed: JPMorgan Chase & Co, Amazon.com Inc, Berkshire Hathaway Inc, Microsoft Corp, Apple Inc, General Motors Co, and Intel Corp. This group contributed roughly one-third of the overall earnings surprise this quarter.

The ‘Magnificent-7’ saw Q2 earnings of $67.1 billion (+38.5% y/y, +11.4 q/q).  This group consists of Apple Inc, Amazon.com Inc, Alphabet Inc, Meta Platforms Inc, Microsoft Corp, NVIDIA Corp, and Tesla Inc.

The ‘Magnificent-7’ saw Q2 revenue of $344.6 billion (+9.8% y/y, +2.2 q/q).

This contrasts to a weaker revenue quarter which saw the revenue beat rate reach a multi-year low along with an in-line revenue surprise rate. The revenue beat rate was the lowest since 2020 Q1 and will be a trend to monitor in Q3 given the debate around pricing power and the follow-through impact on margins. Y/Y revenue growth also reached a multi-year low, due to difficult year-over-year comps. Finally, real revenue growth (adjusted for inflation) was negative in Q2.

The Q2 blended net profit margin (combining estimates and actuals) is 11.1%, a slight tick-up from 11.0% at the start of earnings season (Exhibit 6).

Source: @LizYoungStrat via @DisruptorStocks

• A major test comes this week as Treasury investors place their bids for two risky auctions: 20-year bonds and 30-year inflation-protected debt, demand for which is notoriously unpredictable. If investors shy away, even higher yields will be needed to lure them back. (Bloomberg)

ODD LOT

• Apple holds 57% of the phones market versus Android’s 42% in the U.S., according to web traffic analysis site Statcounter. The data skews worse for Android when narrowed down to teenagers. According to a survey of 7,100 American teens last year conducted by investment bank Piper Sandler, 87% of teens currently have an iPhone, and 87% plan on sticking with the brand for their next phone. But the stigma regarding Android phones is mostly an American phenomenon, at least to the degree to which it affects purchase habits. Worldwide, per the same Statcounter report, Androids represent the significant majority of all smartphones, holding a 71% share of sales compared with Apple’s 28%. (WSJ)
• In a new CBS News/YouGov poll, Trump voters were far more likely to view him as a source of truth than they were religious leaders.

Image: CBS News

Economists Lift US Growth Forecasts, See Fed Higher for Longer This supports expectations that the Federal Reserve will keep interest rates higher for longer.

Gross domestic product is expected to advance an annualized 1.8% in the third quarter, nearly quadruple the 0.5% pace projected in July, according to the latest Bloomberg monthly survey of economists. They also see the economy expanding somewhat in the last three months of the year, rather than contracting. (…)

Economists in the survey now see the Fed holding interest rates higher for longer amid risks that a stronger economy will keep inflation above their goal. While economists don’t see further hikes on the horizon, they also don’t expect the central bank to cut rates until the second quarter of next year — which is three months later than July’s estimate.

However, economists did revise up their expectations for bond yields through the end of 2025. The two-year Treasury yield is now seen ending the current quarter at 4.82% compared to last month’s projection of 4.65%. (…)

Excluding food and energy, forecasters now see the personal consumption expenditures price index cooling more quickly through the end of this year compared to their July projections. Their estimates for the overall PCE measure — which is the Fed’s preferred inflation target — were little changed. (…)

At the same time, unemployment estimates were marked lower through the end of next year and hiring was seen higher, also supportive of a soft landing.

Be warned that Blomberg’s “Aug. 11-16 survey of economists included 68 responses, and many were submitted before a government report showed retail sales beat estimates in July after upward revisions to the prior two months.” (…)

The Atlanta Fed’s GDPNow for Q3 jumped from +4.1% to 5.0% after the retail sales report and to 5.8% Wednesday after new data on housing and industrial production.

Some economists have argued that “weird” seasonal adjustments boosted the retail stats in July. But unadjusted data show total sales growth accelerating from +1.8% YoY in June to +2.5% in July. More significantly, excluding gasoline stations where sales fluctuate with gas prices, growth went from +4.8% in June to +5.3% in July.

My calculation of retail inflation (0.35 x CPI-Durables + 0.65 x CPI-Nondurables) gives “CPI-Retail” down 1.1% in June and down 0.6% in July.

Goods demand seems to be reaccelerating. If so, inventories will get normalized faster, helping manufacturing demand, particularly China’s, right on time for the holidays…Data on this Inventories to Sales Ratios chart is at the end of June.

BofA’s Warning of a ‘5% World’ Sinks in With Yields Pushing Higher

All around the world, bond traders are finally coming to the realization that the rock-bottom yields of recent history might be gone for good.

The surprisingly resilient US economy, ballooning debt and deficits, and escalating concerns that the Federal Reserve will hold interest rates high are driving yields on the longest-dated Treasuries back to the highest levels in over a decade.

That’s prompted a rethink of what “normal” in the Treasury market will look like. At Bank of America Corp., strategists are warning investors to brace for the return of the “5% world” that prevailed before the global financial crisis ushered in a long era of near-zero US rates. And BlackRock Inc. and Pacific Investment Management Co. say inflation could remain stubbornly above the Fed’s target, leaving room for long-term yields to push even higher.

“There is a remarkable repricing higher in longer-term rates,” said Jean Boivin, a former Bank of Canada official who now heads the BlackRock Investment Institute.

“The market is coming more to the view that there is going to be long-term inflation pressures despite recent progress,” he said. “Macro uncertainty is going to remain the story for the next few years, and that requires greater compensation to own long-dated bonds.” (…)

While higher rates will soften the blow by boosting bondholders’ interest payments, they also threaten to weigh on everything from consumer spending and home sales to the prices of high-flying tech stocks. What’s more, they will increase the US government’s financing costs, worsening the deficits that are already forcing it to borrow some $1 trillion this quarter to cover the gap. (…)

Broader economic shifts are also driving speculation that the low rates — and inflation — of the post-crisis period were an anomaly. Among them: demographics that may push up wages as aging workers retire; a shift away from globalization; and drives to combat global warning by shifting away from fossil fuels. (…)

“People are going to need more term premium to own long-term bonds,” she said, referring to the higher payments investors normally demand for the risk of parting with their money for longer.

Even with the recent rise in yields, though, no such premium has returned. In fact, it remains negative as long-term rates hold below short-term ones — an inversion of the yield curve that’s usually seen as a harbinger of a recession. But that gap has started to narrow, cutting a New York Fed measure of the term premium to around minus 0.56% from nearly 1% in mid-July.

That upward pressure has also been exacerbated by US federal spending, which is creating a flood of new debt sales to plug the deficit even as the economy remains at — or near — full employment. At the same time, the Bank of Japan’s decision to finally allow 10-year yields there to push higher will likely cut Japanese demand for US Treasuries.

BlackRock’s Boivin says there’s major shift underway at the world’s central banks. For years, he said, they kept interest rates well below the rate that’s considered neutral to spur their economies and ward off the risk of deflation.

“This has been flipped now,” he said. “So even if the long-term neutral rate is not changed, central banks will hold policy above that neutral rate to stave off inflationary pressure.”

KKR’s Henry McVey agrees:

While inflation has abated, we remain in a new regime characterized by above average inflation and rates, as well as slower, though positive real economic growth. Overall, we expect inflation to remain elevated, contrary to market optimism.The structural labor shortage, insufficient housing supply, ongoing geopolitical conflicts and the energy transition are drivers of elevated inflation.

(…) as we head into 2024, we remain above consensus in Europe and the US as a result of higher ‘sticky’ core inflation and in China as well because of easier year-over-year comparisons.Japan is also now transitioning from a long period of deflation to one of inflation, led by labor shortages and higher wages.

China’s State Developers Warn of Losses as Crisis Spreads

China’s state-owned property developers are warning of widespread losses, fueling concerns that the housing crisis is expanding from the private sector to companies with government backing.

Eighteen out of 38 state-owned enterprise builders listed in Hong Kong and the mainland reported preliminary losses in the six months ended June 30, up from 11 that warned of full-year losses in 2022, according to a Bloomberg tally based on corporate filings. Two years ago, only four firms with controlling or major state shareholdings posted losses.

The warnings signal state builders are no longer immune from the two-year housing slump that has weakened the economy and triggered dozens of defaults by private peers, with speculation that Country Garden Holdings Co. may be next. Authorities have in recent weeks stepped up pledges to support the property sector, though analysts are skeptical that the measures will be enough to revive the market anytime soon. (…)

Companies seeing losses include some of the biggest developers owned by the central government. Shenzhen Overseas Chinese Town Co. warned of a loss of as much as 1.7 billion yuan ($233 million), partly due to a marketing strategy to speed up home sales. That followed a loss in the second half of last year, which was its first since its 1997 listing. (…)

“SOEs could be kitchen-sinking their results for better years ahead,” Chan said. “The key is whether they can still receive liquidity support from banks. For smaller SOE developers, it will be a case-by-case situation.” (…)

But losses will reduce their scope to take on unfinished projects left by defaulted private-sector firms, further denting homebuyer sentiment. Chinese regulators see asset sales as a key step to easing the debt crisis, as President Xi Jinping’s government largely steers clear of direct bailouts.

“Sector consolidation anyhow takes time,” CreditSights’ Zeng said. (…)

• Investors Fear China’s ‘Lehman Moment Looms The troubles at a big trust company are making investors worry about financial contagion from property developers’ distress.

(…) “Zhongzhi is a black box. They don’t have periodic disclosures, it’s a private company, and some investors don’t know what kinds of assets they’re investing in,” said Xiaoxi Zhang, an analyst at Gavekal Research.

The group’s difficulties, coming on the heels of the financial distress at Chinese property giant Country Garden Holdings, have fueled worries about China’s shadow-banking system and how intertwined it is with the property sector.

“The worry is that a ‘Lehman moment’ beckons, threatening the solvency of China’s financial system,” Zhang wrote in a note earlier this week. She added that China’s “regulatory vigilance” meant that would be unlikely. (…)

China’s property downturn has already caused dozens of developers to default on their debt, and many trusts have unwound their exposure to the sector, according to a report from Nomura.

Trust funds in China still had the equivalent of about $155 billion in exposure to the property sector at the end of the first quarter, according to data from the China Trustee Association. That “is now under great threat, in our view,” Nomura said, adding that trust funds have much larger exposures to financial markets, which increases the risk of contagion. (…)

Bloomberg adds this:

Underlining Zhongzhi’s importance, regulators have formed a task force as they seek to prevent contagion. Behind the scenes the firm has hired KPMG to carry out what is likely to be a protracted restructuring process. Potential asset sales threaten to weigh on broader markets. (…

Zhongrong has 270 products totaling 39.5 billion yuan due this year, according to data provider Use Trust. (…)

It’s unclear how many products Zhongzhi has defaulted on and whether the company has sufficient assets to cover the shortfall if liquidated. (…)

About 106 trust products worth 44 billion yuan defaulted this year through July 31, according to Use Trust. Real estate investments accounted for 74% of the defaults by value. Last year also saw billions of dollars in defaults. (…)

While it’s unlikely Zhongzhi’s woes will impact the big commercial banks, it could spread to other asset managers if wealthy investors start pulling their money, said Dinny McMahon, an analyst for Trivium China and author of China’s Great Wall of Debt. (…)

• China Evergrande Seeks U.S. Court Approval for $19 Billion Debt Restructuring The company clinched a restructuring deal with a group of its foreign bondholders this spring and is seeking court approval for a global deal

(…) Court approval of the debt restructuring would make the deal legally binding in the U.S. and would close the door to any disputes against the plan that could be brought in America. Many of China Evergrande’s $19 billion in foreign bonds are governed by U.S. law. (…)

Overseas creditors eventually agreed to a consensual deal in the spring of this year. Holders of the developer’s $19 billion in foreign debt can choose to swap their holdings into new long-term debt or take some principal losses and get a mix of shorter-term bonds and equity-linked notes backed by shares of Evergrande or two of its listed subsidiaries, including China Evergrande New Energy Vehicle Group.

All of the company’s offshore creditors have until next week to vote on the plan, which requires three-quarters’ support to pass.  (…)

Higher Interest Rates and Sluggish Economy Fuel European Bankruptcies EU bankruptcies surge to the highest level since 2015, nudged by the end of pandemic-era aid

(…) The number of European Union businesses filing for bankruptcy in the three months to the end of June rose 8.4% from the previous quarter, reaching the highest level since 2015, according to Eurostat, the European Union’s statistics office. Registrations of new businesses fell 0.6%.

Bankruptcy filings rose in all sectors of the European economy, according to Eurostat, with hotels, restaurants and transportation companies hit especially hard in the second quarter. (…)

In July, the number of companies going into administration in Germany rose 24% compared with a year earlier, according to the Federal Statistics Office, as a combination of high costs for energy and raw materials, rising interest rates, and the late impact of phased out pandemic-era subsidies forced companies to seek protection from creditors.

“We’re now seeing the market shakeout,” said Christoph Niering, head of the Professional Association of Insolvency Administrators in Germany.

Niering says many companies that are seeking protection now were already struggling before the pandemic. But government support during the pandemic and in the wake of Russia’s invasion of Ukraine kept them on life support. Now, the crash is unfolding in slow motion. (…)

The Ozempic Craze Could Put These Companies on a Crash Diet Anti-obesity medications could affect industries that benefit from America’s food problem.

(…) Until recently, though, investors in industries that help treat the consequences of obesity weren’t really sweating. But after a study was released this month showing Novo Nordisk’s Wegovy (the weight-loss version of Ozempic) helped reduce heart attacks and strokes, companies that make medical devices like glucose-monitoring systems and sleep-apnea machines plunged in value. Developers of drugs for fatty liver disease, which is linked to obesity, have also fallen sharply. (…)

Some analysts are even starting to project that reduced cravings could moderately curb demand for fast-food restaurants and packaged snacks.

To understand the potential impact on some sectors, it is important to bear in mind that drugs like Ozempic and Mounjaro don’t just let you binge on french fries guilt-free. These drugs, originally developed to treat Type 2 diabetes, mimic a gut hormone called glucagon-like peptide-1, or GLP-1, which helps suppress appetite (Mounjaro mimics an additional hormone as well).

People on drugs like Wegovy are less likely to crave Krispy Kremes. And if they stay on the drug for years (unlikely at this stage due to restrictions on most insurance plans), their weight loss could help prevent all sorts of complications, like Type 2 diabetes. That could in turn mean fewer sales of things like insulin pumps and sleep apnea machines. And people who slim down could hit the cancel button on their dieting apps. (…)

All this is very hypothetical for now: Paying for the treatment of 100 million obese Americans would literally make Medicare insolvent at the drugs’ current prices. Eventually, though, as data shows longer-term benefits that extend beyond weight loss, insurance coverage will expand.

(…) Intuitive Surgical, the maker of da Vinci robots used in bariatric surgery, warned investors last month that the drugs are starting to hurt demand. (…)

Intuitive’s warning prompted a broader decline in a sector that racks up about $40 billion in annual sales for things like knee replacements, kidney disease and heart-failure machines. The impact could be biggest for businesses that treat conditions that are highly correlated with obesity such as sleep apnea, Type 2 diabetes, and total knee replacements, according to a Morgan Stanley report. (…)

• America’s Obsession With Weight-Loss Drugs Is Affecting the Economy of Denmark Novo Nordisk’s market capitalization has matched the GDP of its home country

(…) Novo Nordisk’s U.S. sales of Ozempic and Wegovy have been so strong that it has had to convert dollars into kroner in unusually large quantities, raising the krone’s value relative to the euro, said Danske Bank director Jens Naervig Pedersen. (…)

Denmark’s central bankers have responded by keeping interest rates below the European Central Bank’s, weakening the krone, said Pedersen. (…)

FYI: So far, US insurers haven’t been convinced the medications are worth the cost. Just a quarter of private insurance plans cover the drugs, and they’re not available through Medicare. (Bloomberg)