Recent economic data are puzzling economists. Corporate conference calls can provide real life indications how things really are. From The Transcript:

• “…on the consumer side, it’s just continued more of the same. Consumer is generally strong, high spend levels continue. We can talk about credit some more, but the short answer is not a whole lot of difference in terms of the trends that we’re seeing.” – Wells Fargo ($WFC ) CEO Charlie Scharf
• “When you look at the spend patterns by different income segments, as you called it, the trends have been relatively unchanged for several quarters” – Visa ($V ) CFO Chris Suh
• “…the consumer is spending, the consumer is spending.” – Fiserv ($FI ) President Frank Bisignano
• “…then on the consumer side, the consumer has just been resilient than any of us would have ever thought. I mean I think you can look at any quarter and say, gosh, this is the quarter, maybe it was going to be the season — the holiday season, whatever it may be that are going to start slow spending.” – Truist Financial ($TFC ) CEO William Rogers
• “So net-net, I’d say the state of the consumer is still pretty strong because that consumer has a job and they’ve had some real wage growth, and inflation is tempering. But it’s certainly more stressed than it was 2 years ago and consumers are a bit more levered than they were 2 years ago. And banks are less reluctant to make new loans, and consumers are less able to afford those loans because of higher rates. So net-net, consumer is okay, but they’re sweating harder than they were certainly 2 years ago. And it’s brought some reluctance to create new lending, and you see that with just a consistent decline in loan origination across most categories.” – TransUnion ($TRU ) CEO Christopher Cartwright
• “I would say — so first of all, credit quality continues to remain very, very good. It is — we know we’ve come from incredibly benign credit environment. The increases that we’re seeing in terms of delinquencies continue to look like they are very much on top of the performance that we had seen pre-COVID, so a more return to normal…we feel very good about what we’re seeing in terms of the credit card growth that we’ve had in the underlying credit quality.” – Wells Fargo ($WFC ) CEO Charlie Scharf

But some specific segments have different vibes:

• “…there’s still a pretty cautious consumer out there on durable goods…the end consumer is still just very cautious with their dollar” – Winnebago Industries ($WGO ) CFO Bryan Hughes
• “The quarter solidified that consumers are feeling the impact of multiple years of inflation across many key categories such as food, fuel, and rent and are, therefore, far more deliberate with their discretionary dollar…I would also call out that the slowdown we experienced was across all geographies, further suggesting there was a broader macro impact.” – Five Below ($FIVE ) CEO Joel Anderson

Also from the real world:

Bank of America aggregated credit and debit card spending per household rose 0.7% year-over-year in May, following the 1.0% YoY rise in April. (…) overall consumer spending momentum has largely remained stable this year. In May, retail spending growth, though still negative, reversed course to trend upwards, and while services spending growth eased back in May, it remained positive. On a monthly seasonally-adjusted (SA) basis, total card spending per household fell 0.9% month-over-month (MoM) in May, following the 1.3% MoM increase in April.

BofA data also reveal that discretionary spending is impacted by inflation:

(…) Are trade-downs and pressure on discretionary spending, despite strong wage gains, a potential sign of deteriorating financial health amongst the younger generations? And are some younger generations increasingly using credit to support their spending?

When looking at credit card data, it’s important to distinguish between ‘revolvers’ and ‘transactors.’ While the latter group uses their cards to make purchases and pays off the full balance each month, revolvers tend to maintain some level of positive card balance from one month to the next.

Intuitively, revolvers would most likely exhibit signs of being financially stretched, given they are already not paying their balance in full. Focusing only on this group, Exhibit 8 uses Bank of America internal data to show how the credit card utilization rate has changed since 2019 across generations for a stable cohort of clients classified as ‘revolvers’ and finds that all generations’ utilization rates are below the level they were in 2019. While Millennials and Gen Z have seen the most significant moves higher in utilization, these levels do not look particularly elevated.

Interestingly, while the older generations’ repayment rates are above 2019 levels, it appears that Gen Z and younger Millennials have seen a decline in their repayment rates to below 2019 levels. This could be a sign that these generations are under greater financial pressure and paying off less of their balances as a result. However, it is hard to abstract from ‘life-cycle’ influences as these cohorts had the highest repayment rates in 2019 and their current trajectory may simply be a reflection of their behavior becoming increasingly similar to older generations as they mature and take on more recurring months costs.

When we look at Bank of America internal data on saving and checking balances by all households, we see that all generations, from Gen Z through to Baby Boomers, have 44% or more deposits than they did pre-pandemic. (…)

Overall, based on our data, it appears that the strength of the labor market and the associated wage growth, as well as elevated savings deposits, have allowed a majority of younger cohorts to weather any pressures they are seeing from higher necessity outlays. However, around the edges, some do seem to be feeling more pressure, with some signs of rising credit card utilization rates and a rising proportion of the younger cohorts finding outflows from their accounts outstripping their inflows by a sizeable margin.

Feel-good consumers (Axios)

Consumers may feel glum about the economy, but when it comes to their own finances, they feel pretty good, according to the New York Fed’s latest Survey of Consumer Expectations.

About 78% of respondents expect to be financially stable or better off in the coming year — the largest share in nearly three years. Consumers’ optimism for stock prices in the year ahead was similarly the highest since 2021.

On average, the perceived odds of missing a minimum debt payment over the next three months fell by 0.9 percentage point to 12% — similar to that seen before the pandemic.

Meanwhile, median expected growth in household income rose a tick to 3.1% (though spending growth expectations moved down by 0.2 percentage point).

Views about the labor market were more mixed: The average probability that the unemployment rate will be higher next year jumped to almost 39%, more than a percentage point above the prior month. But consumers’ perceived chance of losing their own job, on average, fell nearly 3 percentage points to 12.4%.

Consumers had higher confidence inflation will ease in the year ahead, though they were more pessimistic about longer-term price trends.

• Median inflation expectations at the one-year horizon ticked down to 3.2%.
• That means the upward trend in inflation expectations observed in a slate of recent data did not continue — at least by this measure.
• Inflation expectations over the next three years held steady at 2.8%, but increased by 0.2 percentage point to 3% at the five-year horizon.

More on the labor market:

“And the second thing I’m paying a lot of attention to right now is I watch this stat, which is the frequency with which the member base changes jobs on LinkedIn. And if you go back 2.5 years, we all remember, I think it was in the Great Reshuffle, Great Resignation, just a ton of movement, people changing jobs. That really leveled off the past 2 years. But if you look at the past maybe 4 months, it’s really starting to pick up again. So I’m not saying we’re going into another Great Resignation or anything like that. But for the first time in 2 years, we are starting to see people moving jobs more frequently again. I think people were sheltering in place for a while, so we’re starting to pay a lot of attention to that.” – Microsoft ($MSFT ) LinkedIn CEO Ryan Roslansky (via The Transcript)

Many pundits have used the BLS Quits data to support the view that labor markets have normalized. They sure did vs the pandemic highs but note that Quits are still historically very high. The last data point below is April.

LinkedIn CEO, who has access to real time data, says that “we are starting to see people moving jobs more frequently again”.

As a reminder, the Atlanta Fed Wage Growth Tracker showed that wages for “Job Stayers” were rising 4.5% YoY in Q1 but wages for “Job Switchers” were up 5.2%.

For the Descent, Follow the Dots While the Fed still plots its course down from high rates, other central banks are starting off on their own.

Slowly, steadily and reluctantly, impatient central bankers in some developed markets are jumping ahead of the US to cut high interest rates that are weighing on their economies. Easing monetary policy before the Federal Reserve is far from ideal. Lower rates elsewhere lead to capital flow to the US. That puts pressure on local currencies — and increases the cost of servicing dollar-denominated debts for these countries. (…)

So far, the cost of cutting before the Fed hasn’t been as severe as feared. (…)

US economic data downloads in the past few weeks have been infuriatingly inconclusive when it comes to judging the timing of the first rate cut or the magnitude of easing for the rest of the year. Jay Powell, the Fed’s chairman, has remained dovish in the face of a string of first-quarter data that surprised to the upside. He insisted at his last FOMC press conference that rates were restrictive, and data since then hasn’t settled the debate. (…)

Indeed, the robust payroll data shouldn’t surprise the Fed. With minutes from the last FOMC showing that members expected unemployment to peak later this year and then fall, Bloomberg Economics’ Anna Wong argues the Fed’s interpretation will unravel the declining path for interest rates that’s still sketched out by markets:

If that’s how the Fed sees it, then they’re probably not too troubled by the rise in the unemployment rate – which has already reached the median participant’s 2024 forecast from the March Summary of Economic Projections — though the median is also likely to raise the 2024 unemployment forecast in the updated SEP. Rather, the Fed may continue to take a greater signal from robust nonfarm payrolls, leaning on the idea that immigration is supporting the labor market. (…)

Half of EM central banks are either cutting rates, or are on hold below their norm. The majority of developed markets are still on a plateau well above the norm.

Source: Bloomberg

The next move is about to come from the Fed. With employment data taking any chance of a summer rate cut off the table, the focus will be almost exclusively on the dot plot, issued quarterly, in which each FOMC member gives their prediction for the future course of fed funds, and for various economic measures. Last time, the median participant envisaged three cuts by the end of this year — although only one member would have needed to change their mind to move the median to imply only two cuts. It would be a major surprise if that doesn’t happen this week, with the fed funds futures market now implicitly predicting slightly less than two cuts by year-end. The key question now, with the Fed median currently 34 basis points below the market’s prediction, is whether the median member shifts to predict two cuts, or moves all the way to expecting only one.

If the FOMC does move the dots that far, it will complicate life for everyone else. This descent is going well so far, but the hazards aren’t over. It was never going to be easy.

The WSJ’s Nick Timiraos on plotting the dot plot:

(…) Because no meaningful policy changes are expected at this week’s meeting, the focus Wednesday will center on new quarterly rate projections, the so-called “dot plot.” In March, most officials penciled in two or three cuts this year; the median—or midpoint—of the 19 officials was at three, but just barely. That was before a third consecutive disappointing inflation report, which subsequently prompted investors to wonder whether the Fed would be able to cut rates at all this year.

Investors’ intense focus on the median projections, which has at times sown confusion, adds a potential rare element of surprise to the gathering for two reasons.

First, most of the blocking and tackling for Fed meetings happens in the days and weeks leading up to the gathering. But Wednesday faces a wild card because those rate projections could be revised depending on the Labor Department’s report for May inflation as measured by the consumer-price index. The report will be released at 8:30 a.m., around 30 minutes before policymakers typically reconvene for their second day of deliberations.

A disappointing inflation report could hold more officials to a projection of no more than one cut this year. A serene report could lead more of them to pencil in two cuts.

Second, those projections aren’t the result of committee deliberations, even though investors—and occasionally Fed officials—treat them that way. The difference between a median that shows no more than one rate cut versus a median of two or more cuts could be determined by just one or two policymakers.

The Fed meets again in July and September.

Many investors assume a median projection of two cuts would be needed to tee up a rate cut by September. A median of just one would imply rate cuts aren’t likely to start until even later in the year. “It would be taken as a pretty strong signal,” said Jan Hatzius, chief economist at Goldman Sachs.

Some officials who are on the fence about cutting twice this year could pencil in just one reduction to keep their options open. While the projections aren’t a promise of future action, some analysts have said a base case of one cut could be a way to effectively underpromise and overdeliver if inflation data turns out to be placid this summer. (…)

And notwithstanding potential cues from the dot plot, it could be difficult for officials to send a strong signal about that [September] meeting with three more months of data on inflation, hiring and spending between now and then.

China’s Call for ‘Open Mind’ Spurs Hope of New Housing Measures

China urged officials to keep an “open mind” over policies to reduce housing inventory, a signal that led Wall Street economists to predict new measures and additional funding in Beijing’s bid to shore up the market.

The State Council, the country’s cabinet, asked officials to keep formulating new policies that will absorb existing housing stock and stabilize markets, according to a statement posted on the government’s website late Friday before the start of a three-day public holiday. “We should steadily and concretely push forward the work of digesting and revitalizing existing homes and land with an open mind and broadened thinking,” it said. (…)

“Our interpretation is that the impact of the latest round of easing thus far may have been more muted than policymakers had expected,” Goldman Sachs Group Inc. economist Hui Shan wrote in a Sunday note about the cabinet statement. “If the property market still does not show more signs of improvements in the coming months, we think policymakers will likely introduce more funding and new measures to destock inventories and stabilize prices.”

The State Council’s reference to the need for open minds and broadened thinking could encourage local governments to be more creative and bold<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> in rolling out supportive measures, JPMorgan Chase & Co. analyst Karl Chan wrote in a note. He expects stronger measures such as further easing of restrictions on home purchases restrictions, and relaxation of price caps in central areas of China’s biggest and most expensive cities, if sales in June and July disappoint. (…)

AI Corner

Axios sums up Apple’s AI strategy unveiled yesterday:

AI’s iPhone moment

The company’s approach, revealed yesterday and dubbed Apple Intelligence, envisions a future where a ubiquitous AI system that knows all about you can use that knowledge to surface the right information and take action on your behalf.

In contrast to the current chatbots — which know about the world, but little about you beyond what you tell them — Apple is building a context engine that understands each customer and the information and people that matter most to them.

Craig Federighi, Apple SVP of software engineering, described Apple Intelligence as “AI for the rest of us” — alluding to Apple’s 1980s slogan for Macintosh: “A computer for the rest of us.”

Bringing this bold vision to life depends on two key elements — technology and trust.

On the technology front, Apple may not be building the most advanced frontier models like Google, Meta or OpenAI — which struck a deal with Apple.

But given what it showed yesterday, the company seems further along than many thought.

Trust is where Apple has a real edge. The Apple Intelligence vision relies on access to a copious amount of personal data. The company can draw on a reputation for privacy that it has spent more than a decade fostering.

But Elon Musk ain’t trusting Apple:

• Musk threatens to ban employees from using iPhones

Elon Musk threatened to ban his employees from using Apple products after Apple announced that iPhone users would be able to ask ChatGPT questions through Siri, Apple’s voice assistant. (…)

“If Apple integrates OpenAI at the OS level, then Apple devices will be banned at my companies. That is an unacceptable security violation,” Musk posted on X Monday evening after Apple’s announcements.

• It’s not clear exactly what Musk means by “integrates…at the OS level,” or whether Apple’s description of how it plans to use ChatGPT in iOS would match most software developers’ definition of that kind of integration.
• Apple touted the privacy and security protections of the AI services it will provide itself, and showed off a prominent dialog box that will ask users whether they want a query to be forwarded to ChatGPT.

Musk has his own dog in the AI fight. He has raised $6 billion for his own AI company, xAI, to compete with OpenAI, Apple and every other AI provider.

Tesla promises to protect its customers from being tracked or having their data sold or shared.

• But Reuters reported last year that Tesla employees have spied on customers using the cars’ many cameras.
• Musk biographer Walter Isaacson wrote that Musk wanted to use cameras inside the cars to collect evidence to protect Tesla from lawsuits.

For better or worse, most of Big Tech’s customers have tended to prioritize convenience over privacy in the past, and today millions of people use ChatGPT.

While on cybersecurity, From TechCrunch via ADG:

Security researchers say they believe financially motivated cybercriminals have stolen a “significant volume of data” from hundreds of customers hosting their vast banks of data with cloud storage giant Snowflake.

Incident response firm Mandiant, which is working with Snowflake to investigate the recent spate of data thefts, said in a blog post Monday that the two firms have notified around 165 customers that their data may have been stolen.

It’s the first time that the number of affected Snowflake customers has been disclosed since the account hacks began in April. Snowflake has said little to date about the attacks, only that a “limited number” of its customers are affected. The cloud data giant has more than 9,800 corporate customers, like healthcare organizations, retail giants and some of the world’s largest tech companies, which use Snowflake for data analytics.

So far, only Ticketmaster and LendingTree have confirmed data thefts where their stolen data was hosted on Snowflake. Several other Snowflake customers say they are currently investigating possible data thefts from their Snowflake environments.

BTW: The Fed’s view on AI: There’s a lot more being used than you realize

“We are talking to firms of all different industries, and what we’re hearing are two things that might surprise you. First, AI is being used a lot more than you believe, and generative AI is being used a lot more than you might imagine. … So, the second fact, though, is that businesses are using it. The second fact that we hear is, yes, we’re using it, actively, but not for our most valuable prized products, the things that we’re selling that have a reputation. So, I’m going to use a – we did not talk to a rocket-making company, but I’m going to use it. It’s useful to understand. If you’re making rockets, you’re not using generative AI to build the rocket, and nobody’s [inaudible] employees anymore. You’re using it to do back-office operations, to look at early schematics, to [inaudible] research tells you about jet fuel or rocket fuel. You’re using it to have inputs to the process, but not to do these other ones. And that’s because, as repeatedly we’re told, it’s not ready yet.” – US Federal Reserve Governor Lisa D. Cook via The Transcript

Hiring and Wages are Up, Reinforcing the Economy’s Resilience The U.S. posted surprisingly large gains in both jobs and pay, even though the unemployment rate ticked up to 4%

Employers added 272,000 new jobs in May, the Labor Department reported on Friday, more than in April and well above the 190,000 that economists had expected.(…) Average hourly earnings also topped forecasts, rising 4.1% from a year earlier. (…)

It was the first time in more than two years that the jobless rate hit 4%. It also marked the extension of a steady climb higher; the rate was as low as 3.4% last year. (…)

Government jobs increased 43,000 last month, returning to the steady pace of gains that had paused in April when just 7,000 jobs were added in the sector. Private sector hiring also climbed, with a noticeable pickup among leisure and hospitality businesses. (…)

Survey says…???

• The BLS Establishment survey shows employment up 1.0% since November 2023 and +1.8% YoY in May.
• Its companion Household survey, used to calculate the unemployment rate, shows employment down 0.5% since November 2023 and +0.2% YoY.
• PMI surveys say employment was weak in the past 2 months, particularly in services.
• Job openings have declined 10% since December 2023.
• May’s jump in the number of unemployeds is from workers aged 24 and under: +205k (vs +157k overall). The unemployment rate for this group rose from 8.2% to 9.2%. Seasonal aberration?

• BTW: US Jobs Household Survey Size to Be Cut Due to Budget Constraints

BLS will cut the size by 5,000 households to a total of 55,000 a month starting in 2025, Commissioner Erika McEntarfer said at the quarterly meeting of the Council of Professional Associations on Federal Statistics. She noted there’s a “real risk” of a decline in quality, especially as response rates have declined substantially in recent years.

And this: hourly wages (black bar below) jumped by 0.40% MoM in May, much faster than April’s +0.23% and the last 3-month average of +0.25%. Wages for Private Production and Nonsupervisory employees (80% of total) jumped 0.47% in May (+5.8% a.r.) vs +0.2% in April and +0.23% in the previous 3 months, and the fastest monthly growth rate since March 2023.

On a YoY basis, the nice slowdown in wage growth stopped in April and ticked up to 4.2% in May.

Aggregate weekly payrolls (employment x hours x wages) suggest that consumer expenditures should hold up around 5.0% growth in May:

One more thing blurring the everybody’s vision:

About half of the non-farm payroll job growth since October 2023 has come from asylum-seekers, refugees and other migrants who have been authorized to work in the U.S., per a research note from Standard Chartered Bank released last month. Migrants comprised one-third of the monthly jobs numbers in the 12 months before that, per the report.

The figures line up with a Brookings analysis of Congressional Budget Office data earlier this year that attributed higher than expected post-pandemic job gains to immigration. (Axios)

On Tuesday, the administration issued an executive order preventing people who unlawfully cross the Southern border from seeking asylum. Instead, they’ll be sent to their home country or removed to Mexico.

Economic Data Paint a Picture of Two Americas A growing disconnect between the fortunes of upper- and lower-income Americans could account for some of the crossed signals in the U.S. economy.

(…) In the latest shocker, the Labor Department reported on Friday that the U.S. added 272,000 jobs in May, up from 165,000 in April and much higher than economists’ expectations. The strong reading is especially perplexing because it comes on the heels of a string of weak economic reports in recent weeks, including soft income and spending data for the month of April and a lower-than-expected reading on manufacturing sentiment in May.

It isn’t just government reports: Companies have been warning in recent weeks that consumers are pulling back. (…)

There were also disconnects within the May jobs report that had analysts scratching their heads. For instance, while the overall unemployment rate remains quite low by historical standards at 4.0%, unemployment among 20- to 24-year-olds was 7.9%, up from 6.3% a year earlier. And earlier this week, job openings fell to their lowest level in more than three years.

One possible reason for the mix of caution and abandon is that people lower on the income ladder who spend a bigger share of their income on necessities are feeling pinched and less confident about their job prospects. Meanwhile, wealthier households are still spending.

Consider one of the biggest surprises in the May jobs report, which was that the leisure and hospitality sector added 42,000 jobs. That was up from 12,000 in April and better than an average of 36,000 over the prior 12 months. By contrast, the entire goods-producing sector of the economy added just 25,000 jobs in May. Within leisure and hospitality, food services and drinking places added 24,600 jobs and the “amusement, gambling, and recreation industries” added 10,200. (…)

What is becoming hard to miss is that companies that serve a wealthier clientele sound much more confident lately. While food makers see shoppers struggling with inflation, cruise lines are booming. (…)

Stepping back, this makes a certain amount of sense. The upper cohort in the U.S. mostly own their homes, and the lion’s share are likely sitting pretty with ultralow mortgage rates taken out or refinanced during the pandemic. They are also benefiting from an effervescent stock market, including downright euphoric valuations for anything associated with the promise of artificial intelligence. They also aren’t struggling with high rates on credit card or auto loans. Instead, high interest rates are actually supplying them with record levels of investment income, as The Wall Street Journal recently reported.

It is this cohort, whether by splurging on vacations or further bidding up Nvidia shares, that is making it harder for the Federal Reserve to get comfortable cutting rates.

This is a good time to revisit my September 11, 2023 post The Wealth Defect which showed that when inflation-adjusted household net worth rises rapidly above trend, like in the late 1990s, the mid-2000s and recently, consumer expenditures grow faster than income, i.e. the savings rate declines.

The Bernanke/Yellen unconventional monetary policies have rendered the FOMC’s conventional playbook ineffective!

Monetary and fiscal policies boosted household wealth 25% above their 2019 level and 20% above trend, thanks to rising stock prices but, principally, to rising home values due to unusually low supply of existing homes due to Fed-supplied mortgage handcuffs.

From a monetary policy perspective, the wealth effect is now a wealth defect: rising interest rates have little impact on a very wealthy, under leveraged, American consumer looking to enjoy life AMAP (as much as possible) post pandemic.

And we’re not even going back to trend just yet, are we?

Hence the continued divergence between expenditures and income…

… causing real expenditures to keep rising 2.6% YoY when real disposable income is only up 1.0% in April.

Many April data revived “hopes” for the desired soft landing but May’s labor income data suggest expenditures growth still around a +0.45% monthly range, 5.5% annualized. With PCE inflation below 3.0% YoY (2.6% in April), the “no-landing” scenario remain possible.

Canada Unemployment Rate Inched Up in May With Softer Hiring A spike in wage growth, however, adds a wrinkle for a central bank pondering further rate cuts

Employers across the country added 26,700 jobs in May from April while the unemployment rate edged 0.1 percentage point higher to 6.2%, the highest since January 2022, Statistics Canada reported Friday. The pace of hiring was slightly stronger than market expectations for the addition of 22,500 jobs but follows a 90,400 jump in employment the month before.

Hiring in May was all for part-time positions.

Statistics Canada’s survey showed 62,400 part-time jobs were added, which more than made up for the drop of 35,600 full-time roles. And that came even as the start to the summer job market looked soft, with the employment rate for students planning to return to school in the fall lower than a year earlier.

When calculated using U.S. Labor Department methodology, Canada’s unemployment rate was inched up 0.1 point to 5.2%. In contrast, U.S. job creation blew past expectations even as the jobless rate ticked up to 4% for a mixed view of America’s labor market.

The unemployment rate in Canada has trended higher for a little over a year, rising 1.1 percentage points since April 2023 even as employers have continued to add to their ranks. Canada in May added 402,300 jobs compared with a year earlier, though that strength has been outpaced by immigration-driven growth in the population, with almost 100,000 added to the population during May alone. The employment rate, the proportion of the working-age population that is employed, eased 0.1 point from April to 61.3%. (…)

Still, earnings continue to advance more strongly than headline inflation and average hourly wages for permanent employees advanced in May by the most since January, rising 5.2% from a year earlier to beat the 4.7% growth economists anticipated. The re-acceleration comes after signs in recent months, including in separate payroll data, that the pace was cooling. (…)

Europe Readies Tariffs on Flood of Cheap Chinese EVs

The European Union is expected to tell manufacturers of EVs in China as early as [this] week whether it will impose provisional tariffs from July 4 that would boost import duties above the current level of 10%. (…) The EU’s tariff levels are expected to be significantly lower than the 100% duty introduced by the US as they are based on a different approach within World Trade Organization rules and procedures. (…)

The manufacturer [BYD] plans to build a factory in Hungary and has said it’ll bring its $10,000 Seagull hatchback to the region in 2025. (…)

• Nio Inc. has established sales and service networks in markets including Norway, Germany, the Netherlands, Sweden and Denmark. The brand’s ET5 sedan and EL7 sport utility vehicle won the maximum five-star safety ratings in the 2023 Euro NCAP safety tests.
• Xpeng Inc. this year started selling electric models including its flagship G9 SUV in Germany, Spain and France and has plans to expand to the UK and Italy. In Germany, unlike some of its Chinese peers, the company is selling via a local dealer network.
• Other Chinese companies have bought European brands to facilitate their entry into the market. SAIC has had success in the region with the British-origin MG badge, while Geely controls Norfolk, England-based sports-car maker Lotus and Sweden’s Volvo Car AB. (…)

Closer to home, manufacturers are racing to offer more affordable EVs to defend against the cheap Chinese competition:

• Volkswagen, which has been struggling with its EV shift, is introducing more than 30 new products this year including the all-electric Porsche Macan and the ID.7 sedan, which comes with a display that beams information into the driver’s field of vision. The German manufacturer also has plans for a €20,000 EV developed and produced in Europe, but that won’t arrive until 2027.
• Stellantis — owner of the Fiat and Peugeot brands — earlier this year introduced the €23,300 electric Citroën ë-C3 and in September will start sales of cars co-developed with China’s Zhejiang Leapmotor Technologies Ltd. in Europe.
• France’s Renault SA said in May it will develop much of its sub-€20,000 EV in China, part of a push to speed up time to market. It plans to start deliveries of the R5 E-Tech city car — which is assembled in France — in September, with a price tag of around €25,000.
• Mercedes-Benz Group AG and BMW last year unveiled prototypes for their next-generation EVs, but those models won’t be available until around mid-decade.

(…) The European Commission in March said it had found “sufficient evidence” that the imports of new EVs from China received subsidies including direct transfer of funds, tax breaks, or public provision of good or services below market prices. (…)

It’s still far cheaper to make a car in China than it is in Europe given the country’s low cost of land, energy and labor, and its vast economies of scale from being a first mover in mass-production of EVs. That’s reflected in the contrast in EV sticker prices between China and Europe. In Germany, SAIC’s MG4 costs €34,990. In China, it’s 109,800 yuan (€13,917). (…)

The companies that rely heavily on sales in China — mainly Volkswagen, Porsche, BMW and Mercedes — have much more to lose if trade relations continue to deteriorate. Earlier this month, Mercedes CEO Ola Källenius said Europe should resist the urge to take protectionist measures, repeating a mantra he’s been championing ever since the EU opened its probe. Slapping tariffs on Chinese EVs will delay the transition to a cleaner economy, with an escalating trade conflict poised to hurt “the whole world,” former Volkswagen CEO Herbert Diess — now Chairman for chipmaker Infineon Technologies AG — said during a BloombergNEF conference in Munich in June. The Germans and US rival Tesla produce cars in China that are then exported to Europe, adding to the potential impact on their businesses from an escalating trade spat with Beijing.

China has urged Brussels not to impose the EV duties, and signaled in May that it’s ready to unleash retaliatory tariffs as high as 25% on imports of cars made in the EU with large engines — which would affect Mercedes-Benz, Porsche and BMW the most. Beijing has also hinted at possible tit-for-tat levies on European aviation, agricultural and dairy goods and wine, and has begun an investigation into European exports of brandy. It could also restrict exports of goods that are vital for EV production, such as rare earths or battery metals like lithium. The EU mines only a small fraction of the lithium it consumes, and relies on China to process it. Another retaliatory tool China has used in the past is to restrict tourism to inflict economic punishment.

The EU is expected to privately notify the Chinese carmakers of its planned tariffs some time after the June 6-9 European elections. Brussels will then accept comments, before officially announcing the preliminary tariffs in July. Final levies are due to be set in November. (…)

• Turkey to Impose Additional 40% Tariff on All China Vehicles

CAPS, LARGE AND SMIDs

From Ed Yardeni:

• The S&P 500 absolute P/E (20.6) nears the high end of its P/E range, the latter rising along booming profits. Ed’s MegaCap-8 P/E is at 28.3. S&P 500’s ex-MegaCap-8 {/E is at 18.2, 4% above the 17.5x historical median.

• The S&P 400 MidCaps and S&P 600 SmallCaps are currently trading at forward P/Es of 15.0 and 14.2.
• The LargeCaps outperformed the SMidCaps mostly because the former’s forward earnings has rebounded to new record highs since the last earnings recession, while the latter two’s forward earnings have been mostly flatlining below their record highs in early 2022.

As a result, as Bespoke explains:

While weak breadth has become especially pronounced in recent days, the trend is not new.  Look at the chart below which shows the performance of the S&P 500 market cap-weighted index versus its equal weight counterpart over the last two years. While the S&P 500 has rallied 30.3%, the equal weight index is up by just a little more than a third of that (11.3%).

Below we show the rolling two-year performance spread between the two indices over time.  At the current level of 19 percentage points, the spread has reached its widest level in nearly 24 years (6/30/00) putting it in the 95th percentile relative to all other two-year periods since 1992.  The last time the spread was this wide, it came just ahead of what ended up being a period of massive long-term underperformance for the cap-weighted index. That being said, the period during which the cap-weighted index had outperformed leading up to that lasted for years.

Yardeni’s price targets:

When we calculate our S&P 500 price targets for the end of each year, we project S&P 500 forward earnings per share for the end of each year and multiply it by a forward P/E range of 16 to 20. We are still forecasting the following forward earnings at the end of each year: 2024 ($270), 2025 ($300), and 2026 ($325). (FYI: “Forward” earnings and revenues are the time-weighted average of industry analysts’ consensus estimates for the current and following year.)

That gives us the following year-end target ranges for the S&P 500 stock price index: 2024 (4320-5400), 2025 (4800-6000), and 2026 (5200-6500). In our Roaring 2020s scenario, we are picking the tops of these three ranges as our point estimates: 2024 (5400), 2025 (6000), and 2026 (6500). By the end of the decade, we expect to see the S&P 500 at 8000, with forward earnings at $400 and the forward P/E at 20.

(…) the S&P 500 profit margin ticked up to 12.0% during Q1, while the forward profit margin rose to 13.3% during the May 30 week. Again, in our Roaring 2020s scenario, we expect the actual profit margin to rise from 13.2% this year to 13.7% in 2025, and 14.6% in 2026.

FYI, by comparison:

@OliverRakau