Month: September 2024

ECONOMY WATCH

• Initial weekly unemployment claims fell 12,000 in the week ended September 14 to 219,000, much better than the 230k economists were expecting and unchanged from one year ago. Continuing claims also fell by 21,000 to 1.829 million in the week prior, up 2.1% YoY but down 1.0% from its mid-August peak. Prior to previous recessions, these indicators were deteriorating much more significantly.

• The Philly Fed’s Manufacturing PMI moved back into positive territory in September. That followed a spike in the New York Fed’s M-PMI. Ed Yardeni says that “Assuming the other three regional Fed surveys follow suit, this bodes well for September’s national ISM M-PMI. It suggests rate cuts will be an additive force to an already recovering goods-producing sector. Also of note, the Philly Fed’s employment index jumped from -5.7 to 10.7 this month. Meanwhile, the prices paid indexes in both the New York and Philly surveys are climbing again.” However, the new orders index fell 16 points to -1.5.

• The Conference Board Coincident Economic Index increased by 0.3% MoM in August to a new record high. “The CEI’s component indicators—payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production—are included among the data used to determine recessions in the US. All components improved in August, with industrial production recovering the most after July’s decline. The CEI is highly correlated with S&P 500 forward earnings, which rose to a record high in August too.” (Ed Yardeni)

• Posted wage growth rose to 3.3% in August, according to the latest data from the Indeed Hiring Lab. This jibes with the stabilization in the Atlanta Fed Wage Growth Tracker between 4.5-5.0%. Let’s hope productivity growth remains strong.

Europe’s EV Sales Plunge Has Carmakers Seeking EU Relief

EV deliveries in the region’s biggest car market fell 69% during August, fueling a 36% drop across the region, the European Automobile Manufacturers’ Association said Thursday. The group urged the European Commission to take urgent relief measures ahead of 2025 fleet-emissions targets that could result in billions of euros in fines for carmakers that fail to meet them.

Europe’s auto industry has struggled with a drop in demand for EVs after governments pulled back financial incentives that had made the relatively expensive cars more affordable. With the battery-car market share shrinking to 14% in August — down from just over 15% last year — auto manufacturers are rethinking their strategies and timelines for shifting away from combustion engines.

The decline has been most pronounced in Germany, which is facing a spate of setbacks in its industrial core. Volkswagen AG, the continent’s biggest automaker, has scrapped a decades-old labor pact and is poised to close domestic factories in Germany for the first time due to lagging demand. BMW AG cut its full-year earnings guidance, partly citing sluggish EV sales. Elsewhere, chipmaker Intel Corp. has pushed back building a planned factory for which the country’s government had earmarked €10 billion ($11.1 billion) in subsidies.

The German economy may already be in recession, the Bundesbank said Thursday in a report. After shrinking slightly in the second quarter, output could stagnate or decline again in the third, according to the central bank. (…)

Across Europe, new-car registrations dropped 16.5% compared to a year ago to 755,717 million units last month with declines also in France and Italy. The UK was the only major market where EV sales rose, gaining 10.8%. (…)

McKinsey recently polled 15,034 individuals in France, Germany, Italy, and Norway:

• Of the car buyers in our survey who have not yet purchased an EV, 38 percent say their next vehicle will be electric. A little less than half of these potential buyers plan to buy a BEV, with the rest opting for plug-in hybrid electric vehicles (PHEVs).
• While almost 80 percent of European car buyers in our survey expect to get an EV in the future, 22 percent remain skeptical about these vehicles. Our survey suggests that the main reasons preventing skeptics from considering EVs involve high purchase prices, the inability to charge at home, and concern about real battery driving range—the actual driving range for a mix of trips and conditions, compared with a vehicle’s advertised cycle range based on the worldwide light-vehicle test procedure (WLTP).
• Among prospective buyers who do not yet own a BEV, the main concerns about EVs are slightly different from those that the EV skeptics have, especially home charging access being less of a concern. High purchase prices topped the list (37 percent), followed by insufficient battery driving range (36 percent), and battery lifetime (35 percent). Many respondents are also concerned about increases in electricity prices and availability of public charging infrastructure (28 percent for both). Overall, sustainability had a minor influence on purchase decisions.
• In our survey, consumers who would consider an EV but have not yet purchased one state that the driving range would need to be about 500 kilometers for them to switch from an internal combustion engine (ICE) vehicle to a fully electric BEV.
• In our survey, only 42 percent of existing BEV owners in Europe are satisfied or very satisfied with their car’s real driving range; for those who would consider switching back to ICE vehicles, this percentage fell to 30 percent. What’s more, most of the dissatisfied respondents indicate that they are likely to switch to an ICE vehicle, rather than search for an EV with a greater driving range.
• While the overall outlook for electrification is positive, our survey reveals that 19 percent of current EV owners in Europe say they are likely or very likely to switch back to a traditional combustion engine at their next purchase because of their current EV ownership experience. This is a reality check, but it must be considered in context. Globally, 29 percent of EV owners in our survey say they are very likely to switch back to an ICE vehicle at their next purchase, so Europeans are less likely to revert to traditional cars than people in other regions.
• Of the EV owners who are considering a switch back to ICE vehicles, 41 percent say that the cost of EV ownership is too high. (Their return to ICE vehicles could occur shortly, since they are closer to buying their next vehicle than other respondents, and 40 percent are planning to purchase a vehicle in 2024.) If they do, they may find that the residual value of their current EV is lower than expected and that demand for used EVs is relatively low compared with that for traditional cars.
• In our survey, 40 percent of current BEV owners in Europe state that the number of public EV charge points is insufficient. Only about 10 percent of BEV owners feel that the current charging infrastructure is ready to meet future demand; an additional 50 percent feel that it can meet current needs but believe that there will not be enough public charging stations if more EVs hit the road.
• Prospective buyers are increasingly considering non-European brands, and our survey shows that EV owners are broadening their considered set of brands for purchase. European brands such as BMW, Mercedes-Benz, Renault, and Volkswagen are still the most popular, with 51 percent of EV owners stating that they are likely to purchase from them. Southeastern Asian brands such as Hyundai, KIA, and Toyota were in second place with 39 percent, followed by American brands such as Cadillac, Rivian, and Tesla (30 percent) and Chinese brands such as BYD, Li Auto, NIO, and Xpeng (27 percent).
• Customers’ willingness to buy an emerging brand differs by country and segment. In the premium-brand segment, for instance, 33 percent of European respondents considering EVs state that they would be open to purchasing a Chinese brand in the future. Given the European Union’s recent decision to impose tariffs on imported EVs from China, it is still uncertain how successful such new EV brands will be in Europe.

• Compared with American brands and other Asian brands, Chinese OEMs have relatively low name recognition in Europe. In our survey, 55 to 80 percent of European respondents had never heard of them.
• Survey respondents tend to be skeptical about product quality and data security for new market entrant brands from China, although they do perceive them as offering good value for the money. The customers we interviewed at car clinics had similar concerns about Chinese brands, but after seeing the vehicles in person, they were also impressed by their innovative features and cutting-edge technologies, such as comfortable interiors, voice assistants’ conversational intelligence, and high-end multimedia offerings with advanced sound and displays.
• In our survey, about half of European respondents say that they would only consider purchasing a Chinese EV if its price was at least 15 percent below that of a similar domestic model. Roughly a quarter of European respondents say they would seek a price advantage of up to 10 percent, and only 25 percent would not require a price advantage.

Big Rate Cut Forces Fed to Contend With New Obstacles Where is the Fed taking rates and how fast will it get there?

(…) Powell characterized the Fed’s latest cut, which lowered the benchmark federal-funds rate to between 4.75% and 5%, as “recalibrating policy down over time to a more neutral level.” While he has typically avoided offering specific pronouncements about where that might be, he volunteered on Wednesday that “the neutral rate is probably significantly higher than it was” before the pandemic.

“How high is it? I just don’t think we know,” Powell said. (…)

“There’s no sense that the committee feels it’s in a rush to do this,” he said. “I do not think that anyone should look at this and say, ‘Oh, this is the new pace.’” (…)

Officials will have two more months of labor-market data before the Nov. 6-7 meeting, including one report less than a week before their meeting. (…)

Fed officials are trying to balance two risks: One is that they drag their heels on reducing rates in a way that gives rise to rising joblessness and makes officials rush into bigger cuts. (…)

The other risk is that they move too fast in dialing back rate hikes. The chances that inflation gets stuck at a level above the Fed’s 2% target “increase if the Fed does continue to do 50-basis-point cuts going forward” when the economy doesn’t need them, said Maki. (…)

“There is thinking that the time to support the labor market is when it’s strong, and not when you begin to see the layoffs.” (…)

What Powell said:

• Recent indicators suggest that economic activity has continued to expand at a solid pace.
• The labor market is not a source of elevated inflationary pressures.
• The balance of risks are now even.
• All 19 of the participants wrote down multiple cuts this year. All 19.
• 17 of the 19 wrote down three or more cuts and 10 of the 19 wrote down four more cuts.
• You can see our 50-basis-point move as a commitment to make sure that we don’t fall behind.
• We made a good, strong start to this. And that’s really, frankly, a sign of our confidence – confidence that inflation is coming down toward 2 percent on a sustainable basis. That gives us the ability. We can, you know, make a good, strong start. And I’m very pleased that we did. To me, the logic of this, both from an economic standpoint and also from a risk management standpoint, was clear.
• The labor market is actually in solid condition. And our intention with our policy move today is to keep it there. You can say that about the whole economy. The U.S. economy is in good shape. It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there.
• Clearly, labor market conditions have cooled off by any measure, as I talked about in Jackson Hole. And—but they’re still at a level—the level of those conditions is actually pretty close to what I would call maximum employment, you know. So you’re close to mandate, maybe at mandate on that.
• We’re not seeing rising claims. We’re not seeing rising layoffs. We’re not seeing that. And we’re not hearing that from companies, that that’s something that’s getting ready to happen. So we’re not waiting for that.
• Anything in the low 4s [unemployment rate] is a really—is a good labor market.
• Certainly it appears that we’re very close to that point, if not at it, so that further declines in job openings will translate more directly into unemployment.
• We will continue to look at that broad array of labor market data, including the payroll numbers. We’re not discarding those. I mean, we’ll certainly look at those, but we will mentally tend to adjust them based on the QCEW adjustment which you referred to.
• Wage increases are still just a bit above where they would be over the very longer term to be consistent with 2 percent inflation, but they’re very much coming down to what that sustainable level is. So we feel good about that.
• It feels, to me, that the neutral rate is probably significantly higher than it was back then. How high is it? I don’t — I just don’t think we know.
• I don’t see anything in the economy right now that suggests that the likelihood of a recession—sorry—of a downturn is elevated, OK? I don’t see that. You see—you see growth at a solid rate. You see inflation coming down. And you see a labor market that’s still at very solid levels. So I don’t really see that, no. 
• For a time you can have the balance sheet shrinking, but also be cutting rates.

In all, a strong economy, a strong labor market with nothing that suggests a downturn, and inflation confidently coming down to target. Nirvana!

But the current policy is judged as too restrictive (!) and they don’t want to fall behind, so they are now managing risk, which they consider balanced, but still needs a strong 50 point cut.

So long the data-dependent Fed, hello again preemptive policies, really focused on the labor market, with key data so unreliable that they will “mentally tend to adjust them”.

No mental adjustment is necessary on Indeed Job Postings which clearly show that job openings have stopped declining (through Sept. 13), still 12% above pre-pandemic levels.

John Authers:

The first cut to the benchmark fed funds rate in four years was a big one of 50 basis points. Market pricing had moved in the last few days to imply that there was a slightly better than 50-50 chance that this would happen, but the economists away from the trading floor largely weren’t expecting it. Only nine out of 113 economists who responded to Bloomberg’s survey expected a cut of this magnitude.

The Federal Open Market Committee accompanied the jumbo move with a big shift in its predictions for where the rate will be at the end of this year and next, set out in the quarterly Summary of Economic Projections, commonly known as the dot plot. The median expectation for the end of both 2024 and 2025 dropped by 75 basis points. This isn’t extraordinary, as they made exactly the same adjustment earlier this year. It would bring the effective rate to 3.4% by the end of 2025, compared to the 5.33% where it’s been set for the last 14 months. But such a drop is unusual at a time when there’s no obvious crisis to change the perceived balance of risks. (…)

The median dot suggests that there are only 50 basis points more in cuts to come this year. No more jumbos. (…)

Asked whether it had been a mistake not to have cut at the last meeting in July, he admitted that the Fed probably would have moved if it had had access to the surprisingly good inflation numbers for June, which were published shortly afterward. In other words, Wednesday’s cut should be seen as a “catch-up” and not a harbinger.

That helped him tackle the greatest objection to such a steep cut, which is that it simply wasn’t necessary. Big cuts generally happen at times of great stress — most recently the pandemic and the Global Financial Crisis. According to the Chicago Fed’s index of financial conditions, things presently are about as lenient as they get. The last time the Fed cut this much when financial conditions were set this fair was way back in 1992: (…)

The key for Powell, to use the phrase of Goldman Sachs’ Lindsay Rosner, was to convince his listeners that this was “a focused 50, and not a fearful 50.” (…)

Powell managed to convince all and sundry that he was cutting from strength, not weakness, and narrowed the gap between him and the markets. (…)

CONSUMER WATCH

Pretty Good Shape Credit card issuers seem to agree that the consumer is in decent shape

• “We believe that consumer spending remains healthy… if you compare the trends and what we saw in July and the trends, what we see in August, they are very consistent.” – Mastercard ($MA ) CEO Michael Miebach
• “Quarter-to-date, things are looking generally stable with Q3, and that’s in the U.S. and a number of major markets around the world. U.S. payment volumes quarter-to-date through August are up 5%, which is consistent with Q3.” – Visa ($V ) CFO Chris Suh
• “We released Q2 earnings a few weeks ago, and the word that I used back then was stable. Stable in a slow-growth economy. Over the last six, seven weeks, nothing has really changed much.” – American Express ($AXP ) CFO Christophe Le Caillec
• “The consumer is actually in pretty good shape. We can see their balances in their account. We can see on the loan side, delinquencies. And there’s been no abrupt changes there. Losses like for credit cards have been in the 4% range for us or lower. That’s about normal. So again, we don’t see anything from the consumer that causes us to believe there are problems there.” – Regions Financial ($RF ) CFO David Jackson Turner
• “When we look at the spend and we pulled this data, we don’t see signs of stress in the consumer… When we look at spend on our cards for Walmart, Target, Costco, BJ’s, we do not see any shifts in behavior.” – Synchrony Financial ($SYF ) CFO Brian J. Wenzel
• “I think the consumer is in a reasonably strong shape, and it’s been true for quite a while.” – Capital One Financial ($COF ) CFO Andrew M. Young
• “I think most people are still doing pretty well, whether it’s on the consumer side or the commercial side.” – Wells Fargo ($WFC ) CFO Mike Santomassimo
• “From our vantage point, the US consumer is doing fine. I wouldn’t qualify it as rolling in its spending government check, like nothing of that sort. I think it’s fine. I don’t think it’s amazing. But I don’t think it’s weak. I don’t think it’s falling off a cliff.” – Affirm ($AFRM ) CEO Max Levchin
• “Folks on the lower side of the income or wealth spectrum are struggling more… you’re starting to see higher delinquencies in that market. Not a huge piece of our business, but nonetheless, you’re seeing some stress there.” – Wells Fargo ($WFC ) CFO Mike Santomassimo
• “Higher interest rates and the effect of inflation are pressuring customers’ ability to spend. This is especially true for our most budget-conscious customers, as we’ve been seeing for a while now, but we’re now seeing other customer segments beginning to make changes as well… Customers are purchasing lower-priced cuts of meat, buying less and focusing on essentials.” – The Kroger Co. ($KR ) CEO Rodney McMullen
• “I think when you move up the income ladder, we continue to see people pulling back on discretionary purchases, not in a troubled way, but just a pullback.” – Synchrony Financial ($SYF ) CFO Brian J. Wenzel
• “What we see is that the US economy, even though we see some slowdown, is still doing okay, and the consumer is the main driver of that growth. So what we see is consumption is still there, and we have seen some change in behavior like discretionary consumption now stabilized, but it came down a bit, and non-discretionary is still growing at a slower pace but is growing.” – JPMorgan Chase ($JPM ) COO Daniel Pinto

On growth and inflation:

• “And so, we believe and we’re seeing in our portfolio, companies, inflation in the rearview mirror. The significant increase in input costs is down close to zero. Wages are continuing to grow, but at 3 or 4 percent, not the 6 – 7 percent. We’re seeing rents come down across most of the real estate asset classes. And we don’t see the inflation in our companies that the Fed is currently talking about. And we are seeing the US economy slowing and the European economy very slow.” – Blackstone ($BX ) Global Head of Private Equity Joe Baratta
• if you are going to cut 75 basis points between now and year-end, you’re much better off cutting 50 basis points now because you’ll spur more economic activity next year because corporations are making decisions about next year now. And if they know they have 50 basis points on a huge balance sheet of debt, they could do more hiring, they could do more investing even having that information.” – SoFi Technologies ($SOFI ) CEO Anthony Noto
• We then have been asking, what would it take? What does the Fed need to do in order for you to be willing to invest. And the answer is I need to believe that the economy is going to hold up. And then generally, it’s about 100 basis points in cuts is what we have been hearing, like 4.5% would reach a point where more projects pencil out, where there would be more confidence in making some of those investments.” – Fifth Third Bancorp ($FITB ) President Timothy N. Spence

US Housing Starts Increase to Fastest Pace Since April New construction rose 9.6% in August to 1.36 million pace

(…) The report showed overall building permits, a gauge of future construction, rose 5% to a 1.48 million annualized rate, while single-family authorizations increased to a four-month high.

New construction of single-family homes increased nearly 16% to an annualized 992,000 pace, the first monthly advance since February. Starts of multifamily projects declined for the first time since May.

Builders are awaiting a sustained pickup in demand to help work down an inventory of unsold homes that’s hovering near the highest level since 2008. (…)

Starts jumped 15.5% in the South, a month after Hurricane Beryl led to the slowest pace of construction in the region since mid-2020. Homebuilding in August also rose in the Midwest and West.

Completions of new single-family homes declined 5.6% to the slowest pace since March. Multifamily completions jumped. (…)