Month: September 2024

August CPI: Probably a 25 bps Rate Cut Next Week

The 0.2% increase in headline CPI was in line with expectations, while the 0.3% [0.28%] increase in core CPI was slightly higher than consensus forecasts. Another month of tepid food inflation and falling energy prices kept headline inflation in check.

(…) A larger-than-expected drop in prices for core goods was more than offset by faster-than-expected services inflation. (…)

Primary shelter inflation also came in high relative to our expectations and at odds with leading indicators from private sector data sources. Overall, we see the lingering split between goods and services inflation as a sign that the unwinding of pandemic-era effects on prices is taking somewhat longer, rather than as an indication disinflation is running out of steam. (…)

The ongoing deterioration in the labor market has become an increasing focus for the FOMC, and inflation is slowly but surely returning to 2% on trend. The core CPI has increased at a 2.1% annualized pace over the past three months, a slow enough pace that 50 bps rate cuts at future meetings remain squarely on the table if the labor market data spur faster action. Regardless, all signs point to additional rate cuts beyond next week in our view.

(…) Based on the limited data available for September and the recent trend in oil prices, another decline in energy prices appears likely to come in next month’s CPI release. Food inflation also continued its run of relatively benign gains, rising 0.1% in August. Price growth for food consumed away from home (0.3% month-over-month and 4.0% year-over-year) once again outpaced inflation at the grocery store (prices unchanged over the month and up 0.9% compared to one year ago).

Monetary policymakers like those at the Federal Reserve tend to focus on inflation excluding food and energy given that these two components are quite volatile and their prices are often determined by factors other than the stance of monetary policy. That said, headline inflation better reflects the price growth that consumers experience in their daily lives. Much slower food and energy inflation over the past year has brought good news for households on the inflation front. The 2.5% increase in the headline CPI over the past 12 months is more or less in line with where this indicator was on the eve of the pandemic (2.3% in February 2020).

Core inflation picked up in August, rising 0.3% after a 0.2% gain in July. The slower pace of disinflation when excluding food and energy comes amid what is still rather sticky services inflation.

Core services prices advanced 0.4% in August, the largest increase since April. The moderation in shelter inflation remains painfully slow. Despite the notably lower pace of rental inflation signaled by private sector measures, primary shelter (the weighted average of rent of primary residences and owners’ equivalent rent) rose 0.5% in August. We have not given up the view that shelter inflation should slow more materially ahead, with the BLS’s All Tenant Rent Index having fallen sharply. That said, the stubbornly high pace of official shelter inflation raises some doubts about the extent to which it may ultimately ease further this cycle.

Core services ex-shelter also got a boost in August from higher travel-related prices (lodging away from home +1.8%, airfares +3.9%). Given that these categories are some of the more volatile components of core services, we are less concerned about their monthly rise in the context of further services disinflation ahead. (…)

While core prices rose more in August relative to the prior three-month average pace of monthly gains (0.13%), the early summer pace likely understated the trend in inflation just as the first quarter’s average gain of 0.37% seemed to overstate it. August’s figures likely give a somewhat cleaner read, in our view. The three-month annualized rate of core CPI inflation was just 2.1% in August, below the year-over-year pace of 3.2%. With food and energy related commodity prices having retreated of late and ongoing cooling in the labor market, we expect inflation to remain in check in the months to come. (…)

The Fed’s luck continues (see Lucky Fed):

• Goods deflated 0.2% MoM in August after –0,3% in July. They are down 1.9% YoY. Not because the Fed succeeded to tame demand (real spending on durables is up 6.4% in the last 2 years, +2.9% YoY in July), but because China keeps flooding the world with surplus goods shunned by its own consumers. Nothing on this chart suggests that tight money tamed demand for goods.

• CPI-Energy dropped 0.8% MoM after declining 4.0% sequentially in the previous 3 months. It is down 10.1% YoY, all because oil prices declined (electricity costs are up 3.9% YoY). The IEA revealed yesterday that “Chinese [oil] demand contracted in July for a fourth straight month, and fuel use elsewhere is “tepid at best,” the report said. Beijing’s oil imports have dwindled to the lowest in almost two years amid an economic slowdown marked by weak consumer confidence.
  “Chinese economic growth is slowing down, and the penetration of the transportation system by electric cars is going at a very strong pace,” Fatih Birol, the agency’s executive director, said in an interview from Paris.”
• We all look at core CPI, but energy is a large part of service providers costs and thus impacts services inflation not to mention how it also helps transportation and heating costs for just about everything.
• CPI services rose 0.4% MoM in August after +0.3% in July, +4.3% a.r. in the last 2 months. It is up 4.8% YoY in August, and even after removing shelter, was still up 4.3%. Non-housing services prices increased 0.33% last month, +4.1% annualized and the most since April.

• As John Authers show, “the  anti-core — an index of just food and energy — is now, remarkably, showing deflation. As calculated by Bloomberg Opinion’s data editor Carolyn Silverman, anti-core now stands at -0.1%. The peak above 20% two years ago matched anything seen during the shocks of the 1970s, but it’s over. The Fed has set much store by the “supercore” measure of services excluding shelter. This is most directly exposed to wages, and should therefore be drivable by monetary policy (unlike food and fuel). It’s proving stubborn, and on a month-on-month basis has ticked up very slightly.

• Is this a sustainable trend?

• And those stubborn rents: shelter prices, the largest category within services, climbed 0.5%, the most since the start of the year. That marked the second month of acceleration and defied widespread expectations for a downshift.

In all, there is no such thing as an immaculate disinflation. China’s inability to boost its domestic economy deflated imported goods and oil prices which kept inflation and inflation expectations anchored. Part of the normalization of the labor market came from surging immigration.

Meanwhile, Beijing keeps trying to boost its domestic demand.

China to Cut Rates on $5 Trillion Mortgages as Soon as September

China is poised to cut interest rates on more than $5 trillion of outstanding mortgages as early as this month, according to people familiar with the matter, as it accelerates a move to reduce the borrowing costs for millions of families to spur consumption. (…)

Some homeowners may enjoy up to 50 basis points of immediate rate reduction, one of the people said. (…) The proposed cuts will likely come in two steps totaling about 80 basis points, people familiar with the matter said. (…)

Existing mortgages carry an average interest rate of about 4%, compared with 3.2% on newly-issued loans for a first home and 3.5% for a second home, according to data compiled by China Real Estate Information Corp in late August.

China’s outstanding amount of mortgages, which count as prime assets at Chinese lenders, stood at 37.79 trillion yuan ($5.3 trillion) at the end of June, the lowest level in nearly three years. Further rate reductions would pile pressure on the banks, which have already seen their margin tumble to a record low of 1.54% as of end-June, well below the 1.8% threshold regarded as necessary to maintain reasonable profitability. 

Homeowners would save more than 300 billion yuan in annual interest expenses assuming an 80 basis points cut, analysts at Shenwan Hongyuan Group estimated. For a household with 1 million yuan of 30-year mortgages, its monthly payment will drop by about 9%, they said. (…)

US businesses’ optimism in China falls to record low, survey shows

Only 47% of U.S. firms were optimistic about their five-year China business outlook, a drop of five percentage points from last year, according to the survey published on Thursday by the American Chamber of Commerce in Shanghai. This was the weakest level of optimism reported since the AmCham Shanghai Annual China Business Report was introduced in 1999. Also at record lows were the number of firms profitable in 2023, at 66%. (…)

The 306 U.S. firms polled were from a range of industries. U.S. foreign direct investment into China fell 14% to $163 billion in 2023 from the previous year, according to the U.S. State Department. (…)

The bilateral relationship was cited by 66% of respondents as their biggest challenge and by 70% as the greatest challenge to China’s economic growth.

On a marginally positive note, there was a slight uptick from last year – to 35% – in businesses reported believing China’s regulatory environment is transparent. However, there was also a rise to 60% in companies that reported favouritism toward local companies.

• Western Firms That Flocked to China Are Now Pulling Back As China’s growth slows and the difficulty of doing business there rises, Western companies have stopped plowing money into the country

(…) China has noticed. In August, the Shanghai city government said one of its most pressing economic challenges was the hollowing out of the “fruit chain”—a reference to Apple’s move to diversify production of some electronics to countries such as India and Vietnam.

Driving these decisions are a prolonged economic slump, intensifying local competition, geopolitical tensions and the rise of alternative manufacturing destinations in Asia. Business chambers say profit margins in China no longer outshine other markets. (…)

Last year, foreign investment into China fell 8% from the previous year in yuan terms. According to United Nations figures, Indonesia, with a far smaller population than China, is drawing more so-called greenfield investment in which facilities are built from the ground up.

To be sure, most companies aren’t abandoning China. The majority are trying to maintain existing operations, with some saying that staying abreast of Chinese technology helps them sharpen their competitive edge. (…)

In an annual survey by the EU chamber conducted in May, 15% of the respondents said China was their top investment destination. For years, about 20% of the respondents had said so.

In another poll, about 20% of the 306 respondents surveyed by the American chamber in Shanghai said they would be cutting investment in China this year, citing concerns about growth and moves to redirect investments to places such as India and Vietnam. (…)

Shanghai’s economic-planning agency said last month that the decline in foreign investment in Shanghai was partly because of multinational companies such as suppliers to Apple shifting production capacity out, according to The Paper, a news outlet backed by the Shanghai government. (…)

Even so, for companies with the right product, China is still too big to ignore. In cars, it is the world’s largest market by unit sales.

If domestic demand picks up, China will return to becoming a top investment priority for multinationals again, said Allan Gabor, the chair of the American chamber in Shanghai. (…)

Adam Tooze on the Big Misconceptions of the Chinese Economy Should we really be talking about excess capacity?

There’s a constant line of argument that China is unfairly flooding the world with unprofitable goods and creating huge, unsustainable imbalances. Western countries, particularly the US (but also Europe), have responded by raising tariffs and engaging in domestic industrial policy in order to compete. On this episode of the podcast, we speak with Columbia Professor Adam Tooze, the author of several books, as well as the popular Chartbook newsletter. He argues that the overcapacity framing is misguided, and that the US may be making a mistake putting its chips down on an industrial revival. He talks us through some of the actual weaknesses of the Chinese model, as well as its global political reverberations.

• Listen to Odd Lots on Apple Podcasts
  Listen to Odd Lots on Spotify

BTW: Earlier this week, S&P lowered its forecast for U.S. 2024 EV sales penetration to 9% from 12%. Its EV penetration forecasts for ‘30/’35 was also revised down from 46% to 36% & 64% to 58%, respectively. Evercore/ISI estimates that China/EU account for 80% of global EV sales and forecasts ~16.5MM global NEV sales this year (+17-19% YoY).

Yesterday, BYD said that it now expects its sales to reach 4M (prev 3.6M) for 30%+ YoY growth. BYD’s Chinese NEV market share is mid-30% as well as export of ~500K vehicles in ‘24. “BYD is now 2x+ TSLA and accounts for 1 out of 4 NEVs sold GLOBALLY!” (EvrISI)

Jobs Watch

The percentage of small businesses with job openings increased to 40% in August. This series is highly correlated with the JOLTS job openings series and suggests they are normalizing rather than tanking. There was a significant jump to 56% of small business owners who can’t find qualified workers for their job openings. (Ed Yardeni)

The NFIB data supports the stabilization of Job Postings on Indeed through September 6:

OPEC Trims Oil Demand Outlook Further Amid Price Slump The report comes after oil prices tanked last week, erasing all gains made this year

The Vienna-based cartel expects demand to grow by 2.03 million barrels a day this year and 1.74 million barrels a day in 2025, from 2.11 million and 1.78 million barrels a day previously. Total demand is estimated to reach 104.2 million barrels a day in 2024 and 106 million the following year.

Demand is still seen at healthy levels—well above the historical average of 1.4 million barrels a day seen before the pandemic—bolstered by strong air travel and road mobility, as well as healthy industrial, construction and agricultural activities in non-OECD countries, OPEC said. (…)

In its latest report, the cartel raised its estimates for global economic growth to 3% this year from 2.9% previously, but left expectations for next year unchanged at 2.9%. (…)

Meanwhile, overall OPEC crude-oil production fell by 197,000 barrels a day to 26.59 million barrels a day in August, dragged down by Libya’s supply disruptions. Libyan production fell by 219,000 barrels a day to 956,000 barrels a day, while Saudi Arabia’s production fell by 25,000 barrels a day to 8.98 million barrels a day, the cartel said, citing secondary sources.

OPEC kept its estimates for supply growth from countries not participating in the Declaration of Cooperation—the formal name for OPEC+—at 1.2 million barrels a day for 2024, saying the main drivers of growth are expected to be the U.S., Canada and Brazil. Growth estimates for 2025 were also maintained at 1.1 million barrels a day. (…)

• Oil’s Fall Into $60s Widens the Runway for the Global Economy to Make a Soft Landing

With global benchmark Brent crude falling below $70 a barrel for the first time since late 2021 on Tuesday, a key component of the energy shock that drove the worst inflation crisis in a generation is already benign enough to give policymakers a green light for interest rate cuts.

But the prospect of a descent toward $60 a barrel in 2025, raised by forecasters from Citigroup Inc. to JPMorgan Chase & Co., and echoed on Monday by one of the world’s largest commodities traders, could further bolster the chances of the US and its peers weathering the effect of high borrowing costs without a damaging recession. (…)

The promise of $60 oil — at least for those who investors and policymakers who believe it — has the potential to further depress headline inflation rates and offer consumers a disposable-income boost. (…)

Adjusted for inflation, oil is now at levels seen two decades ago, when Beijing’s commodities boom was just beginning. Analysts at JPMorgan and Citigroup expect prices to fall further next year, as subdued demand growth is overwhelmed by a flood of new supply. (…)

Global oil production will swell by 1.5 million barrels a day this year and next — led by American shale fields — surpassing growth in world demand by roughly 50%, according to the International Energy Agency in Paris. This supply surge is one reason why prices have continued to wilt despite extended production cuts by Saudi Arabia and its allies in the OPEC+ cartel. (…)

The SHOK model devised by Bloomberg Economics suggests an immediate drop of that magnitude would remove 0.4 percentage point off inflation rates in the US and Europe in late 2024 and early 2025. For China, the decline would be half of that. (…)

• US Online Grocery Prices Plunge the Most on Record in August

Data by Adobe Inc. shows that online grocery prices fell 3.7% in August from a month earlier, the largest decline since the firm began tracking the numbers in 2014. (…)

Overall, online prices fell 4.4% in August from a year earlier, the 24th consecutive month that they’ve posted an annual decline, according to Adobe’s Digital Price Index.

The gauge is created by analyzing data from 1 trillion visits to retail sites and over 100 million product codes across 18 categories. The methodology behind the index was developed with guidance from Austan Goolsbee before he became president of the Federal Reserve Bank of Chicago.

Bond Market Sees Risk of Inflation Falling Below Fed Target

Two years into the Federal Reserve’s battle against inflation, bond investors are seeing a new risk: Consumer price growth is slowing too much.

A day ahead of the August inflation report, one gauge of expectations of consumer price index increases is showing that the inflation rate is in danger of falling below the Fed’s target. The central bank has long argued that persistently low inflation is as detrimental to the economy as elevated prices because it would force policymakers to keep borrowing costs too low for too long, reducing the Fed’s ability to fight off economic downturns.

“Market participants are sensing that the inflationary surge is now fully over, and there’s some chance here now, with the balance of risk being shifted to the employment mandate, that the Fed undershoots its inflation target,” said Tim Duy, chief US economist at SGH Macro Advisors. “You do have to take those risks fairly seriously.”

The so-called 10-year breakeven rate fell to 2.02% on Tuesday — the lowest closing level since 2021. That suggests investors see inflation averaging over the coming decade below the Fed’s 2% goal since historically CPI runs about 40 basis points above the preferred Fed target metric, the personal consumption expenditures price index.

The rate is calculated based on the difference between the yield on inflation-protected securities, or TIPS, and standard Treasuries. The falling measure is driven by the yields on the nominal bonds falling faster than the TIPS, which typically are less traded than regular bonds. (…)

In addition to the longer-term inflation outlook, Angelo Manolatos, a strategist at Wells Fargo Securities, said inflation swaps contracts are showing an even more dire outlook in shorter horizon.

The one-year swaps suggested traders are betting that consumer prices will only rise about 1.7% over the next 12 months. That would mark a sharp slowdown. (…)

China’s Unworkable Housing Rescue Math Is Prolonging Crisis

In May, China’s central government urged more than 200 cities to buy unsold homes to ease oversupply. More than three months later, only 29 have heeded the call.

The glacial pace of implementation — driven in large part by the unattractive economics of the plan for local governments — underscores the challenge President Xi Jinping faces as he tries to arrest a record property slump that’s threatening to undermine the country’s growth targets.

The plan has been a key part of the government’s attempt to shore up the real estate sector, while achieving Xi’s goal of creating more affordable housing. The disappointing progress raises the pressure for more forceful measures as China tries to deal with 382 million square meters of excess inventory, equivalent to the size of Detroit.

“Local governments have made slow headway,” Ding Zu Yu, chairman of real estate information platform Shanghai CRIC Info Tech Co., wrote in a late August report. Purchases stood at only 1.9% of unsold apartments nationwide as of July, Ding estimates. (…)

Buying apartments at this point makes little financial sense for those officials, as apartment prices are expected to drop at least another 30% in major cities before stabilizing, according to Jefferies Financial Group Inc. (…)

A few cities have proposed to resort to heavy bargaining to minimize their risks, raising doubts on whether distressed developers would be willing to sell their inventory. (…)

“We do not expect a wide rollout of the purchase program due to the lack of funding and the fact that banks and state-owned firms need to bear the full credit and investment risks,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.  (…)

• China Brings Heartbreak to US Families With Foreign Adoption Ban

(…) The ban applies to all pending applications, according to a US State Department spokesperson, who put the number of affected families at hundreds. (…)

“It truly fulfills a Chinese sense of assertiveness that ‘We can take care of our orphans well and we don’t need to send them to the West,’” said Guo Wu, associate professor of history at Allegheny College, noting how much wealthier China has become over the three decades since the adoptions formally began. (…)

Demographics is also a consideration for leaders in Beijing. Foreign parents in past decades helped underfunded Chinese orphanages find homes for babies — mostly girls — abandoned by parents complying with the now-scrapped one-child policy.

That saw China send some 150,000 children abroad, with about half going to America, said Zhou Yun, an assistant professor of sociology at the University of Michigan. With China’s birth rate hitting a record low last year, Beijing is now trying to encourage people to have more children. (…)

Demographic issues are a threat to China’s already slowing economy, as officials try to bolster the declining workforce. (…)

JPMorgan Leads Banks in Dimming Outlooks, Spoiling Win on Rules Tighter margins, struggling borrowers spark warnings by banks

Fears that a Goldilocks era of healthy borrowers and fattened loan margins is ending swept onto the market’s center stage Tuesday, as financial stocks tumbled. JPMorgan Chase & Co. dialed back expectations for next year’s net interest income, while major auto lender Ally Financial Inc. sounded a warning bell on consumer credit metrics. (…)

“We’re clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that’s worsened,” Ally Chief Financial Officer Russ Hutchinson told an industry conference. “As that pool of struggling borrowers in those later-stage delinquency buckets has grown, it gives us pause.” (…)

At JPMorgan, interest-rates trends were the theme, as President Daniel Pinto told analysts that they’re being too optimistic in projecting next year’s expenses and net interest income — the difference between what banks earn on their assets and what they pay on debts.

NII, as it’s known in the industry, surged to a record at the four largest lenders last year on the back of higher rates. But for months, JPMorgan leaders including Chief Executive Officer Jamie Dimon have been cautioning shareholders that the firm is “over-earning” amid tailwinds that wouldn’t last forever.

Now, they’re diminishing amid expectations for the Fed to lower rates in coming months, Pinto said, calling analysts’ current NII estimates “not very reasonable.”

Meanwhile, Fed Vice Chair for Supervision Michael Barr unveiled extensive changes to proposed bank-capital rules — slicing roughly in half the 19% capital hike that regulators had proposed in mid-2023 for the eight biggest US banks.

Those lenders, including JPMorgan, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. would now face a 9% increase in the capital they must hold as a cushion against financial shocks. (…)