Month: March 2024

US Consumer Borrowing Exceeds Forecast on Non-Revolving Credit

Total credit rose $19.5 billion after a revised $919 million gain in December, according to Federal Reserve data released Thursday. The median estimate in a Bloomberg survey of economists called for a $10 billion increase.

Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $11.1 billion. Revolving credit, which includes credit cards, climbed $8.4 billion in January.

Simply back on trend (as of Feb. 21):

Powell: Fed Is ‘Not Far’ From Gaining Confidence Needed to Cut Rates The Fed chair said that rates were far above levels that might be anticipated during periods of mild inflation and moderate growth.

Powell repeated his view Thursday that the central bank was looking for greater confidence that inflation was returning to its 2% target, but he went one step further during his second day of testimony on Capitol Hill by qualifying how soon the Fed might get there.

“When we do get that confidence, and we’re not far from it, it will be appropriate to dial back” interest rates to avoid tipping the economy into a recession, he said.

Powell had signaled earlier that the Fed wasn’t considering a rate cut at its next meeting, March 19-20, which has shifted attention to whether the central bank might be in a position to cut rates around the middle of the year. (…)

Rates are “well above neutral,” he said. “We’re far from neutral now.” (…)

But some officials have voiced doubts recently, given the strength of economic activity despite higher interest rates, over whether the neutral rate might be higher right now, diluting the impact of tighter policy.

“We thought we had two feet on the brakes, but maybe we have only one foot on the brakes,” said Neel Kashkari, president of the Minneapolis Fed, at The Wall Street Journal’s CFO Network Summit on Wednesday.

ECB Holds Rates as Central Bankers Weigh Timing of Cuts Officials signaled they would likely wait until June to be confident enough to start cutting rates, as policymakers around the world consider the risk of moving too fast.

At a news conference on Thursday, ECB President Christine Lagarde surprised investors by signaling that officials expect to gather fresh data through June before deciding on any rate cuts, pushing back against some market expectations of an earlier April move.

While inflation in the eurozone is heading in the right direction, “we clearly need more evidence, more data,” Lagarde said. “We will know a little more in April but we will know a lot more in June.” (…)

The bank also published fresh economic forecasts that signaled the possibility of earlier rate cuts. Its staff now expects inflation to average 2.3% this year and 2% next year, compared with December forecasts of 2.7% and 2.1%, respectively. It also expects economic growth of 0.6% for the eurozone this year compared with a December forecast of 0.8%. (…)

State of the Union: Biden vows to raise taxes on wealthy, corporations

U.S. President Joe Biden vowed Thursday to raise taxes on wealthy Americans and large companies, announcing plans in his State of the Union address to hike corporate minimum taxes and cut deductions for executive pay and corporate jets.

Biden previewed the steps that will be part of a proposed fiscal 2025 budget released next week that aims to decrease the federal deficit by $3 trillion over 10 years while cutting taxes for low-income Americans and aiding middle-class homebuyers.

He proposed a new tax credit that would help Americans buy first homes or trade up to larger ones by providing the equivalent of $400 per month for the next two years to offset high mortgage rates. Biden also called for the elimination of title insurance on refinancings of federally backed mortgages, a move that can save homeowners $1,000 or more. (…)

Most of Biden’s tax proposals have little chance of enactment unless Democrats win strong majorities in both chambers of Congress in November, a sweep that polls suggest is unlikely.

In addition to previous calls to raise the corporate income tax rate to 28% from 21% currently, he called for an increase to “at least 21%” for the 15% corporate minimum tax that he won as part of 2022 clean energy legislation. The tax applies to firms reporting over $1 billion in profits.

Biden administration officials also told reporters he wants to quadruple the 1% tax on corporate stock buybacks approved in 2022. (…)

ABOUT CONCENTRATION

Excerpts from a Goldman Sachs analysis.

In contrast with record concentration, the valuations of the largest stocks remain well below previous highs. Today’s 10 largest stocks trade at a collective forward P/E multiple of 25x today, substantially below the peak valuations carried by the largest stocks in 2000, 2020, or even in the middle of 2023.

Likewise, the 35% valuation premium carried by the largest stocks relative to the rest of the S&P 500 ranks in the 70th percentile since 1985, well below the 80% premium registered in the middle of 2023 or the 100% premium carried in 2000. (…)

The degree of market cap concentration today is higher than the peak reached in either of the episodes of 2000 and 1973. However, compared with the peak of the Tech Bubble, the largest stocks today carry much lower multiples. The valuations of the largest stocks today are similar to those carried by the largest stocks in 1973. However, today’s leaders generally have higher profit margins and returns on equity than the top stocks in either 1973 or 2000. (…)

While the episodes in 1973 and 2000 preceded large market downturns, equities continued to rally following most other instances of extreme concentration. The relatively recent episodes of elevated concentration that occurred in 2009 and 2020, for example, coincided with sharp positive shifts in the macroeconomic outlook. Like those episodes, peak concentration in 1932 marked the bottom of a major economic downturn, with the S&P 500 rising sharply in the subsequent months.

There are some clear similarities between the macro backdrops of the episodes in 1973 and 2000 and conditions today, with unemployment low and concentration rising alongside strong equity market returns. In each of those episodes, the peak of equity market concentration also marked the peak of a bull market, and the economy entered recession with the subsequent year.

However, the 1964 experience shows that an ongoing bull market can continue to move higher even as market concentration declines. Like in 1973 and 2000, the peak of equity market concentration in 1964 coincided with low unemployment and a strong equity market backdrop. But after market concentration peaked in 1964, both share prices and the US economy remained healthy for an extended period. (…)

Today’s combination of elevated market concentration and recent Momentum outperformance has furthered investor concern that a sharp drop in the largest stocks will lead to a market downturn. But history shows that “catch up” episodes are much more common than “catch down” experiences. (…) While the performance of the high Momentum market leaders during these reversals was mixed, in every instance the low Momentum laggards appreciated in absolute terms.

Most of the sharpest Momentum reversals occurred following market sell-offs. As the S&P 500 declined, investors fled the stocks perceived to be most vulnerable to the cause of the market downturn and crowded in stocks perceived to be safe havens, boosting the long/short performance of Momentum. When the outlook improved and the market rebounded, investors then rotated out of those leaders and back to laggards. Of the 26 episodes, 17 took place during or within 3 months of a recession. (…)

Momentum feeds itself from the macro backdrop and profit trends. In the chart below, the black line provides a valuation reading but look also at the yellow line which plots the “Rule of 20 Fair Value”. It shows where the S&P 500 would be at a R20 P/E of 20, its long-term median.

The trend in the yellow line is dictated by profit growth and inflation. Trailing profits are unchanged since October 2022, but core inflation dropped from 6.6% to 3.9%. Profits are up 3.7% from their July 2023 trough and inflation is down 1 pp since.

BUYBACKS

While share buyback activity remains well below the levels seen last year when excluding Chevron’s massive buyback from the previous year’s data, the current figures align more closely with last year’s trend. (The Daily Shot)

Source: Goldman Sachs; @MikeZaccardi

The above chart shows “announcements”. Ed Yardeni plots actual buybacks on the second pane through Q4’23. Dividends are now about equal with buybacks, and much less volatile.

But nobody cares. The S&P 500 dividend yield is 1.35%. Since 1968, it only got lower in mid-2000 (1.1% in August), at the market peak.

(gurufocus)

January JOLTS: Staying Put 

Despite the impressive headline numbers from the January Employment Situation, the first Job Opening and Labor Turnover Survey for 2024 showed that labor market conditions continue to gradually cool. Job openings fell slightly in January to 8.86 million, 16% below their year-ago levels.

The moderating demand for workers signaled by the JOLTS report jibes with other indicators like the NFIB’s Small Business Hiring Index and Indeed job postings that show job opportunities are not as abundant as they have been over the past couple years.

The number of job openings per unemployed worker, a frequently cited metric by Fed officials, was little changed in January at 1.45, down from 1.82 a year ago. (…)

For now though, the JOLTS data signal that the jobs market is slowly settling down, consistent with wage, and thus inflation, pressures cooling without a worrisome slowdown in net job creation and overall economic activity. The gradual, rather than marked, softening in the labor market will likely keep the FOMC comfortable in waiting a little while longer before beginning to cut rates.

The labor market is normalizing, but very slowly. Openings remain 20-25% above their pre-pandemic levels.

Widely read John Authers’ comments will influence many people’s views…

The JOLTS followed Tuesday’s supply manager survey of the services sector that also moved in exactly the right direction to avert any risk of higher interest rates. After surprisingly strong readings a month earlier, businesses reported that both the prices they paid, and their employment, were falling back again:

… but ING warns us from reading too much into the recent ISM employment data:

Historically, there has been a very strong relationship between the ISM services employment index and the monthly change in nonfarm payrolls, but throughout 2023 and into January 2024 they have had an inverse relationship.

ISM services employment and nonfarm payrolls changes (000s)

Source: ING, Macrobond

S&P Global’s PMI survey sees continued growth in employment:

Total employment growth remained only modest midway through the first quarter. Although manufacturers stepped up their hiring activity, service providers indicated a historically subdued pace of job creation amid cost-cutting initiatives and labor shortages.

Apollo’s chief economist: Arguments for a Strong February Employment Report

1) Financial conditions have eased dramatically since the December FOMC meeting, with the S&P 500 at all-time highs and very tight IG and HY spreads. Significant wealth effects and lower borrowing costs are a major tailwind to consumer spending and capex spending, see the first and second charts.

2) Jobless claims remain very low, around 200,000, and the economy remains surprisingly resilient, with households and firms having locked in lower interest rates during Covid, see the third and fourth charts.

3) The fiscal deficit is running at a high 6% of GDP for an expansion, driven by the CHIPS Act, IRA, and Infrastructure Act, and associated positive effects on manufacturing construction, energy investments, and infrastructure investments.

4) The employment-to-population ratio is almost a full percentage point lower than pre-Covid, and immigration continues to be strong, suggesting there is still more upside potential to employment.

Powell Says Fed on Track to Cut Rates This Year The Fed chair characterized last year’s inflation slowdown as notable and widespread but said officials want more evidence it is cooling.

Rate cuts won’t be warranted until officials have “gained greater confidence that inflation is moving sustainably” toward the central bank’s 2% goal, Powell told the House Financial Services Committee on Wednesday during the start of two days of testimony on Capitol Hill.

“We want to see a little bit more data so that we can become confident,” Powell said. “We’re not looking for better inflation readings than we’ve had. We’re just looking for more of them.”

The recent strength of the economy and labor market “means that we can approach rate cuts carefully and thoughtfully,” he said. His comments did little to change expectations in interest-rate futures markets that the central bank will lower interest rates in June. (…)

“We are on a good path so far to be able to get there,” he said. Powell also said he saw “no reason to think” that the U.S. economy faces an immediate risk of falling into a recession. (…)

“We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

On Wednesday, Powell characterized the recent slowdown in inflation as both notable and widespread, an indication the rise in January prices hadn’t changed the Fed’s outlook that inflation will continue to slow this year. (…)

Hmmm…

• Core CPI MoM (red bar is Cleveland Fed’s Nowcast for February.

• 16% Trimmed-Mean CPI and Median CPI:

Bank of Canada Keeps Policy Rate at 5%, ‘Too Early’ to Weigh Cuts The central bank seeks more evidence that underlying inflation and wage growth are on a sustainable slowing trajectory.

Macklem said rate cuts are not in the immediate offing. “It’s still too early to consider lowering the policy interest rate,” he said, adding senior officials believe headline inflation will remain close to the 3% level until midyear.

He reiterated the central bank required more evidence that core inflation is on a sustainable downward trajectory. “One month doesn’t make a trend, you need to see a few months,” Macklem said at the press conference. (…)

Macklem said labor-market activity is cooling, with job growth lagging behind the increase in population. One particular concern for the central bank has been annual wage growth in the 4% to 5% range. Central bank officials have previously warned that those levels of wage gains, amid declines in productivity, posed a headwind to reaching 2% inflation.

“There are some signs that wage growth may be easing,” Macklem said, adding that “with the labor market coming into better balance, we are looking for further evidence that wage growth is moderating.”

Other factors the central bank is monitoring before contemplating rate cuts are business and household inflation expectations, which surveys indicate remain elevated, and corporate pricing behavior. “We don’t want to give a sense of false precision” on rate cuts, said Macklem, when asked about possible forward guidance on policy easing.

• ECB on Hold But Forecasts to Boost Case for Rate Cuts The ECB president is likely to again signal an initial reduction in June, when there’ll be more clarity on whether Europe’s labor market is cooling.

US regulators expected to significantly reduce Basel capital burden

U.S. regulators are expected to significantly reduce the extra capital banks must hold under a proposed rule that has drawn aggressive pushback from Wall Street, said eight industry executives in regular contact with the agencies and regulatory officials.

Bank regulators led by the Federal Reserve in July unveiled the “Basel III” proposal to overhaul how banks with more than $100 billion in assets calculate the cash they must set aside to absorb potential losses.

The agencies said it would increase aggregate capital by around 16% for the roughly three dozen affected lenders. That figure is expected to fall sharply as regulators embark on a sweeping rewrite of the draft, the people said.

The regulatory discussions are in their early stages and no decisions have been made, the people said. The agencies have said they are analyzing hundreds of public comments and data from banks on the impact of the proposal.

The biggest capital savings will come from changes to how banks will have to calculate potential losses from operational risks, which is the costliest plank of the proposal, three people said. In that section, banks had been pushing regulators to reduce the risk weights for fee income associated with lending services, such as investment banking.

Officials are also expected to scrap or reduce higher risk weights on mortgages to low-income borrowers and on renewable energy tax credits, the people said. (…)

On Wednesday, Powell told lawmakers he anticipates the rewritten rule will include “broad, material” changes.

The WSJ adds:

The banking industry says that more-stringent requirements aren’t needed and has asked regulators to scrap the original plan and start again with a new proposal.

A truck drove by the central bank’s headquarters on Wednesday carrying an ad by a big-bank industry group opposing the capital rules. The ad, by the Bank Policy Institute, said the capital plan would harm consumers, small businesses and the economy.

Yi Gang Proposes Plan to Help China Real Estate Developers Access $139 Billion Ex-PBOC governor suggests insurance system for pre-sales funds

China’s former central bank governor Yi Gang has suggested a new way for Chinese real estate developers to use pre-sale funds, which could help the country’s ailing property market.

Under the proposed system, developers would be able to withdraw 1 trillion yuan ($139 billion) immediately if the central government or People’s Bank of China insured pre-sale proceeds, Yi said at the Chinese People’s Political Consultative Conference assembly meeting on Thursday.

The central government or the People’s Bank of China could insure pre-sale proceeds — money from buyers before the building is complete — of about 10 billion yuan a year from 2024 to 2026, which would total 30 billion yuan. Yi said the insured funds would account for about 1% of the country’s pre-sale regulatory fund balance, and developers would be allowed to use a proportion of the funds in a lawful and compliant manner.

“There is no shortage of funds in the market currently — what is lacking is capital that can bear risk,” Yi said. “We should focus on supporting most real estate companies, especially top private real estate firms, to continue stable operations and focus on solving their liquidity difficulties.” (…)

China Intensifies Push to ‘Delete America’ From Its Technology A directive known as Document 79 ramps up Beijing’s effort to replace U.S. tech with homegrown alternatives.

Document 79 was so sensitive that high-ranking officials and executives were only shown the order and weren’t allowed to make copies, people familiar with the matter said. It requires state-owned companies in finance, energy and other sectors to replace foreign software in their IT systems by 2027.

American tech giants had long thrived in China as they hot-wired the country’s meteoric industrial rise with computers, operating systems and software. Chinese leaders want to sever that relationship, driven by a push for self-sufficiency and concerns over the country’s long-term security.

The first targets were hardware makers. Dell, International Business Machines and Cisco Systems have gradually seen much of their equipment replaced by products from Chinese competitors. 

Document 79, named for the numbering on the paper, targets companies that provide the software—enabling daily business operations from basic office tools to supply-chain management. The likes of Microsoft and Oracle are losing ground in the field, one of the last bastions of foreign tech profitability in the country.

The effort is just one salvo in a yearslong push by Chinese leader Xi Jinping for self-sufficiency in everything from critical technology such as semiconductors and fighter jets to the production of grain and oilseeds. The broader strategy is to make China less dependent on the West for food, raw materials and energy, and instead focus on domestic supply chains. (…)

Revelations by former National Security Agency contractor Edward Snowden in 2013 that U.S. authorities had hacked into Chinese mobile phone communications, universities and private companies strengthened Xi’s resolve. (…)

As China focused on replacing hardware, IBM’s China revenues have steadily declined. It downsized its China research operations in Beijing in 2021, more than two decades after it opened.

Cisco, once a technology powerhouse in China, said in 2019 that it was losing orders in the country to local vendors because of nationalist buying. American PC maker Dell’s market share in China almost halved in the past five years, to 8%, researcher Canalys said.

Hewlett Packard Enterprise, or HPE, which makes servers, storage and networks, got 14.1% of its revenue from China in 2018, according to estimates from database provider FactSet. By 2023, that had fallen to 4%. (…)

In software, Adobe, Citrix parent Cloud Software Group and Salesforce have pulled out or downsized direct operations in the country over the past two years.

Microsoft, the world’s biggest software provider, historically dominated computer operating systems in China. A Morgan Stanley poll of 135 chief information officers in China found that many expected the share of computers powered by Microsoft’s Windows operating system installed in their companies to fall over the next three years. They expected Linux-based UOS, or Unity Operating System, an effort co-led by a state-owned company, to gain in the shift. (…)

Microsoft President Brad Smith said in a subcommittee hearing last September that China made up just 1.5% of the company’s overall sales. The company posted sales of $212 billion in the last fiscal year. (…)

But in addition to growing more advanced, China’s own technology is also well plugged into the local ecosystem. Providers of domestic business software allow interoperability with WeChat, a ubiquitous chat messaging app widely used in place of email among Chinese businesses.

The buy local policy is trickling down to privately run companies, which are showing greater inclination to buy domestic software, according to Morgan Stanley’s CIO survey. (…)

China-based vendors took more than half of that market [database software] in China—worth $6.3 billion overall—for the first time in 2022, and continue to grow, according to researcher Gartner. Tenders examined by the Journal also show more state-linked entities and companies have opted for Huawei’s databases in recent years.

China’s banks, brokerage firms and insurers have sped up procurement of homegrown databases, Yang Bing, chief executive of Chinese database company OceanBase, said at a Beijing conference in November. OceanBase, developed by Alibaba and its fintech affiliate Ant Group, replaced Oracle databases at Alibaba and Ant in 2016. (…)

• Temu’s Push Into America Pays Off Big Time for Meta and Google The e-commerce platform’s parent company spent nearly $2 billion at Meta last year and it was a top advertiser at Google

(…) The volume of advertising from Temu, which launched in 2022, has caught executives off guard at both tech companies, which have long been the dominant players in digital advertising.

Temu, fast-fashion giant Shein and other online shopping platforms with Chinese roots are spending aggressively to reach American consumers, pushing up digital advertising prices, poaching logistics employees and delivering so many products that they have become a boon to the shipping industry.

The ensuing ad battle in the e-commerce space is welcome news for Meta and Google, helping the tech giants’ ad businesses rebound after they were hampered by an advertising slowdown and new Apple policies that hurt the platforms’ ability to target ads.

Meta’s stock price surged in early February after it posted its best quarterly sales growth in more than two years. Revenue from the company’s China operations nearly doubled last year, reaching $13.69 billion, a big reversal from the prior year, when revenue fell almost 3% to $7.4 billion. By contrast, revenue growth from U.S.-based customers was up only 5.5% to $49.78 billion for 2023. (…)

“Temu is likely losing money on every sale, as it attempts to invest their way into a position in the marketplace,” said Brian Wieser, an advertising analyst. “If it doesn’t work, or if it decides that they’ve spent enough money on advertising,” that would become a headwind for big tech companies such as Meta. However, Wieser noted that because spending coming from China is so broad, a pullback by Temu wouldn’t make a significant dent in Meta’s overall growth. (…)

Temu dropped tens of millions of dollars on its Super Bowl marketing effort, which included airing several commercials during CBS’s broadcast of the big game. It ran a 30-second ad four times during Super Bowl LVIII and again during the post-game coverage. This year, brands paid roughly $7 million for 30 seconds of ad time during the Super Bowl, the priciest ad real estate on TV. (…)

FYI: China’s exports to the U.S. rebounded to 5% growth in the January-February period from a 6.9% decline in December, while the trend line of falling year-over-year exports to Europe narrowed, according to Wall Street Journal calculations based on Thursday’s data release. (WSJ)

In 2023, U.S. exports of goods to China declined 4%. Goods and Services: –2.7%. Exports of “Advanced Technology Products” declined 7.6%.

FYI #2, related:

Data: N.Y. Times/Siena College, Wall Street Journal, CBS News/YouGov, Fox News. Chart: Axios Visuals