Year: 2023

Pending Home Sales Plummet 7.1% in August

The index plummeted 7.1% in August to 71.8, a larger decline than the expected -0.8% decrease. This is the lowest reading for the index since April 2020 and is the second lowest figure in the historical series. Pending home sales are down 18.7% compared to one year ago. (…)

UAW Joins Wave of Union Strikes Looking for Big Wins The U.S. has lost seven million workdays to walkouts so far this year, the most in more than two decades.

(…) Eight strikes involving more than 1,000 workers each affected employers in August, matching the highest number since 2005, according to the Labor Department. The U.S. lost more than seven million workdays because of labor disputes this year through August, more than any full year since 2000—and the figures don’t include the United Auto Workers strike that started earlier this month. (…)

And more walkouts could be coming. On Tuesday, the union representing 53,000 housekeepers, bartenders and other workers in Las Vegas voted to authorize a strike to demand higher wages and better working conditions.

Roughly 75,000 workers at healthcare giant Kaiser Permanente could go on a three-day strike next week for increased pay and higher staffing levels. And last month, more than 26,000 flight attendants at American Airlines voted to authorize a strike as talks continue with the carrier over a new contract. (…)

Polls show a revival in public support for unions. Last year, 71% of Americans approved of labor unions, the highest share since 1965, according to Gallup. That number dipped slightly to 67% this year. (…)

Union members accounted for roughly 6% of private-sector workers last year, down from roughly 19% in 1981.

Strikes are proliferating as workers see them succeed. (…)

“Is this the other bookend to the [1981] air-traffic-controllers’ strike, where organized labor can really say: ‘We’re back?’ ” said Michael Lotito, a lawyer with Littler Mendelson who represents companies on workplace matters. (…)

• At Stake in the Strikes The Impact of the UAW Strikes on Output, Jobs and Inflation

(…) Even after the escalation, the total number of autoworkers striking today is fewer than half the number involved in the GM strikes of 2019. So why is the economic angst so high that for the first time ever a sitting president is visiting picket lines? The answer has to do with the fact that a well-capitalized union and an unusually tight labor market set things up for a potentially long standoff and adds a fresh headwind to current efforts to reduce inflation without crippling growth.

As we explain in this report, the longer the strike, the worse the impact on the economy. The near-term effects can be seen easily in terms of output measures such as auto assemblies and inventories. Longer term, higher labor costs mean more expensive vehicles, repairs and related services, which complicates the Federal Reserve’s job of getting inflation in check. (…)

The strike could also damage auto suppliers, particularly with some parts facilities now directly in the crosshairs. In looking at the biggest inputs used in motor vehicle & parts production, the top 10 manufacturing industries that supply to the auto sector represent about 5% of total value add in the economy (chart).

The expansion of the strikes at the end of last week targets this vulnerability. The UAW orchestrated walk-outs of all 38 parts-distribution centers operated by General Motors and Stellantis in 20 states. Ford has been excluded from further shutdowns for now as the UAW rewards the Blue Oval for progress in negotiations. (…)

The union is paying striking workers $500/week. Because the UAW has an $825M strike fund, if push came to shove, it could afford to keep up those payments to all the big-three members for 11 weeks. (…)

The latest ask from the UAW is reported to be a 30% pay increase over four years. It has left the automakers’ offers for approximately 20% pay bumps over four years on the table, suggesting that the ultimate wage increase will be at least about 5% annualized—above the 3-3.5% wage rate consistent with inflation returning to 2% over time, assuming the recent trend in productivity persists.

Furthermore, the UAW has asked for the reinstatement of automatic cost of living adjustments (COLAs), already conceded to by Ford, which would push nominal pay growth even higher and further impede wage growth from returning to a pace conducive to the Fed’s inflation target.

(…) the UAW’s initial demands would more than double the Detroit automakers’ average hourly labor costs up from $66 to $136. (…)

Evergrande’s Stalled Turnaround Plan Casts Doubt on Corporate Restructuring in China The embattled property giant is at risk of being broken up or liquidated after regulators in Beijing blocked key parts of its proposed turnaround plan, a foreboding sign for other troubled real-estate companies in China.

(…) “There are signs of a break in patience,” said John Han, attorney at Kobre & Kim in Hong Kong. “It only takes a few breakaway creditors to wind up a company, and the more surprises we see like this, the more likely it is that creditors will opt out in favor of a liquidation.” (…)

Evergrande submitted an application to approve some of its restructuring plan with the China Securities Regulatory Commission, the country’s primary securities regulator, according to people familiar with the matter. However, the regulator rejected the company’s application to issue new stock, stating that the company isn’t eligible to sell shares under commission rules, according to the people.

Days later, Evergrande said in a securities filing that commission rules may prohibit it from issuing new debt because its property development arm is under investigation by local authorities. (…)

Without the ability to swap old debt for a mix of new stock and debt, Evergrande’s restructuring is now effectively impossible to execute, according to the people. Evergrande’s offshore bondholders are likely to swallow some $15 billion in losses and seek its liquidation, likely netting them only a few pennies on the dollar in recoveries, the people said. (…)

With limited options available to them, companies like Evergrande could face liquidation by their foreign creditors, who can sue to take control of offshore parent companies in jurisdictions like the Cayman Islands or the Bahamas.

After taking over control of offshore companies, creditors can move to exercise their authority and attempt to replace the boards of mainland China companies and push for them to be broken up and sold for parts.

Courts in China recently have started to recognize the legal authority of liquidators from jurisdictions like Hong Kong, where Evergrande’s parent company is located. In 2022, a Shenzhen court recognized a Hong Kong court-appointed liquidator’s authority in the reorganization of Samson Paper.

However, in the Samson case, the Shenzhen court insisted that it sign off on any proposed asset sales that would involve the transfer of property abroad, throwing a potential obstacle in offshore creditors’ path if they can’t get judges’ signoff on their liquidation plans.

“Powers of liquidators once granted are subject to judicial oversight,” wrote a team of attorneys at Sidley Austin analyzing the court case. “Offshore creditors should not assume they can realize the onshore assets and remit the proceeds offshore.”

It looks like Beijing is letting Evergrande fail with foreigners taking the hit without being able to access the mainland assets. The government could then step in and organize a controlled liquidation over many years in order to protect the housing market.

As I showed yesterday (China Stopping Domino Effect), measures are already taken to prevent a domino effect from an Evergande bankruptcy.

The bad news is that the long-expected, slow moving accident is happening in real time now.

The good news is that Beijing seems ready to prevent a collapse.

BlackRock CEO Larry Fink Sees US 10-Year Yields Heading Above 5%

BlackRock Inc.’s CEO Larry Fink expects 10-year Treasury yields to top 5% as shifts in geopolitics and supply chains make inflation more persistent.

“My opinion is we’re going to have 10-year rates at least at 5% or higher because of this embedded inflation,” Fink said at the Berlin Global Dialogue forum on Friday. “We’re underestimating the change in geopolitics is so structurally inflationary.”

Fink is the latest Wall Street pundit to warn this week of the risk of higher rates and bond yields. Jamie Dimon, CEO of JPMorgan Chase & Co., said US interest rates could surge as high as 7% in a worst-case scenario, while Pershing Square Capital’s Bill Ackman is eyeing 30-year Treasury yields at 5%. (…)

On politics, Fink said politicians should provide more hope to voters to help bolster confidence. Asked whether he’d run for president, the 70-year-old joked: “I’m too young.”

Canada: Soft data does not suggest a soft landing at all

This morning, the CFIB released the results of its survey, which do not bode well for a strengthening of the economy in Q4 after the recent soft patch. The confidence index fell by 6 points in September, the biggest drop in 14 months. During the month, no fewer than 8 out of 10 provinces with the two largest provinces (Ontario and Quebec) showing the worst outlook.

At the sectoral level, 9 out of 13 sectors posted declines, also suggesting widespread economic weakness for the coming months. (…)

As today’s Hot chart shows, both consumer and SME confidence are now at recessionary levels. It’s true that the latest inflation data was enough to raise eyebrows, and the Bank of Canada may be tempted to raise rates again. In the minutes of its September decision, members agreed that weak demand would not be enough to convince them to lower their guard, and that confirmation was needed that the slowdown in demand was easing inflationary pressures.

This approach carries a high risk of overkill, given that the economy has yet to feel the full impact of the rate hikes already implemented. Let’s hope that the Bank of Canada will be patient by considering the significant weakening of the economy and the tightening of financial conditions brought about by higher global interest rates.

Encouraging drop in eurozone inflation in September but concerns remain

As expected, inflation fell in September – not just the headline rate but the core as well, which saw a strong decline from 5.3 to 4.5%. Base effects from government support last year ended, which was the main reason for the fall, but the good news is that the sharp decline was more than anticipated, as current price developments have become more benign.

Using our own seasonal adjustment, non-energy industrial goods inflation was negative month-on-month in September. Services inflation may have ticked up MoM and remains elevated although businesses in the service sector do indicate that pricing power is diminishing as demand for services weakens.

There are big differences between countries at the moment in large part driven by how energy translates to consumer prices, but also by differences in wage growth and economic performance. Spain saw inflation increase from a low base on the back of the increasing energy prices, while Germany, Netherlands and Belgium experienced sharp drops.

Higher oil prices are a concern for the inflation outlook. Energy prices did not fall as much as expected in recent months and are now set to contribute positively again to inflation as the oil price has risen above US$90 per barrel. We expect that this will mainly push eurozone inflation higher at the start of next year, and a contribution of one percentage point to headline inflation is not unimaginable.

This is well below last year’s impact, but still sizable enough to prevent headline inflation from hitting the European Central Bank’s 2% target as soon as forecast.

A big question is if this will again spark significant second-round effects. In the current, much weaker economic environment, businesses are indicating that pricing power is weakening. This seems to limit any significant resurgence of inflation.

Still, higher energy costs and high wage growth – in combination with current weak productivity – should continue to put upward pressure on inflation in 2024. With demand currently alleviating pressures, we do expect inflation to continue to gradually trend down. But as uncertainty about the pace of the normalisation of inflation will persist for some time, higher-for-longer interest rates from the ECB are definitely a realistic scenario despite September’s very promising drop in inflation.

Apple, China Met to Discuss Beijing’s Crackdown on Western Apps Country’s push to register foreign apps threatens to remove Facebook, Instagram and X from iPhone App Store in China.

Officials told Apple that it must strictly implement rules banning unregistered foreign apps, people familiar with the discussions said. Apple employees expressed concern over how the rules would be implemented and affect its users.

China’s move to restrict the apps would close a loophole in the Great Firewall that allows Chinese iPhone users to download popular Western social-media apps such as Instagram, X (formerly called Twitter), Facebook, YouTube and WhatsApp.

While China has for years blocked web access to those sites, iPhone users who download the services’ apps can engage on the platforms if they log on through a virtual private network, or VPN, that connects them to an internet server outside the country. Many users, especially younger people, do this even though China bans the use of unauthorized VPNs.

Combined, those five social-media apps have been downloaded from Apple’s app store more than 170 million times in China over the past decade, according to estimates by Sensor Tower, a market insights company. Some apps such as X were used to spread information and videos of protests against Covid rules in China that erupted late last year.

By next July, Apple will no longer be able to offer such apps in its China app store unless the app operators are registered with the government, under new rules issued by China’s Ministry of Industry and Information Technology in July this year.

Analysts say those operators are unlikely to register with the Chinese government because they could then have to comply with data transfer and censorship requirements, leaving Apple no choice but to remove them or face legal punishment.

(…) The Cupertino, Calif.-based company is likely to be among those most affected given its app store has more than 1,000 unregistered foreign apps. Chinese companies including smartphone makers Huawei Technologies and Xiaomi have updated their app store rules recently, urging app developers to complete registration procedures.

Apple hasn’t said anything publicly on the new rules, which investors say pose a threat to its services business in China. The services segment, which includes app-store transactions, plays an important role in Apple’s profitability. Anything disrupting the Chinese app store could eat into profits for its business in the country.

Apple has been making concessions in China for years to comply with the country’s increasing censorship and tightening rules on data security.

Beijing has increasingly been giving priority to national security over economic interests and is clamping down on cross-border information flows.

Apple has previously removed apps from its China store based on Beijing’s edicts, including thousands of videogame apps booted in 2020 after Chinese officials cracked down on games software without a government license. (…)

In Apple’s exchanges with officials, which haven’t been previously reported, the company was told the new rules are needed to crack down on online scams, pornography and the circulation of information that violates China’s tough censorship rules, people familiar with the discussions said. (…)

Last year, China’s top internet watchdog started requiring app stores to file their business details to it and to review apps and their developers before publishing them. The regulator this week said 26 app stores have passed through its registration process, including Samsung. Apple wasn’t one of them.

Some foreign companies are taking action after the latest app registration rules were released. In August, Amazon.com’s China business urged app operators who are using its network services in China to complete the registration. Apps could lose access to Amazon’s network services if they don’t follow the new government rules, Amazon China said in a statement posted online.

• U.S.-China Talks Pave Way for Xi-Biden Summit Both governments are discussing Washington visits by a senior Chinese economic-policy official and the foreign minister.

Durable Goods Orders Unexpectedly Rise in August

New orders for manufactured durable goods unexpectedly rose in August, coming in at $284.75B. This is a 0.2% increase from the previous month and is better than the expected 0.5% decline. The series is up 3.5% year-over-year (YoY). If we exclude transportation, “core” durable goods were up 0.4% from the previous month and up 1.1% from one year ago. (…)

Great chart by VettaFi showing the impact from Transportation and Defense while Capex have flattened over the past 12 months.

• More CFOs Pull Back Spending Plans Due to Higher Interest Rates Forty-one percent of finance chiefs said current rates have pushed them to scale back capital expenditures

In the survey [by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Atlanta and Richmond], 41% of finance chiefs said current rates have forced them to pull back capital spending, while 42% said they have cut costs in other areas such as travel or advertising.

An additional 21% of respondents said they would curb capital spending, and 15% would pull back on other types of operational costs, if rates remain at current levels for another year or climb higher.

The remainder said their businesses aren’t sensitive to changes in rates, or that they weren’t sure at what rate they would pull back spending. The poll, conducted between Aug. 21 and Sept. 8, included CFOs from 320 companies.

The quarterly survey shows that CFOs are growing more concerned about higher borrowing costs. The last time the survey included the same question, in the fourth quarter of 2022, 32% of finance chiefs said they had pulled back on capital investments, while 29% said they had reduced other expenses.

Still, most finance chiefs have a positive outlook on the U.S. economy. When asked to rate their optimism about the economy on a scale of 0 to 100, CFOs on average provided a ranking of 56, up from 53 a year earlier. (…)

Government Nears Brink of Shutdown as Standoff Persists Speaker Kevin McCarthy rebuffed a bipartisan funding bill from the Senate in favor of a House plan driven by conservatives, as dim prospects for a deal raised the likelihood of a partial government shutdown.

• A Last-Minute Deal Averting Government Shutdown Is Unlikely Republican disarray weakens ability get concessions from Biden.

Canada Sees Fastest Population Growth Since 1957 on Influx of Immigrants Temporary residents grew by 46%, largest jump on record

The country’s population rose 2.9% in the 12-month period ending July 1, one of the world’s fastest growth rates, bringing the number of residents to 40.1 million. The jump was driven by the largest recorded increase in temporary residents in data going back to 1971. (…)

The number of non-permanent residents in Canada — a category that includes people on work or study permits as well as refugees — is now 2.2 million, or more than 5% of the total. (…)

The growth in the non-permanent population is “extraordinary” and was not planned by the government, Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by email. The increase can’t be sustained by the available supply of affordable housing, he said.

The last time Canada’s population grew faster was in 1957, nearly the height of the postwar baby boom and a period when the country was accepting Hungarian refugees who were fleeing Soviet repression. (…)

France looks at windfall levy to ‘take back control’ of energy prices

More to come…

John Authers: Rounding Up the Usual Suspects After a New Low Markets were supposed to have hit their bottom last October. Yet here we are again, with nowhere to hide. Now what?

Whose Fault Is This?

As ever, there’s a desire to apportion blame. Even more importantly, there’s a desire for a clear explanation, a narrative that is comprehensible. So it’s time to round up the usual suspects:

• Oil

(…) The latest numbers on inventories at Cushing, Oklahoma, published by the Department of Energy, showed a seventh successive weekly fall in the oil stockpile. The drawdown has been steady throughout the summer, and leaves the country vulnerable to further supply disruptions from sources beyond control, such as a cold winter or a hurricane in the Gulf of Mexico. (…)

• A Possible US Government Shutdown
• Derivatives

Colleague Lu Wang has a fascinating piece on a $16 billion JP Morgan fund that holds put options (conferring the right to sell for a given price, and used as protection against falling prices) that are on the verge of being triggered at the end of this week. If that happens, those on the other side of the options would be obliged to buy stocks, unwillingly. To guard against this, it makes sense for them to hedge by selling some stocks short, in a bet that they’ll fall. That will provide some profits to offset the losses they have to take.

When markets fall, there is always the risk that derivatives positions will mean that some individuals will take outsize losses. It’s difficult to blame an entire bear market on derivatives markets.

• The Federal Reserve

(…) the package of projections, in combination with the words of Chair Jerome Powell, sent the market into a funk. The 10-year bond yield has gained 50 basis points in the five trading days since that FOMC. Its three big jumps this month, marked on the chart below, were caused by the non-farm payroll data, the FOMC meeting, and Wednesday’s news on oil inventories.

(…) If the Fed wants some bang for its rate rises, it needs to leave them where they are for a while. It’s only recently that the notion has sunk in that the Fed really means it about keeping rates high for longer, and that is a problem. (…)

• The Yen

Foreign exchange, a series of zero-sum games in which someone has to win at someone else’s expense, offers the clearest fault lines. The greatest attention now focuses on Japan and China. The yen has dropped below 149/dollar. The level of 150, another bottom that appeared to have been reached last October, triggered intervention by the Japanese authorities last year. It’s difficult to see how much further the yen can be allowed to fall.

The greater issue for both Japan and China, however, might be the exchange rate between their own currencies. The yen has dropped to a level of 20 to the offshore yuan on two occasions in the last decade. The first time, in the summer of 2015, China responded with a poorly handled devaluation. The second time, in October 2022, Japan intervened to force its currency upward. Now, some move by Japan looks hard to avoid. As it’s still the world’s largest source of very cheap money, higher rates or bond yields there could be an issue elsewhere.

• Emerging Markets

The other typical victim of a strong dollar is the emerging markets complex. When the dollar exchange rate goes up, dollar-denominated debt gets more expensive to finance. (…) Now, the JPMorgan EM foreign exchange index, a popular benchmark, has dropped to fresh lows. There are inevitable risks in this.

• Banks

It was duration that precipitated the regional bank failures in March, as banks that had heavily invested in longer bonds were unable to access liquidity without taking losses. Judging by the share price of regional banks, which only made an unconvincing recovery and are sagging again, and even of the much larger Bank of America Corp., which is seen as vulnerable to further falls in bond prices, worries that duration will cause more financial accidents are still with us. (…)

At 4250:

• The S&P 500 is up 18.6% from its Sept. 30 2022 close when its trailing P/E was 16.2 and its Rule of 20 P/E was 22.5.
• Since then, trailing EPS have declined 2.5%, bringing the trailing P/E to 19.6 and the R20 P/E to 23.9.
• Ten year Ts were at 3.8%, now 4.6%.
• Core CPI was +6.3%, now 4.3%.
• Oil was $79/bbl, now $93/bbl.

China’s way to prevent a domino effect

Chain of events:

• Reuters on Sept. 7, 2022: China state firms takeover Evergrande’s $1.1 bln holding in Shengjing Bank

State-owned companies of the Chinese northestern city of Shenyang bought China Evergrande Group’s shareholding in Shengjing Bank in an auction for 7.3 billion yuan ($1.05 billion), Alibaba auction platform showed on Wednesday.

In July, Evergrande, the world’s most indebted property developer, said its unit, Evergrande Nanchang, had been ordered to pay an unamed guarantor 7.3 billion yuan for failing to honour debt obligations.

The unit has provided counter-guarantees in the form of a pledge of a total of 1.3 billion shares that it held in Shenyang-based Shengjing Bank, the firm said at the time. (…)

The 1.3 billion shares account for a 14.6% stake in Shenjiang Bank. Evergrande, which held 36.4% in the bank at the end of 2020, has been selling down its holdings in the bank since it slid into a debt crisis in the second half of last year.

• Reuters on Nov. 1, 2022: China Evergrande unit gets notice for $4.48 bln loan from Shengjing Bank

Debt-laden property developer China Evergrande Group said on Tuesday its unit received a notice of enforcement for unrecoverable funds from Shengjing Bank Co Ltd.

The bank said it failed to recover funds totalling 32.595 billion yuan ($4.48 billion), which was provided to the unit from 2020 to 2021, according to Evergrande. (…

• Buried within Reuters yesterday: China’s Shengjing Bank in $24 billion deal to sell assets to government-backed entity

Chinese regional lender Shengjing Bank (2066.HK) said on Wednesday it has agreed to sell a portfolio of assets, including certain loans and investments, among others, for 176 billion yuan ($24.07 billion) to Liaoning Asset Management.

Liaoning Asset will fund the purchase of assets by issuing special-purpose notes to the bank, the lender said.

Over 70% of the assets to be disposed are loans and the remainer include asset management plans, corporate bonds and deposits with banks, Shengjing bank said.

Liaoning Asset, which focuses on transactions of non-performing assets of financial institutions, is a unit of Liaoning Financial Holding owned by the finance authority in the Chinese province of Liaoning, where Shengjing Bank is based.

Last month, Shengjing Bank reported a 21.8% drop in its net profit attributable for half-year to 737.9 million yuan.

So, state-owned companies bought Evergrande’s stake in a bank that was a lender to Evergrande. Two months later, the bank called its $4.5B loan to Evergrande, which is unable to oblige.

The now distressed bank is “selling” a bunch of non-performing loans ($24B!!!) to another “government-backed entity”, getting paid, not with cash, but with “special-purpose notes” that will conveniently find their way to “performing loans”.

Voilà!

More to come.

• Finally, There’s More Money Than Fools in China Investors have become risk averse, shunning the markets in favor of bank deposits.

(…) For evidence of that changing sentiment, look no further than consumers’ savings data and the central bank’s quarterly urban survey. As of August, household deposits totaled a record 132 trillion yuan ($18 trillion), blowing past China’s entire gross domestic product last year. People keep on putting money into banks even as the People’s Bank of China cuts deposit rates.

It’s well-known the Chinese have been hoarding cash since the pandemic. But this behavior started as early as 2018. By then, households had already gone through a rollercoaster ride of excitements and disappointments. In fact, their preference for buying investment products, such as stocks, bonds and trusts, has been on a steady decline since the 2015 crash, according to the central bank survey.

This risk-off mentality creates a big headache for the government, in that it inevitably dampens new policies aimed at boosting market sentiment. (…)

The Shanghai Composite Index hovers at around 3,100, more than 40% below its record high in 2007. In the property market, existing home prices have fallen by at least 15% from their peak in more than half of China’s tier-2 and tier-3 cities. (…)

People have realized that taking risks doesn’t benefit them, at least not in the current political economy. They have money, but prefer sitting on the sidelines.

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