Year: 2023

Consumers Pulled Back on Spending, Inflation Eased in October Weakening price pressures likely end Fed rate hikes

Consumer spending rose 0.2% in October, down sharply from a 0.7% rise in September, the Commerce Department said Thursday. The October reading marked the slowest increase since May. The combination of ebbing income growth, high interest rates and prices, dwindling pandemic savings and the resumption of student-loan payments is eroding Americans’ ability to keep boosting their spending as briskly as they did through the summer, economists say. (…)

Core prices, which exclude volatile food and energy items, were up 3.5% from a year ago. They rose 2.5% at a six-month annualized rate, down from 4.5% in the six months through April, a dramatic improvement. (…)

In remarks Thursday morning, New York Fed President John Williams suggested the Fed might be done raising interest rates and said he thought interest-rate policy was tighter than at any time in the past 25 years.

But Williams, a top lieutenant to Fed Chair Jerome Powell, said he expected it would be appropriate to maintain a restrictive interest-rate stance “for quite some time” to ensure inflation doesn’t flare up again. (…)

Personal income—which includes income from investments and other sources as well as wages—rose 0.2% in October from September, down from September’s 0.4% gain, the Commerce Department said Thursday. (…)

Here’s the Wells Fargo detailed table:

Note the 4th line: Wages and Salaries rose only 0.14% MoM in October. If this is not a statistical quirk it would mark a major and potentially significant break in wage trends. Good for inflation, particularly on services, but a big headwind for consumer spending.

• Over the last six months, the trimmed mean has been rising at an annualized rate of less than 3%, suggesting that the target is growing coming within range:

• Most importantly, the inflation rate of PCED services excluding energy and housing is falling. It has been stuck around 5.0% in 2022 and earlier this year. But it was down to 3.9% y/y in October. Fed Chair Jerome Powell and his colleagues have said that they are concerned about the stickiness of this “super-core” measure of inflation. Now, they should be less concerned as it seems to be coming unstuck. (Ed Yardeni)

• 6-month changes annualized (GS)

US Continued Jobless Claims Jump to Highest Since Late 2021

Continuing claims, which are a proxy for the number of people receiving unemployment benefits, rose to 1.93 million in the week ended Nov. 18, higher than all estimates in a Bloomberg survey of economists. This figure has climbed since September, suggesting out-of-work Americans are finding it more difficult to secure new employment.

Meanwhile initial jobless claims rose by 7,000 to 218,000 in the week ended Nov. 25, a period that included the Thanksgiving holiday. Given the figures tend to be particularly volatile around holidays, the four-week moving average offers a clearer picture of the trend in applications. That measure was little changed last week, according to a Labor Department report. (…)

The Federal Reserve’s Beige Book survey of regional business contacts — published Wednesday and containing information gathered on or before Nov. 17 — showed a continued easing in labor demand. Most regional Fed banks reported flat to modest increases in employment in their districts, and reductions in headcounts through layoffs or attrition were reported. (…)

The 4-week moving average of continuing claims is now exceeding its pre-pandemic level.

Job postings on Indeed keep falling but are not collapsing. The next JOLTS report on December 5 should be weak however.

Pending Home Sales Fall to Record Low

The index fell 1.5% in October to 71.4, the index’s lowest reading since the NAR began tracking data in 2001, and is down 8.5% compared to one year ago. (…)

Oil Holds Drop as ‘Voluntary’ OPEC+ Cuts Leave Mass of Confusion Oil steadies following a vague output cut plan.

The alliance announced roughly 900,000 barrels a day of fresh output cuts from January, but the curbs are voluntary, with Angola already rejecting its quota. Saudi Arabia, meanwhile, said it will prolong its separate 1 million barrel-a-day reduction through the first quarter. (…)

“These are all still voluntary cuts, and that’s one of the reasons for the disappointment,” she said, adding that whether the extra 900,000 barrels a day of additional curbs are delivered over the first quarter remains to be seen. (…)

• Despite the extra cut, we still see the risks to our unchanged December 2024 Brent forecast of $93/bbl as tilted moderately to the downside for two reasons. First, the extra cut is a temporary response to recent large upside surprises to inventories and supply, including in the US, worth around -$10/bbl on December 2024 Brent, if they mostly persist. Second, the further rise in spare capacity and the voluntary nature of today’s cut imply that any additional cuts become increasingly difficult to implement. (GS)

MANUFACTURING PMIs

Eurozone factory downturn remains strong in November, but reductions in output, new orders and inventories ease

The HCOB Eurozone Manufacturing PMI, compiled by S&P Global, posted below the 50.0 threshold that separates growth and contraction for a seventeenth month in a row during November, signalling a further worsening of conditions within the goods-producing sector. However, while the latest reading of 44.2 pointed to another strong deterioration, this was up from 43.1 in October and the highest since May. (…)

Factory production across the euro area continued to decrease during November. That said, while the pace of decline was strong overall, it eased to its softest since May. A slower fall in output coincided with a weaker contraction in new orders, and the slump in new export sales (which has been ongoing since March 2022) also moderated.

Eurozone manufacturers were less aggressive with their destocking efforts, November survey data showed, with pre- and post-production inventory levels falling at weaker rates. The fall in stocks of purchases was nevertheless the second-fastest seen since December 2012 amid another substantial month-on-month reduction in manufacturers’ buying activity.

Backlogs of work declined in November, extending the current period of depletion in outstanding business to a year-and-a-half. Lower volumes of incomplete orders, in tandem with a continued and marked deterioration in demand, led eurozone manufacturers to reduce their staffing capacity for a sixth month in a row midway through the fourth quarter.

Furthermore, the rate of job shedding was the fastest since August 2020. That said, although employment cuts worsened, there was a pick-up in business confidence during November, with growth expectations at their strongest for three months. (…)

Lastly, the latest survey data signalled a further sharp reduction in costs faced by eurozone factories. This was despite the rate of decrease in input prices cooling to its softest since April. Output charges continued to be discounted, as has been the case since May, as lower costs enabled businesses to offer more competitive prices to their clients.

China: PMI improves to three-month high in November

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) increased from 49.5 in October to a three-month high of 50.7 in November, to signal a renewed improvement in manufacturing conditions. Though only marginal, it marked the third time in the past four months that the health of the sector has strengthened.

Supporting the above 50.0 PMI figure was a sustained and quicker rise in overall new business received by Chinese goods producers in November. Though modest, the rate of new order growth was the best seen since June, with firms often noting that firmer market conditions had helped to lift sales. However, new work from overseas continued to fall slightly, underscoring a relatively challenging external demand environment. (…)

In line with the trend seen for output, purchasing activity also returned to expansion in November. Input buying has now increased in three of the past four months, though the latest rise was only slight. (…)

Although employment across China’s manufacturing sector continued to contract, the rate of job shedding eased in November. Notably, the rate of payroll cuts was the slowest seen in the current three-month sequence of falling headcounts and only marginal. (…)

Prices data indicated that cost pressures remained subdued in November, with average input costs rising at a modest pace that was slower than in October. At the same time, efforts to attract and secure sales curbed overall pricing power, and output charges were broadly unchanged on the month.

Sustained contraction in Japan’s manufacturing sector

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) fell from 48.7 in October to 48.3 November to signal a deterioration in the overall health of the Japanese manufacturing sector. While only modest, the reduction was the strongest seen since February.

Contributing to the sub-50.0 PMI reading was a further contraction in output levels, and one that was the strongest seen in nine months. The downturn reportedly reflected production adjustments in response to weaker demand and a lack of new product launches. There was also a sustained contraction in new orders midway through the final quarter of 2023. The rate of decline sharpened from October amid cooling demand in both domestic and international markets. As such, foreign sales of Japanese manufactured goods reduced for the twenty-first month in a row. Moreover, the rate of reduction was the strongest recorded since June.

Mirroring demand developments, firms reduced input purchases in November, extending the current contractionary sequence to 16 months. The rate of decrease was sharp and the steepest since February. Latest data also provided evidence of stockpiling.

On the prices front, cost pressures remained historically elevated in the latest survey period. Input prices rose at a marked pace that was nonetheless the softest since August. Average cost burdens were driven up by higher raw material prices and unfavourable exchange rate trends. Charged price inflation eased for the first time in three months to reach the lowest since July 2021.

Weak customer demand allowed firms to work through existing orders, as signalled by a stronger fall in backlogs of work. Moreover, the rate of depletion was the strongest since March. Firms often indicated they had enough capacity to work through outstanding business. In fact, manufacturers lowered employment levels for the second month in a row, as firms opted to not replace voluntary leavers.

‘Struggling to grow’: Canada’s economy shrinks in third quarter amid higher interest rates

Real gross domestic product, which is adjusted for inflation, shrank at an annualized pace of 1.1 per cent in the third quarter, according to figures published by Statistics Canada on Thursday. The results were considerably weaker than the Bank of Canada’s estimate of 0.8-per-cent growth and Bay Street’s expectations of a slim 0.1-per-cent increase.

Canada’s economic performance has increasingly diverged from that of the U.S., which posted a 5.2-per-cent expansion in the third quarter.

Canada did, however, avoid two consecutive quarters of GDP decline – what some economists refer to as a “technical recession.” Statscan made sharp upward revisions to its second-quarter figures, which are now showing annualized growth of 1.4 per cent, where previously they showed a slight decline. (…)

Thursday’s report showed how higher borrowing costs are weighing on economic activity, although the summer months were also affected by wildfires and more striking workers than usual.

In a preliminary estimate, Statscan said that GDP rose 0.2 per cent in October, and many analysts project growth will swing back into positive territory in the fourth quarter.

Still, the economic situation looks more grim when soaring population growth is accounted for. GDP per capita – a popular measure of living standards – has fallen for five consecutive quarters. (…)

The GDP figures showed several areas of weakness. Business investment fell at an annualized rate of 10.1 per cent in the third quarter, while exports shrank by 5.1 per cent. Statscan noted that inventories accumulated at the slowest pace in two years. Household spending was essentially flat for a second consecutive quarter.

The household savings rate picked up to 5.1 per cent in the third quarter from 4.7 per cent in the second quarter. Canadians have been squirrelling away more money than usual; the average savings rate between 2015 and 2019 was 2.2 per cent. (…)

Government spending rose by 7.3 per cent annualized during the third quarter, which saw Ottawa send a “grocery rebate” to millions of households. (…)

Final domestic demand – a metric that includes household and government consumption, along with capital investments – rose at an annualized pace of 1.3 per cent, similar to growth in the second quarter. (…)

• Bank of Canada preview: Dovish pressure mounting

The Bank of Canada is widely expected to hold the target for the overnight rate at 5% at the upcoming policy meeting on 6 December. At the October policy meeting, the accompanying statement warned that “progress towards price stability is slow and inflationary risks have increased, and [the BoC] is prepared to raise the policy rate further if needed”.

However, since that meeting the activity data has softened, the labour market has shown evidence of some cooling and inflation has continued to slow. Consequently, the threshold for a rate hike does not appear to have been met.

Moreover, Governor Tiff Macklem has since conceded that “the excess demand in the economy that made it too easy to raise prices is now gone” and that the “economy is approaching balance”.

The economy contracted at an annualised rate -1.1% rate in the third quarter, with month-on-month increases having effectively stalled since June. Meanwhile, the unemployment rate is trending higher and wage pressures appear to be topping out.

Macklem admitted that this softening in activity means “more downward pressure on inflation is in the pipeline”. We agree and expect CPI to slow to 2% in the second quarter of 2024, especially if gasoline prices remain at the current low levels. (…)

Given this situation we feel the BoC will cut sooner and more aggressively than the market and consensus are expecting. We look for 150bp of rate cuts in 2024, starting at the April policy meeting.

Canada’s quarterly GDP annualised

Source: ING, Refinitiv

The Big Risk Causing Investors to Shun China More than $24 billion of foreign money has left mainland China’s stock market since August as geopolitical risks turn people off investing there.

(…) This past summer, the U.S. restricted Americans from investing in Chinese companies in certain high-tech industries. The U.S. has also imposed export restrictions on advanced semiconductor chips that can be used to develop artificial intelligence and related manufacturing equipment, to limit their use by China’s military. (…)

American investors have been forced to sell shares in companies that the U.S. says are aiding China’s military. That led to the delisting of Chinese state-owned telecom carriers and energy companies from U.S. stock exchanges. Americans have also been barred from investing in other blacklisted Chinese companies.

International venture-capital and private-equity investors also have to tread extra carefully when assessing Chinese companies. (…)

Morgan Stanley strategists have warned investors of “sustained geopolitical complexity” in 2024 and an election year in both the U.S. and Taiwan. 

Goldman Sachs said in a Nov. 12 report that under what it called a very harsh scenario, investors could sell $170 billion more in Chinese shares—if U.S. pension funds completely liquidate their China holdings due to policy and geopolitical reasons and active mutual funds and hedge funds revert to their lowest China allocations. (…)

• Xi Takes Flurry of Small Steps to Open China After US Trip China unleashes a flurry of market access concessions.

(…) Beijing approved a long-delayed Mastercard Inc. joint venture, then followed up by green lighting one of the world’s largest technology mergers between US chipmaker Broadcom Inc. and cloud company VMWare Inc. Last week, officials announced visa-free access to China for six countries.

Translating “the San Francisco vision into actual policies and concrete steps” is a matter of “first-rate importance,” the official Xinhua News Agency wrote this week. A meeting of the Politburo that Xi chaired on Monday called for “high-level opening up,” a slogan associated with more market access.

The Chinese leader also visited commerce and finance hub Shanghai this week for the first time since 2020, a trip viewed by some analysts as a signal of his determination to reinvigorate investor confidence.

The spate of conciliatory acts since the Biden meeting signals China’s vast bureaucracy, which waits on clear instructions from Xi, is ramping up efforts to stop an exodus in capital. (…)

• Putin Seizes Rights to St. Petersburg Airport From Foreign Investors Presidential decree transfers Pulkovo stakes to Russian entity

President Vladimir Putin ordered the transfer of all the rights to managing St. Petersburg’s Pulkovo airport from foreign shareholders that include Germany’s Fraport AG and the Qatari wealth fund by shifting their stakes into a new Russian entity.

Under a decree published late Thursday, shareholdings in the Cyprus-registered concession that runs the airport of Russia’s second-largest city will be consolidated in a new domestic company. Existing investors, which also include a consortium with Abu Dhabi sovereign fund Mubadala Investment Co., will retain their stakes but won’t be able to vote because those rights will be held only by Russian shareholders in the new company.

German airport operator Fraport, the Qatar Investment Authority, and Russia’s VTB Bank each hold about 25% of Pulkovo’s concession. The remainder is controlled by a consortium of investors including Russia’s sovereign wealth fund, RDIF, Mubadala and Baring Vostok, according to the Interfax news service. (…)

Putin’s decree raised the possibility that stakeholders’ voting rights can be restored “upon their application, subject to the conclusion of corporate agreements with other participants in the company and upon the assumption of obligations to comply with Russian legislation.”

That potentially opens the door for the Middle East investors to restore their voting rights. (…)

National Association of Credit Management

(…) in a marked change from recent prior months of the CMI survey, credit managers are sounding the alarm
on account performance, ranging from more accounts delinquent, poor application quality, and more bankruptcies. (…)

• Half of the six unfavorable factor indexes deteriorated in the November survey which records credit
  performance for the prior month; the index for filings of bankruptcies led with a decline of 2.6 points to an index value of 47.8, its lowest level since June 2020.
• The index for accounts placed for collection deteriorated by 1.0 point to 44.6, its 18th month below 50
  points the lowest level recorded for this factor index.
• The index for the rejections of credit applications declined 1.0 point in the November CMI survey to a level
  of 48.7, the third consecutive month of decline for this index.

“It’s almost like a switch was flipped in the comments provided by survey respondents,” said Cutts. “We went from a gradual subsiding of comments regarding supply chains to sort of random comments and then this month they all aligned on worry about account performance.

The US Courts reports filings of bankruptcies and year-to-date through September their data show a 39% increase in business bankruptcies over 2022. While the level is not yet fully back to pre-pandemic it won’t be long before business failure surpasses that mark at this rate.” (…)

“Respondents in this month’s CMI survey representing companies in the manufacturing sector stated that orders are slowing and payments slowing even more, not at all in line with the news reports indicating a strong economy,” Cutts said. (…)

“The Service Sector CMI index is managing to stay in expansion but there is a troubling narrative emerging in the unfavorable factors indexes,” said Cutts. “Not only are all of the factors in contraction, some are deeply so and have been for a long while.

More accounts are beyond terms, more and more are being referred to collections, disputes over invoices are increasing—these are all signs that businesses are stressed. (…) The only bright spot is that dollar collections are still strong once the hammer is brought down on customers.”

“Service sector respondents to the CMI survey noted that more bankruptcies and business closures. As the cost of money increases, we are likely to see more accounts stretching their terms and being less responsive as they work to conserve cash. Unfortunately for credit managers it means their work is getting harder and harder.”

• US Leveraged Loan Default Rate Pushes Above 3%

Six defaults in the last 30 days have brought the US trailing twelve month (TTM) leveraged loan default rate back above 3%, Fitch Ratings says. Operational issues and free cash flow challenges, in tandem with elevated leverage, high interest expense and weak liquidity, pushed several issuers to file Chapter 11 or engage in distressed debt exchanges (DDEs) to address near-term maturities.

The U.S. Leveraged Loan TTM Default Rate stands at 3.0% by volume and 3.5% by issuer count in October, up from 2.9% and 3.4% in September. YTD default volume as of Nov. 20 is $49.7 billion from 61 issuers, compared with $25.1 billion from 23 issuers over the same period in 2022. There were six defaults over the past month, four of which were DDEs and two were issuers in healthcare. (…)

• Fannie and Freddie Serious Delinquencies in October: Single Family Declined, Multi-Family Increased

Ed Yardeni:

The bond market liked today’s Beige Book, the collection of regional surveys of economic activity conducted by each of the 12 Fed district banks. While Q3’s real GDP growth was revised up to a red hot 5.2%, the latest survey from October 6 to November 17 was more like a cool beige color. Six of the 12 Fed banks reported slight declines in economic activity. Two others were “flat to slightly down.” Demand for labor “continued to ease, as most districts reported flat to modest increases in overall employment,” the Beige Book said. Wages also grew a bit more slowly. Price increases “largely moderated” across the country, the Beige Book found, and “most districts expect moderate price increases to continue into next year.”

Eurozone inflation drops much more than expected again in November

Headline inflation fell from 2.9 to 2.4% in November, while core inflation dropped more, from 4.2 to 3.6%. This shows that signs of an imminent victory on inflation are mounting for the European Central Bank. When will they dare to admit so themselves? We expect a first rate cut before the summer

The decline in inflation was seen across the board in November. Energy inflation is still driven by significant base effects (-11.5% year-on-year), and food inflation dropped from 7.4 to 6.9% year-on-year. Goods and services inflation also both fell significantly, to 2.9% and 4% year-on-year, respectively.

In fact, on a monthly basis, core inflation was negative.

We always expected inflation to drop significantly in the final months of the year, but the process of disinflation is happening even more quickly than we expected, particularly for core inflation, where expectations were for price pressures to remain more stubborn.

But weak demand and quickly fading supply-side problems have set core inflation on a much quicker path down than thought a few months ago. Taking the monthly pace of price increases seen in the past three months, core inflation will drop below 2% well before the end of next year. While we think that might be a bit optimistic given the remaining price pressures coming from wages, for example, it does show that inflation is now much more benign than earlier in the year.

For the ECB, signs of an imminent victory on inflation are mounting. The central bank worries about factors like wage growth and possible spikes in the energy market that could put inflation on a higher path again. But current monetary policy is sufficiently restrictive as bank lending data out earlier this week showed that the effects of higher rates are impacting lending significantly. Also, there is still a lot more of the impact of tightening to come as interest payments are still increasing. The market is therefore right to start looking at rate cuts for 2024. We think the first one could well happen before the summer.

China Factory, Services Activity Shrink in Snag for Recovery Services sector gauge records first drop below 50 this year

The official manufacturing purchasing managers index fell to 49.4, the second straight month of contraction, according to a Thursday statement from the National Bureau of Statistics. While economists expected a decline in the index, the number was lower than estimates.

A gauge of non-manufacturing activity — which measures the construction and services sectors — unexpectedly eased to 50.2, barely clearing the 50 mark above which indicates expansion. An underlying measure of services activity fell to 49.3, the first contraction for that gauge this year. (…)

A sub-measure of new orders placed with Chinese factories dipped to a five-month low of 49.4 in November, with a shrinkage in new export orders even worse, according to the NBS. The sub-gauge of employees was entrenched in contraction at 48.1.

The government has in recent months worked to support activity by ramping up bond sales for infrastructure investment. A gauge of construction activity rose in November to 55 from 53.5 the prior month, the NBS data showed. (…)

• China’s Home Sales Spiral Despite Backstop Plan for Developers

The value of new home sales among the 100 biggest real estate companies fell 29.6% from a year earlier to 390.19 billion yuan ($54.6 billion), according to preliminary data from China Real Estate Information Corp. on Thursday. That follows a 27.5% decline in October.

Sales were down 4.1% from a month earlier. The top 100 developers’ aggregate annual sales are expected to fall 15% from 2022, according to the report. (…)

China’s home prices fell the most in eight years in October, signaling the property slump is worsening even after the government ramped up efforts to revive demand.

The WSJ adds:

China’s huge real-estate sector is mired in a protracted downturn, putting the squeeze on consumer confidence and households’ willingness to spend. House prices fell in 70 major cities at a faster clip in October than a month earlier, while nationwide the amount of new home sales measured in floor space was around 20% lower than a year earlier. (…)

The November sales were also 4% lower than October, ending a short-lived period of sequential growth. Traditionally, September and October are the busiest months for property sales in China, as developers often offer discounts around the mid-autumn festival and weeklong national holiday. CRIC estimated that new home sales from the top 100 developers in 2023 will be down 15% from 2022, to their lowest level in recent years. (…)

• China Investment Bank Bans Displays of Wealth CICC also asks analysts to avoid negative macro market commentary.

Analysts at China International Capital Corp. are barred from sharing negative comments about the economy or markets in both public and private discussions, according to an internal memo sent to the research department this month and seen by Bloomberg News. Employees should also avoid wearing luxury brands or revealing their compensation to third parties, the memo said.

The directive underscores the increasing level of self-scrutiny at Chinese financial institutions after authorities lashed out this year at bankers’ “hedonistic” lifestyles, and ordered them to comply with President Xi Jinping’s “common prosperity” drive. It also highlights concern among international investors that China is increasingly restricting access to transparent data and research in the world’s second-largest economy. (…)

Among recent examples of pushback against negative commentary, Goldman Sachs Group Inc. analysts attracted a wave of criticism in July after publishing a bearish report on Chinese banks. (…)

At least two other major investment banks have given verbal guidance to analysts over the past year barring them from making negative comments on the domestic economy or bragging about their pay, people familiar with the matter said, asking not to be identified discussing private information. A Shenzhen-based brokerage discouraged its economists from discussing topics including deflation and the yuan exchange rate, one of the people said. (…)