Month: February 2024

U.S. Shoppers Cut Back in January Larger-than-expected decline in retail sales came after a strong round of holiday shopping in December

U.S. retail sales fell a seasonally adjusted 0.8% in January from a month earlier, the Commerce Department said Thursday.

The larger-than-expected loss came after a strong round of holiday shopping in December, which the report revised to a 0.4% gain. Excluding autos, sales were down 0.6%; economists expected an increase. (…)

December and November sales were revised lower, a sign that consumer spending, while still robust, might not have been quite as strong in the fourth quarter as earlier reported. Economists at Goldman Sachs estimate that gross domestic product grew at a 3.2% annual rate in the fourth quarter, down a notch from the 3.3% the Commerce Department reported last month. In addition, the economists lowered their forecast of first-quarter GDP growth to a 2.5% rate from 2.9%.

Behind January’s weakness, two factors might have pushed the sales figures lower. The first was technical: The seasonal adjustments the Commerce Department applied to January sales were less supportive than in years past. The second was the cold weather that spread across much of the U.S. last month and might have significantly weighed on sales. (…)

Cold and wet weather in large parts of the country was likely a factor in weaker debit- and credit-card spending, economists at Bank of America Institute said in a report. Overall card spending among the bank’s customers fell 0.2% in January from a year earlier. But spending actually rose 1.7% in the Western U.S., where weather was relatively mild, and declined in the South, Midwest and East.

One indication of how weather might have weighed on spending last month: Sales at building materials and at lawn and garden stores fell a seasonally adjusted 4.1% from December. That decline “undoubtedly was driven by cold temperatures,” wrote Santander chief U.S. economist Stephen Stanley in a note.

But sales at food services and drinking establishments rose 0.7%, marking a bright spot in Thursday’s report. That could be an indication that the shift in spending away from goods away from services continues as Americans keep re-engaging with prepandemic behaviors. (…)

Wells Fargo:

The data suggest the consumer lost momentum at the start of the year. On a year-ago basis, control group sales growth slipped to 2.4%, which is the slowest gain since April 2020, when the economy was in the depths of the pandemic.

Even as we expect spending will moderate this year, the January slowdown may overstate the near-term pull back in consumption. Households have benefited from a real income tailwind over the past year as inflation is slowing more than wage growth.

While the unique factors of excess liquidity and easy access to cheap credit are tales of the past in the story of consumption, a still-sturdy labor market should lead to only a gradual moderation, rather than collapse in spending this year.

Consumer resilience is positive in the sense that it helps ward off economic contraction but could be problematic if it gets in the way of the downtrend in consumer inflation. This week’s inflation data showed the consumer price index (CPI) came in hotter than expected, with the core CPI up 0.4% during the month.

The data did little to give the FOMC the “greater confidence” it needs to start imminently cutting rates, but the final mile in getting inflation back to the 2% target is expected to be bumpy. How consumer demand evolves will play a key role in continued disinflation and the pullback in January sales suggests some lost momentum.

More from the WSJ:

Economists at Goldman Sachs, for instance, said in a note that cold weather doesn’t explain a decline in e-commerce, as sales by nonstore retailers fell 0.8%. Analysts at Bank of America noted that card spending remained soft in the week ended Feb. 10, despite no big weather events that week.

Growth in aggregate weekly payrolls (black) slowed from 5.9% to 4.7% from December to January. Spending on goods (retail sales) suffered more than services if restaurant spending is any guide. We will get total consumer expenditures at the end of the month. Weakness in January and February is not very harmful.

US Factory Production Declines for First Time in Three Months

The 0.5% decrease in manufacturing output followed a 0.1% gain a month earlier, Federal Reserve data showed Thursday. Total industrial production, which includes mines and utilities, fell 0.1% in January as severe winter weather caused pullback in mining activity. (…)

Excluding autos, manufacturing decreased 0.6% from December, the most since March. It also marked the fourth-straight monthly decline.

Recent surveys, however, suggest the worst of the malaise is drawing to an end. The Institute for Supply Management’s factory index climbed to a 15-month high in January as the largest share of purchasing managers since April reported higher orders.

Separate regional surveys on Thursday showed a slower pace of contraction in New York state manufacturing in February and the first expansion in Philadelphia-area factory activity in six months. (…)

More evidence that the weather slowed things down in January, including hours worked, reversing balmy 2023 January. Note how more normal hours would have boosted aggregate income last month as both the number of employeds and wages were strong.

Fed’s Bostic Says May Take ‘Some Time’ to Hit Rate-Cut Threshold

(…) “The evidence from data, our surveys, and our outreach says that victory is not clearly in hand, and leaves me not yet comfortable that inflation is inexorably declining to our 2% objective,” Bostic said in a speech Thursday in New York. “That may be true for some time, even if the January CPI report turns out to be an aberration.” (…)

The Atlanta Fed chief said last month that he anticipates the first cut to occur in the third quarter of this year. He repeated that position Thursday and noted that he had projected two cuts for 2024 in the central bank’s last quarterly set of economic projections. Market participants are betting the central bank will lower interest rates starting in June. (…)

He also pointed to anecdotal evidence. Business contacts carry the “ring of expectant optimism — perhaps even pent-up exuberance” that could unleash a burst of demand that could reverse the progress made on inflation, Bostic warned. (…)

HERE WE GO!

Follow up on my Daily Edge post “Here We Go!” of January 12.

Finally a concrete measure to begin to really address China’s real estate problem. A Chinese version of the U.S. Resolution Trust Corporation (1989-95 savings and loan crisis) the Fed’s TARP program (2008-10 subprime mortgage crisis): the government and/or the central bank provide low cost funds to purchase vacant apartment buildings from troubled developers or, even better, from troubled LGFVs, thereby transferring bad debt up to the central government and/or the PBOC.

The key part is in bold (my emphasis).

China Revives Socialist Ideas to Fix Its Real-Estate Crisis Xi Jinping aims to put the state back in charge of the crumbling property market, part of a push to rein in the private sector.

Under the new strategy, the Communist Party would take over a larger share of the market, which for years has been dominated by the private sector. Underpinning it are two major programs, according to policy advisers involved in the discussions and recent government announcements.

One involves the state buying up distressed private-market projects and converting them into homes that the government would rent out or, in some cases, sell. The other calls for the state itself to build more subsidized housing for low- and middle-income families.

The goal, the policy advisers say, is to increase the share of housing built by the state for low-cost rental or sale under restricted conditions to at least 30% of China’s housing stock, from 5% or so today. (…)

Beijing’s economic mandarins, led by Xi’s top economic-policy aide, Vice Premier He Lifeng, are still hammering out how to execute the real-estate strategy. Economists caution that the plan could take years to achieve—if it’s achievable at all.

The cost would be huge: potentially up to $280 billion a year for the next five years, or a total of around $1.4 trillion, according to some analysts. (…)

Initial plans call for adding six million affordable housing units in the coming five years, government documents show.

The People’s Bank of China has set aside 500 billion yuan, or roughly $70 billion, in low-cost financing to policy banks to help get the strategy rolling. A handful of projects funded with that money are under way. (…)

Today, more than 90% of Chinese households own their own homes, compared with around 66% in the U.S. (…)

In internal policy discussions, Vice Premier He, one of Xi’s most trusted lieutenants, argued that getting the state more involved would be a way for the government to absorb excess home supply, put a floor under falling prices and help protect banks from having to write down hundreds of billions of dollars of property loans if the market kept getting worse. (…)

The PBOC, China’s central bank, has since allocated 70% of the roughly $70 billion it is making available to three policy banks, China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China, PBOC disclosures show.

China Development Bank disclosed on Dec. 19 that it had granted a line of credit totaling 202 million yuan to the city of Fuzhou to build an affordable housing project. Upon its completion, expected in 2026, the project will have some 701 housing units, which the local government plans to sell to modest-income families at discounted prices.

The bank also extended a 10 million yuan loan to the government of Hunan, a province south of the Yangtze River, to develop government housing in a rundown inner-city district, according to information from the Hunan government.

It’s unclear how much of those funds would be used to develop new projects or to purchase and repurpose existing properties from commercial developers. The bank and Hunan’s government didn’t respond to requests for comment. (…)

Arrest the price declines, solidify the main developers, restore confidence. The cycle will gradually restart.

China steps up ‘whitelist’ mechanism for property sector

Five state-owned Chinese banks have been matched with more than 8,200 residential projects for development loans under the “whitelist” mechanism aimed at injecting liquidity into the crisis-hit sector, government-backed media The Paper reported.

The high number of projects already approved for possible support highlights the government’s efforts to free up funding for the debt-riddled industry, although it is unclear how many will secure loans.

“The progress for whitelist projects is faster than expected and it looks like regulators have put much higher pressure on banks to lend to developers this time,” said Raymond Cheng, head of China research at CGS International.

Under the “project whitelist” mechanism launched on Jan. 26, city governments are recommending to banks residential projects suitable for financial support, and are coordinating with financial institutions to meet projects’ needs. (…)

China Holiday Travel Surge Hints at Consumer Spending Pickup

More than 61 million rail trips were made in the first six days of the national new year holiday, according to official reports. That was the highest in data compiled by Bloomberg News in the last five years, and it marked a 61% increase over the same vacation period in 2023.

“The Chinese consumer is beginning to stir,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc., adding that spending indicators had exceeded expectations. He acknowledged, though, that surpassing 2023 was a “low bar” given the country was still contending with a rampant outbreak of Covid-19 at the time. (…)

Hotel sales on Chinese e-commerce platforms surged more than 60% from a year earlier, according to media reports citing the Ministry of Commerce.

Just ahead of the holiday, Shanghai reported some 8.8 million tourists, up more than 50% year-on-year, according to state broadcaster China Central Television.

The average daily consumer spending on Meituan’s online platforms during the holiday period jumped some 36% from the same period last year, according to a report from the delivery giant. The report didn’t give the actual value of consumption, but said it exceeded pre-Covid levels in 2019. There was also strong growth from restaurant spending in the first five days of the Chinese New Year break, with overall order volume from groups rising by 161% from last year.

Chinese shoppers also took their spending overseas during the long holiday week, with tourists from the country spending 70% more on food and beverages compared to 2019, according to data from fintech giant Ant Group. Among the top destinations for Chinese travelers were Hong Kong, Japan, Thailand, France and Australia. (…)

Consumer confidence in China has been weak for a range of reasons, including declines in home prices. Sales of some goods such as cars have also lost steam: Passenger car sales fell 26% in January compared to December, according to the China Association of Automobile Manufacturers. (…)

Nvidia bubble?

Source: @financialtimes  Read full article

I am not a fan of these comparisons, easy to make up with time and price scales. But NVDA’s recent trends do remind me of CSCO in the late 1990s.

Using Koyfin data, current NVDA vs peak CSCO in 2000:

                               CSCO      NVDA

Trailing P/E:            235.1       95.7

Forward P/E:          155.0       35.6

EV/EBITDA (trl):     125.6       79.8

EV/EBITDA (fw):       n.a.        28.6

 Those were the days, my friend, we thought they’d never end…

OpenAI joins race to make videos from text prompts OpenAI on Thursday announced Sora, its first tool that can turn a text prompt into a video of up to one minute in length.

KKR on the January CPI

The January CPI report strengthens our view that growth and inflation will be more resilient this year, even more than we previously thought. Against that backdrop, we expect fewer Fed cuts.

We continue to argue that we are in a Regime Change where there is a ‘higher resting heart rate’ for inflation this cycle. This report confirms our view that investors have been overly optimistic about the Fed cutting rates into an environment that is defined by low growth, low inflation, loose monetary policy, and tight fiscal policy.

That environment is one that we have permanently exited, we believe. Key to our thinking is that four drivers – more fiscal stimulus, a messy energy transition, heightened geopolitics, and tight labor markets – will make this cycle different. (…)

Despite some seasonal noise, the details suggest that Core Services inflation (the key focus area for Fed policymakers right now) remains even more resilient than we had expected.

Supercore inflation (Services inflation ex-Shelter and Healthcare) accelerated for the third month in a row and is now running at around six to seven percent annualized on a three-month moving average basis. While we think that there is some residual seasonality at play here (e.g., we saw a similar ‘blip’ around 3Q/4Q last year), it is clearly taking longer than policymakers had hoped for inflation to cool in labor-sensitive sectors.

Meanwhile, Shelter inflation unexpectedly accelerated to +0.5% from +0.4% in December, driven by a sharp increase in Owners’ Equivalent Rent. Although market rents have been on a cooler path, Chair Powell’s latest press conference suggests that he wants to see that slowdown reflected in official BLS data; all else equal, the January data will encourage Fed policymakers to take a more patient approach to rate cuts.

Netting together this month’s data (including payrolls, ISMs, and claims), we are raising our 2024 real GDP forecast even further above consensus to +2.5%, up from +2.0% previously (consensus is +1.7%). These increases support our view that we are living in a higher nominal GDP environment this cycle.

We think seasonals will push Services CPI lower by this summer (Exhibit 1), allowing the Fed to start cutting in June (vs. our prior May baseline). Our base case now moves back to three cuts this year (versus four previously), which raises our YE 2024 fed funds forecast to 4.625%. Our YE 2025 forecast rises to 3.875%, from 3.625% previously. (…)

We raise our YE 2024 10Y UST target to 4.25% from 4.0% previously, while retaining our longer-term view that bond yields settle around 4.0% (meaning 4.25- 4.5% represents reasonable value for longer term allocators).

AMERICAN EXCEPTIONALISM

Japan Economy Shrinks Unexpectedly Japan dropped a rank to became the world’s fourth-largest economy as growth in tourism spending failed to offset sluggishness in domestic consumption and capital spending.

Japan’s gross domestic product shrank 0.1% in the three months to December from the previous quarter, government data showed, weaker than economists’ forecast for 0.2% growth. The economy contracted 0.8% in the July-September quarter.

Although the economy weakened late in the year, real GDP grew 1.9% in 2023, improving on 2022’s 1.0% expansion. In nominal terms, Japan’s GDP was worth 591.482 trillion yen, or about $3.93 trillion, at current exchange rates. That puts Germany’s economy, with its 2023 GDP of about $4.42 trillion, in third spot globally. (…)

Technically, the Japanese economy is in recession, as it has contracted for two consecutive quarters. However, the data are preliminary and the drop small enough to leave room for doubt about whether the country has really slipped into recession. Revised estimates due next month could paint a different picture.

Based on the PMI surveys, Japan manufacturing is still contracting but services are a strong offset. The composite PMI rose from 50.0 to 51.5 in January

led by the fastest expansion in services business activity
in four months, while the reduction in manufacturing output eased
to a three-month low.

There was a renewed, albeit fractional rise in new order inflows at Japanese private sector firms that was the first since last September and was led by the steepest rise at service providers for four months.

Eurozone Industrial Production Unexpectedly Expands Amid Signs Recovery for Sector

Total production rose on 2.6% on month in December, according to figures published Wednesday by European Union statistics agency Eurostat, the second-straight rise, after a revised 0.4% increase recorded in November.

December’s result upended expectations of a fall of 0.2%, according to a consensus of economists polled by The Wall Street Journal.

Amid low demand and steep interest rates, industrial production had fallen in four of the five months prior to November. But purchasing managers’ survey data has shown that manufacturing sentiment has improved in each of November, December and January, indicating that there could have been some bottoming out of weakness in the sector.

Compared with December 2022, output grew 1.2%—the first time it has risen on year since February 2023.

The rise in production was driven by a 20.5% increase on month in capital goods, which incorporate assets like machinery, equipment and vehicles that are used to make consumer goods. Meanwhile, energy output climbed 0.3% on month, production of durable consumer goods rose 0.5%, while for nondurable goods it ticked up by 0.2%. (…)

But in Germany, traditionally the workhorse of European industry, the environment is still weak, with production falling there by 1.2%. In Spain, it dipped by 0.4%, while output grew in both France and Italy by 1.1%. (…)

Apparently not out of the wood yet:

New business inflows fell in January, extending the current sequence of shrinking demand that began last June. Weaker falls in new orders were seen at manufacturers and services companies, leading to the softest overall rate of decline in sales for seven months. Although new business from external clients fell for a twenty-third month in a row, January’s decrease was the least pronounced since April 2023.

Euro-Area Economy Is Losing Momentum, EU Says, Slashing Outlook

Gross domestic product in the currency bloc will accelerate only slightly to 0.8% this year after 0.5% in 2023, the European Commission said in a report Thursday. In November, it had predicted a more marked improvement to 1.2%. It also cut its 2025 forecast to 1.5%, from 1.6%

“The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labor market,” Economy Commissioner Paolo Gentiloni said in a statement. (…)

In recent weeks, both the International Monetary Fund and the Organization for Economic Cooperation and Development cut their GDP forecasts for European countries in 2024, while revising up global expectations. (…)

So far, the deterioration in the euro-area outlook has not caused the European Central Bank to reconsider its record-high 4% interest rate, though policymakers acknowledge that borrowing costs will be reduced this year. (…)

ECB President Christine Lagarde — speaking the EU lawmakers on Thursday — cautioned again rushing into rate cuts as rising salaries becoming an ever-more significant driver of inflation. (…)

“Incoming data continue to signal subdued activity in the near term,” Lagarde said. “However, some forward-looking survey indicators point to a pick-up in the year ahead.”

Which ones Mrs. Lagarde?

• The HCOB Germany Composite PMI Output Index slipped deeper into sub-50 contraction territory in January, dropping from December’s 47.4 to a three-month low of 47.0.

 

• German Economy May Have Shrunk in First Quarter, Nagel Says
• France‘s manufacturing sector remained under intense pressure at the beginning of the year as indices for output, new orders and employment remained in deep contraction territory. The latest survey data showed another considerable month-on-month drop in new orders. France’s service sector saw its downturn extend into the new year, as client hesitancy and generally subdued demand conditions reportedly weighed on activity and new business inflows.
• France to Lower Its Growth Forecast as EU Outlook Worsens
• Driven by a renewed expansion in the service sector, the HCOB Italy Composite PMI Output Index re-entered growth territory for the first time since last May, rising from 48.6 in December to 50.7 in January. That said, the rate of increase was only marginal. New business across the Italian private sector also rose at a slight pace in January. The upturn was led by service sector firms as manufacturers continued to record a drop in new sales, albeit softening on the month.
• The seasonally adjusted S&P Global UK Manufacturing
  Purchasing Managers’ Index™ (PMI®) posted 47.0 in January,
  up from 46.2 in December but below the earlier flash estimate
  of 47.3. The PMI has signalled a deterioration in operating
  conditions in each of the past 18 months. Four out of the five
  PMI sub-components – output, new orders, employment and
  stocks of purchases – were showing trends consistent with
  overall contraction.
• UK Recession Deals Fresh Blow to Sunak’s Economic Promises

The UK and China together absorb nearly 25% of EU exports.

European banks and their $1.5 trillion commercial property headache

European banks have about 1.4 trillion euros ($1.50 trillion) in loans to the troubled commercial property industry, amid a steep fall in office prices on both sides of the Atlantic and investor concerns about lenders’ ability to handle the risk.

Banks in Germany have become a particular focus because the country is in its worst real-estate slump in decades – one marked by insolvencies, halted construction and a freeze in property deals. Investors dumped the shares of one of Germany’s top property financiers last week, concerned about its exposure to the U.S. market.

Fallout from the downturn also has the potential to affect banks in France and the Netherlands, which are among Europe’s biggest commercial real estate lenders. (…)

The real-estate sector accounted for roughly a fifth of Germany’s output, with low interest rates pulling billions of euros into property.

Industry experts say prices have further to fall. There is currently not much price transparency, with owners unwilling to sell at reduced prices and asset managers slow to revalue their holdings.

“Valuations are still too high. Everybody knows it. But at a certain point of time, people need to drop their pants,” said Alexandre Grellier, founder of Drooms, a service provider to property dealmakers. (…)

With 285 billion euros in commercial property loans, German lenders account for around a fifth of the EU banks’ 1.4 trillion euros in loans to the sector, based on European Banking Authority data. (…)

Deutsche earlier this month disclosed 17 billion euros in loans to the hard-hit U.S. commercial property market, more than 3% of its entire book. That would make up about a fifth of the 76 billion euros that EU banks overall have lent in the United States, based on EBA data.

Deutsche Pfandbriefbank (PBB), created after the global financial crisis more than a decade ago, is one of Germany’s top property financiers.

It has 5 billion euros – or 15% of its loans – tied up in the U.S. commercial market, PBB has said.

Last week, it doubled its risk provisions, and investors got spooked, dumping its shares and bonds as short sellers moved in. PBB reacted by issuing two separate announcements that sought to reassure the public about its health.

Late on Wednesday, the credit rating agency S&P downgraded PBB due to its links to commercial real estate and gave it a negative outlook. (…)

Some European banks are even bigger in commercial real estate lending than German banks, with France and the Netherlands dominating, based on EBA data. Rabobank and BNP Paribas top the chart.

Loans from French banks to the sector are slightly ahead of Germany’s, according to the EBA data, Netherlands comes in third, ahead of Italy and Spain. (…)

The ECB warned in November that the property slump could last years, although it said the sector was not big enough to create a systemic risk for lenders.

Last month, the head of Germany’s financial regulator stepped-up his warnings, predicting 2024 will be less rosy for bank profits and that real estate was an increasing risk.

Europe Earnings Haven’t Missed This Bad Since 2020

With about a third of companies in the MSCI Europe Index having reported to date, energy, industrials and consumer companies have disproportionately fallen short of expectations.

Industrials had a difficult year, with the percentage of misses steadily rising throughout 2023 as client spending dried up.

About 53% of the companies in the MSCI Europe Index that have reported so far missed estimates, while just over a third posted earnings beats. (…)

SENTIMENT WATCH

Ed Yardeni today wonders if we are in a meltup equity market. Among his evidence charts:

• High, near extreme bullishness:

• NDR has a similar reading from this chart:

• Extended equities:

• The 13,34-week EMA is also extended, but still positive:

This trend helps explain the unending rise of the Magnificent Seven.

As John Mauldin explains, “The recent rise of the “Magnificent Seven” tech stocks is mathematically dooming many others to below-average gains. (…) in 2023, less than 30% of the S&P 500 stocks were able to beat or even match the S&P 500 return.”

Harvard Slashes Healthcare Investments, Tech Rises to 98% of Portfolio

The Harvard Management Company increased its direct holdings of Alphabet and Meta and continued its major sell off of biopharma holdings — which now make up less than 1 percent of the portfolio — during the last three months of 2023.

Meta and Alphabet together make up 70 percent of the HMC’s public portfolio. Light & Wonder Inc., a company that provides gambling services, makes up the third largest stake in HMC’s portfolio. (…)

During the latest quarter, HMC sold its stake in eight of its nine biopharma companies, which are counted as part of the healthcare sector.

The persistent sell-off of stocks within the sector continues a trend that began in early 2021.

In 2020, at the height of the Covid-19 pandemic, healthcare stocks represented 67 percent of HMC’s portfolio. The holdings have now been reduced to less than 1 percent. (…)

Adding to the near total sell-off of biopharma holdings, HMC sold its full position in Grab — a Singaporean tech app — after purchasing over 13 million shares since December 2021.

HMC sold their holdings after shares declined by over 50 percent in value, the first shares were purchased at $7.13 and all were sold at $3.46 apiece last quarter. Grab was once hailed as a long-term growth investment after emerging markets experienced lowered evaluations in 2020, but failed to meet investor expectations.

HMC preserved its direct holdings in semiconductor companies, the most notable including NVIDIA, Taiwan Semiconductor Manufacturing Company, and Advanced Micro Devices. They combine for roughly 8 percent of the portfolio. (…)

Hmmm…

Let me repeat this line:

Meta and Alphabet together make up 70 percent of the HMC’s public portfolio. Light & Wonder Inc., a company that provides gambling services, makes up the third largest stake in HMC’s portfolio.

Interesting trio…