EDGE AND ODDS’ Almost DaiLY CHAT (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): October 18, 2024

U.S. Consumers Drive Retail Sales Growth

American shoppers and diners closed out the summer without much sign of cutbacks—fresh evidence of how strong consumer spending has helped insulate the economy from a downturn.

Sales for retailers and eateries grew by 0.4% in September from a month earlier, according to advance data from the Census Bureau, an acceleration from 0.1% growth in August and a higher pace than economists had been expecting. (…)

Over the past 12 months, retail sales have climbed 1.7%, not adjusting for inflation. (…)

“Not adjusting for deflation” would be more appropriate. My calculation of the U.S. retail sales deflator is at –1.5% YoY in September, unchanged from August but down from –0.6% in July.

This puts real retail sales up 2.9% YoY in September (+3.0% in August, +2.7% in July and +1.7% in June) indication that real expenditures on goods will also come in near 3.0% YoY.

On a quarterly basis, real retail sales jumped 1.7% QoQ in Q3 after +0.4% in Q2 and zero in Q1. That’s a 7.0% annualized rate!

Wells Fargo:

If you were looking for a sign that consumer spending was slipping, today’s retail sales report for September was not it.

The headline increase of 0.4% for September was just a bit ahead of the 0.3% increase that had been expected, but the real upside was in the core measures of spending. Excluding sales at auto dealers and gas stations, retailers notched a solid 0.7% increase which was more than double the 0.3% gain that had been expected.

These gains came despite the fact that August’s sales numbers were revised higher.

Control group sales, which tends to line up with personal consumption spending in the GDP report, also came in much stronger than expected with 0.7% gain. That is the biggest gain in three months and the third largest monthly gain of 2024. (…)

The upshot is that despite hand-wringing over the state of the labor market, U.S. consumers Just. Keep. Spending.

U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Economics

• The [Atlanta Fed] GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 3.4 percent on October 17, up from 3.2 percent on October 9.

After recent releases from the US Census Bureau, the US Bureau of Labor Statistics, and the Federal Reserve Board of Governors, the nowcast of third-quarter real personal consumption expenditures growth increased from 3.3 percent to 3.6 percent, while the nowcast of third-quarter real gross private domestic investment growth decreased from 3.3 percent to 3.1 percent.

And if you wonder about labor demand, Indeed Job Postings have really stabilized after its steep decline since early 2023. Still 12% above pre-pandemic levels.

Initial jobless claims fell 17,000 in the week ended October 12 to 241,000 (sa). The impact of hurricanes and manufacturing layoffs amid strikes were expected to spur more jobless claims. Indeed, the largest increases on a state-by-state basis were in rust-belt states and those hit by Hurricane Helene (i.e., Michigan, North Caroline, Ohio, and Florida). Today’s report shows that the jobs market broadly remains on solid footing. (Ed Yardeni)

• “… we have seen upward revisions to GDI, an increase in job vacancies, high GDP growth forecasts, a strong jobs report and a hotter than expected CPI report… I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting.” (Federal Reserve Governor Christopher Waller,
  October 14, 2024.)

China Moves to Support Markets After Data Showing Economy Slowed GDP rises 4.6% from last year, slowest pace in six quarters

The People’s Bank of China disclosed more details of its measures to boost capital markets minutes after authorities released figures showing China’s slowdown deepened in the third quarter. At a separate event in Beijing, PBOC Governor Pan Gongsheng flagged the real estate and stock markets as key challenges in the economy that require targeted policy support. (…)

China’s benchmark CSI 300 Index of onshore stocks rebounded from earlier losses to close up 3.6% higher, after the central bank kicked off a re-lending facility for listed companies and major shareholders to buy back shares. Stocks also got a boost from President Xi Jinping’s call for efforts to achieve the year’s economic goals and financial support for technology, with chipmaker Semiconductor Manufacturing International Corp. gaining 20%.

Gross domestic product increased 4.6% in the July-to-September period from a year prior, data released by the National Bureau of Statistics showed, bringing growth for the first nine months to 4.8% — the lower end of China’s annual growth goal.

Things appeared to take a turn for the better during the last stretch of the period, with retail sales accelerating in September to grow 3.2% after expanding 2.1% the prior month.

The better-than-expected consumption gauge likely received a boost from government subsidies for upgrading consumer goods. Home appliances saw a 21% surge in sales from a year ago, picking up from a 3% gain in the previous month. Increased subsidies for car purchases also paid off, with auto sales snapping a six-month declining streak.

The appliance and goods trade-in program is part of China’s stimulus measures including interest rate cuts, with the elite Politburo led by Xi supercharging the push with a vow to stabilize the beleaguered real estate sector.

The slate of measures prompted a historic stock rally and led banks including Goldman Sachs Group Inc. to upgrade their forecasts for China’s growth. But skepticism has grown over whether authorities are willing to deploy greater fiscal firepower to turn around the economy and markets.

Investors now expect Chinese lawmakers to approve additional budget or debt sales to fund public spending in a meeting as soon as this month after authorities promised fiscal support.

At a Beijing forum, PBOC’s Pan reiterated that the monetary authority will make a reasonable rebound in prices a key policy consideration. A broad measure of prices fell for a sixth quarter, data showed Friday, extending the economy’s deflation streak, the longest since 1999.

Apart from retail sales, industrial production and fixed-asset investment also picked up in September, and jobless rate fell to 5.1%, the lowest since June.

New home prices, however, fell for a 16th month, dropping at almost the same pace as in August.

The NBS said there’s reason for caution despite improvements in the main indicators as the stimulus measures are rolled out, citing an “increasingly complex and grim” external environment and a need to strengthen the economy’s foundation. (…)

Beijing is clearly focused on the stock market, throwing money to “listed companies and major shareholders to buyback shares”, minutes after releasing “grim” economic data.

Some more data:

• GDP rose 0.9% QoQ in Q3 after +0.5% in Q2 (revised from +0.7%) per Goldmans Sachs numbers. Annualized: Q3 was +3.6% after Q2 at +2.0%. Nice acceleration but nowhere near 5%. Bloomberg consensus was +1.1% QoQ non-annualized.
• Retail sales got a nice prop from the consumer goods trade-in program which strongly boosted home appliance and automobile sales. Time will tell if this is sustainable but sequential sales are flat nonetheless.
• The grim and complex environment is best seen in real estate. Property sales declined -11.0% in volume terms and -16.3% in value terms (-6.3% deflation). New home starts growth fell to -19.9% YoY in September vs -16.7% in August. New home completions contracted -31.5% YoY in September, nothing to help the inventory clearance effort. Floor space under construction declined -12.2% YoY in September.
• “China’s housing ministry said it would redevelop one million homes in rundown urban shantytowns and said it would prod banks to double the loans on offer for developers to around $500 billion, part of a broader attempt to complete unfinished homes.” (WSJ) But most developers are already technically bankrupt!
• “New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.71% from August, largely in line with a 0.73% decline a month earlier, National Bureau of Statistics figures showed Friday.” (Bloomberg)
• Existing-home prices decreased 9%.

China hedge funds caught out by abrupt market surge

China’s abrupt and ferocious stock market rally has slammed some of the country’s biggest hedge funds, forcing them to hastily cover short positions and take losses on their bets in the heavily regulated derivatives market.

Beijing X Asset Management, Techsharpe Quant (Beijing) Capital Management and Shenzhen Chengqi Funds are among the funds sideswiped when China’s struggling stocks recovered a quarter of their value in less than a week in late September, following a raft of stimulus measures.

Their losses stemmed from short positions in China’s stock index derivatives, which market-neutral fund strategies use to hedge equity holdings.

Market euphoria as China showed serious intent to fix its ailing economy drove futures prices up sharply, causing losses on those positions that could not be offset by gains in cash holdings.

British hedge fund giant Winton’s trend-following strategy was also upended by China’s unexpected market reversal, forcing the firm to quickly unwind its bearish bets.

Regulators have clamped down on data-driven quant funds and tightened curbs on stock short-selling this year, rendering the market prone to wild swings, said Hu Bo, fund manager at Shanghai Professional Fund Management Co. (…)

EQUITIES

Here is a look at equity valuations across US and international markets. (The Daily Shot)

Source: Goldman Sachs; @MikeZaccardi

China’s Latest Round of Property Stimulus Fails to Inspire Markets Markets largely shrugged off the new measures, which were milder than expected

Authorities plan to fast-track credit for struggling property developers, and aim to renovate 1 million apartments in so-called urban shantytowns, a strategy used during the prior real-estate slump, the housing ministry and other policymakers said Thursday at a highly anticipated press conference.

More funds will be deployed for housing projects on the government’s “white list,” with 4 trillion yuan, equivalent to $550 billion, in loans to be available by the end of this year, Minister of Housing and Urban-Rural Development Ni Hong said, urging banks to lend to as many projects as possible.

Projects on Beijing’s “white list” are eligible for government-backed financing to complete unfinished apartments and ensure delivery of homes.

Markets largely shrugged off the news, which was milder than what many expected after an aggressive round of economic stimulus last month. (…)

China launched a similar state-financed slum redevelopment program in 2015. Back then, local governments compensated the residents of demolished homes with cash or new housing, and state policy banks provided loans to local governments to finance the program. (…)

“This is because the proceeds of the loans will be parked at the escrow accounts and cannot be used to service debt or fund new projects,” she said. “The aim of the white list is to accelerate the construction of pre-sold but incomplete homes,” so its expansion won’t help reduce China’s excess property inventory or lift expectations about home prices, she added. (…)

The urban-renewal project is also smaller than the previous reconstruction program in 2015-2018, and may take much longer to implement due to developers’ strained liquidity and local governments’ squeezed wallets, she added. (…)

“Homebuyers’ demand is tougher to control,” she said. “The government can roll out favorable policies, but whether households bite depends on a lot of factors.” (…)

  

  

• Japan’s Exports Fall Most Since 2021 Amid Global Slowdown Shipments to China, US, Europe all decline amid weak demand

(…) Shipments to China sank 7.3%, reversing gains of 5.2% the month before, while those to the US and Europe fell 2.4% and 9%, respectively. (…)

Japan’s Wage Deal Timeline May Shape BOJ View on Next Rate Hike Largest labor union reportedly seeks 5% or more in wage hikes

The country’s largest labor union federation is reportedly seeking 5% or more in wage hikes again next year, an early indication that upward pressure on pay will remain at least as strong as this year. Negotiated wage gains tracked by the Rengo federation hit a 33-year record of 5.1% in 2024. (…) Still, the scale of those pay deals hasn’t spread to all parts of the country’s workforce. Average cash earnings through August this year have averaged 2.3%, leaving wage gains trailing behind even stronger growth in prices.

AI CORNER

TSMC Hikes Revenue Outlook in Show of Confidence in AI Boom

The main chipmaker to Nvidia Corp. and Apple Inc. now expects sales to climb roughly 30% in US dollar terms this year, up from previous projections for about a mid-20% rise. That’s after TSMC reported better-than-predicted earnings for the September quarter. And it foresees capital expenditure rising in 2025 from roughly $30 billion this year.

“The demand is real and I believe it’s just the beginning,” Wei said, echoing a number of executives including Nvidia’s CEO. In terms of overall chip demand, “everything’s stabilized and start to improve.” (…)

Wei said he expects revenue from AI server processors to more than triple this year, yielding a mid-teens percentage of total sales in 2024.

It’s planning more plants in Europe with a focus on the market for artificial intelligence chips, according to a senior Taiwanese official. That’s on top of construction underway in Japan, Arizona and Germany.

Amazon joins the nuke party

Amazon has become the third tech company in as many weeks to announce a massive nuclear investment to fuel the energy-sucking data centers that bring you generative AI.

Amazon Web Services, still the world’s largest cloud computing provider, said it will spend $500 million to fund nuclear projects in Virginia and Washington state. The news follows recent nuclear announcements from peers Google and Microsoft, the latter of which recently inked a deal to reopen a shuttered nuclear reactor at Pennsylvania’s infamous Three Mile Island.

The nuclear industry has been in decline for years because of concerns over safety in the event of a meltdown. But the gen AI boom’s massive energy needs have rekindled interest in the carbon-free energy source.

For Amazon, that includes partnering with Virginia’s Dominion Energy utility company to develop small modular nuclear reactors, or SMRs. These small-scale fission facilities are a fraction of the size of a traditional nuclear plant, quicker to fire up, and less expensive to build.

Amazon has previously committed to spending $40 billion on a data center expansion in Virginia through 2040, which might partly explain the state’s warm embrace.

World Set for Cheaper Energy on Shift From Oil and Gas, IEA Says

The world is heading into an era of cheaper energy prices as a shift towards electricity use leaves behind surpluses of oil and gas, the International Energy Agency predicted.

Global demand for all fossil fuels will stop growing this decade, while supplies of oil and LNG are set to climb, the IEA forecast in its annual long-term report. Meanwhile, an ongoing surge in electricity consumption led by China is on track to accelerate, it said.

“The world is set to enter a new energy market context in the second half of this decade because underlying market balances for oil and gas are easing,” IEA Executive Director Fatih Birol said in an interview. “Bar major geopolitical conflicts, we will be entering a period where prices will see significant downward pressures.” (…)

Electricity use has grown at twice the pace of total energy demand over the past decade, and, driven by China, will increase six times as fast during the coming 10 years, according to the agency. Electric vehicles will account for 50% of new car sales worldwide by 2030, up from 20% currently, it predicted.

“In energy history, we’ve witnessed the Age of Coal and the Age of Oil – and we’re now moving at speed into the Age of Electricity,” said Birol.

The agency reiterated its view that demand for oil and gas will hit a plateau this decade. Nonetheless, oil supplies are climbing amid new output from the US, Brazil, Canada and Guyana, and there is a looming “wave” of liquefied natural gas projects.

A “huge addition” of around 270 billion cubic meters of new LNG capacity is scheduled by 2030, according to the report. Even some clean energy technologies, like solar photovoltaic, will see a surplus.

Crude prices can continue to trade between $75 and $80 a barrel, but only if OPEC and its allies restrain output further, according to the report.

Led by Saudi Arabia, OPEC+ is already holding back record spare capacity of around 6 million barrels a day following a series of production cutbacks, a level that the IEA expects will reach 8 million barrels by 2030.

“The rise of electric mobility, led by China, is wrong-footing oil producers,” it said. (…)

Goldman Sachs Group Inc. forecasts that oil demand will continue rising through to 2034. (…)

Related: Power Play

The state of corporate insiders

The insider activity database we use is from Bloomberg and goes back to March 2010. This is not a lot of data to work with. However, we have chosen to use it as it provides the most reliable database we could find. Some of what follows is based on my earlier work with data from a different source.

Our Corporate Insider Buy/Sell Ratio indicator shows a ratio of the total number of corporate insiders of S&P 500 companies that have bought shares on the open market during the past six months versus those that have sold shares. Because insiders typically only buy if they have confidence that their company (and stock) will do well, insider buying is considered a stronger signal than insider selling. When buying picks up quickly and dramatically, it tends to be an excellent sign for the stock market, so quick increases in this ratio tend to be a positive sign for stocks.

The chart below highlights all dates when the indicator registered a weekly reading of 0.14 or higher. We see five distinct periods.

The table below summarizes S&P 500 performance following all dates (including overlaps) highlighted in the chart above. Note the very favorable performance results, particularly for six and twelve months.

For comparison, the table below summarizes SPX performance for all database dates starting in 2010. Note that results are lower across the board.

The bottom line: When insiders aggressively buy shares, you should probably consider doing the same. (…)

It bears repeating that corporate insider activity is best used not as a standalone trading “system” – triggering “All In” or “All Out” signals – but as a “weight of the evidence” tool. Insider buying can often be “too early” – i.e., they may start buying into a market decline and keep buying as the market tanks.

Because they typically have a multi-year time frame, this almost invariably works out well as they buy when their companies’ shares are down or in the process of bottoming out and then wait patiently for a rebound and rally.

Not every investor is wired to invest this way. Likewise, corporate insider selling does not necessarily generate “timely” sell signals anywhere near a notable market top.

The simple method highlighted above does an excellent job of allowing investors to designate insider activity as “favorable” or “not meaningful” at any given time. For now, that approach is still sitting in the “favorable” camp.