Year: 2023

Retail Sales Rose for Fourth Straight Month Americans increased their retail spending in July, as consumers continue to open their wallets and bolster the resilient U.S. economy.

Retail sales rose a seasonally adjusted 0.7% in July from the prior month, the Commerce Department said Tuesday, an acceleration from June’s 0.3% gain. Unrounded at 0.729%, July’s pace was the fastest since January.

The retail sales gain also was higher than the 0.2% increase in consumer prices last month, a sign that Americans’ spending is outpacing inflation. (…)

In July, shoppers also increased their outlays at grocery and hardware stores. A measure of online spending rose 1.9% in July, a month that saw Amazon.com’s Prime Day summer promotion.

Sales declined at auto dealerships and electronics and furniture stores, which are sensitive to higher borrowing costs. (…)

Americans keep buying goods:

Core sales (ex Autos) also exceeded expectations by registering 1.0% growth in July, defying the forecasted 0.3% decline. Core retail sales are up 2.2% compared to July 2022.

But Control Sales, an even more “core” view of retail sales which excludes motor vehicles & parts, gasoline, building materials and food services & drinking places and which feeds directly into GDP data, also jumped 1.0% MoM in July after rising 0.5% per month in each of the previous 3 months. Control sales are up 4.8% YoY but have been rising at a 7.9% annualized rate in the past 4 months.

Spending in restaurants and bars, a true discretionary expenditure, rose 1.4% MoM in July. it is up 11.8% YoY but rose at a whopping 13.2% annualized rate in the past 4 months, +15.8% in the last 3 months!

Hence: the latest Atlanta Fed GDPNow tracker now sees Q3 GDP growing at a 5% clip.

The Fed may not be done…

Is It Time to Worry About Consumer Debt? Consumers are still flush with cash but are more often falling behind on some payments, making for a complex picture.

Until very recently, the rate of late payments had trended below historical norms across virtually all lending types and consumer groups. A frequent explanation is that Americans built up a cushion of extra cash savings during the pandemic and still haven’t spent it down.

The good news is this looks to still be the case. According to anonymized and aggregated account data tracked by the Bank of America Institute, the median savings and checking balances were at least 30% higher in July than they averaged in 2019. Notably, balances are highest on a relative basis among households with lower income levels.

Yet the frequency with which people are becoming late with payments on their debts for some kinds of loans is returning not just to prepandemic levels, but even moving beyond them. The percentage of credit-card and auto-loan balances transitioning into delinquency—that is, going from current to becoming 30-days-plus late—is happening at a pace faster than that of 2019, according to the Federal Reserve Bank of New York’s recently released second-quarter Quarterly Report on Household Debt and Credit, which is based on a nationally representative sample of anonymized Equifax credit data.

Where the stress appears the most acute is for borrowers with poor credit records. The 60-day-plus delinquency rate for subprime auto loans rose to 5.37% in June, according to S&P Global Ratings’ latest composite performance tracker for U.S. auto loan asset-backed securities. That is well above the 0.49% June rate for prime loans in the tracker, and the highest June level ever for subprime.

However, consumers aren’t moving into financial distress at the same level they did when card or auto delinquencies were last occurring at those paces. The number of consumers facing new foreclosures and bankruptcies is still at levels well below the prepandemic period. (…)

One thing that is different for many consumers today versus prepandemic is their student-loan debt. Many borrowers are in forbearance periods on their government loans, reducing that burden on their budgets. But those payments are set to resume in October. Still, student-loan debt overall has been declining. Student-loan balances contracted by $35 billion in the second quarter, the biggest quarter-over-quarter drop in at least two decades, according to the New York Fed’s household report data. These loans represented 9.2% of all consumer debt in the second quarter, the lowest share since 2013. (…)

[Mortgage] payments are near record lows as a percentage of median household income, at just 21%, according to Black Knight. (…)

Two charts that may explain:

• Delinquency rates are almost back to their pre-pandemic levels but reman well below historical levels:

• The high credit levels as a percent of disposable income should prove painful as interest rates rise but low fixed mortgage rates have created a big, lasting cushion

Canada Inflation Quickens to 3.3% But Core Measure Shows Progress

The consumer price index rose 3.3% from a year ago, the first reacceleration since April, Statistics Canada reported Tuesday in Ottawa. That was faster than the 3% forecast by economists in a Bloomberg survey. On a monthly basis, the index rose 0.6%, double their expectations.

Canada’s headline rate is now above that in the US for the first time in three years. But the uptick is watered down by some easing in core measures. Two key yearly metrics tracked closely by the Canadian central bank — the so-called trim and median core rates, which filter out extreme price fluctuations — eased, averaging 3.65% from a downwardly revised 3.7% a month earlier. (…)

A three-month moving average of the measures that Governor Tiff Macklem says is key to his team’s thinking fell to an annualized pace of 3.49%, from an upwardly revised 3.91% previously, according to Bloomberg calculations. That’s the slowest rate of increase since October 2022. (…)

The latest inflation print with cooling core measures — along with recent signs of softening in the economy and labor market — may pave the way for policymakers to return to pause mode as early as their next meeting on Sept. 6. The majority of economists expect the central bank to hold the overnight rate steady at 5% next month. (…)

Services inflation rose to 4.3% in July from 4.2% one month earlier. (…)

Grocery prices grew at a slower pace year over year, rising 8.5% last month after a 9.1% increase in June.

On a monthly basis, higher prices for travel tours and air transportation led the gain, jumping 15.5% and 13.6% respectively, with July being a peak travel month. (…)

RENT RANT (3)

I don’t pretend to be an expert on rent, although I was among the few to warn about the coming rentflation in 2021 and among the few to warn that rentflation was not as transitory as many believe since mid 2022. I once again see a need to curb the widespread enthusiasm that rental stats are about to solve the inflation problem.

The San Fran Fed’s August 7 paper has fueled the belief that rents are falling fast and will soon bring headline and core inflation measures within the Fed’s target, prompting the FOMC to adopt a much easier monetary policy.

In this Economic Letter, we forecast the path of CPI shelter inflation over the next 18 months by combining data from various market indexes that measure shelter inflation and housing markets. Our results suggest that the recent slowdown in asking rents and house prices is likely to slow shelter inflation significantly in the future, although substantial uncertainty surrounds these forecasts. (…)

In our model, we evaluate how well we can predict the evolving cost of shelter based on monthly data for lagged year-over-year growth from the Zillow Home Value Index, Zillow Observed Rent index, Apartment List National Rent Index, Apartment List Vacancy Index, CoreLogic Single-Family Rent Index, S&P/Case-Shiller U.S. National Home Price Index, and past CPI shelter inflation. (…)

Our sample covers the period from March 2018 to April 2023. (…)

The dashed line in Figure 3 presents our baseline forecast of year-over-year shelter inflation over the next 18 months based on the average of cumulative shelter inflation forecasts at the CBSA level. (…)

The limited model does not forecast a deflationary episode in 2024, although it does suggest that year-over-year shelter inflation will hit zero around summer 2024. Critically, both models agree that shelter inflation is likely to slow significantly over the next 18 months. (…)

  

There are several important caveats to these forecasts. First, the range of possible forecast errors is quite wide, with year-over-year shelter inflation in late 2024 estimated to fall anywhere from about –9% to about 2% in our baseline model, and –2% to 5% in our limited model. This suggests significant uncertainty in the forecasts. However, even the more modest predictions shown by the upper value of the range of estimates would represent a slowdown in shelter inflation.

A second caveat is that these models are estimated primarily on data from the pandemic period, which saw exceptional growth in housing markets and inflation. The relationship between these housing market indicators and shelter inflation could therefore be different going forward. This introduces additional uncertainty for our projections, beyond that reflected in the shaded confidence regions. (…)

The forecasts we present in this Economic Letter indicate that future shelter inflation may decline considerably, reflecting the signals of slowing in recent rental markets. At a minimum, our results imply that the risk of surprise increases in shelter inflation has become significantly smaller with the rapid rise in interest rates since early 2022.

But there more caveats:

• Their sample covers the period from March 2018 to April 2023, partly because rent data aggregation is fairly recent.
• The model is based on measures of “asking rent” on new leases which only account for less than 10% of the actual rental market. The Census Bureau estimates that only 8.4% of Americans move in a given year (last data point in 2021). The proportion of “new leases” is thus very small against “renewals” which represent 90%+ of the market and are not included in any of the measures used by the San Fran Fed analysts.

Recent work by the Cleveland Fed observed that a so-called New Tenant Repeat Rent index (NTTR) leads the BLS-Rent data by 3 quarters at YoY turnings points, using a rather limited sample. Apartment List’s National Rent Index peaked in Q4’21 and turned clearly down in Q1’22. This cycle, the BLS CPI-Rent index turned down in Q2’23. Unknown, however, is where both series are heading to at their next turning points.

July’s Apartment List NRI is down 0.7% YoY, noting that “seasonal trends suggest that monthly rent growth will continue to slow for the remainder of the year, so it is likely that annual rent growth will sink further into negative territory in the months ahead.”

On a MoM basis, the NRI is up 2.7% YtD, a slower pace than every previous year measured by the index, aside from 2020. Unfortunately, again, the sample is vry small.

Recall that the above refer to new, move-in rents as opposed to renewals.

Since WWII, CPI-Rent has never been negative on a YoY basis except for 2 months after the GFC (and only barely). The SF Fed models thus defy history.

Fortunately, we have some real world data to work with:

• RealPage’s June monthly rent data showed a 1.5% YoY increase for blended rents, down from +2.3% in May and +15.7% at its March ‘22 peak.
• New lease growth decelerated 40bps to 4.3% YoY while renewal lease growth slowed by 30bps to +6.2%.
• Amid strong new supply, the sunbelt’s occupancy held up well (down just 10bps to 93.8%) while coastal occupancy was unchanged at 95.7%.
• ISI notes that a sizeable portion of the projected deliveries have been pushed out and are now likely to hit the markets in 2024 (vs. 2023). Still, the existing pipeline for the next 2 years is equal to 5.7% of the existing inventory. More than 60% of the new apartments are in the major Sunbelt markets.

Among public companies:

• Tricon Residential owns 37k single-family homes across the U.S. Sun Belt. During Q2’23, it signed new leases averaging 13.4% rent increase and renewals averaging 6.5% increases.
• During the same quarter, Invitation Homes (82k units) saw new rents up 11.0% and renewals up 9.1%. American Homes: +10.6% and 7.5% respectively in spite of a 28.5% annualized turnover.
• All 3 companies operate in the Sun Belt where the bulk of new apartments are being built owing to strong population and job growth and above average income levels.

Other facts:

• The S&P/Cas-Shiller National Home Price Index is up 40.5% from its April 2020 level and has recently turned back up. New houses sold 34% above their April 2020 average price level. The CPI-Rent index is up 17.7% meanwhile.

• Rental demand is boosted by rising home prices and mortgage rates:

• The median American household would need to spend 46.4% of their income to afford payments on a median-priced home in the US, the highest % on record with data going back to 2006.

Much is written about the lags in the BLS Rent data. The July rent growth rate was down to 0.41% MoM (5% a.r.), still well above the 0.31% (3.7% a.r.) average monthly advance between the more normal 2014-19 years.

Time will tell how good the San Fran Fed’s formulas are at predicting rent growth.

For my part, understanding that people need living spaces and generally buy or lease what they can reasonably afford, I note that CPI-Rent is 99.8% correlated with wages since 1985…

Here’s the YoY growth rates since 1989. The pandemic has uphanded the relationship but wage growth is in the 5% range.

Since February 2020, wages are up 20.5% while CPI-Rent is up 18.2% even with all the lags.

It seems simpler, and wiser, to focus on wages. The Atlanta Fed wage growth tracker adjusts for compositional biases. Its 3-month moving average ticked up to 5.7% in July.

Previous Rent Rants:

• #1 October 14 2022 
• #2 December 7 2022

Home Prices Drop in China at Faster Pace Second month of declines adds to evidence of weaker market

New-home prices in 70 cities, excluding state-subsidized housing, fell 0.23% last month from June, when they slipped 0.06%, National Bureau of Statistics figures showed Wednesday. Prices slid 0.47% in the secondary market, according to the data. (…)

Last month’s price decline was widespread, with 49 cities out of the 70 tracked by the government seeing new-home values drop from a month earlier, the most this year. In the existing-home market, where prices are less subject to government intervention, they fell in all but seven cities.

Shenzhen, a bellwether city in the south, saw prices slide 0.9% in the secondary market, trending closer to the level in June last year after Covid lockdowns halted economic activity. (…)

The value of residential sales nationwide tumbled 43% in July from June to 654.5 billion yuan ($90 billion), the weakest monthly sales in almost six years, according to Bloomberg calculations based on separate official data Tuesday.

Goldman Sachs says that seasonally adjusted house prices in the primary market declined 2.5% MoM annualized in July, accelerating from -2.2% in June. Very dangerous!

• China Shadow Bank Crisis Sparks Protest by Angry Investors
• China Is Hiding More and More Data From the Rest of the World

(…) The government last month indicated that July’s figure would probably increase, setting another record. Then suddenly on Tuesday, officials said they would pause publishing the data, citing the need to iron out the method for how it is assessed. (…)

Numbers showing the amount of land developers bought and the price they paid have been missing from the monthly release. The data series goes back to 1998. The move came as the amount of land sold for development slumped more than 50% last year.

That decline indicated the housing crisis was worse than the government has said. Local government revenue from land sales last year only fell 23%, according to official figures.

Another curious data point is the amount of money the government holds in official foreign exchange assets, which has held remarkably steady since 2017. That’s despite China running an increasingly large trade surplus over that period, which should have led to an increase in reserves.

Brad Setser, the former US trade and Treasury official, suggests that half of the actual reserves are “hidden.” Many of the nation’s reserves don’t show up in the official books of the People’s Bank of China because they’re stashed in “shadow reserves,” appearing among the assets of entities such as state commercial lenders and policy banks, he said.

Despite the growing trade and current account surplus, the currency has also been stable, indicating that some of that money is likely being used to intervene in currency markets.

Even some data from the private sector has become unavailable. In March, the bond market was plunged into chaos after fixed-income brokers stopped supplying aggregated bond quotes to data vendors long relied on by traders. Transactions plunged by 30% to 60% from one day to the next after the two-day halt, which some media said was due to regulators trying to address data security concerns.

In May 2022, the main bond trading platform for foreign investors quietly stopped providing data on their transactions after record outflows in the nation’s $20 trillion debt market.

Some corporate registration data are also no longer available to overseas clients. (…)

Cremations in one of China’s most-populous provinces surged by 72.7% year-on-year in the first quarter, Chinese financial media outlet Caixin reported in July, citing official data released by Zhejiang province.

That gave a rare insight into the scale of mortality after the government’s sudden relaxation of coronavirus restrictions in December. And then the data vanished. The official statement was later removed from the internet, and Caixin deleted its report on that release.

Since April 1, overseas access to parts of the popular academic database China National Knowledge Infrastructure has halted. That means foreign academics can no longer access Chinese dissertations, patents, statistics and conference proceedings, the University of California, Berkeley said in an online notice. (…)

It isn’t just economic data that’s harder to come by. Official biographies of senior politicians and officials have shrunk, with the new format only giving basic personal information in a few sentences instead of the detailed resumes that were common before.

There’s also been at least three months when the Communist Party didn’t publish a readout from its top decision-making body since Xi took a third term last October. The Politburo normally meets every month and releases a statement with some details of what was discussed. That didn’t happen last November, January or May. (…)

• China Asks Some Funds to Avoid Selling Stocks as Markets Sink

Stock exchanges issued the so-called window guidance to several large mutual fund houses, telling them to refrain for a day from selling more onshore shares than they purchased, according to the people who asked not to be identified discussing private information. The instructions were relayed to fund managers through investment executives at the firms, they added. (…)

The authorities issued similar instructions to investment firms several times last year, according to the people. (…

After the authorities were said to have made a similar request in September, the CSI 300 gauge plunged about 10% in the following few weeks to reach the lowest in over three years.

John Authers: China Sneezes, But Will the World Catch a Cold? The security blanket that Chinese expansion gave to the global economy for the past two decades is being pulled away.

(…) On several occasions over the last two decades, a big release of credit in China has raised boats across the world.

But now, economic woes are proving way deeper than initially feared (or desired). (…)

Bloomberg Economics suggests that fears are overstated, and that a cushioned decline in China’s growth would have only a “limited impact on the US economy.” In a downside scenario where China under-delivers on stimulus and growth spirals down, the Fed could be tipped into rate cuts sooner than expected. (…)

Even so, the medium-term outlook could ostensibly be seriously bearish for investors. Markets have already had to get used to the end of the “put” from the Fed as the lender of last resort. If they also have to survive without the Chinese “put” as the buyer of last resort, a lot of cosy assumptions from the last two decades come into doubt.

Win Thin, global head of currency strategy at Brown Brothers Harriman, suggested that China could muddle through in the short term. But:

Longer-term? Not so much. With debt/GDP approaching 300%, there are limits to returning to the old debt-fueled stimulus. Furthermore, China can no longer grow their way out of their problems as it struggles to meet its target for this year ‘around 5%.’ Besides the obvious downside risks to global growth, we don’t yet have a firm grasp of the potential global financial impact from a debt event in China but that is clearly the big “known unknown.” As always, the big ‘unknown unknowns’ elude us until it’s too late.

(…) The monthly Bank of America Corp. survey of global fund managers was published Tuesday, and charts of the evolution of what respondents label the “biggest tail risk.” From 2013 to 2016, the Chinese economy and the danger it would crash headed the list, while trade war with the US dominated attention for the years before the pandemic.

Now, however, fund managers are still much more worried about global inflation. A Chinese hard landing didn’t even make the top five perceived risks. That’s strange, given that such a scenario looks a much more imminent threat now than a decade ago, when China seemed to be the sum of all fears. (…)

China thwarts Intel’s $5.4bn Israeli chipmaker purchase

The Labor Market’s So Wobbly Even Head Hunters Can’t Forecast Recovery

(…) ZipRecruiter Inc. withdrew its annual guidance citing “atypical hiring patterns” in the first half after cutting 20% of its staff in May. Recruit Holdings Co., the owner of Indeed and Glassdoor, warned it was “not sure yet” when growth would return despite expecting $500 million of annual cost savings after chopping about 2,400 jobs, including about 15% of Indeed’s workforce. (…)

“I’d say broadly, clients were more cautious, more conservative, more tentative than we had counted on,” Robert Half Chief Executive Officer M. Keith Waddell said on the company’s recent earnings call after its second-quarter profit and third-quarter outlook missed estimates. (…)

“We are already operating in an environment that is indicative of what we would call a garden variety recession level for now,” Manpower’s chief executive officer Jonas Prising said on a recent earnings call, adding that while rates stay high, the labor market can be expected to decline further. (…)

“We’re not expecting stabilization if you will in the very short-term. (…)

Often dubbed the canary in the coal mine for employment, the temp business has been shrinking its own workforce since March 2022:

Given the scarcity of labor post pandemic, employers have been hoarding employees. But they have cut workweeks: total hours worked have been flat so far in 2023 while employment rose by 1.4 million jobs 1.1%:

Excluding January’s weather related surge in jobs and hours, total employment rose 1.1 million or 0.8% in the last 6 months, averaging only 180k per month, down from +511k per month in 2022.

There is limited scope for further reductions in the workweeks. Unless overall demand improves, which is not what the Fed wants, employers will need to chose between cutting their workforce or accepting lower operating profit margins.

Speaking of demand, the goods sector is not recovering just yet:

Cass Freight Index

The shipments component of the Cass Freight Index® fell 2.2% m/m in July and fell 1.2% m/m in SA terms.

• July volumes were on par with January in absolute terms, despite 10% stronger seasonality.
• On a y/y basis, the index was 8.9% lower in July, after a 4.7% decline in June.
• The freight market downcycle is now 19 months old, which compares to a range of 21 to 28 months in the past three downcycles.
• Declining real retail sales and destocking remain the primary issues, but dynamics are shifting as real incomes improve and the worst of the destock is in the rearview.

In seasonally adjusted (SA) terms, the index is now 13% below the December 2021 cycle peak, slightly greater than the peak-to-trough declines in two of the three downcycles in the past dozen years.

With normal seasonality, this index would increase slightly m/m in August but decline about 11% y/y, comparing to the extraordinary time last summer when destocking was actually creating freight demand as retailers were shipping out stale inventory.

The expenditures component of the Cass Freight Index, which measures the total amount spent on freight, fell 2.8% m/m and 24.4% y/y in July.

With shipments down 2.2% m/m in July, we infer rates were down 0.6% m/m (see our inferred rates data series below).

• On an SA basis, the index declined 2.0% m/m, with shipments down 1.2% and rates down 0.8%.

The expenditures component of the Cass Freight Index rose 23% in 2022, after a record 38% increase in 2021, but is set to decline about 18% in 2023, assuming normal seasonal patterns from here. Both freight volume and rates remain under pressure at this point in the cycle, but fuel price increases could limit the savings for shippers.

The rates embedded in the two components of the Cass Freight Index declined 17% y/y in July, after falling 21% in June.

• Cass Inferred Freight Rates decreased 0.8% m/m SA after a 0.9% decline in June, as contract rates continued to reset lower.
• Based on the normal seasonal pattern, this index would decline slightly m/m in August, and the y/y decline would remain about 17%.
• We estimate lower fuel prices are knocking about 5% off freight rates y/y, and while fuel is a big factor, there’s clearly also still market pressure on rates.

China Slashes Rates, Suspends Youth Jobless Data as Economy Signals Sharper Downturn Retail sales, factory output miss expectations as overall urban unemployment rises

Chinese officials said they would stop reporting the country’s youth unemployment rate after months of spiraling increases, depriving investors, economists and businesses of another key data point on the declining health of the world’s second-largest economy.

The surprise move extends China’s efforts to restrict access to a variety of data on its economy and corporate landscape to outside scrutiny.

At the same time, China’s central bank unexpectedly cut a range of key interest rates, an emergency move to reignite growth after new data showed the economy slid deeper into distress last month. (…)

China’s currency, the yuan, weakened past 7.31 a U.S. dollar in Hong Kong trading on Tuesday, touching its lowest level since November 2022. The offshore yuan has depreciated more than 5% against the dollar since the start of this year, and is near a record low.

For the first time since February, China’s headline measure of unemployment rose, climbing to 5.3%.

The jobless rate for people ages 16-24, meanwhile, had marched steadily higher for six consecutive months to hit a series of record highs, culminating in a reading of 21.3% in June. Economists had generally expected the jobless rate for that group to climb even higher through the summer, as another batch of graduates entered the labor market. (…)

The risk for the global economy is that a prolonged spell of soggy demand in China holds back growth elsewhere in the world by blunting exports of iron ore, crude oil, factory equipment and luxury goods.

Already, U.S. companies in sectors including chemicals and heavy machinery have warned of disappointing sales in China and a gloomier outlook for what had long been a large and dependable market.

The People’s Bank of China said Tuesday that it lowered the interest rate on a key facility that funnels one-year loans to banks to 2.5% from 2.65% previously, at the same time shoveling the equivalent of $55.2 billion of new loans into the banking system. Such a move is usually followed within days by a reduction in bank lending rates to households and businesses.

The PBOC said it also cut the interest rate on seven-day reverse repurchase operations to 1.8% from 1.9%, having cut that short-term lending rate as recently as June. So-called repo and reverse repo transactions are key tools used by central banks, including the Federal Reserve, to manage banks’ funding needs and influence interest rates on loans to households and businesses. The PBOC said it dished out $28.1 billion of short-term loans at the new, lower rate.

Later Tuesday, the central bank said it made additional cuts to its suite of policy rates, with trims to overnight, seven-day and one-month rates on loans available from its standing lending facility, which provides emergency funding to commercial banks in exchange for high-quality collateral. The rates available on loans from the facility serve to cap short-term market interest rates. They were also last cut in June. (…)

New data Tuesday showed retail sales in China expanded 2.5% in July compared with a year earlier, a deterioration from the 3.1% annual pace recorded in June and well below the 4.4% annual expansion expected by economists polled by The Wall Street Journal. (…)

Industrial production expanded at an annual 3.7% rate, down from 4.4% in June and missing forecasts for a 4.6% increase. (…)

Investment in buildings, machinery and other fixed assets from January through July rose 3.4% from the same period a year earlier, slowing from the first half’s 3.8% pace. (…)

Home sales by value rose 0.7% from a year earlier in the January-to-July period, slowing significantly from a 3.7% increase in the first six months of the year. Property investment fell 8.5% during the period, compared with a 7.9% decline recorded in the first six months. New construction starts plunged 24.5%. (…)

The end of the real-estate boom is hitting household wealth, meaning Chinese families anxious about their economic future are squirreling away cash and paying down debt instead of splashing out on goods and services.

Data released on Friday showed Chinese banks lent far less than expected to households and businesses last month, highlighting weak demand for borrowing despite a succession of interest-rate cuts by China’s central bank. (…)

Foreign direct investment in China in the second quarter of 2023 was just $4.9 billion, according to data from China’s balance of payments, the lowest quarterly total in records stretching back to 1998.

Chinese officials have announced dozens of small stimulus measures in recent weeks but economists doubt they will do much to revive the ailing economy. A larger stimulus seems unlikely as Beijing has repeatedly signaled its unease about taking on too much debt to finance wider fiscal deficits.

• China’s Shadow Banks Could Be Another Property Casualty

China’s real-estate downturn is entering a more acute phase again. Problems are also popping up in another perennial trouble spot: the nation’s enormous and opaque shadow banking sector.

The last thing the nation needs now is tighter financial conditions. But if more shadow banking investment products start going belly up, that might happen anyway.

Three companies haven’t received payments from investment products managed by Zhongrong International Trust, according to exchange filings in recent days. Over the weekend, Shanghai-listed Nacity Property Service disclosed that it hasn’t received principal and interest due from a 30 million yuan ($4.2 million) Zhongrong trust product which came due last week. Materials company KBC Corp says it is missing 60 million yuan due from two maturing Zhongrong trust products. And tool manufacturer Xianheng International hasn’t received payments due from one Zhongrong product and two other products from a separate trust firm.

Trust companies, a venerable part of China’s “shadow banking” system of nonbank lenders, make investments on behalf of their clients. In addition to managing assets entrusted to them, many also sell high-yield investment products directly to companies and individuals. They then invest the proceeds in a variety of assets, or lend directly to companies or property projects—often ones that cannot secure regular bank or bond market financing.

The country’s trust industry had around $2.9 trillion of assets as of March, according to the China Trustee Association. About 72% are held by these so-called financing trusts which peddle investment products to wealthy investors and companies. (…)

In mid-2019, around 15% of financing trust assets were invested in real estate. But defaults on trust investment products—especially those linked to real estate—picked up over the past couple of years, and many financing trusts scaled back their investments in property. Such outstanding investment in real estate has dropped 62% since 2019, and accounted for only 7.4% of total financing trust assets as of March. But the absolute outstanding amount—around $156 billion—is still rather sizable.

And though the size of the missed payments announced by the three companies isn’t that big in the grand scheme of China’s labyrinthine financial system, it’s still concerning since Zhongrong has some important backers. Zhongrong’s top shareholders are a state-owned enterprise, Jingwei Textile Machinery, and private asset-management company Zhongzhi Enterprise, which is one of the largest in the industry. (…)

China’s trust sector isn’t quite the heavyweight it was before the shadow banking crackdown of recent years, but it’s still important to watch because it is a source of capital for marginal borrowers—and intimately connected with key sectors such as housing and infrastructure. (…)

Bloomberg informs us that the “Chinese authorities have already set up a task force to study any possible contagion, with the banking regulator examining risks at Zhongzhi, according to people familiar with the matter.”

This follows task forces on local governments’ indebtedness and on the housing industry’s woes…

BTW, BB continues:

It’s not the only firm in difficulties. A total of 106 trust products worth 44 billion yuan defaulted this year through July 31, according to Use Trust. Real estate investments accounted for 74% of the defaults by value. Last year also saw billions of dollars in defaults.

Zhongzhi is the second-largest shareholder of Zhongrong Trust, holding about 33%. The conglomerate also holds stakes in five other licensed financial firms, including a mutual fund manager and two insurers, and is invested in five asset management companies and four wealth units, according to its website. It also controls listed companies and owns 4.5 billion tons of coal reserves among its industrial operations. (…)

Even as rival firms sought to pare risks, Zhongzhi and its affiliates, especially Zhongrong, provided financing to troubled developers, snapping up assets from companies including Kaisa Group Holdings Ltd. and Shenzhen Wongtee International Enterprise Co. Zhongrong issued more than 10 trust products for the now defaulted China Evergrande Group between 2014 and 2016. The percentage of real estate trust assets at Zhongrong more than doubled to 18% in 2020 from 6.6% in 2017, according to the newspaper. (…)

Japan’s Economy Grows at 6% Pace in Second Quarter Exports rise and surge in foreign visitors helps lift spending.

Japan’s real gross domestic product increased 1.5% in the three months to June from the previous quarter, compared with 0.9% growth in the January-March period.

That marked a rare case in which the world’s third-largest economy grew faster than its bigger counterparts. In China, growth slowed to 0.8% in the second quarter compared with the previous three months. (…)

In the April-June quarter, the Japanese economy grew an annualized 6%, compared with 2.4% in the U.S.

It was the fastest quarterly growth in Japan since 2015, not counting a period of pandemic-induced gyrations in 2020. The Japanese economy grew for a third straight quarter and finally surpassed its prepandemic size in real terms.

One reason was strength in car exports, which had struggled until recently because supply-chain problems made it hard for Japan’s car factories to meet customer demand. Overall exports rose 3.2% from the previous quarter, a strong pace in a global economy where trade overall is rising only weakly. (…)

Inflation in Japan has been running above 3% recently, while prices in China fell in the latest month—a reversal of the decadeslong trend in which Japan typically suffered from flat or declining prices. (…)

In a sign of weak domestic demand, private consumption fell 0.5% from the previous quarter, the first decline in three quarters. Although companies decided earlier this year to give larger pay increases, inflation is still outpacing wage growth. Real wages adjusted for price increases have fallen for 15 straight months.

Imports dropped 4.3% from the previous quarter, indicating lackluster consumer demand.

SMBC Nikko Securities expects the Japanese economy to shrink an annualized 3% in the current July-September quarter because it says the slowdown in the global economy will likely reduce exports.

• au Jibun Bank Japan Composite PMI

At 52.2 in July, the au Jibun Bank Japan Composite PMI Output Index rose fractionally from 52.1 in June to signal a further modest expansion in the Japanese service sector. The uptick was the seventh in as many months and was underpinned by a solid expansion in services business activity, although the inflow of new business slowed sharply from that seen in June.

The manufacturing sector meanwhile, remained subdued, as both output and new orders declined further, with the rate of reduction in new orders quickening on the month.

Japanese private sector jobs expanded at the start of the third quarter, although the rate of job creation was only fractional and the softest in the current six-month sequence. Concurrently, the level of outstanding business at private sector firms fell for the first time in four months, owing to a renewed reduction in services backlogs.

  

Fitch warns it may be forced to downgrade multiple banks, including JPMorgan – CNBC

An analyst at Fitch Ratings warned that U.S. banks, including JPMorgan Chase (JPM.N), could be downgraded if the agency further cuts its assessment of the operating environment for the industry, according to a report from CNBC on Tuesday.

In June, Fitch lowered the score of the U.S. banking industry’s “operating environment” to AA- from AA, citing pressure on the country’s credit rating, gaps in regulatory framework and uncertainty about the future trajectory of interest rate hikes.

Another one-notch downgrade, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, analyst Chris Wolfe told CNBC.

Lenders were rocked earlier this month after Fitch’s peer Moody’s downgraded 10 mid-sized U.S. banks and warned it may cut ratings of several others.