Month: February 2024

U.S. Manufacturing PMI: Strongest improvement in manufacturing performance since September 2022

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI) posted 50.7 in January, up from 47.9 in December and slightly higher than the earlier released ‘flash’ estimate of 50.3. The latest upturn ended a two-month sequence of decline, and signalled the strongest improvement in operating conditions since September 2022.

Driving the uptick in the headline figure was a renewed expansion in new orders at manufacturing firms at the start of the year. The pace of growth was moderate overall and the quickest since May 2022. Where an increase was noted, companies linked this to successful marketing initiatives and stronger customer demand.

That said, improved demand conditions were domestically focused, as new export orders fell for the nineteenth time in the last 20 months. Europe and Canada were identified by panellists as key export markets with a weakened sales environment.

Despite greater new order inflows, goods producers recorded a drop in output during January. Supply disruption stemming
from severe storms and transportation delays reportedly hampered firms’ ability to expand production. The pace of output decline eased to only a marginal pace, however.

Supplier delivery performance deteriorated for the first time in just over a year as trucking and transportation was delayed. Although only marginal, the extent to which lead times for inputs lengthened was the greatest since October 2022.

Concurrently, higher transportation, supplier and fuel costs pushed up the pace of input price inflation in January. The rate of increase accelerated for the second month running to the sharpest since April 2023, despite being softer than the series average.

Meanwhile, manufacturers stated that output prices continued to rise as firms sought to pass on higher costs to customers. The pace of charge inflation was broadly in line with the series trend and the quickest in nine months.

Employment at manufacturers rose fractionally in January, thereby ending a three-month period of job shedding. Firms hired in anticipation of greater new orders despite a further strong drop in backlogs of work.

A rise in new orders led firms to cut their input buying at a much slower pace compared to that seen in December. Although stocks of inputs also continued to fall, the pace of depletion eased to a marginal pace, with stocks of finished goods also declining only slightly.

Finally, business confidence at goods producers jumped to a 21-month high in January. Optimism was reportedly underpinned by planned investment in marketing spending and building capacity, alongside hopes of stronger demand conditions.

The ISM: Demand remains soft but shows signs of improvement

The Manufacturing PMI^® registered 49.1 percent in January, up 2 percentage points from the seasonally adjusted 47.1 percent recorded in December. The New Orders Index moved into expansion territory at 52.5 percent, 5.5 percentage points higher than the seasonally adjusted figure of 47 percent recorded in December. (…) The Prices Index registered 52.9 percent, up 7.7 percentage points compared to the reading of 45.2 percent in December. (…) Also, the Customers’ Inventories Index contracted further, becoming more accommodative for future production. (…)

The U.S. inventory cycle is over. New domestic orders are picking up which should allow production to rise in coming months. Goods prices are firming somewhat. Recall from yesterday`s PMIs:

• In China, “New export orders increased for the first time since last June, albeit marginally.“
• In ASEAN countries: “the rate of contraction in new orders was the softest seen over this period and only marginal.“

John Authers:

If you want to predict that rates aren’t coming down as quickly as everyone seems to think, you could use the latest Institute of Supply Managers surveys of the manufacturing sector. In the US, new orders and prices unexpectedly turned up sharply, suggesting that the sector wasn’t contracting, and that some inflationary pressures might still be around. The proportion of businesses complaining about rising prices was the highest in nine months:

Canada: PMI up to three-month high on back of slower falls in output and new orders

(…) rising to 48.3, from 45.4 in December, the PMI pointed to the weakest rate of sector contraction since last October. (…)

Panellists nonetheless commented on soft market demand, and an unwillingness amongst clients to commit to new work especially against a backdrop of elevated market prices. Demand from abroad was also lower, with various conflicts from around the world cited as a factor weighing on sales. New export orders declined during January for a fifth month in a row.

Strong Productivity in Q4 Further Helps Fed’s Inflation Fight

Nonfarm labor productivity, or output per hour worked, increased at a stronger-than-expected 3.2% annualized rate in the fourth quarter. The outturn marks a deceleration from the third quarter’s 4.9% rise, but continues to indicate a solid pace of productivity over the past year. Relative to the fourth quarter of last year, productivity is up 2.7%.

Productivity growth can be volatile not only on a quarterly basis, but also through the economic cycle. Productivity typically surges at the beginning of an economic expansion as output ramps up quicker than hours worked. In the pandemic experience, this trend was super-charged; businesses saw robust demand seemingly overnight once initial lockdowns ended, and many firms struggled to staff up. This dynamic led to annual productivity growth of 5.2% in 2020. As hiring picked up, productivity growth nosedived in 2022 (declining 1.9%, the steepest annual drop in records dating back to 1948) as hours worked outpaced output.

Having moved further into the post-pandemic expansion, a cleaner read on productivity is emerging. Employment growth decelerated over the past year while output moved full steam ahead. Taken together, productivity perked up in 2023, increasing 1.4%, and has increased at an annual rate of 1.6% since the end of 2019. The current cycle’s average is slightly above the 1.5% annualized pace that prevailed over the past business cycle (2007-2019), while still paling in comparison to the near 3% growth seen in the early 2000s.

The recent firming in productivity has helped restrain the inflationary impulse from wage growth. Unit labor costs (ULCs), or the ratio of hourly compensation to labor productivity, increased at just a 0.5% annualized rate in Q4. Although that marked a pickup on both a quarterly and year-over-year basis from Q3, the trend in ULCs has slowed sharply over the past year as nominal compensation growth has slowed and productivity growth has rebounded. Having risen 2.3% year-over-year in Q4, growth in ULCs adds to other recent readings of labor costs, including the fourth quarter Employment Cost Index, that inflation pressures from the labor market are quickly moving back toward levels consistent with the Fed’s 2% inflation target.

In the last 3 years, inflation has been much higher than growth in ULC, meaning that nominal sales grew faster than labor costs …

… significantly boosting corporate profit margins and profits:

Quarterly trends show a narrowing gap between inflation and ULC growth rates, even more so using PCE inflation data. The Fed’s fight on inflation needs to also hold labor costs growth through slower gains in compensation or higher productivity in order to sustain margins at their current historically high levels.

Compensation per hour increased at an annualized 3.7% pace in Q4 (vs. +3.8% in Q3), while the YoY pace increased 1.0pp to +5.0%.

Goldman Sachs’ wage tracker stands at +4.1% annualized in Q4 (vs. +4.3% in Q3) and +4.6% year-over-year (vs. +4.4% in Q3). PCE inflation was 2.7% YoY in Q4, 2.6% in December. Good thing energy costs are down…

The Impact of the Boomer Exodus

Baby boomers—those born between 1946 and 1964—are steadily aging out of the U.S. labor force. The cohort represents a population bulge that produced dramatic demographic and economic changes in the country. The change continues as an ever-larger share of baby boomers reach retirement. Replacing these retirees, particularly after a period of curtailed immigration, has been a tall order. (…)

The relationship between the age profile of an economy and productivity is not immediately clear. Previous analysis has highlighted two opposing effects of changing demographics on productivity. (…)

The macroeconomic consequences of interest are determined by the growth rate of labor productivity. The compositional changes underway will leave the U.S. labor force younger, with the potential to accelerate productivity growth. (…)

  

New businesses introduce new technology and ways of operating that can lead to improvements in productivity. The median entrepreneur in the U.S. is in their early 40s. A growing share of workers in the early and middle parts of their careers means an increasing concentration of entrepreneurship. Further, the return on learning new skills and adapting to new technology decreases as fewer work years remain in front of an employee. A younger labor force, then, should be better positioned to receive new productivity-enhancing technology. (…)

Nevertheless, the current trend—where the oldest cohort in the labor force is declining in representation—has not been seen since the early 1990s. Though the decline will prove relatively modest compared with previous generational cycles, it is occurring at a time of rapid technological advancement. Recent developments in artificial intelligence are quickly finding value-adding uses in the workplace. Embracing a new technology like AI is disruptive in the short term but holds the promise of long-term efficiency gains. A marginally younger labor force means a greater share of people willing to invest the necessary time and energy to learn how to use it, hastening its broader implementation.

In the period between the global financial crisis and the COVID-19 pandemic, labor productivity growth in the U.S. averaged about 1.5% per year. (…)

In early 2024, our baseline forecast for the coming decade assumes labor productivity will expand faster than 2%. This would represent a meaningful improvement for the U.S. economy with far-reaching consequences. One of the most obvious effects of consistently high productivity is the ability for strong income growth, the function of a tight labor market, alongside a diminished fear that inflation will take off.

Eurozone Economy Slipping, But Not Slumping

(…) Eurozone Q4 GDP was unchanged for the quarter which, while far from impressive, was actually slightly better than the 0.1% quarter-over-quarter decline forecast by consensus economists. It also meant that, for now, the Eurozone avoided a technical recession—two consecutive quarters of negative GDP growth—during the second half of last year. With respect to the region’s largest economies, German GDP shrank 0.3% quarter-over-quarter, French GDP was unchanged, Italy’s GDP rose 0.2% and Spain’s GDP rose by a more solid 0.6%. Even though the Eurozone avoided recession, it has stuttered in recent quarters, and as a result Eurozone Q4 GDP was up just 0.1% year-over-year. (…)

  

As inflation has decelerated, Eurozone real household incomes have begun to grow again, albeit slowly. Based on the latest available data through Q3-2023, we estimate that real compensation of employees rose 0.7% year-over-year, while real household disposable income rose 0.5% year-over-year. The further slowing of inflation through the fourth quarter suggests those positive real income trends may have gathered further momentum in recent months. As a result, the worst of the downturn in real consumer spending—which fell 0.4% year-over-year in Q3-2023—may be behind us. Finally, we observe that household interest costs have risen only moderately over the past several quarters, to 2.3% of household disposable income by Q3-2023. At the very least, these moderately more favorable household finance fundamentals should, in our opinion, prevent a significant further decline in consumer spending. (…)

Eurozone employment has continued to advance, with Q3-2023 registering an employment gain of 0.2% quarter-over-quarter and 1.3% year-over-year. In December, the Eurozone unemployment rate held steady at a cycle (and record) low of 6.4%. The indications are that employment growth could have continued into early 2024, as although the Eurozone Employment Expectation Indicator fell to 102.5, that is still a level that is historically consistent with positive jobs growth.

While these key economic indicators argue against a deep slump in Eurozone activity, they do not offer much encouragement for a quick rebound either. Real household incomes are growing at less than a 1% pace, employment growth could potentially slow to below a 1% pace, and although PMI surveys have improved, they remain in contraction territory for the time being. It is against this backdrop that we see only a gradual firming in momentum as 2024 progreses, and forecast Eurozone GDP growth of 0.7% in 2024, up only slightly from the 0.5% growth seen in 2023.

Meanwhile:

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 4.2 percent on February 1, up from 3.0 percent on January 26. After [Thursday’s] construction spending release from the US Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, the nowcasts of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth increased from 3.6 percent and -0.3 percent, respectively, to 4.9 percent and 1.7 percent, while the nowcast of the contribution of the change in real net exports to first-quarter real GDP growth decreased from 0.27 percentage points to 0.18 percentage points.

China Merges Hundreds of Rural Banks as Financial Risks Mount Move affects 2,100 rural banks with $6.7 trillion assets

China is embarking on its biggest consolidation in the banking industry by merging hundreds of rural lenders into regional behemoths amid growing signs of financial stress.

After engineering mergers of rural cooperatives and rural commercial banks in at least seven provinces since 2022, policymakers pinpointed tackling risks at the $6.7 trillion sector as one of its top priorities for this year. That means another wave of consolidation is on the way across the nation.

China’s banking industry has been weighed down by a litany of troubles over the past years, including a deepening slump in the real estate market and an overall fragile economy. The 2,100 banks in the rural cooperative system saw their bad-loan ratio stand at 3.48% at the end of 2022, more than twice as high as that for the whole sector.

“It’s where risks are the most concentrated among smaller financial institutions, so China is pushing the reform at a faster pace,” said Liu Xiaochun, deputy director of think-tank Shanghai Finance Institute. (…)

Fed Signals Cuts Are Possible but Not Imminent as It Holds Rates Steady The central bank abandons formal guidance that had kept hikes on the table since last raising rates in July.

(…) “It’s a highly consequential decision to start the process” of lowering interest rates “and we want to get that right,” said Fed Chair Jerome Powell at a news conference. “We’ve made a lot of progress on inflation. We just want to make sure that we do get the job done in a sustainable way.” (…)

“I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting” to justify a rate cut, “but that’s to be seen,” he said. (…)

Powell said Wednesday the Fed might be slower to cut rates or drag out the process if inflation proved to be more persistent. It could cut rates sooner and faster if the labor market weakened or there was “very, very persuasive lower inflation,” he said. (…)

“We want to see more good data. It’s not that we’re looking for better data,” Powell said. “Are the last six months flattered by factors that are one-off factors that won’t repeat themselves? We don’t think so. But that’s the question…we have to ask.” (…)

About inflation specifically:

So we have six months of good inflation data. The question really is: That six month of good inflation data, is it sending us a true signal that we are, in fact, on a path—a sustainable path down to 2 percent inflation? That’s the question. And the answer will come from some more data that’s also good data. It doesn’t—it’s not that the six-month data isn’t low enough; it is. It’s just a question of can we take that with confidence that we’re moving sustainably down to 2 percent. (…)

But you can—and you know this—you can look behind those numbers and you can see that a lot of it’s been coming from goods inflation, for example. And goods inflation running significantly negative, it’s a reasonable assumption that over time—because inflation will flatten out, probably approximate zero—that would mean the services sectors would have to contribute more. So, in other words, what we care about is the aggregate number, not so much the composition.

(Wells Fargo)

Mr. Powell acknowledged that monetary policy has been and is “well into restrictive territory, and we’ve been seeing the effects on economic activity and inflation.”

And yet:

So I think, whereas a year ago we were thinking that we needed to see some softening in economic activity, that hasn’t been the case. So I think we look at—we look at stronger growth—we don’t look at it as a problem. I think at this point we want to see strong growth. We want to see a strong labor market. We’re not looking for a weaker labor market.

With strong growth and a strong labor market, “the case is likely that it [inflation] will continue to come down”.

US Labor-Cost Gauge Cools in Sign of Easing Inflation Pressures Employment cost index increases at slowest pace since 2021

A broad gauge of US labor costs cooled by more than forecast in a fresh sign of easing inflation pressures that give Federal Reserve officials room to cut interest rates this year.

The employment cost index, which measures wages and benefits, increased 0.9% in the fourth quarter, the smallest advance since 2021, after rising 1.1% in the prior three-month period, according to Bureau of Labor Statistics figures released Wednesday. (…)

Compared with a year earlier, the ECI was up 4.2%, the smallest annual advance since the end of 2021. Still, that’s well above the typical pace seen in the years before the pandemic. (…)

Wages and salaries for civilian workers also rose 0.9% in the fourth quarter and were up 4.3% from a year earlier for the smallest annual increase since 2021. (…)

(Wells Fargo)

Focusing on the service sector, labor costs growth remains in 4.0% range but is not accelerating.

Yesterday’s release of eurozone inflation data also shows services inflation stuck around 4%:

(Goldman Sachs)

Canada: GDP avoids contraction in the last months of 2023

After having contracted in the third quarter, it appears that GDP has evaded a similar fate in the final three months of the year. Data for November and preliminary figures for December indeed hint at 1.2% annualized expansion in Q4. This below-potential figure nonetheless follows a relatively tepid period for the Canadian economy; November saw the first output expansion since May and thus broke a lethargic streak the length of which had not been seen since the
2008-2009 financial crisis and the 2015-2016 slowdown attributable to the oil supply shock.

Despite the slight economic rebound to end the year, population growth remains stunning. As such, GDP as measured on a per capita basis contracted for a 10th consecutive month on a year-over year basis.

Looking at what drove growth in November, the goods producing sector was the standout. It recovered some lost ground and rose at its fastest pace in 10 months on broad-based gains. Despite a manufacturing PMI in contraction territory, the sector saw healthy growth in November due to the resumption of
activities following shutdowns/maintenance in plants.

Looking on the services side, it was more of a mixed bag. While growth stemmed in part from the transportation segment which rebounded following strikes in the Saint-Lawrence seaway it was also limited by educational services as strikes in Quebec commenced in the month.

Information and cultural services also saw a rebound in the month following 5 months of pullbacks as the SAG-AFTRA strike ended and businesses in the industry spun up productions. Looking ahead, we continue to expect the Canadian economy to contract in the first half of 2024, as it has yet to feel the full effects of past rate hikes and interest rates remain restrictive, particularly in real terms.

Eurozone manufacturing downturn cools in January

The HCOB Eurozone Manufacturing PMI, compiled by S&P Global, rose to 46.6 in January, up markedly from 44.4 in December to its highest level in ten months. While still below the 50.0 no-change mark – as has been the case since July 2022 – and therefore indicative of a further deterioration in manufacturing sector conditions, the headline index signalled a softening of the downturn for the third successive month.

All five components of the Manufacturing PMI exerted a positive directional influence in January. Indices for new orders and output (which combined, account for 55% of the PMI) each increased by over two points at the start of the year. Although they were indicative of further month-on-month contractions, the rates of decline were their weakest for nine months in both instances. A slower rate of deterioration was also seen in new orders from external sources, with export sales falling by the weakest margin since last April.

Nevertheless, January survey data showed substantial spare capacity at eurozone factories, as evidenced by yet another sharp monthly drop in backlogs of work. This was despite the rate of depletion cooling for a third month in succession. Further reductions to employment were made, extending the current period of job shedding that began last June, but cuts to workforce numbers were the softest in four months.

Eurozone manufacturers were less aggressive with purchasing reductions during January. After registering some of the steepest contractions in the survey history during the second half of 2023, input buying fell at the weakest pace since last March. Inventory levels declined further in January, although a softer reduction in pre-production stocks contrasted with a quicker decline in holdings of finished goods.

Sustained (albeit slower) inventory drawdowns remained deliberate, anecdotal evidence showed, with the weak prevailing demand environment a key motivator for firms to hold less stock. This was despite renewed supply chain disruption, caused by the rerouting of ships away from the Suez Canal. According to the latest survey data, suppliers’ delivery times lengthened for the first time in a year.

As for prices, January saw sustained declines in input costs and output charges, with rates of decrease accelerating for the first time since last July and last September respectively.

Beijing Pledges More Fiscal Support as Economy Stumbles

(…) Fiscal expenditure in 2024 will be maintained at the necessary intensity and fiscal transfers to local governments will remain at certain levels, officials from the Ministry of Finance said at a press conference on Thursday, signaling more financial support from Beijing to local governments struggling with piling debt.

Authorities will set a reasonable size for government investment, Vice Finance Minister Wang Dongwei said at the briefing, adding that the ministry will increase the amount under the central budget.

China’s Finance Minister Lan Fo’an said earlier this month that Beijing will boost fiscal spending this year to better support domestic demand. (…)

• China’s Central Bank Adds $21 Billion in Cheap Funds for Housing

The People’s Bank of China provided 150 billion yuan ($20.9 billion) worth of low-cost funds for lending to housing and infrastructure projects last month, stepping up support for the economy.

The outstanding amount of the PBOC’s Pledged Supplemental Lending program to policy-oriented banks 3.4 trillion yuan at the end of January, according to a central bank statement Thursday.

The PSL program is seen as an important tool for Beijing to support the economy and mitigate the impact from the worst property downturn on record. The cheap central bank money is for policy banks to lend to projects, which could help alleviate the decline in construction activities.

The PBOC increased the quota of PSL funds by 500 billion yuan for the so-called “major projects,” which include building government-subsidized housing and renovating run-down inner city districts, according to an article published by the central bank last month. It injected a net 350 billion yuan in December, which was the largest since November 2022. (…)

CHINA MANUFACTURING PMI: Manufacturing sector expansion holds steady in January

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) posted 50.8 in January, unchanged from December, and pointed to a further mild improvement in business conditions. The health of the sector has now strengthened for three successive months, to mark the longest period of continuous improvement for two-and-a-half years.

Chinese manufacturing companies signalled an expansion of output for the third month running in January. The rate of growth was little-changed from December and, though modest, was among the fastest recorded over the past year-and-a-half. Firms often mentioned raising output due to firmer market conditions and higher sales.

Overall new business increased for the sixth successive month, though the rate of growth slipped to the slowest since last October. The softer rise in total sales was despite a renewed improvement in foreign demand. New export orders increased for the first time since last June, albeit marginally.

In line with rising business requirements, manufacturers expanded their purchasing activity in January. Whilst modest, the rate of growth was the best recorded since last August. Inventories of purchased inputs and finished items also increased at the start of the year, though rates of accumulation were only slight in both cases.

Supply chain performance improved for the third time in the past four months, albeit fractionally. Firms often mentioned that suppliers had sufficient capacity to deliver orders in a timely manner.

Capacity pressures at manufacturing firms in China were also relatively muted, as highlighted by a back-to-back decline in unfinished workloads. This led firms to trim their workforce numbers again at the start of the year. However, the rate of job shedding moderated notably from December and was the weakest recorded in five months.

The softer drop in employment coincided with an improvement in business confidence around the 12-month outlook for production. The degree of positive sentiment was the most pronounced in nine months, and supported by forecasts of stronger global demand conditions, planned investment, new product releases and efforts to expand into new markets.

Finally, prices data indicated that inflationary pressures remained muted at the start of 2024. Average inputs costs increased at a marginal pace that was the slowest in five months. At the same time, efforts to attract and secure new business prompted manufacturers to cut their own selling prices slightly in January.

Modest deterioration in Japanese manufacturing conditions in January

At 48.0 in January, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) rose fractionally from 47.9 in December to signal a further modest deterioration in the health of the sector.

Total new work decreased for the eighth month running in the latest survey period, and at a sharp rate overall. Weak domestic and global economic conditions were cited as key headwinds to new order intakes. Lower export sales, especially in Mainland China and the wider Asia-Pacific region, also held back total new orders at the start of the year. (…)

ASEAN manufacturing sector sees renewed improvement in operating conditions at start of 2024

Printing above the neutral 50.0 threshold for the first time in five months, the headline S&P Global ASEAN Manufacturing Purchasing Managers’ Index™ (PMI®) rose from 49.7 in December to 50.3 in January. The latest reading signalled only a slight improvement in the health of the ASEAN manufacturing sector, however.

Output rose for the twenty-eighth month running in January, and at the quickest pace since last August. The upturn was supported by firms working through backlogs, which fell for the seventh successive month, as new orders declined again.

Demand weakness was particularly notable across export markets, and this led overall new orders to decline for the fifth straight month. That said, the rate of contraction was the softest seen over this period and only marginal. Turning to employment, for the second time in three months payroll numbers were left unchanged, thereby reflecting a hesitancy across firms to commit to new hires.

New York Community Bancorp Stock Plunges 38%, Reigniting Fears for Regional Banks NYCB built up capital after acquiring most of the failed Signature Bank in last year’s crisis.

Shares of New York Community Bancorp plummeted 38% Wednesday after the company swung to a fourth-quarter loss and slashed its dividend to shore up capital following its purchase of the assets of the collapsed Signature Bank.

The company swung to a loss of $252 million, or 36 cents a share, at the end of December. That was compared with a profit of $172 million, or 30 cents a share, in the same period a year earlier. Analysts expected earnings of 27 cents a share for the fourth quarter.

Loan losses surged, and the bank set aside millions of dollars more to prepare for future potential losses. (…)

As part of its steps to bolster those capital and liquidity levels, the company cut its quarterly dividend to 5 cents a share, from 17 cents a share. (…)

In the fourth quarter, deposits at NYCB were down 2% from the previous quarter, driven by a $1.8 billion decrease in custodial deposits related to the Signature transaction.

“In the spring, it was deposits running out the door,” said Casey Haire, an analyst at Jefferies. “This is preparing to be a $100 billion bank and credit risk.”

NYCB said more of its property loans have started to sour. The bank also piled into its reserves for potential losses, particularly in the commercial-property space that has come under stress. (…)

Net charge-offs surged to $185 million from $1 million a year earlier, driven by two loans in that space. One was an office loan that had gone bad after an updated valuation in the third quarter. The other was a co-op loan that wasn’t in default but that the bank expects to sell in the first quarter.

“I don’t see systemic issues within their loan portfolio that I’m overly concerned about,” said Mark Fitzgibbon, head of financial services research at Piper Sandler. “It felt like this was a cleanup quarter…the company said we’re going to rip the Band-Aid off all at once.”

• A $560 Billion Real Estate Warning Hits Banks From NY to Tokyo

The US commercial real estate market has been in turmoil since the onset of the Covid-19 pandemic. But New York Community Bancorp and Japan’s Aozora Bank Ltd. delivered a reminder that some lenders are only just beginning to see the pain.

New York Community Bancorp’s decisions to slash its dividend and stockpile reserves sent its stock down a record 38% and dragged the KBW Regional Banking Index to its worst day since the collapse of Silicon Valley Bank last March. Tokyo-based Aozora Bank plunged more than 20% after warning of a loss tied to investments in US commercial property. In Europe, Deutsche Bank AG more than quadrupled its US real estate loss provisions to €123 million ($133 million) in the fourth quarter from a year earlier.

The concern reflects the ongoing slide in commercial property values coupled with the difficulty predicting which specific loans might unravel. Setting that stage is a pandemic-induced shift to remote work and a rapid runup in interest rates, which have made it more expensive for strained borrowers to refinance. Billionaire investor Barry Sternlicht warned this week that the office market is headed for more than $1 trillion in losses. (…)

“Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.” (…)

Banks are facing roughly $560 billion in commercial real estate maturities by the end of 2025, according to Trepp, representing more than half of the total property debt coming due over that period. Regional lenders in particular are more exposed to the industry, and stand to be hurt harder than their larger peers because they lack the large credit card portfolios or investment banking businesses that can insulate them.

Commercial real estate loans account for 28.7% of assets at small banks, compared with just 6.5% at bigger lenders, according to a JPMorgan Chase & Co. report published in April. (…)

The Aon Center, the third-tallest office tower in Los Angeles, recently sold for $147.8 million, about 45% less than its previous purchase price in 2014. (…)

New York Community Bancorp said its increase in charge-offs were related to a co-op building and an office property. (…)

New York Community Bancorp, which acquired part of Signature Bank last year, said Wednesday that 8.3% of its apartment loans were considered criticized, meaning they have an elevated risk of default.

At the end of last year, the Federal Deposit Insurance Corp. took a 39% discount when it sold about $15 billion in loans backed by rent-regulated buildings. In another indication of the challenges facing these buildings, roughly 4.9% of New York City rent-stabilized buildings with securitized loans were in delinquency as of December, triple the rate for other apartment buildings, according to a Trepp analysis based on when the properties were built. (…)

“The percentage of loans that banks have so far been reported as delinquent are a drop in the bucket compared to the defaults that will occur throughout 2024 and 2025,” said Aviram. “Banks remain exposed to these significant risks, and the potential decline in interest rates in the next year won’t solve bank problems.”

Jefferies: “”We believe NYCB has several idiosyncratic characteristics, but the result and reaction are reminders of risks that remain in the regional banking space.”

A New Global Tax Is About to Raise Billions. The U.S. Is Missing Out. The 15% global minimum tax is here, and it is raising corporate tax payments—just not in the U.S., where Congress hasn’t changed tax law to conform with an international deal.

Johnson & Johnson, Baxter International and Zimmer Biomet are all warning investors that the 2021 international tax deal will make them pay higher taxes this year as Switzerland, South Korea, Japan and European Union countries implement the accord. 

U.S. companies that enjoyed single-digit tax rates in some foreign countries now must pay at least 15% in each. But even though Treasury officials were crucial in forging the international accord and President Biden has pushed to implement it, Congress hasn’t changed U.S. tax law to conform to it. Republicans generally oppose the global deal, contending that Biden administration negotiators gave away too much of the U.S. tax base.

So for now, the U.S. isn’t directly collecting any money from domestic or foreign companies because of the deal.

J&J is forecasting a roughly 1.5-percentage-point increase in its tax rate. (…) Other companies pointing to potentially higher taxes in 2024 include Johnson Controls, Henry Schein, Teleflex, Enovis, Edwards Lifesciences and Methode Electronics. (…)

Thirty-six countries have implemented the deal or have new rules in progress, and businesses with global revenues exceeding €750 million—equivalent to about $810 million—could pay new taxes on profits.

The Organization for Economic Cooperation and Development, which spearheads the minimum tax project, recently estimated that businesses altogether will pay additional taxes of between $155 billion and $192 billion annually, an increase of between 6.5% and 8.1% from current tax payments. Some analysts looking at company projections have said it could be lower.

The U.S. created a minimum tax on companies’ foreign income in 2017, but it applies to their global profits, not country-by-country as required by the international deal. The U.S. created a second minimum tax in 2022, but that, too, doesn’t align with other countries’ levies. China also hasn’t implemented the agreement.

American companies are facing higher tax bills even though the U.S. hasn’t changed its rules. That is because the deal allows countries to make global companies operating in their jurisdictions pay at least 15% there. So Switzerland can make U.S. and Japanese companies pay 15% tax on their Swiss operations.

In many cases, American companies have already maxed out U.S. foreign tax credits. So paying more abroad won’t reduce their U.S. taxes. Instead, they effectively will pay taxes in two countries on the same income.

Meanwhile, the U.S. isn’t benefiting directly. The rules say countries can require that their home companies pay 15% in every country where they operate. So South Korea can ensure that a South Korean company pays 15% in the U.K., the U.S. and France. If it doesn’t pay enough in those countries—for instance, because U.S. research incentives lower its tax rate there—it must pay more to South Korea, not the U.S.

The OECD estimates that the U.S. will get some new revenue even without implementing the global deal. That is because some companies may shift operations and profits to the U.S. as tax rates become more similar around the world.

“I’m not seeing so much of that actually happening yet,” said Jason Yen of Ernst & Young. (…)