Year: 2023

Cooling Pay Gains Add to Debate on When Fed Could Pause Rate Hikes Pay increases cooled at the end of 2022, with the new sign of moderating inflation leaving the Federal Reserve on course to slow rate increases Wednesday and increasing the possibility of a pause this spring.

Employers spent 1% more on wages and benefits last quarter versus the prior three months, a slowdown from a 1.2% increase in the third quarter, the Labor Department said Tuesday. Compensation gains slowed in the second half of 2022, after touching the highest readings since the series began in 2001. (…)

Tuesday’s report showed wage and benefit growth ran at an annualized rate of 4% in the fourth quarter, well below the 5.8% rate recorded early in 2022. (…)

The report was consistent with others showing slowing wage and price inflation. Average hourly earnings for private-sector workers rose 4.6% in December from a year earlier, down from a recent high annual gain of 5.6% in March 2022. (…)

Worker compensation cooled in many of the most in-demand industries compared with the prior quarter, Tuesday’s report showed. Compensation grew at a slower rate in the fourth quarter for nursing and residential home healthcare workers, transportation and trucking employees, and retail staffers. (…)

The quarterly Employment Cost Index, in the 4.0% annualized range, remains much higher than its 2-3% pre-pandemic range but has decelerated rapidly in 2023.

It confirms the trends we were seeing in hourly earnings:

Importantly, monthly data reveal a sharp slowdown in December to the pre-pandemic range. Not a sign of a “very,very tight labor market”, and certainly not pointing to a wage spiral.

As importantly, the wage slowdown is more pronounced in services than in goods. We know that the goods-producing sector is weak and deflating but service-providers are expected to keep the economy humming.

We are being told that slower employment growth is partly due to low labor supply. But slower wage growth is not confirming. Meanwhile, employment growth has slowed to a crawl, particularly in services where December employment grew only 1.7% annualized.

Furthermore, both average weekly hours and overtime hours have declined below their pre-pandemic levels.

Let’s hear Mr. Powell today.

BTW: Economic and financial indicators 3 months before recessions (NBF)

BTW #2: The yield curve is getting deeper, now at 1979 levels.

The yield curve is never wrong 

A super-soft kitten style landing is what everyone expects now, at the same time as the yield curve, which was never wrong, continues to paint a very different picture. (US10YR – 3M) (The Market Ear)

JPM

• PayPal will cut 2,000 jobs, or 7% of its workforce, in the coming weeks. Workday is eliminating 3% globally. (Bloomberg)

Whole Foods Asks Suppliers to Lower Prices The grocery chain told suppliers at a virtual summit that it wants to bring down retail prices in its store aisles as inflation moderates.

The Amazon.com Inc.-owned AMZN 2.57%increase; green up pointing triangle grocer told suppliers at a recent virtual summit that it wants to bring down retail prices in its store aisles as companies’ own costs start to decline, according to a recording of the meeting viewed by The Wall Street Journal.

As food suppliers have raised wholesale prices, citing higher transport, labor and production costs, supermarket operators said they have passed those increases along to consumers. The higher price tags have helped grocery-store operators generate higher sales and profits. (…)

Foot traffic to Whole Foods stores decreased about 8% in the fourth quarter of 2022 compared with the same period a year earlier, according to data from research firm Placer.ai. Rival grocers Kroger Co. and Albertsons Cos. have experienced declines, too, though discounters such as Aldi Inc. and Trader Joe’s have recorded increases, according to Placer.ai. Traffic generally remains higher than prepandemic levels across the grocery sector, the data show.

The Whole Foods spokeswoman said that Placer.ai’s data doesn’t capture 13% of its stores and that the number of in-store transactions grew 3.5% in December year over year, while the amount of items bought by customers remained flat. Placer.ai said its coverage of 87% of stores gives an accurate picture of overall visits for the chain.

Across the grocery sector, the volume of edible goods sold in December declined by about 2%, while the dollar value of the sales increased by about 12%, according to data from Information Resources Inc. (…)

MANUFACTURING PMIs

Eurozone manufacturing downturn eases further in January and cost pressures fade

The eurozone manufacturing sector downturn continued into the new year, with production volumes and new factory orders falling further. However, slower rates of contraction in both cases tentatively suggested that the worst of the sector’s slump has passed. Indeed, some parts of the euro area even recorded an expansion in output in January.

Meanwhile, stocks of finished goods declined for the first time since May last year, while pre-production holdings were unchanged, reflecting manufacturers’ efforts to align inventories with the prevailing economic environment. Indeed, purchasing activity continued to decline, while suppliers’ delivery times were broadly stable. These two factors helped reduce cost pressures across the euro area, with input price inflation slowing to a 26-month low. That said, output charges increased at a faster pace.

The S&P Global Eurozone Manufacturing PMI® rose for a third successive month to 48.8 in January, up from 47.8 in December. Albeit still below the 50.0 mark, and therefore indicative of a worsening in the health of the euro area manufacturing sector, it was the highest reading since last August.

Of the eurozone countries monitored by the survey (which account for an estimated 89% of total manufacturing activity), respective Manufacturing PMIs rose across the board at the start of the year. Indeed, in the cases of France and Italy sector conditions improved marginally when compared to December. The Manufacturing PMI for Ireland recorded fractionally above the 50.0 mark, signalling broadly no change overall. Elsewhere, although operating conditions worsened again, rates of deterioration slowed.

Eurozone manufacturing output continued to fall in January, extending the current sequence of contraction which began in mid-2022. However, the decline was marginal and the slowest in seven months. Weak demand pressures were cited as the principal drag on production schedules, anecdotal evidence showed.

January survey data showed new orders falling solidly and at a markedly faster pace than that for output. Particularly sharp falls in new factory orders were seen in Austria and Germany. Overall order books were also dragged lower by sales performances in overseas markets, with new export business falling for an eleventh month in a row. The reduction in total sales was a reflection of generally subdued client demand, although some companies remarked on the negative effects of inflation and uncertainty. That said, the overall new orders decline was the weakest since May 2022.

With volumes of incoming new work falling quicker than production, eurozone manufacturing backlogs fell at a strong rate during January. This marked an eighth successive monthly decline in orders pending completion. That said, factory employment levels rose, with the rate of jobs growth picking up slightly to a three-month high.

Meanwhile, January survey data showed stocks of finished goods falling for the first time since May 2022 as companies adjust their inventories to align with prevailing demand conditions. Stocks of purchases were unchanged, ending a 17-month sequence of accumulation.

Another month of broadly stable supply-chain conditions was seen in January, with the respective seasonally adjusted index posting just below the 50.0 no-change mark. Reduced pressures on lead times came amid a further marked drop in purchasing activity. These factors also partly explained a further easing of input cost inflation, which dropped to a 26-month low and was below its historic average. However, selling prices increased at a slightly faster pace, although inflation here was well below the 2022 trend.

Lastly, there was a notable improvement in business confidence during January. Growth expectations were at their strongest since February 2022, prior to Russia’s invasion of Ukraine.

China: Production levels move closer to stabilisation as COVID-19 measures relaxed

The recent relaxation of COVID-19 containment measures helped to ease pressure on China’s manufacturing sector during January. Output fell at the softest pace for five months, while the downturn in new orders also moderated. Nevertheless, there were reports that the pandemic and relatively subdued market conditions continued to impact customer demand and operations. Notably, staff absences contributed to a further drop in employment and a renewed rise in backlogs. Pressure on supply chains meanwhile eased, with delivery times increasing only slightly, and cost pressures remained mild.

When considering the 12-month outlook for output, firms expressed the strongest optimism since April 2021, supported by hopes that economic conditions and new business will rebound.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) rose from 49.0 at the end of 2022 to 49.2 in January, to signal a decline in the health of China’s manufacturing sector for the sixth month in a row. That said, the rate of deterioration eased from December and was only marginal.

The relative improvement in the headline index was partially due to a softer fall in production volumes at the start of the year. Output fell at a marginal pace that was the softest in five months, with some firms noting that the easing of COVID-19 containment measures had reduced pressure on operations.

Nevertheless, firms reported that demand conditions remained relatively subdued overall, and this contributed to a further fall in overall new work. In line with the trend for output, the rate decline eased since December and was marginal. New export business also contracted further amid reports of relatively weak global demand conditions.

Supply chains moved closer to stabilisation at the start of 2023, with average lead times for inputs increasing only slightly. While a number of firms mentioned that the rollback of containment measures had helped to ease strain on supply chains, logistics had yet to recover fully in some areas amid worker shortages.

Although purchasing activity fell further in January, the rate of reduction eased notably compared to December and was the slowest for three months. At the same time, inventories of both pre- and post-production items fell at quicker rates as firms often made greater use of current stocks in light of muted customer demand.

Workforce numbers at manufacturing firms continued to fall in January, though at a slower rate than at the end of 2022. According to panellists, staff resignations and absences due to COVID-19 illness weighed on headcounts. Insufficient staffing levels contributed to a renewed upturn in backlogs of work, albeit one that was marginal overall.

Average input costs increased at the quickest rate in seven months in January. That said, the rate of inflation remained much slower than the historical average. At the same time, selling prices fell slightly as pricing power was constrained by efforts to stimulate sales.

The return to more normal business operations, and hopes that the economy and new business will rebound, helped to lift business confidence at the start of the year. Notably, the degree of optimism was the highest recorded since April 2021.

Growth across ASEAN manufacturing sector picks up amid rebound in new orders

(…) Overall, manufacturing conditions across the ASEAN region improved for the sixteenth month running in January, with the latest uptick the fastest in three months. The PMI was boosted by a stronger upturn in production and a fresh rise in new orders following two months of contraction.

To meet growing business requirements, purchasing activity also rose and at the fastest extent since last October. Additionally, employment levels stabilised during January. This was a notable improvement compared to the contractions – albeit soft –recorded in the previous two survey periods.

In terms of prices, the rate of input cost inflation picked up from December’s two-year low in January. That said, the rate of inflation remained softer than the post-pandemic average. At the same time, the rate of output charge inflation moderated for the third month running, signalling the weakest rise in selling prices for a year. (…)

Japan: Manufacturing sector business conditions stabilisein January

Manufacturing production continued to decrease in January, but the rate of decline eased to its least marked for three months, according to the latest S&P Global PMI® data. Similarly, new orders decreased to a slightly lesser extent than at the end of 2022, while net job creation was maintained for the twenty-second successive month.

Input price inflation abated in January, with lower fuel costs helping to offset pressure on business expenses from higher raw material and energy bills. As a result, average prices charged by manufacturing firms increased at the slowest pace since September 2021.

At 48.9 in January, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) remained below the neutral 50.0 threshold for the third month running. However, the index was unchanged since December and thereby suggested an overall stabilisation of manufacturing sector business conditions. The main positive influences on the headline PMI came from slower cutbacks to production and a smaller decline in new orders. (…)

Eurozone Inflation Eases for Third Month as ECB Rate Rises Bite The annual rate of inflation fell for the third-straight month in January as energy prices continued to pull back from recent peaks.

(…) The European Union’s statistics agency Wednesday said consumer prices in the eurozone were 8.5% higher in January than a year earlier, a slowdown from the 9.2% rate of inflation recorded in December. Home energy prices were up 17.2% on the year, having been up 25.5% in December. (…)

The measure of core inflation in the eurozone that excludes volatile items such as energy was unchanged at 5.2% as prices of manufactured goods rose at faster pace. (…)

However, a measure of pay deals developed by jobs website Indeed in collaboration with the Central Bank of Ireland found annual wage growth in the eurozone slowed in December, to 4.9% from 5.2%. Figures also released Wednesday by Eurostat showed the number of unemployed workers in the eurozone edged up in December, although the unemployment rate was steady at 6.6%. (…)

In France, the eurozone’s second-largest member country, household consumption fell by 0.9% in the fourth quarter of 2022, having risen by 0.5% in the three months through September. (…)

EARNINGS WATCH

So far this week (from the WSJ):

• Exxon posted a record annual profit on surging oil prices, but its shares fell after fourth-quarter earnings missed expectations.
• General Motors’ fourth-quarter profit rose as supply chain problems eased.
• McDonald’s said price hikes and promotions boosted sales, but cautioned that inflation will continue to pressure its business.
• Pfizer expects revenue to drop by as much as a third this year as demand for Covid-19 products slumps.
• UPS warned that its revenue could decline for the first time in years with a slowdown in global delivery volumes.

Earnings misses have been resulting in outperformance so far. Too much enthusiasm?

Source: Goldman Sachs; @GavinSBaker (via The Daily Shot)

New China Rule Threatens to Disrupt U.S. Solar Ambitions A plan by China to restrict exports of key solar manufacturing technology could delay attempts to build up a domestic solar supply chain in the U.S., industry experts say.

(…) China’s Ministry of Commerce and Ministry of Science and Technology are considering adding advanced technology used in the production of ingots and wafers, some of the building blocks of solar panels, to a list of technologies that are subject to export controls.

China currently accounts for nearly all of solar ingot and wafer production globally, as well as much of the equipment used in the manufacturing process—especially for the large-scale solar panels that increasingly dominate the market, industry experts say. (…)

If the plan is adopted, Chinese solar manufacturers would be required to obtain a license from their provincial commerce authorities to export such technologies.

“China’s proposed export restraints are Exhibit A on the need to rapidly scale American solar manufacturing,” said Abigail Ross Hopper, president and CEO of the U.S. business lobby Solar Energy Industries Association. (…)

Chinese companies control an estimated 80% of the global supply chain for solar manufacturing and produce nearly half of all the equipment needed to manufacture solar panels and their components, the Paris-based International Energy Agency estimates. All but 3% of the world’s solar-grade silicon ingots and wafers come from China.

At present, only Chinese companies are able to make larger 182 and 210 millimeter wafers, according to the Taipei-based market research firm TrendForce. Larger wafers, which allow for the manufacturing of solar panels that are cheaper and more efficient, are expected to make up 96% of the world’s market share in 2023, TrendForce said. (…)

There are currently no plants that make solar ingots or wafers in the U.S., but at least two companies, the Qcells unit of South Korean conglomerate Hanwha Group and Bill Gates-backed startup CubicPV Inc., have announced advanced plans to fill that gap with facilities that are expected to go online in the next few years. (…)

Because solar is a broadly commoditized technology, cost competitiveness is one of the key advantages of China’s solar sector, said Dan Wang, analyst at the consulting firm Gavekal Dragonomics. Inability to access manufacturing technology for these large-size modules would likely further drive up production costs in the U.S., he said.

It would also force prospective manufacturers in the U.S. to find equipment elsewhere, or wait for the build-out of domestic manufacturing for those machines—a process that could take a few years.

Yet the plan could hurt China’s own solar industry by complicating its efforts to globalize and diversify its supply chains, according to analysts at TrendForce.

In response to U.S. tariffs imposed on Chinese-made solar panels, Chinese companies have been setting up plants in Southeast Asia, which accounts for roughly 80% of U.S. solar-panel imports. In December, a Commerce Department investigation issued a preliminary conclusion that some Chinese solar-panel companies had circumvented U.S. tariffs by routing their operations through Southeast Asia while still doing most of the high-value manufacturing, such as ingot and wafer production, in China. (…)

The U.S. Consumer Is Starting to Freak Out The flush savings accounts and cheap credit that helped keep Americans spending at high rates since 2020 are disappearing, while inflation remains elevated.

The engine of the U.S. economy—consumer spending—is starting to sputter.

Retail purchases have fallen in three of the past four months. Spending on services, including rent, haircuts and the bulk of bills, was flat in December, after adjusting for inflation, the worst monthly reading in nearly a year. Sales of existing homes in the U.S. fell last year to their lowest level since 2014 as mortgage rates rose. The auto industry posted its worst sales year in more than a decade. (…)

A downshifting consumer is a key reason that business and academic economists polled by The Wall Street Journal, on average, put the probability of a recession in the next 12 months at 61%. However, many economists say, the U.S. might avoid a recession entirely if spending patterns stabilize. (…)

Still, there are signs of labor-market weakness. Employers are shedding temporary workers at a fast rate, and people who lose their jobs are taking longer to find new ones. Meanwhile, the number of hours worked a week has declined for two straight months, according to the Labor Department, resulting in a slowdown in workers’ take-home pay. (…)

Credit-card balances were up 15% on the year in the third quarter, according to the Federal Reserve Bank of New York, the largest increase in more than two decades.

Additionally, tens of millions of Americans are set to start or resume making payments on student loans later this year, after the Supreme Court rules on President Biden’s student-debt cancellation plan. Payments have been frozen since March 2020, and are scheduled to begin again 60 days after litigation is resolved or the program is implemented.

Many taxpayers will get smaller refunds when they file their returns in the coming months because Congress didn’t extend the breaks put in place at the height of the pandemic.

Most Americans who lose their jobs can expect unemployment payments for six months or less, at a fraction of their former paychecks, the same as before pandemic programs kicked in. Pandemic programs allowed Americans to receive unemployment payments for as long as 18 months, and in some cases paid workers more than their paychecks. (…)

The large stock-market declines over the past year also alarmed consumers (…).

• The share of Americans who say they live paycheck-to-paycheck climbed 3% last year, a likely reflection of the growing strain on household budgets. But it’s not just the lowest earners feeling the squeeze. Most of the newcomers were people earning more than $100,000 a year, according to a Pymnts.com and LendingClub survey. It all points to weaker consumer spending in the months ahead. (Bloomberg)

• America’s “Excess” Household Savings Are Going Away

• Important to monitor:

U.S. Gasoline Prices

U.S. Natural Gas Prices

(Macrotrends)

• Banks Brace for More Consumers to Fall Behind on Their Loans Delinquencies are rising, in some cases surpassing prepandemic levels, prompting banks to add to their rainy-day funds.
• U.S. lender Citizens stepping back from auto loans – CEO

(…) “Spreads are tight, so you’re not making a good return on that capital,” he said, adding that there are limited cross-selling opportunities. (…)

“We are being very selective on where we are extending credit given the potential for recession in 2023,” Van Saun said.

Moody’s analyst Warren Kornfeld told Reuters that banks’ auto loan charge-offs now are approaching pre-pandemic levels (…). “We believe that most banks recognize the growing risks in auto lending outside of the super prime segment,” he said. (…)

Fed Debates Whether Wages or Low Unemployment Will Drive Inflation

• U.S. : Demand-driven inflation has vanished (NBF)

While we eagerly await the Federal Reserve’s interest rate decision this Wednesday, we got crucial developments on the inflation front Friday with December’s reading of Personal Consumption Expenditure (PCE) inflation, the indicator the U.S. central bank targets according to its official mandate.

The San Francisco Fed has developed a methodology to decompose PCE inflation into supply and demand components a few months ago, and the December decomposition has plenty to raise eyebrows.

As today’s Hot Chart shows, demand has been a negative contributor to U.S. inflation for two consecutive months now, a first since the initial pandemic shock. This development is consistent with volume consumption, which also recorded a second consecutive monthly decline in December, a first during this expansion.

China’s recent announcement to end its zero-covid policy and reopen its economy argues for a fading contribution from supply-driven inflation in the months ahead. With a resurgence in deflationary forces, we are confident that inflation will continue to come down faster than what is currently assumed by the Fed.

What about the situation in Canada? In a report published last week, we used the methodology developed by the San Francisco Fed to evaluate the situation in our country and we noted the absence of demand-driven inflationary pressures in headline PCE in the third quarter, and a fading contribution of demand on the core figure.

• Fed’s Wall Street Clash Sets Stage for Powell’s Hawkish Message

Despite 2022’s slew of interest-rate hikes from Chair Powell and colleagues, financial conditions are the loosest since last February as investors bet fading inflation will allow the central bank to soon cease raising borrowing costs and then cut them later this year.

That’s likely wishful thinking as far as Powell is concerned and he has a clear incentive to push back against the trade given rising stocks and bonds could fan the very price pressures he wants to restrain.

Such a backdrop means Powell is expected to balance this week’s likely 25 basis-point increase in rates with a stern message that the step down in size from the past six hikes doesn’t diminish his commitment to reducing inflation to 2%. It stood at 5% in December. He may even be willing to roil the upbeat markets if that’s what it takes to make his point.

(…) financial conditions are now looser than in March when policymakers began to raise rates, and minutes of their December meeting show that this was already on their minds. Officials noted that an “unwarranted” easing in conditions would complicate their task of restoring price stability.

Dallas Fed President Lorie Logan, speaking on Jan. 18, cautioned that policy could respond if financial conditions ease further in response to a slower pace of rate increases.

“If that happens, we can offset the effect by gradually raising rates to a higher level than previously expected,” she said. (…)

• Fed officials see lots of room to shed bonds from balance sheet

Euro zone banks tighten credit by most since debt crisis, ECB says

(…) But demand for loans from enterprises and households also fell for the same reasons, with the drop in demand for mortgages the biggest on record, the ECB’s quarterly Bank Lending Survey showed. (…)

A net 26% of banks polled by the ECB said they made their standards stricter for approving loans to companies in the final quarter of last year, the biggest tightening since 2011.

Banks also restricted access to consumer credit and mortgages, a trend that banks expect to continue this quarter. (…)

IMF Upgrades Outlook for Global Economy Easing inflation and China’s reopening should allow the global economy to grow a bit faster than previously expected, the international lender said.

In its latest World Economic Outlook, released Monday Washington time, the IMF sees the global economy growing 2.9% this year, up from its October projection of 2.7%. The IMF expects growth to accelerate to 3.1.% in 2024, still less than last year’s 3.4%. (…)

“With a global growth rate at 2.9%, we are well away from any sort of global recession marker,” Mr. Gourinchas said during a press briefing. Nonetheless, he warned of downside risks to the outlook, such as rebounding inflation and the war in Ukraine.

Several developments in the past few months contributed to the shift in the IMF’s views, its economists explained. Economic growth proved surprisingly resilient in the third quarter of last year, helped by tight labor markets, stronger-than-expected spending by households and businesses, and Europe’s swift adaptation to the energy crisis caused by the war in Ukraine. (…)

China’s economy is projected to expand 5.2% this year, up from 3% in 2022, and significantly faster than the 4.4% expansion the IMF had projected in October. (…)

Emerging market and developing economies are leading the improved global outlook. Their growth is projected at 4% this year and 4.2% in 2024, compared with 3.9% in 2022. (…)

U.S. growth is expected to slow from 2% in 2022 to 1.4% this year and 1% next year. Euro-area growth is expected to decelerate from 3.5% last year to 0.7% this year, before rebounding to 1.6% in 2024. The U.K., after putting in solid 4.1% growth last year, will see its economy contract 0.6% this year. It is the only major advanced economy the IMF expects to experience negative growth. (…)

The World Bank, the IMF’s sister organization, is more cautious. Earlier this month, the bank had sharply lowered its global growth forecast for this year to 1.7%, from an estimated 3% in June. It cited elevated risks of a worldwide recession due to persistently high inflation.

Thanks to lower fuel and commodity prices and tighter monetary policy, global inflation is set to fall to 6.6% this year and 4.3% in 2024, after peaking at 8.8% in 2022, the IMF said. About 84% of countries are expected to see lower consumer price inflation this year. (…)

China Top 100 Developers See Jan Sales -32.5% Year on Year and -48.6% MoM: CRIC (@Sino_Market)

Ford Cuts Prices of EV Mustang Mach-E Move comes after Tesla slashed prices on a number of its models in the U.S.

Ford Motor Co. said it is boosting production and cutting prices of its electric Mustang Mach-E crossover up to 8.8% on some versions. (…)

“We are not going to cede ground to anyone,” said Marin Gjaja, chief customer officer of Ford’s electric-vehicle business. He added that the company is keeping its pricing competitive and reducing customer wait times.

Ford’s Mach-E price cuts range from 1.2% to 8.8%, depending on the configuration. In dollar terms, that is about $600 to $5,900 less than the previous sticker price on the sporty SUV, a model that hit the market in late 2020 and is a direct competitor to Tesla’s Model Y.

The Mach-E has a starting price tag of about $46,000. But some fully loaded versions can sell for over $60,000. (…)

John Murphy, an auto analyst for Bank of America Merrill Lynch, said Tesla’s markdowns create the risk of triggering a broader EV price war in the auto industry. Mr. Murphy, in a research note earlier this month, said many car companies are losing money on EVs and will have to seek ways to build these models even more efficiently. (…)

Ford became the No. 2 EV seller in the U.S. last year, although it still trails Tesla by a wide margin. Tesla accounted for about 65% of all electric vehicles sold in the country last year, according to market research firm Motor Intelligence. Ford’s EV market share in the U.S. was about 7.6% last year.

• Chinese upstarts Xpeng and Seres Group announced price cuts earlier this month on the heels of Tesla’s multiple reductions in China. Electric vehicle prices shot up 54% in July last year from the same month in 2021, compared to 10% for gas-powered cars. (Axios)
• Tesla uses its profits as a weapon in an EV price war

Tesla, once one of the auto industry’s biggest money losers, has over the past year built a commanding lead over most major rivals in profit per vehicle, a Reuters analysis of industry data shows.

Tesla earned $15,653 in gross profit per vehicle in the third quarter of 2022 – more than twice as much as Volkswagen AG (VOWG_p.DE), four times the comparable figure at Toyota Motor Corp (7203.T) and five times more than Ford Motor Co (F.N), according to a Reuters analysis.

For most of this year, Tesla joined rivals in aggressively raising prices on its most popular vehicles, such as the Model Y SUV. Shortages of semiconductors and other materials kept auto industry production down, allowing companies across the industry to focus on higher-margin models and book strong profits, even as sales volumes fell.

Reuters Graphics

I would not take these numbers to the bank. Corporate accounting varies significantly and TSLA is not the most transparent company. For example, a Nikkei-Asia analysis recently put Tesla’s profits per vehicles at $9,570 and Toyota’s at $1,200.

FYI: BP Energy Outlook, 2023 edition

Samsung Expects Sluggish Demand to Drag On as Profit Slides The South Korean tech company saw operating profit drop 69%, hit by falling sales of chips and smartphones as demand for gadgets languishes.

Economic uncertainties are weakening momentum for any short-term rebound in demand for memory chips, Samsung’s main cash cow, said Kim Jae-june, executive vice president for global sales and marketing at the company’s memory business, in an earnings call on Tuesday. (…)

Samsung is the world’s largest producer of two major types of memory chips called DRAM, which enables devices to multitask, and NAND flash that provides storage on devices.

Industry analysts expect average contract prices of both types of memory to keep falling through the first half of the year, as demand remains sluggish and inventory levels high amid continued macroeconomic challenges and widening recessionary fears.

Samsung’s semiconductor business led by memory-chip sales saw operating profit for the October-December quarter drop by 96.9% from the prior year to 270 billion won, the company said. Semiconductor revenue for the three-month period declined 23.6% from last year to 20.07 trillion won.

Despite the current downturn, Samsung said it would keep its capital expenditure plans for 2023 similar to last year’s as it looks to prepare for mid- to long-term demand. The move contrasts with that of rivals that have already pulled back their capacity expansion plans or lowered output for this year to ease the supply glut.

Samsung, however, signaled a near-term reduction in production through line maintenance and other adjustments. The firm also plans to increase the research and development portion of its capital expenditure compared with prior years. (…)

Worldwide smartphone shipments during the fourth quarter—typically a strong quarter aligned with the holiday season—declined 18.3% from the prior year to 300.3 million units in the largest-ever decline in a single quarter, according to International Data Corp., a tech-market researcher. (…)

Wilson doubling down on bearish bets (The Market Ear)

Wilson thinks we will soon have the final leg of this bear market. “…Bottom line, we double down on our thesis, which is now out of consensus again, based on sentiment and positioning. With month end this week taking some pressure off active managers to keep chasing this rally that is based on a narrative that started in October from much lower valuations, it’s time to fade it…A pause is very different this time given the fact the Fed is still doing QT and remains unlikely to cut rates in the absence of a recession. In short, we think the Fed meeting this week will be a reminder of that fact.”  (Wilson, Morgan Stanley)

U.S. Considers Cutting Off Huawei From Exports The Biden administration is considering entirely cutting off the Chinese telecommunications giant from U.S. suppliers over national-security concerns by tightening export controls targeting the firm.

The Trump administration in 2019 added Huawei to the Department of Commerce’s “Entity List,” a roster of foreign companies deemed to be national-security threats. However, the Commerce Department later agreed to grant licenses to U.S. companies allowing them to sell technology to Huawei as long as it wouldn’t put national security at risk.

The Biden administration is now considering no longer granting such licenses, although no decision has been made, the people familiar said. The deliberations were previously reported by Bloomberg and the Financial Times. (…)

Officials have signaled to Qualcomm Inc. and Intel Corp., which continue to supply Huawei, that this is a good time to wind down their sales to the Chinese company, said one of the people familiar with the matter. (…)

One of the ideas under consideration is to use more stringent controls that not only ban direct dealings with the company, but that also prohibit exports to other companies and intermediaries who then supply Huawei, according to this person. That policy has the potential to suppress Huawei’s dealings outside the U.S. given the extent U.S. components are used internationally.

(…) Huawei didn’t feature among the top five providers of handsets in China last year, according to research firm International Data Corp. Those five vendors, including Apple Inc. and Chinese manufacturers, accounted for about 84% of smartphone shipments in the country in 2022, according to IDC. (…)

• Three-Way U.S. Chip Alliance Should Spook Beijing Deal with Japan, Netherlands sends strong signal on allied unity and possibly complicates China’s expansion plans

Japan and the Netherlands agreed on Friday to join the U.S. in limiting exports of advanced chip-manufacturing equipment to China. The three countries dominate the manufacturing of equipment for advanced semiconductors, so the plan could make it even harder for China to develop its own chip industry.

Japan and the Netherlands are particularly dominant in a manufacturing process called lithography: using light to print tiny circuits on silicon wafers. Dutch manufacturer ASML essentially monopolizes the production of equipment needed for the process called extreme ultraviolet lithography, or EUV, used to make the most cutting-edge chips. It has already stopped shipping EUV machines to China.

But since the Biden administration expanded its chip-related curbs on China in October, some older Dutch and Japanese technologies also might need to be restricted to make the U.S. measures effective—and avoid forcing U.S. companies to absorb the impact alone. Japan’s Nikon competes with ASML in supplying parts for a technological process called deep ultraviolet lithography, or DUV, which is one step less advanced than EUV. Friday’s agreement likely will restrict Japanese and Dutch companies from shipping at least some models of DUV machines. (…)

These latest restrictions won’t completely hamstring China’s chip industry, but they send a strong signal of allied unity, and could even presage further measures to come. For Beijing and China’s chip aspirants, that might be the most worrying aspect of this latest salvo.

• Why China Will Never Lead on Tech Communism is incapable of nurturing the curiosity that leads to innovation.

(…) But there is a bigger reason that China’s ambitious technology endeavors are failing: Its communist system stifles innovation. In China, all major funding is controlled and distributed by the Communist Party. Top scientists must be in the party system to advance their careers and get funding. The higher they rank within the party, the more funding they can receive. They can also make fortunes steering projects and government funds to companies owned by their associates and earning huge kickbacks. The recent corruption investigations have implicated key Big Fund officials and executives of companies that have received the most funding, raising speculation that the fund’s leaders may have taken kickbacks from these companies.

Before the investment pause, chip startups that were linked to the local government officials tasked with recommending and verifying candidates were capturing subsidies. According to an analysis by the South China Morning Post, 15,700 new Chinese semiconductor companies were registered from January to May 2021. A Chinese media outlet, Sing Tao Global, reported that many companies in industries ranging from construction and cement to garments and pharmaceuticals had switched, at least on paper, to chip manufacturing, resulting in unfinished projects and frequent shutdowns. But even without this poor resource allocation, China’s chip development still would be hindered by the country’s lack of long-term vision.

In 2019 I interviewed a data and AI scientist at Huawei, China’s largest and most powerful telecommunications company, which at the time was poised to take over the global rollout of 5G. He told me that despite Huawei’s achievements, a hunger for quick success pervaded the company. While Ren Zhengfei, the company’s founder and CEO, would publicly encourage new research, he was likely to cut off funding if there were no notable achievements within a project’s first two years. This pattern has led to the most consistent innovation at Huawei taking place only at the application level. The company rewards innovations that can make money immediately, but long-term research that might lead to world-changing innovation isn’t being done.

This isn’t unique to Huawei. It is the norm of Chinese society under communist control. Great innovation comes from free and curious minds. Such minds need nurturing, and, despite all its dazzling skyscrapers and smart cities, China today is incapable of doing so.

China’s test-oriented education discourages creativity and independent thinking. The Communist Party uses propaganda to instill a sense of loyalty and gratitude in the people, to the detriment of faith, which encourages broader inquiry. All this, combined with a sense of achievement derived from China’s recent economic successes, has caused the Chinese to become entirely focused on attainment. The goal is always to achieve the greatest benefit at the least cost. Dreams and passions are impractical and expensive, even silly. They must be discarded.

If China can’t cultivate free thinkers, it will always be a follower and never a leader as the West imagines and invents the future.

Life is Good, Especially for Older Americans

Overall self-reported happiness grows with age, with a striking spike among those age 70-plus, an AARP Research, in collaboration with National Geographic Partners, study reveals. Thirty-four percent of adults 80-plus and 27% of those in their 70s report they are “very happy,” compared to 21% of those 60 to 69, 18% of those 50 to 59 and 16% of those 40 to 49.

The research shows this increased happiness is bolstered by a focus on quality of life over quantity of years, and the importance of relationships and independence. Fielded in January 2022, the 15-minute survey of 2,580 US adults ages 18-plus found that older adults recognize the challenges of growing older but worry about them less as the years pass. Middle age by comparison is the time where life’s burdens take on the greatest prominence.

Stress, anxiety, and fear diminish with age. Even fear of death wanes as older adults focus on planning to minimize the burden and pain of others and finding peace.

Friends, family, and community are the hallmarks of finding happiness, the study revealed. Relationships become a central feature and a source of purpose and joy as people age, particularly in retirement.

Relationships become most important as people reach their 70s and continue to strengthen on into their 80s, while concerns over finances, health, and purpose diminish. Still, people of various ages seem to understand that relationships are not made overnight, with many saying they take time to build and improve relationships in younger years to ensure they are in place as they age. (…)

Despite medicine’s obsession with prolonging life, people are not overly concerned with how long they will live. As they age, this concern continues to diminish.

Instead, individuals are more in tune with the quality of their lives. A long life should be gratifying, not simply a march through time, they feel.

That doesn’t mean people aren’t taking steps for good health. In seeking quality of life, the focus on taking care of oneself increases over the decades in the second half of life. Caring for relationships, going to wellness and screening appointments, monitoring vitamin intake, eating fresh produce and engaging in exercise are all part of ensuring quality years to come. (…)

On a cruise ship last week, we did not notice much emphasis on good health…