Month: August 2023

Back at the ranch today.

Cooler July Inflation Opens Door to Fed Pause on Rates Inflation ticked up last month, but steady monthly readings on underlying price pressures could deter the Federal Reserve from raising rates.

The consumer-price index, a measure of goods and services prices across the economy, rose a mild 0.2% in July, the same as in June, the Labor Department said Thursday. Core prices, which exclude volatile food and energy categories, also increased just 0.2% in both months, extending a broader slowdown in price pressures.

The figures led to 3.2% annual inflation in July, up from 3% in June. Annual core inflation ticked down to 4.7% in July from June’s 4.8%.

The new numbers lowered the three-month annualized rate of core inflation to 3.1%, the lowest such reading in two years, from 5% in May. (…)

Prices for housing rose 0.4% in July from the prior month, the same increase as June, and accounted for more than 90% of the overall CPI increase, according to the Labor Department.

Prices for used cars dropped 1.3% in July from June, continuing a reversal from a large surge during the economy’s rebound from the Covid-19 pandemic. (…)

Americans got a break on summer travel expenses with hotel and flight prices declining in July from June. Restaurant and bar prices rose modestly last month. Auto-insurance prices jumped 2% for the month, amid a move up in rates this year.

Meanwhile, energy prices rose by a slight 0.1% in July, but could put upward pressure on inflation in coming months. The average U.S. price of a gallon of regular unleaded gasoline climbed gradually in July to $3.76 at the end of the month from roughly $3.54 at the start, according to OPIS, an energy-data and analytics provider.

Because the CPI is essentially based on average prices over the month, that recent move up in gasoline prices is likely to have more of an impact on August’s inflation data, economists said.

Key numbers:

• CPI (MoM) +0.17% for July after +0.18%
• Core CPI +0.16% after +0.16%
• CPI (YoY) +3.18% after +2.97%
• Core CPI +4.65% after +4.83%
• Cleveland Fed Trimmed CPI (MoM) +0.21% after +0.22%
• Cleveland Fed Trimmed CPI (3m ar) +2.7% after +3.2%
• Cleveland Fed Trimmed CPI (YoY) +4.8% after +5.0%

Ed Yardeni:

The FOMC can take the rest of the year off. (…) Excluding shelter, the headline CPI is up just 2.0%, and the core CPI is up only 2.5%.

UPS Pay Hikes for Package Handlers Raise Pressure on FedEx Increases for some workers in sorting centers are hitting 55%.

While the salaries that unionized UPS drivers will make under the tentative five-year agreement have grabbed headlines — ones with a few years experience could earn nearly $50 an hour — the bigger problem for FedEx might be that workers in sorting centers are getting even bigger pay hikes, with some increases hitting 55%.

These employees, who are often part-time, have already been difficult for FedEx to recruit. During the pandemic, the company had to run facilities at partial capacity, which drove up costs and hurt its on-time delivery performance. Meanwhile, better pay and benefits helped UPS maintain its labor force. (…)

The UPS contract will bump up the starting wage for package handlers to $21 an hour from about $16. By the end of the deal, a part-time handler with more than 15 years on the job will make nearly $36 an hour, according to the International Brotherhood of Teamsters.

Delivery drivers hired by FedEx Ground contractors typically make anywhere from $15 to $25 an hour, according to Bright Flag Recruiting. That’s much lower than the $49 an hour plus full pension and health-care benefits that UPS drivers with more than four years of experience will make at the end of the new contract. Contractors offer their drivers scant benefits, if at all.

The UPS tentative labor agreement, which was reached on July 25, still needs to be ratified by the 340,000 Teamsters it covers. The results of that vote are schedule to be released on Aug. 22.

• Everyone Wants to Work at UPS After Teamsters Deal

United Parcel Service Inc. has become a hot employer since its union last month secured $30 billion in new money over a five-year contract.

Online jobs board Indeed Inc. saw a more than 50% increase in searches with “UPS” or “United Parcel Service” in the job title the week after the deal announcement, according to data shared with Bloomberg News. The trend doesn’t appear to be industrywide, as searches for “delivery driver” didn’t see similar spikes. “UPS driver jobs near me” has also been a top trending search on Google in the two weeks since the deal was reached. (…)

UPS shared some details of the new labor contract on its earnings call. Full-time drivers will make around $170,000 in annual pay and benefits by the end of the five year contract. Part-time union employees will earn at least $25.75 per hour and receive full health care and pension benefits. (…)

• UPS Cuts Forecast With Costs Set to Rise After Union Deal

The company expects an adjusted operating margin of 11.8% in 2023, down one percentage point from earlier guidance. The move, along with a reduction in the revenue outlook, reflects “the volume impact from labor negotiations and the costs associated with the tentative agreement,” Chief Executive Officer Carol Tomé said on a call with analysts Tuesday following the release of quarterly results.

UPS said Tuesday that it will pare its management ranks by 2,500 jobs to help keep expenses in check. (…)

Average daily volume fell about 10% at the domestic unit, which makes up about two-thirds of UPS’s revenue, partially offset by a 3.3% increase in average price per package. Volume dropped 6.6% at the international unit.

Retailer Canadian Tire Warns Consumers Are Cracking Under High Rates

Canada’s largest publicly traded, big-box retailer is withdrawing its ambitious long-term profit target, saying inflation and higher interest rates are hammering consumer demand.

Canadian Tire Corp. is abandoning the goal it set last year of earning C$26 per share by 2025, which would have been more than double its profit in 2019. Economic conditions have changed significantly since the target was established early last year, the Toronto-based company said Thursday.

“With 10 interest rate hikes in less than 18 months and persistent inflation impacting the cost of living and leading to reduced savings cushions, Canadian consumers are experiencing increased financial strain and facing tougher spending decisions,” Chief Executive Officer Greg Hicks told analysts. (…)

Canadian Tire’s analysis of its own data of suggests that “debt-burdened” households cut their spending on discretionary goods with the company “significantly” during the quarter, Hicks said. (…)

Revenue was C$4.26 billion ($3.2 billion) in the quarter, down 3.4% from a year earlier but broadly matching estimates. Retail sales were down 2.8%. (…)

Investor and Committing ‘Sacrilege’ in New Edition of ‘Security Analysis’ Klarman edited the classic to remind investors of basic principles — but he questions “how much of this will be read by institutional investors who may think they know it all.”

(…) In Klarman’s introduction to the famous chapter, he explains that among other things, investors no longer get an edge from analyzing publicly available balance sheets. The advantage has been steamrolled by hyper competition from professional investors willing to spend enormous sums on R&D to find a money-making edge and the availability to everyone of endless streams of financial information and data.

The larger change for investors trying to calculate a margin of safety from balance sheets is technology. Klarman believes that tech in all its forms poses a bigger threat to portfolios than even a prolonged market downturn. “What is technology doing to this business — is it helping this business or is it killing off this business?” he said during the interview. (…)

“Graham and Dodd’s emphasis on book value may have been supplanted by newer metrics, but their focus on balance sheet analysis remains valid,” he writes in the chapter’s introduction.

It was the right time to revisit Security Anlaysis. Klarman says he took on the job of editing the book to remind people that some basic principles could keep them out of trouble. Over the last 15 years, he believes that the markets have become a place for investors to speculate, even more so than in previous bull markets. He considers it his obligation to warn investors of the dangers, but he thinks the biggest pension funds and endowments may ignore it. “[I don’t] know how much of this will be read by institutional investors who may think they know it all.” (…)

Klarman argues that people need to have both a strong conviction in an idea and a willingness to let it go and change their mind. (…)

To counteract the innate human talent for inventing reasons to hold on to their ideas despite bad or changing news, Baupost requires what it calls a “re-buy analysis.” When circumstances change, analysts use the new information to underwrite existing investments from scratch. Would they buy the same investments today? Baupost’s objective is not to hold investments forever; it’s to hold them until they’re no longer a good investment.

Although Baupost works hard to counter them, the persistence of cognitive biases are why markets are still inefficient, argues Klarman. (…)

“Investors must be resolute in the face of withering criticism from clients, superiors, and their own self-doubt during protracted periods of underperformance,” Klarman writes in the preface.

“There’s cyclicality in investor preferences. When value investing is doing well it becomes more popular, people see the logic of it,” Klarman told Institutional Investor. “When it’s doing poorly, it becomes less popular because people want to make money right away.” (…)

“The one I’m guilty of the most…is when you’ve stayed with a position a long time and you still believe in the thesis but you’re starting to grow a little skeptical about ‘will it ever work?’ I think that the human tendency that I have that I shouldn’t have is to feel like…and this isn’t how I experience it but… maybe it owes you something. Maybe you’ll be a schmuck if you sell it now. You’ve waited all this time, you’ve paid your dues, it owes you. Stocks never owe you.”

While U.S. equities are melting up, China is showing increasing risks of a melt down.

Chinese Exports Fall at Steepest Pace Since February 2020 Slide in outbound shipments reflects fraying trade ties with the Western world, even as exports to Russia boom

(…) Overseas shipments from China slumped 14.5% in July from a year earlier, the steepest year-over-year decline since February 2020, in the earliest days of the Covid-19 pandemic, data released Tuesday by China’s General Administration of Customs showed.

Compared with those of a year earlier, China’s exports to the U.S. and European Union plunged by more than 20% each last month. There was a lone bright spot: Chinese shipments to Russia soared in July, calculations from the customs data show. (…)

July’s 14.5% drop in Chinese outbound goods shipments was sharper than the 12.4% year-over-year decline in June and outpaced the 12% decline expected by economists polled by The Wall Street Journal.

Chinese goods shipments to the U.S. fell 23% in July compared with a year earlier. Shipments to the European Union and to the Association of Southeast Asian Nations, a group of 10 countries that includes Singapore and Indonesia, each dropped by about 21%. (…)

Chinese shipments to Russia, a country under Western sanctions over its invasion of Ukraine, rose 52% in July from a year earlier, helped by sales of high-value goods including automobiles. For the first seven months of this year, Chinese exports to Russia soared 73% from a year earlier, even as China’s total exports have fallen 5%, data from Chinese customs show. (…)

Chinese imports also fell by more than expected in July, falling 12.4% compared with last year, versus June’s 6.8% decline, marking the worst month of year-over-year declines since January and well below the 5% drop expected by surveyed economists.

The fall in Chinese imports, which include intermediate goods that Chinese companies turn into finished products, reflects the broader weakness in the entire chain of global manufacturing, analysts say. It also shows just how tepid domestic consumption remains, even with China’s economy freed from Covid-related curbs for more than six months.

Economists say the latest raft of soft economic data will likely prompt Beijing to consider more stimulus measures.

Chinese officials have already ordered local governments to more quickly issue bonds to fund infrastructure spending, a move that could boost China’s appetite for commodities and help Chinese imports regain ground in the coming months, say economists from Capital Economics.

• China Slips Into Deflation in Warning Sign for Global Economy China entered deflationary territory for the first time in two years, pressuring Beijing to avoid a deepening economic malaise.

(…) Prices charged at the factory gate, which have been contracting on a year-over-year basis since last October, fell 4.4% in July from a year earlier, narrowing from June’s 5.4% decline, according to data published by China’s National Bureau of Statistics on Wednesday.

But it was consumer-price inflation, which had remained positive even as producer prices turned negative, that marks the bigger shift. Last month’s 0.3% drop, after a flat June, was the first decrease since February 2021, a reading thrown off by year-over-year comparisons to the early days of the pandemic, when supply chains and food prices were in disarray.

Apart from November 2020, when the pandemic was rattling the economy, consumer and producer prices hadn’t been in deflationary territory together since 2009, at the depths of the global financial crisis. (…)

Stripping out volatile food and energy prices, so-called core inflation rose to 0.8% in July, the highest level since January, from 0.4% in June. (…)

Even though producer-price deflation eased in July, the 4.4% drop was worse than 4.1% expected by economists polled by The Wall Street Journal. (…)

Bloomberg adds:

(…) “With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually,” Dong Lijuan, chief statistician at the NBS, said in rare additional comments to accompany the official data. Chinese authorities have recently sought to prevent economists from discussing deflation in a bid to promote positive narratives about the economy. (…)

Beijing has tried to downplay the risk of deflation in the economy with some Chinese-based analysts saying they were instructed by regulators and their companies not to discuss the matter publicly. PBOC officials said last week that China will avoid deflation in the second half of the year, with consumer-price growth likely to trend closer to 1% by the end of the year. (…)

The core inflation measure, which excludes volatile food and energy costs, picked up to 0.8% from 0.4%, a sign of underlying — although subdued — demand in the economy. A breakdown of the consumer inflation figures showed prices for household goods, food and transport contracted, while prices of services spending, like recreation and education, climbed. (…)

Using the gross domestic product deflator — a measure of economy-wide prices — China was in deflation in the first half of the year.

• Country Garden Is in Danger of a Default Rivaling Evergrande

Country Garden Holdings Co., helmed by one of China’s richest women, Yang Huiyan, has left investors in the dark after dollar bondholders said they’ve yet to receive coupon payments effectively due Monday. That puts the firm—which had 1.4 trillion yuan ($199 billion) of total liabilities at the end of last year—on course for its first public default if it doesn’t make the payments within a 30-day grace period.

Formerly the nation’s largest private-sector developer by sales, the builder of more than 3,000 housing projects in smaller cities is a household name and employed about 70,000 people at the end of last year. That status had given it the firepower to withstand an industry cash crunch that led to record defaults since Evergrande first missed bond payments in 2021. But tumbling industry home sales and soaring refinancing costs are threatening that streak.

“Any default would impact China’s housing market more than Evergrande’s collapse as Country Garden has four times as many projects,” Bloomberg Intelligence analyst Kristy Hung wrote in a report Wednesday. “Any debt crisis at Country Garden will have a far-reaching impact on China’s housing market sentiment and could significantly weaken buyer confidence on solvent private developers.”

No small stuff!

• Chinese exports to the U.S. fell 23% YoY in July. Shipments to the EU and ASEAN each dropped by about 21%.
• July China manufacturing PMI survey reveals that “new export business [new orders] contracted at a solid pace that was the fastest since September 2022” and that “competitive pricing strategies and price negotiations with clients led to another reduction in average output charges.”
• “July survey data highlighted a considerable decrease in eurozone manufacturing output. (…) weakness was broad-based (…) [with] demand conditions extremely weak”.
• “New Export Orders Index signalling the fastest reduction in international demand for ASEAN manufactured goods in four months.”
• In the USA: “Alongside evidence of subdued domestic demand, new
  export orders fell for the fourteenth month running. Challenging economic conditions across key export markets, especially in Europe, were often linked by panellists to the decrease.”
• While demand from its Western clients keeps weakening, Russia’s contribution seems to be waning as “new sales rose at the softest pace in 2023 to date as new export orders returned to contraction.”

Evidently, the goods inventory correction in the U.S. has spread across the globe and is particularly impacting China, already hurting from the trade conflict with the U.S. and the ongoing, perhaps accelerating, deglobalization in manufacturing.

(Ed Yardeni)

The hope was that domestic demand would offset weak exports but Chinese seem to prefer to boost their savings after a devastating pandemic and the demise of the housing market where the bulk of their savings reside.

The Chinese housing industry has been unraveling in slow motion for 2 years but the pace is accelerating with a risk of imploding under its mountain of debt. Xi and co. are trying to fix it but this is a confidence problem that can only go away after the industry restructures. How and when is not apparent just yet.

Here’s how the South China Morning Post described the housing market in June:

Grim figures for home sales in June in China show that the sector remains in crisis and will continue to weigh on the country’s economy as developers suffer amid a lack of buyer confidence.

Sales in June fell 28.1 per cent among the 100 largest developers by sales, compared to the same month last year when Covid restrictions were widely in place, according to CRIC, one of China’s largest real estate brokers. Sales rose 8.5 per cent month on month – the lowest recorded growth in what is normally a buoyant month.

Looking at just the top 25 developers selected by CGS-CIMB Securities, the news is even worse, as June sales fell 38 per cent year on year, said the firm’s managing director Raymond Cheng, citing CRIC’s data.

“We think further sales declines since April will lead to more liquidity issues for the sector and hurt China’s economic recovery as well as job creation,” he said. “Typically, developers report double-digit growth of 10 to 20 per cent year on year or month on month for June, before the liquidity issues started.”

The nightmare scenario is a collapse in prices. Recent stats indicate that secondary market prices declined 0.7% MoM in June after -0.4% in May.

Meanwhile, the government is widely expected to keep stimulating but this can only go so far when external demand is declining and the housing market, some 25% of the economy, needs a major intervention.

As BCA Research shows, China needs more and more capital to sustain growth.

Source: BCA Research via The Daily Shot

So, this is no slam dunk:

China to Be Top World Growth Source in Next Five Years, IMF Says Nation’s contribution of 22.6% seen as double the US portion

The nation’s slice of global gross domestic product expansion is expected to represent 22.6% of total world growth through 2028, according to Bloomberg calculations using data the fund released in its World Economic Outlook released last week. India follows at 12.9%, while the US will contribute 11.3%.

Source: Bloomberg using IMF WEO April 2023 forecasts

The emergency lender sees the world economy expanding about 3% over the next half decade as higher interest rates bite. The outlook over the next five years is the weakest in more than three decades, with the fund urging nations to avoid economic fragmentation caused by geopolitical tension and take steps to bolster productivity. (…)