Fed Official Says Central Bank Isn’t ‘Really Talking About Rate Cuts’ New York Fed president appears to recast comments that ignited market rally
Federal Reserve officials offered competing views Friday of when they might begin to lower interest rates next year after Chair Jerome Powell suggested they were likely done raising them.
One of Powell’s senior lieutenants said Friday that central-bank officials weren’t actively debating when to cut rates at their policy meeting this week, an apparent effort to temper markets’ exuberant interpretation of the chair’s comments at a news conference Wednesday.
“We aren’t really talking about rate cuts right now,” New York Fed President John Williams said on CNBC on Friday. “I just think it’s just premature to be even thinking about that”. “We’re very focused on the question in front of us, which as Chair Powell said…is, have you gotten monetary policy to a sufficiently restrictive stance?”
Another official, Chicago Fed President Austan Goolsbee, said recent declines in inflation meant policy makers might need to prepare to lower rates sooner than they had previously anticipated. (…)
“The question of when it will become appropriate to begin dialing back the amount of policy restraint…begins to come into view, and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today,” Powell said Wednesday. (…)
“It’s just premature to be even thinking” about a March rate cut, Williams said Friday. (…)
Goolsbee said that if recent inflation declines reversed, then the Fed should be prepared to raise interest rates. “But also, if we see inflation going down more than we expected, we should be prepared to recognize whether” the current level of interest rates is too tight “and whether we should loosen,” he said. (…)
He added that because interest rates are at levels that should restrict economic activity, officials need to remember that when unemployment rises, it tends to go up by a lot. “It doesn’t just gradually drift up,” he said.
A third official, Atlanta Fed President Raphael Bostic, said Friday he didn’t think the central bank would need to lower interest rates until the second half of next year. In an interview with Reuters, Bostic said he had penciled in two rate cuts for 2024 in his projections this week. (…)
For the record, verbatim from the Powell presser:
- “Our actions have moved our policy rate well into restrictive territory, meaning that tight policy is putting downward pressure on economic activity and inflation and the full effects of our tightening likely have not yet been felt.”
- “There’s a general expectation that this [rate cuts] will be a topic for us, looking ahead. That’s really what happened in today’s meeting,”
Now, it is easy to pick and choose quotes and words to fit one’s narrative. Because I travelled last week, I watched Chair Powell’s presser Saturday and, in all fairness, I found he was much more balanced and restrained in his assessment and policy description than what I had read in the media and other reports and what financial markets made of it.
On inflation, he acknowledged that much of the decline in inflation so far has come from the reversion of pandemic-related goods and labor supply issues and that “at some point we will run out of supply side help; then it comes down to demand, and that’s harder”.
Right on! Actually, all components of domestic demand accelerated as the Fed was tightening. Whither those famous lag effects?
The most interest rate sensitive sectors have yet to flinch to this rather forceful tightening:
Another way to look at it: total business sales exploded in 2021, price inflated in 2022, declined in 2023 before recovering since mid-year. Inventories also jumped in 2022 and flattened nominally in 2023. The total economy inventories to sales ratio is below 2019 levels but it is roughly in line with the 2016-19 range, particularly when excluding very low autos inventories (45% below normal).
Manufacturing has been in a mini recession in 2023 (production -0.8% and employment +0.1% YoY in November), but the inventory cycle could become positive if sales/demand hang on.
From Wells Fargo:
Government hiring and output have accelerated this year (…). Nearly one-quarter of the 2.6 million jobs added to the U.S. economy year-to-date have been in government, with payrolls up 2.9% over the past year versus 1.6% in the private sector. The government component of GDP was up 4.7% year-over-year in Q3, near the strongest growth rates of the past 30 years. (…)
The vast majority (nearly 90%) of public sector workers are employed by S&L governments, and the fiscal situation for many of these entities has been relatively healthy over the past couple years. Robust tax receipt growth, significant federal aid and generally strong balance sheets have bolstered S&L governments’ fiscal flexibility. (…)
In the near term, we believe the solid growth in government hiring and output will persist. (…) Infrastructure funding from the federal government is also still ramping up, and the impact on economic growth likely will not peak for another year or two.
On a YoY basis, core CPI (black) slowed from 6.6% in September 2022 to 4.0% in November thanks to deflating goods throughout 2023. Rentflation peaked at 8.8% in March 2023 but is still at 6.9% in November. Services ex-rent (“supercore CPI!”) decelerated from 8.2% to 3.5% but has been re-accelerating in the past 2 months.
MoM trends are not encouraging other than on goods. Both rent and supercore inflation (75% of core-CPI) remain significantly above the 0.2% needed to reach the Fed’s target.
Mr. Powell said that rising labor supply has helped bring wage growth down to 4.0%, “a little above where it needs to be”, but the Atlanta Fed Wage Growth Tracker, which is composition adjusted, has stalled at 5.2% YoY (3-m moving average) in November, well above the 3.5% average of 2016-19. Wage growth for job stayers is at 4.6% but job switchers are still at 5.7%.
Labor supply rose nicely in the last 12 months: the participation rate climbed to 62.8% from 62.2% (63.1% in 2019). Since June, all of the increase came from the very young (16-19) and the older (55+) workers as the key 25-54 age group was unchanged. These two groups earn less than the average which has likely brought down the BLS wage growth measure. The Atlanta Fed adjusts for changing composition.
The Atlanta Fed calculates that the 12-m moving average wage growth for the 25-54 age group was 6.0% in November down only a little from 6.7% in February 2023.
Mr. Powell’s official presser statement:
- “Inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.”
- “It is far too early to declare victory, and there are certainly risks”.
- “Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers.”
- “Given how far we have come, along with the uncertainties and risks that we face, the Committee is proceeding carefully.”
- “We are prepared to tighten policy further if appropriate. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.”
During the press conference:
- “Participants didn’t write down additional hikes that we believe are likely, so that’s what we wrote down. But participants also didn’t want to take the possibility of further hikes off the table. So that’s really what we were thinking.”
- “That’s us thinking that we have done enough but not feeling that really strongly confidently and not wanting to take the possibility of a rate hike off the table.”
- “We’re pleased with the progress [on inflation], but we see the need for further progress, and I think it’s fair to say there is a lot of uncertainty about going forward. We’ve seen the economy move in surprising directions, so we’re just going to need to see more further progress.”
- “We’re obviously looking hard at what’s happening with demand, and what we see, we see the same thing other people see, which is a strong economy, which really put up quite a performance in 2023. We see good evidence and good reason to believe that growth will come in lower next year. And you see what the forecasts are. I think the median participant wrote down 1.4 percent growth, but you know, we’ll have to see. It’s very hard to predict. We’ll also be looking to see progress on inflation, and you know, the labor market remaining strong, but ideally without seeing the kind of large increase in unemployment that happens sometimes.”
- “If we see stronger growth, we will set policy according to what we actually see. (…) That could mean we need to keep rates higher for longer. It could even mean ultimately that we would need to hike again.”
Nothing new… except this, which really got investors’ attention…
- “We’re aware of the risk that we would hang on too long. We’re very focused on not making that mistake.”
- “You wouldn’t wait to get to 2% [inflation] to cut rates. It would be too late. You’d want to be reducing restrictions on the economy well before you get to 2%.”
…coupled with the dot plot showing lower rates in 2024.
Mr. Powell on dot plots:
First of all, let me just say, that isn’t a plan. That’s just cumulating what people wrote down. So that’s not something, you know this, but allow me to say it again. We don’t debate or discuss what right, you know, whose SEP is right. We just say what they are, and we tabulate them and publish them.
So, and it’s, you know, it’s important for people to know that. But it wouldn’t need to be a sign of — it could just be a sign that the economy is normalizing and doesn’t need the tight policy. It depends on — the economy can evolve in many different ways, right.
Bill Dudley: Jerome Powell’s Pivot Is a Pretty Big Gamble
(…) The pivot significantly lowers the risk of a recession and hard landing — in large part through its effect on markets. (…) The Goldman Sachs Financial Conditions Index has eased by about 100 basis points, and the firm’s economists now expect the economic impulse to be positive in 2024. (…)
Problem is, the central bank’s dovishness also increases the possibility of no landing at all — that is, overheating and persistent inflation that could undermine the Fed’s credibility, while requiring renewed tightening and a deeper recession to get things back under control.
There’s plenty that can go wrong. The slowdown in growth at the end of 2023 might reverse in 2024, as happened a year earlier. What appears to be weakness in spending could prove to be merely bad seasonal adjustment of the data.
This year’s large increase in labor supply might not extend into 2024, leaving the job market too tight and wage inflation too high (as Powell noted, the current trend of 4% probably isn’t consistent with sustainable 2% inflation).
Prices could accelerate again after the unwinding of transitory phenomena, such as pandemic-fueled demand for goods and supply-chain disruptions. Services inflation (excluding housing) might prove more stubborn than expected. As Powell has noted, the “last mile” in reaching the 2% inflation target should be more difficult.
Powell has repeatedly emphasized that the Fed must finish the job, ensuring inflation gets back to 2% and stays there. Yet the more weight he puts on cutting rates to avoid a recession, the greater the risk of failing to control inflation — and of markets getting a big, unpleasant surprise.
U.S. business activity growth ticks higher in December
At 51.0, the headline S&P Global Flash US PMI Composite Output Index was up slightly from 50.7 in November and posted above the 50.0 neutral mark for the eleventh successive month to signal a modest expansion in business activity. The rate of growth, although subdued in the context of the series history, accelerated to the fastest since July.
There was a divergence in sector trends with regards to output in December, as service providers signalled a faster expansion in activity while manufacturers recorded a renewed decline in production. The fall in manufacturing output was only slight but stemmed from a quicker drop in new orders.
Service sector firms, however, registered the joint-fastest rise in new business in six months. Stronger customer demand was linked to greater advertising spending, looser financial conditions and upselling of additional service lines to existing clients.
Meanwhile, new export orders were unchanged on the month as a contraction in service sector new business from abroad countered an expansion in foreign client demand at manufacturers. Service providers noted that pressure on disposable incomes in overseas markets had constrained customers’ purchasing power.
Manufacturers and service providers alike were more upbeat in their expectations regarding the outlook for output over the coming year in December. Business confidence was the strongest for six months, as firms linked optimism to increased referrals and hopes for further improvements to demand conditions in 2024. The level of positive sentiment remained below the long-run series average, however, amid concerns regarding demand fragility.
Following broadly unchanged employment levels during November, US businesses registered a return to job creation at the end of the year. The rate of growth in staffing numbers was modest overall and the quickest since September. New hires were brought in to process incoming new work, but also in anticipation of greater new business in the coming months.
That said, employment growth was led by service providers. Service sector firms recorded the fastest rise in headcounts since June, while manufacturing companies registered a third successive monthly round of job shedding.
Higher prices for materials and fuel, alongside greater wage bills, added pressure to cost burdens during December. The pace of input price inflation picked up to the steepest since September, albeit broadly in line with the historic trend rate. Although much slower than the average seen over the last three years, inflation regained momentum at the end of the year at both manufacturers and service providers.
Firms moderated the extent to which higher costs were passed through to customers, as the pace of charge inflation slowed from November. Service sector selling price inflation cooled to the second-lowest in ten months. Manufacturers, however, raised their selling prices at the quickest rate since April in a bid to protect margins. (…)
Despite the December upturn, the survey therefore signals only weak GDP growth in the fourth quarter.
The survey’s selling price gauge, which tends to lead changes in consumer price inflation, remains sticky but at a level which is indicative of CPI running only modestly above 2%. Service sector input cost inflation, a key gauge of core inflation, once again remained notably elevated by historical standards, though even here the average rate of increase in the fourth quarter has been the lowest since mid-2020.
Across the U.S. northern border, the economic situation is much different, but the CB message much the same…
Bank of Canada’s Macklem expects inflation to be ‘close to’ 2-per-cent target by late 2024
Bank of Canada Governor Tiff Macklem said inflation could be “getting close to” the bank’s target by the end of next year, and that central-bank officials are becoming more confident that interest rates don’t need to move higher to get prices back under control.
Speaking in Toronto, Mr. Macklem said it’s still too early to be talking about interest-rate cuts. But he highlighted the bank’s “significant progress” in fighting inflation, and said his team could start easing monetary policy once it’s confident that inflation is “on a sustained downward track.”
“The 2-per-cent inflation target is now in sight,” he said in an end-of-year speech to the Canadian Club Toronto. “And while we’re not there yet, the conditions increasingly appear to be in place to get us there. The economy is no longer in excess demand, and underlying inflationary pressures are easing in much of the economy.”
Mr. Macklem said 2024 will be a “year of transition.” The next few quarters will be tough for many Canadians as economic growth stalls while inflation remains elevated, particularly for key goods and services such as food and shelter. But things should look up as the year progresses, he said.
“By the time I give my year-end speech next year, I expect the economy will be growing, business hiring plans will be expanding, and inflation will be getting close to the 2-per-cent target.” (…)
In a news conference after the speech, he said members of the bank’s governing council, which sets monetary policy, “did agree that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased.”
That’s the clearest a Bank of Canada official has been that interest rates have likely peaked. (…)
Most Bay Street analysts believe the bank could start cutting rates in the first half of next year. Interest-rate swaps markets, which capture market expectations about monetary policy, put the odds of a rate cut in March at about 50 per cent, and the odds of a quarter-point rate cut by April at 90 per cent, according to Refinitiv data.
Mr. Macklem said he didn’t want to put rate cuts on a calendar. But he did lay out a possible path forward.
“We don’t need to wait until inflation is all the way back to the 2-per-cent target to consider easing policy, but it does need to be clearly headed to 2 per cent,” he said. (…)
Canada’s gross domestic product contracted in the third quarter, consumer spending and business investment is down, and the rate of unemployment has risen to 5.8 per cent from 5 per cent at the start of the year. Many homeowners with mortgages have been hit by big jumps in their monthly payments, and more will see sizable increases in the coming quarters when their mortgages reset.
“With the cost of living still increasing too quickly, and with growth subdued, the next two to three quarters will be difficult for many,” Mr. Macklem said, noting that the unemployment rate will likely increase further in the coming months.
When it comes to inflation, Mr. Macklem said the bank is seeing prices stabilize across a broad range of goods and services. But there are pockets where prices continue to rise quickly, including food and shelter. He said he expects food inflation to decline in the coming months, but shelter inflation to remain a more persistent problem because of a “structural undersupply of housing.” (…)
The bank’s next interest-rate decision is on Jan. 24.
You may have noticed that Macklem is only discussing inflation, warning Canadians of a “tough economy” ahead. Unlike the Federal Reserve, it does not have a dual mandate including employment.
The BOC mandate, as defined in the Bank of Canada Act, is “to promote the economic and financial welfare of Canada.” The Bank’s vision is to be a leading central bank—dynamic, engaged and trusted—committed to a better Canada.
The Bank has four core functions:
- Monetary policy: The Bank’s monetary policy framework aims to keep inflation low, stable and predictable.
- Financial system: The Bank promotes safe, sound and efficient financial systems within Canada and internationally.
- Currency: The Bank designs, issues and distributes Canada’s bank notes.
- Funds management: The Bank acts as fiscal agent for the Government of Canada, managing its public debt programs and foreign exchange reserves.
Eurozone activity falls at increased rate in December
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index registered 47.0 in December, down from 47.6 in November to signal a seventh consecutive monthly reduction in business activity across the euro area. The weak reading rounds off the sharpest average quarterly decline in activity recorded by the survey since the fourth quarter of 2012, if early pandemic lockdown months are excluded.
Manufacturing continued to lead the downturn, accompanied by a steepening drop in service sector output. Manufacturing output fell for a ninth month running, the rate of decline re-accelerating after the moderation seen in November, albeit remaining less severe than seen in the four months to October.
Services activity meanwhile fell for a fifth successive month, the pace of decline likewise gathering momentum again to register the third-steepest fall since the lockdowns of early 2021.
The overall reduction in business activity was again a reflection of deteriorating order books. Inflows of new orders fell for a seventh straight month, the rate of decline remaining unchanged on the steep pace seen in November (though somewhat less severe than witnessed in the three months to October).
New orders for goods fell for a twentieth straight month, the rate of decline still sharp by historical standards despite easing for a second month in a row, while the rate of loss of new orders in the service sector remained among the highest seen over the past three years to register a sixth successive monthly fall.
Backlogs of work consequently also fell sharply, dropping for the seventeenth time in the past 18 months, the rate of decline ticking higher than in November. Manufacturing backlogs continued to fall especially sharply, but December also saw a sixth successive monthly fall in service sector backlogs, which were depleted at the fastest pace since February 2021.
Employment fell for a second consecutive month as companies scaled back capacity in line with the weakened demand environment. Although only modest, the recent falls in employment are the first recorded since early 2021. Manufacturing payrolls were cut for a seventh month in a row, the rate of job losses continuing to run at one of the highest seen since 2012 if pandemic months are excluded.
Service providers meanwhile continued to pull back on their hiring, resulting in only a very modest expansion of their staffing levels, in marked contrast to the strong job gains seen in the sector earlier in the year.
As well as reducing employment, manufacturers cut their purchasing activity at one of the steepest rates recorded since the global financial crisis, resulting in the largest fall in inventories of inputs since November 2009. Inventories of finished goods likewise continued to be scaled back, largely in response to cost cutting amid weak sales. (…)
Eurozone companies recorded a slowing in the rate of increase in input costs, which registered the smallest monthly increase since August and an increase only marginally above the survey’s pre-pandemic average. A tenth successive month of falling input prices in manufacturing, the rate of decline of which remained among the highest seen since the global financial crisis, was accompanied by a further cooling of service sector input cost inflation to the lowest since July, albeit the latter remaining elevated by historical standards.
While input cost inflation cooled in December, average selling prices rose at an increased rate, posting the largest monthly increase since May to remain high by the historical standards of the survey. Although goods prices fell for an eighth straight month, the decline was only marginal, and the smallest recorded since May. Charges for services meanwhile rose at a rate not seen since July. (…)
Japanese private sector output rises slightly in December
- Flash Composite Output Index, December: 50.4 (November Final: 49.6)
- Flash Services Business Activity Index, December: 52.0 (November Final: 50.8)
- Flash Manufacturing Output Index, December: 47.0 (November Final: 47.2)
Shipping firms to avoid Suez Canal as Red Sea attacks increase
Two major freight firms including MSC, the world’s biggest container shipping line, on Saturday said they would avoid the Suez Canal as Houthi militants in Yemen stepped up their assaults on commercial vessels in the Red Sea.
Yemen’s Iranian-backed Houthi movement has been attacking vessels in response to the Gaza war on a route that allows East-West trade, especially of oil, to use the Suez Canal to save the time and expense of circumnavigating Africa. War risk insurance premiums have risen as a result. (…)
German container line Hapag Lloyd has said it might do the same. (…)
Goldman Strategists Lift S&P 500 Forecast a Month After Setting It This comes as the year-end rally shows no signs of abating.
The Federal Reserve’s dovish pivot last week, along with lower consumer prices, is an outcome that will allow real yields to fall while supporting stock valuations, a team led by David Kostin wrote in a note. “Equities were already pricing positive economic activity but now reflect an even more robust outlook,” they said.
Kostin sees the S&P 500 at 5,100 points by the end of next year, joining Wall Street peers like those at Bank of America Corp. and Oppenheimer Asset Management in expecting a fresh high in 2024. The Goldman strategist raised his forecast by almost 9% from the 4,700 level he predicted in mid-November.
There is also a risk that his earnings forecast of 5% year-over-year growth in 2024 may prove too pessimistic, thanks to looser financial conditions that should boost economic activity and company profits, Kostin said. The strategist previously said his team was right in predicting that the S&P 500 would show no profit growth in 2023, but was wrong to say the index wouldn’t climb this year.
Kostin noted that $1.4 trillion was poured into money-market funds this year as interest rates climbed, far higher than the $95 billion that flowed into US equities. “As rates begin to fall, investors may rotate some of their cash holdings toward stocks,” he said.
Even Morgan Stanley’s Michael Wilson — among the most prominent bearish voices on Wall Street this year — said the dovish pivot is a sign the Fed wants to make sure it shifts policy in time to achieve a soft landing. “This is a bullish outcome for stocks,” as the chances of avoiding an economic downturn have increased if the central bank prioritizes sustaining growth over reducing inflation to its target, he said.
Wilson said that while there is a risk of the dovish pivot allowing inflation to eventually re-accelerate, it’s still “welcome news to equity investors, especially given the bond market’s reaction to the dovish guidance.” Markets seem to be of the view the Fed is not making a policy mistake, he wrote. His 2024 target remains 4,500, implying a near 5% drop from the last close.
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It’s the Magnificent Seven’s Market. The Other Stocks Are Just Living in It. Big tech stocks have jumped 75% in 2023—and now make up about 30% of the S&P 500
Collectively, the stocks known as the Magnificent Seven have jumped 75% in 2023, leaving the other 493 companies in the S&P 500 in their dust. (Those have risen a more modest 12%, while the index as a whole is up 23%.) (…)
The Magnificent Seven finished 2022 down 40%, losing $4.7 trillion in combined market value, whereas the remaining stocks in the S&P 500 dropped 12%. (…)
(…) Within the MSCI All Country World Index—a benchmark that claims to cover about 85% of the global investible equity market—the combined weighting of the Magnificent Seven is larger than that of all of the stocks from Japan, France, China and the U.K.
(WSJ)
Although the S&P 500 is just 1.6% from its January 2022 record, only 23% of the stocks in the index are within 10% of their record highs, according to Dow Jones Market Data. That is below the historical average of 28%. (…)
Tech stocks still look expensive compared with the broader market. Nvidia is trading at 25 times its projected earnings over the next 12 months, while Microsoft’s multiple is 31 and Apple’s is 30. In comparison, the S&P 500 trades at 19 times future earnings. (…)
More Americans Than Ever Own Stocks About 58% of households owned stocks in 2022, according to a Fed survey. The pandemic and zero-commission trading gave rise to an entire generation of investors.
That is up from 53% in 2019 and marks the highest household stock-ownership rate recorded in the triennial survey. The cohort includes families holding individual shares directly and those owning stocks indirectly through funds, retirement accounts or other managed accounts. (…)
Most households own stocks through a retirement account, such as a 401(k), but more Americans in the past few years have invested in individual shares directly. Direct stock ownership increased to 21% of families in 2022 from 15% in 2019—the largest increase on record since the survey began in 1989.
As more households bought individual shares, those newer entrants invested with less money than longtime stockholders. The median value of households’ direct stockholdings nearly halved from 2019 to about $15,000 in 2022, adjusted for inflation. (…)
The share of households owning stocks increased across all income levels from 2019 to 2022. Upper-middle-income families recorded the biggest jump in stock ownership. (…)
Stock-market gains and rising home prices helped boost household wealth. Households’ median net worth climbed 37% from 2019 to 2022, adjusted for inflation, the largest increase in the survey’s history. The median value of a U.S. household’s primary residence surged to $323,200 in 2022, surpassing levels from before the 2007 housing market crash.
Americans’ penchant for stocks is distinct. U.S. households held about 39% of their financial assets in equities in 2022, according to Organization for Economic Cooperation and Development data, a higher allocation than most other countries in the data set. (…)
TESTING, TESTING
China South City Warns Can’t Pay Bond Interest Due Wednesday Distressed developer is seen as litmus test of state support
A Chinese developer partially owned by the southern city of Shenzhen warned it can’t pay interest due Wednesday as it races to win support from creditors to extend dollar bond deadlines, raising the risk of its first default.
China South City Holdings Ltd. said in a stock exchange filing that it doesn’t have the resources to pay the interest of its 9% notes due July 2024 — with $235 million of principal outstanding — by the end of a grace period Dec. 20, citing liquidity and cash flow constraints from a deteriorating operating environment. (…)
All of that is creating one of the first major tests of Chinese authorities’ support for distressed property firms after more recent vows to curb an unprecedented wave of defaults. China will “forcefully prevent developers from defaulting on their debts all at once,” said Dong Jianguo, Vice Minister of Housing and Urban-Rural Development, state broadcaster China Central Television reported earlier this month.
China South City — partially owned by the Shenzhen SEZ Construction and Development Group Co., a unit of the southern Chinese city’s local state asset regulator — was among the first in China’s property sector to receive a state bailout.
The Shenzhen state-owned firm bought a 29% stake in the developer in May 2022 and is now the single largest shareholder of China South City. (…)
The developer’s extension request comes despite the bond’s keepwell clauses provided by the Shenzhen state asset regulator affiliate. Keepwell provisions are a sort of gentleman’s agreement that entails a commitment to maintain an issuer’s solvency, but stop short of a payment guarantee from the parent company. (…)
Stock investments: down 30%. Salary package: down 30%. Investment property: down 20%. As Thomas Zhou reflects on 2023, his household finances are front of mind. (…)
Now, middle class households are being forced to rethink their money priorities, with some pulling away from investing, or selling assets to free-up liquidity.
At the heart of the decline in family wealth is China’s real estate meltdown, which having a pervasive effect on a society where 70% of family assets are tied up in property. Every 5% decline in home prices will wipe out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics. (…)
While China’s official data show just a mild drop in its existing home prices, evidence from property agents and private data providers indicate declines of at least 15% in prime areas in its biggest cities.
The housing sector’s value may shrink to about 16% of China’s gross domestic product by 2026 from around 20% of GDP currently, according to Bloomberg Economics. This would put about 5 million people, or about 1% of urban workforce, at the risk of unemployment or reduced incomes. (…)
Net worth per adult in China slid 2.2% to $75,731 in 2022, UBS said in its August global wealth report, while total assets per adult fell for the first time since 2000 as non-financial holdings shrank due to the housing market difficulties. (…)
Even high-net-worth-individuals are turning more conservative, according to a joint survey by China Merchants Bank Co. and Bain & Co. The number of the cohort citing “wealth protection” among their major money goals jumped significantly in 2023, and mentions of “wealth creation” decreased. (…)
Chinese wealth manager Hywin Wealth Management Co. pledged to address delayed payments on some investment offerings it had distributed, after its US-listed shares sank almost 60% amid investor concerns.
The firm, once China’s largest distributor of real estate wealth management products, has formed a special task force to come up with a treatment plan before end of the month, it said in a statement Sunday. The economic downturn had led to delays in underlying projects of certain products, it said, without disclosing the amount involved. (…)
The company has over the years provided asset allocation and wealth management services to more than 146,000 high-net-worth individuals and institutions, according to its website.
China’s wealthy investors were rocked last month by shadow banking giant Zhongzhi Enterprise Group Co., which warned of severe insolvency after one of its trust affiliates failed to make payments on high-yield products. A following criminal investigation into the firm, which pooled household savings to invest in areas including real estate, could potentially inflict tens of billions of dollars in losses on investors.
Chinese banks are putting bad loans up for sale at a record pace, as regulators push for faster disposal of sour debts amid rising consumer defaults during an ailing post-COVID economic recovery.
Issuance this year of securities backed by non-performing loans (NPLs) is set to jump about 40% from a year ago to a record, data from a ratings agency showed, as lenders rush to offload distressed assets linked to mortgage, credit card and consumer borrowings. (…)
Typical buyers include fund managers, wealth management firms, specialist distressed debt investors and some hedge funds. (…)
Chinese authorities have blacklisted 8.57 million people who missed payments on everything from home mortgages to business loans, according to court data. The cumulative figure is up 50% from the 5.7 million defaulters at the beginning of 2020, highlighting the scars from the pandemic and its aftermath. (…)
The booming market for bad loans underscores the challenges facing a banking sector grappling with a real estate crisis, local government debt woes and rising individual delinquencies as China’s post-COVID recovery fades.
Outstanding bad loans at Chinese banks hit 3.2 trillion yuan at the end of September, up one-third from 2.4 trillion yuan at end-2019, according to the country’s banking regulator.
To fend off systemic financial risks, Beijing is urging banks to accelerate their disposal of non-performing assets. (…)
- Wall Street’s China Stock Bulls Seek Redemption After a Humbling Year Global banks had forecast double-digit China gains for 2023
Global investment banks turned almost unanimously optimistic on the market around this time last year, only to be confounded by a 14% drop in the MSCI China Index. (…)
In hindsight, Wall Street’s misplaced optimism likely resulted from an under-appreciation of the magnitude of headwinds ranging from weak consumption to prolonged housing woes as well as geopolitical tensions, and an overestimation of authorities’ willingness to ramp up fiscal spending in an indebted economy. But it also reflects the difficulties in navigating a market where policymaking has become increasingly opaque and unpredictable. (…)
From Yardeni.com:
FYI
US Steel will be sold to Nippon Steel for $14.1 billion, ending months of uncertainty. The metals producer had been weighing options since mid-August, after rejecting an $7.25 billion offer from rival Cleveland-Cliffs.
Bloomberg’s: 
