China’s Property Crisis Is Starting to Ripple Across the World

Chinese investors and their creditors are putting up “For Sale” signs on real estate holdings across the globe as the need to raise cash amid a deepening property crisis at home trumps the risks of offloading into a falling market. The prices they get will help finally put hard numbers on just how much trouble the wider industry is in.

The worldwide slump triggered by borrowing-cost hikes has already wiped more than $1 trillion off office property values alone, Starwood Capital Group Chairman Barry Sternlicht said last week. But the total damage is still unknown because so few assets have been sold, leaving appraisers with little recent data to go on. Completed commercial property deals globally sank to the lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts.

Regulators and the market are nervous that this logjam could be concealing large, unrealized losses, spelling trouble both for banks, who pushed further into bricks and mortar lending during the cheap money era, and asset owners. (…)

The European Central Bank is concerned that banks in the region have been too slow to mark down the value of loans and the UK’s Financial Conduct Authority is to review valuations in private markets, including real estate.

Now, a new batch of overseas assets acquired in a decade-long Chinese expansion spree are starting to hit the market as landlords and developers decide they want cash now to shore up domestic operations and pay off debts — even if that means taking a financial hit. Beijing’s crackdown on excessive borrowing has left few developers unscathed, even those once considered major players. A unit of Guangzhou-based China Aoyuan Group Ltd., for example, which is in the middle of a $6 billion debt restructuring plan, sold a plot in Toronto at about a 45% discount to the 2021 purchase price late last year, according to data provider Altus Group.

“With motivated sellers, the market freeze could thaw, improving transparency and price discovery,” said Tolu Alamutu, a credit analyst at Bloomberg Intelligence. “Portfolio valuations may have further to fall.”

With every transaction, the market gets more clarity about the capitalization rate — a measure of the return an investor is willing to do a deal at. That data will then be used by appraisers to value other assets, which could trigger wider impairments. As a consequence, landlords may have to inject more money to cure any loan-to-value breaches or risk having the properties seized by lenders. (…)

Just this week, distressed developer Guangzhou R&F Properties Co. agreed to sell its stake in a £1.34 billion ($1.69 billion) property project in London’s Nine Elms district in return for some of its dollar bonds and 10 pence, while an office block in Canary Wharf is selling for 60% less than it sold for in 2017 after it was seized by lenders from a Chinese investor. The sales are part of a rebound in disposals after some developers paused for breath last year while working on restructuring plans. (…)

Sales are picking-up outside Europe too, including in Australia. Only a few years ago, ambitious Chinese developers were major players in the local market. Now most have largely stopped buying and have pivoted instead to offloading projects. (…)

To be sure, China is by no means the only source of potential distress in the commercial real estate market. South Korean investors timed a huge bet on offices badly, and higher interest rates have already caused German and Nordic landlords to sell off properties at large discounts. A wave of loans maturing in the US are also expected to lead to foreclosures by regional banks and sales of the underlying assets. But China is the market where perhaps vendors have the most incentive to sell quickly. (…)

US Commercial Real Estate Contagion Is Now Moving to Europe

The troubles in the US commercial property market, which have already hit banks in New York and Japan, moved to Europe this week, elevating fears about broader contagion.

The latest victim was Germany’s Deutsche Pfandbriefbank AG, which saw its bonds slump on concern about its exposure to the sector. It responded by issuing an unscheduled statement Wednesday that it had increased provisions because of the “persistent weakness of the real estate markets.”

It described the current turmoil as the “greatest real estate crisis since the financial crisis.” (…)

On Tuesday, Treasury Secretary Janet Yellen said that losses in commercial real estate are a worry that will put stress on owners, but added that she thinks the problem is manageable.

For offices in the US, where the return to work following the pandemic has been slower and less substantial, the value destruction has been particularly bad. And some predict the full impact might not even be fully priced in yet. Analysts at Green Street said that a further writedown of as much as 15% may be needed this year. (…)

“There are serious concerns in the US CRE market,” said Rabobank credit strategist Paul van der Westhuizen. “It’s a not an issue for larger US and European banks but the smaller property-focused German banks are feeling a bit of pain. Right now it’s more a profitability issue than a solvency issue for them though. They have sufficient capital and are less exposed to the threat of deposit runs than pure retail banks are.”

In its results last week, Deutsche Bank AG recorded provisions for losses in US commercial real estate that were more than four times bigger than a year earlier. It warned that refinancing poses the greatest risk to the struggling sector as asset values suffer. (…)

Germany’s central bank warned last year about the risks surrounding commercial real estate, saying there could be “significant adjustments” that lead to higher defaults and credit losses.

“The outstanding volume of loans granted by the German banking system to the US commercial real estate market is comparatively small, but relatively concentrated at individual banks,” the Bundesbank said. (…)

If the CRE losses spread to Europe through smaller German banks, that would have an echo of the 2008 global financial crisis. Back then, it was the Landesbanks that got into trouble, when their exposure to subprime mortgages in the US led to billions of euros of writedowns. (…)

For the record, here’s what Mrs. Yellen actually said:

• On Tuesday, to the House Financial Services Committee:

I’m concerned. I believe it’s manageable, although there may be some institutions that are quite stressed by this problem

• On Thursday, to the Senate Banking Committee:

Valuations are falling. And so it’s obvious that there’s going to be stress and losses that are associated with this. I hope and believe that this will not end up being a systemic risk to the banking system. The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments.

Hope and belief. Sounds more like an opinion than actual knowledge and conviction. She could have said it more CREdibly…

Sun Life Sees Value of Its US Office-Property Stakes Sink 26% Executive banks on long-term turnaround, not a ‘forced seller’

(…) The declines came as mark-to-market valuations sunk amid stress in the commercial real estate space, with US office investments taking the biggest hit, dropping in value to C$476 million from C$647 million a year earlier. Sun Life’s Canadian office properties, in contrast, shed almost 11% of their value, declining to C$1.6 billion.

Some of those shifts in value came from selling some buildings and buying other ones, but most of the losses were on paper as Sun Life reduced the value of unrealized gains on properties it’s held for many years, Randy Brown, chief investment officer and and head of insurance asset management, said in an interview Thursday.

Sun Life previously sold all but one of its office buildings in San Francisco, and that property took a major hit in the fourth quarter as increased sales activity reset market comparables lower, Brown said. (…)

Sun Life took a C$148 million charge on lower real estate market values in the quarter, which was the main driver behind a 36% decline in fourth-quarter reported earnings. Still, the company beat analysts’ estimates on underlying results amid strong insurance sales, particularly in Hong Kong.

The firm is likely to take further real estate charges, totaling C$225 million, in the first half of this year, followed by “stability from there,” according to a note to clients Thursday from TD Securities analysts Mario Mendonca and Masa Song.

Biden Is Looking Beyond Tariffs to Keep Chinese ‘Smart Cars’ Out of the US

The Biden administration is considering restrictions on imports of Chinese “smart cars” and related components that would go beyond tariffs to address growing US concerns about data security, according to people familiar with the matter.

The measures would apply to electric vehicles and parts originating from China, no matter where they’re finally assembled, to prevent Chinese makers from moving cars and components into American markets through third countries like Mexico, the people said. The measures could also apply to other countries about which the US has data concerns, one of the people said. Tariffs alone, they added, won’t fully address this issue.

US officials are particularly concerned about the troves of data collected by so-called smart cars — which include EVs and other types of connected and autonomous vehicles — said the people, who were granted anonymity to discuss confidential conversations.

The administration may try to address data security concerns using existing Commerce Department authorities to regulate some information and communications technology transactions, some of the people said, but no decision has been made as officials conduct a sweeping policy study.

A separate executive order intended to ensure data privacy in general is expected to be released as soon as next week, and officials are also weighing adjustments to a 27.5% tariff on Chinese EVs originally imposed by President Donald Trump. (…)

Commerce Secretary Gina Raimondo worries that data could wind up in Beijing’s hands, she said last week, pointing to China’s ban on Tesla Inc. cars near government gatherings and for military use. “You can’t drive a Tesla on certain parts of Chinese roads, they say for national security reasons,” she said at an Atlantic Council event. “Well, think about that. What are the national security concerns?”

Chinese automakers like BYD Co. have stayed out of American markets in part because of high tariffs, but US officials think they may eventually choose to swallow those costs. The retail price of EVs made in China is less than half that of those manufactured in the US, so a flood a Chinese cars could upend President Joe Biden’s efforts to turbocharge domestic EV production. There’s also worry in Congress that Chinese companies like Contemporary Amperex Technology Co., the world’s biggest EV battery maker, may try to take advantage of tax credits in the Inflation Reduction Act, Democrats’ signature climate law. (…)

Companies including BYD have been considering sites in Mexico for factory investments, and Treasury Secretary Janet Yellen said in December that the US intends to help Mexico beef up screening of foreign investments, including from China. (…)

Can Dividend Investing Rise From the Dead? The once-blockbuster strategy of picking big payers has been battered by growth-focused tech titans, but the right approach could bring it back.

U.S. stock data from the economist Robert Shiller shows that the contribution of dividends to total returns averaged 80% from the 1870s to the 1950s, with the rest made up of capital gains. This past decade, it was 30%. The average dividend yield has been stuck below 2% for most of the past 25 years, compared with a historical average of 4.3%.

“The notion that large, successful businesses wouldn’t make a cash distribution to company owners is abnormal,” says Peris.

From the launch of the Amsterdam stock exchange in 1602 until the mid-20th century, buying a share in a company was almost exclusively about the dividend that investors could expect to receive. A more-mature tech sector, higher rates and heightened scrutiny of buybacks will lead minority shareholders to demand income again, Peris argues.

But many of today’s investors own stakes in companies through diversified savings portfolios and 401(k)s. It is unclear whether they care as much about dividends as their forebears did.

Of course, price gains unmatched by profit are speculative and can easily reverse. But if earnings rise in tandem, the company’s owners might not mind whether cash is distributed or kept on the balance sheet (tax considerations notwithstanding). (…)

The 21st century has benefited “growth” sectors such as tech and healthcare. Manufacturers, banks and utilities—mature businesses that still tend to pay dividends—have fallen behind. Since 2020, the pandemic and now the craze for AI have turbocharged this trend. Over the past year, investors have pulled a net $21 billion from dividend funds, even as they added $12 billion to broader equity funds, EP

But that doesn’t mean investors should simply look for stocks with high dividend yields. These are often low-quality companies with unsustainable payouts. A smarter strategy is to focus on companies that can increase dividends sustainably—often dubbed “dividend growth” or “dividend aristocrats.”

Alternatively, investors can pick dividend stocks that exhibit low volatility. This approach has done terribly of late—but on a risk-adjusted basis, it has outperformed other big strategies roughly 60% of the time since 1998.

For a modern investor, the point of shares that pay income regularly is that cash returns are less risky. The ideal role for dividend strategies in portfolios isn’t beating sexier growth companies, but rather occupying a middle ground between them and the low-risk bonds that do better during downturns. They should be judged on the basis of returns adjusted for volatility—the so-called Sharpe ratio. (…)

  

Global Share Buybacks Return With a Bang as Stocks Hit Records US firms see best start to February ever in announced buybacks

Stronger than expected earnings are leading companies on both sides of the Atlantic to announce share buybacks at a blistering pace as 2024 gets going — a potentially crucial pillar of support for global stock markets already trading at all-time highs.

Facing the highest borrowing costs in decades, corporations turned stingy on share repurchases in 2023, but that’s changing with buybacks projected to increase this year. (…)

US companies have announced $105 billion in planned share repurchases in the first seven days of February, surpassing the full-month tally in January. It’s the strongest start to a February ever for announced buybacks and the second-best start to a year after 2023, data by research firm Birinyi Associates Inc. show. (…)

S&P 500 firms are expected to repurchase $885 billion in stock this year, up 10% from 2023 but down 4% from the record-setting pace in 2022, according to preliminary data from S&P Dow Jones Indices. (…)

Buyback announcements have increased in Europe as well, particularly in the financials and energy sectors, which that returned the most to shareholders last year. With banks continuing to reap the benefits of higher borrowing costs, share repurchase programs at Unicredit SpA, Intesa Sanpaolo SpA, Deutsche Bank AG and Banco Bilbao Vizcaya Argentaria SA are pushing stocks higher. (…)

“The economy continues to improve, inflationary pressures continue to subside, interest rates will continue to decline — and all of the above is giving corporate executives the confidence they need to announce share buybacks,” Front said by phone, referring to the US. “It means that companies don’t expect a major economic downturn.”

From Ed Yardeni:

Einhorn Says Markets ‘Fundamentally Broken’ By Passive, Quant Investing

Greenlight Capital was forced to shift its strategy as the growth of passive investing and algorithmic trading transformed markets, founder David Einhorn said.

“I view the markets as fundamentally broken,” Einhorn, 55, said on Barry Ritholtz’s Masters in Business podcast. “Passive investors have no opinion about value. They’re going to assume everybody else has done the work.”

Investors have increasingly looked beyond active money managers, instead opting for passive strategies with lower fees. By late 2019, passive vehicles such as index funds accounted for more than half of publicly traded assets in US equity funds.

That means fewer people are paying attention to individual stocks, posing a problem for funds looking to invest in undervalued companies, according to Einhorn. Value strategies pay off when others notice a company’s potential, driving up its stock.

At the same time, Einhorn said that quants base their trades on short-term price moves rather than a company’s actual worth. Algorithmic investing “has an opinion about price,” he said. “Like, what is the price going to be in 15 minutes?” (…)

Greenlight still bets on undervalued companies, but it looks for even lower market capitalizations relative to earnings than before, as well as strong cash flows that can fund share buybacks.

“We can’t count on other long-only investors to buy our things after us,” Einhorn said. “We’re going to have to get paid by the company.” (…)

Funny that, on the same day, the WSJ and Bloomberg feature two actually related stories: nobody cares about value because of passive investing. We’ve been there before.

What China Really Needs Is More Bad News Ramping up censorship will only feed rumors, dampen risk-taking, and deprive top officials of the data they need to revive markets.

(…) Convinced that pessimism is fueling the selloff rather than poor fundamentals, Party leaders have turned to propaganda, censorship and even veiled threats in order to accomplish what limited stimulus measures haven’t: revive faith in the Chinese economy at home and abroad. (…)

Beijing’s strategy is counterproductive as well as unintentionally comic. Smothering bad news won’t persuade ordinary Chinese to believe official propaganda. The Party’s credibility has suffered irreparable damage after a series of self-inflicted missteps, such as sticking with a failing Covid Zero strategy for too long and compounding the error with a chaotic opening that claimed an estimated 1.4 million lives.

Harsher censorship only leads people to assume the worst, achieving precisely the opposite effect as intended. One perverse consequence is the creation of a thriving market for rumors. People denied sources of reliable information and skeptical of the Party line usually turn to the rumor mill, which can do far more damage than bad-but-factual news.

If anything, suppressing negative data will only increase already high levels of uncertainty among investors, further dampening enthusiasm for Chinese stocks. Few CEOs and asset managers will dare to make big bets on China when there is so little visibility into the country’s economy.

More credible data would at least allow investors to assess whether things are about to bottom out. Lacking such confidence, the only prudent course of action is to withhold capital, thus prolonging the slump. (…)

Ultimately, Chinese President Xi Jinping himself could fall victim to his own censorship regime. Given the Chinese state’s outsize role in the economy, Xi’s administration requires high quality economic data and impartial analysis in order to make decisions, even more than private investors do.

Yet the Party’s emphasis on political loyalty has increased pressure on lower-level officials not to report upward any news that may reflect poorly on Xi’s leadership. Internal communication channels are now so politicized that positive data almost certainly flows more easily to top decision-makers. Without more accurate numbers and analysis from independent sources, Xi and his chief economic advisers will have a hard time choosing the right course of action.

Negative comments aren’t to blame for pervasive pessimism in China. The real issue is a feeling among investors that Chinese leaders have been too timid in addressing economic challenges. Instead of muzzling journalists, economists, and analysts, officials could lift the sour mood with a bolder and more concerted reform effort.

Entrepreneurs and investors want to see a comprehensive and credible package of measures to tackle the real estate crisis, local government debt, and anemic domestic demand. Few Chinese expect instant results. But they are looking for decisive and intelligent leadership, similar to that displayed three decades ago by hard-charging former premier Zhu Rongji when he became the country’s economic czar.

By contrast, the Party’s current ham-fisted approach suggests top leaders have not learned much about how a market economy works. Unless they begin respecting the intelligence of consumers and investors, the markets’ slide will surely resume.

Investors Are Almost Always Wrong About the Fed Wall Street is clinging to hopes for interest-rate cuts despite inflation fears.

Investors are more convinced than ever that interest rates are coming down later this year. Their record on these things, however, isn’t great.

Wall Street has been caught offside in both directions while betting on the path of interest rates over the past few years. Few thought the Federal Reserve would get anywhere near 5% in the first place. Now traders keep ramping up bets that rate cuts are just months away, only to see that day recede with each batch of strong economic data. (…)

Investors use futures markets to bet on the direction of central-bank policy. Right now, those show traders betting that the Fed will cut rates by more than a percentage point this year, much more than Fed officials are projecting. 

Investors’ expectations for rates tend to be anchored to their recent memory. For nearly a decade after the 2008-09 financial crisis, for example, investors repeatedly (and wrongly) bet that rates would soon return to precrisis levels, according to an analysis by Bespoke Investment Group.

More recently, Wall Street didn’t expect the Fed to take rates to near 5.5%, or that it would hold them there for so long. When the Fed said in December that it expected to lower interest rates three times this year, investors bet on six cuts. After Chair Jerome Powell nixed the idea of lowering rates in March, they shifted their wagers to May.

The economy keeps beating expectations, preventing those bets from paying out. Last week’s blockbuster jobs report further enhanced the outlook. The Atlanta Fed now models inflation-adjusted growth as likely being 3.4% in the first quarter—well above levels that would suggest a need for rate cuts.

Wage growth, tracked by the Atlanta Fed, is at 5% as of January. The pace that prime-age workers are increasing their wages has yet to break below 5.4% since 2021. That worries investors and policymakers, because rising worker pay can feed inflation, keeping rates higher.

The healthy labor market also fuels consumer spending, in turn powering the economy. A retail-sales index from Johnson Redbook increased 6.1% last week from the same period a year earlier. (…)

As inflation falls, inflation-adjusted—or real—rates rise. Real rates are often considered a proxy for financial conditions in the economy because inflation factors into the cost of borrowing for households and businesses. Worried that real rates would rise so high that they discourage business activity to the point of sparking a recession, Fed officials have signaled that they could cut benchmark interest rates to avoid a substantial slowdown.

But one Fed official recently pushed back on the notion of cutting for the sake of real rates. Minneapolis Fed President Neel Kashkari argued that long-term real rates—measured via yields on 10-year Treasury inflation-protected securities—have only increased by a net 0.6 percentage point or so over the past year.

Because companies and individuals tend to borrow long-term to finance home purchases or new projects, that implies less drag on the overall economy than the real fed-funds rate suggests. (…)

A significant worry is what happens if inflation stays hot. Wall Street is now convinced that long-term yields are headed lower, but the latest reading of the consumer-price index came in at 3.4% and not everyone is certain it will continue to cool. That would keep rates high and potentially spark a destabilizing selloff in the bond market that could spread to stocks.

Bonds were already under pressure late last year because deficit spending prompted a surge in Treasury issuance that some investors worried would overwhelm demand. The U.S. presidential election is likely to signal more spending ahead, Papic said, bringing fears of rebounding inflation and higher bond yields back to the fore.

“The biggest risk to the stock market right now is the bond market,” Papic said.

Monitoring Changes in Inflation with Leading Economic Indicator Purchasing Managers’ Index ™(PMI)

In this research, we assess the track record of PMI as a leading indicator for inflation, relying on the leading indicator properties of PMI price indices – the Input Prices Index and Output Prices Index. These PMI series can provide signals for Inflation 3-6 months in advance of official CPI statistics and are used by investors and corporations for early signals into inflation and interest rate dynamics.

S&P Global’s price data suggest that inflation is flattening around 3% (PMI data are plotted with a 4-month lead).

The ISM’s measure of price pressures uses “prices paid” by corporate respondents, indicating trends in input costs eventually passed through to clients. A more upstream indicator of potential downstream pressures.

“ISM Prices Paid often leads the headline #CPI yet economists have paid no attention to the fact Prices Paid troughed in December…2022!!” (@RBAdvisors)

On wages, the Atlanta Fed Wage Tracker’s 3-m moving average is at 5.0%, down from 5.2% in December.

On a monthly basis, it fell from 5.4% to 4.7%.

These are unweighted.

Overall weighted wage growth rates have been steady at 5.2% since August 2023. The weighted series is constructed after weighting the sample to be representative of each month’s population of wage and salary earners in terms of sex, age, education, industry, and occupation groups.)

Job switchers: +5.6%, down from 5.7% in December but really flat since August.

Job stayers: +4.7%, down from 4.9%, roughly unchanged since October.

The next CPI report is next Tuesday. Many will be looking for the so far elusive rent relief in official data. Zillow’s data show “new rents” up 0.32% in December, down from 0.36% in November but in line with October.

Zillow’s data says that CPI-Rent remains 10.2% below “market”.

Manhattan Apartment Leases Surge, Keeping Rents From Sliding Leasing jumped and rents rose from a year earlier for the first time since October.

The median price on new leases was $4,150, up 1.3% from January 2023 and $100 more than this past December, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported Thursday. A total of 3,922 rental agreements were signed last month, up 14% from a year earlier and the third straight annual increase.

New Yorkers have been seizing on apartment costs that have come down from the summer’s records. The intense demand — somewhat unusual for the dead of winter — has helped push up rents at a time when they might be expected to level off. While Manhattan’s median remains below the all-time high of $4,440 reached in July, it’s still well above pre-pandemic levels. (…)

Outer boroughs are seeing robust demand as well. New leases almost doubled from a year earlier in Brooklyn, where the median rent was little changed at $3,500. In northwest Queens — the neighborhoods closest to Manhattan — lease signings jumped 31% from the previous January, while the median rent slipped 5% to $3,200. Listing inventory declined in both boroughs.

In China, Deflation Tightens Its Grip Consumer prices fall at steepest pace in more than 14 years, intensifying fears that deflation could become entrenched

China’s deflation problem is getting worse, a stark symptom of a deepening economic malaise that spells trouble for the global economy.

Consumer prices fell for the fourth straight month in January, tumbling 0.8% year-over-year—the steepest decline since 2009, according to the country’s National Bureau of Statistics. Producer prices, which fell every single month last year, declined again in January as companies further slashed prices to find buyers. (…)

Signs of deflationary pressure in China are multiplying. Prices for fruit, vegetables and meat all tumbled in January. Prices for pork—a staple of the Chinese diet—were down 17.3% year-over-year.

Core consumer-price inflation, which excludes volatile prices for food and energy, slowed to a 0.4% annual rate from 0.6% previously.

Producer prices fell 2.5%, extending a run of declines into its 16th straight month.

It isn’t just goods. Services prices are also weakening, rising 0.5% on the year, half the rate notched a month earlier. (…)

Deflation can be a difficult economic problem to overcome. Falling prices eat into corporate profits and prompt consumers to delay spending in anticipation of bigger bargains tomorrow. That leads companies to cut prices and put off hiring and investment, further depressing spending and worsening the deflationary cycle. (…)

Income growth has slowed, making it harder for consumers to service their debts while maintaining spending. Workers are settling for lower-paid jobs in a tight labor market, and some data suggest salaries for new hires are falling.

Corporate profits are sliding, so companies with millions of yuan in debt are wary of investment and hiring. (…)

China has experienced periods of falling consumer prices before, notably in 1998 when a financial crisis ripped through Asia and in 2009 in the aftermath of the subprime mortgage bust in the U.S. that triggered bank bailouts worldwide.

In both those instances, China’s policymakers responded forcefully, flooding the economy with easy money by cutting interest rates and dishing out cheap loans. Growth and inflation soon returned.

But in juicing growth, they created a housing bubble that leader Xi Jinping is now determined to deflate. The result is a policy response that has been far more muted than in the past, with modest cuts to borrowing costs, smaller injections of cash into the financial system, and a jumble of piecemeal housing policies such as loosening restrictions on second home purchases in some big cities. (…)

Bloomberg:

Core CPI, which strips out volatile food and energy costs, rose 0.4%, slower than December and the weakest rise since June last year. Pork prices dropped 17%, helping drag down food prices by 5.9%, which was the biggest decline on record in data back to 1994.

ING:

The biggest drag in non-food inflation remains in transportation & communication (-2.4% YoY), where a decline in vehicle and communication device prices continued to suppress inflation.

In our view, the deflation argument is overstated, and the base effects makes January’s data look worse than they are. Sequential data paints a more upbeat picture. In MoM terms, headline CPI rose 0.3%, food CPI rose 0.4%, and non-food CPI rose 0.2%. While a far cry from the above-target inflation levels seen in many other economies, these numbers do not imply China is stuck in a deflationary spiral.

Furthermore, China’s pork cycle also indicates that the drag from pork prices will also fade in the coming months. While still a major drag in January’s data, pork price inflation has actually risen for the past two months, and the December 2023 MoM change in the pig stock was the largest decline since March 2022. With expected demand for the Lunar New Year holiday in February, this could return to positive growth in next month’s release.

As such, considering the more favourable base effects for February’s data, we see a high likelihood that January’s data could mark the low point for YoY inflation in the current cycle.

NBS commented that the deeper CPI deflation was mainly driven by floating holiday effects – Lunar New Year was in January for 2023, but in February for 2024.

China’s passenger vehicle sales fall 14.1% in Jan m/m Battery electric vehicle sales sagged 37% in January m/m

Mexico takes China’s crown

For the first time in 20 years, “made in Mexico” is outpacing “made in China.”

Mexico is now the top producer of goods shipped to the U.S., according to U.S. Census Bureau data released yesterday.

Together, American consumers buy from three major foreign sources: Mexico, China and Canada.

The U.S. absorbs more than $3 trillion worth of international goods a year. Those three countries account for more than a third of that total.

Data: U.S. Census Bureau, Bureau of Economic Analysis. Chart: Axios Visuals

Are Chinese stocks a value trade or a value trap? When an asset is declared ‘uninvestable’ it is often time to buy

Since 2015, always lower highs, but same lows … since 2009.

US Treasury’s Biggest-Ever 10-Year Auction Garners Solid Demand Auction for $42 billion awarded at 4.093%, below pre-sale rate

The notes were awarded at 4.093%, compared with a yield of about 4.105% moments before 1 p.m. New York time, the bidding deadline. The lower yield indicates stronger demand than traders anticipated. The auction result also broke a streak of tails — or a weaker result for the previous four monthly sales. (…)

Tuesday’s $54 billion auction of three-year notes also drew a lower yield than the one that had been predicted by trading at the bidding deadline, a positive sign. The US Treasury will complete its quarterly debt refunding Thursday with the sale of $25 billion of 30-year bonds. (…)

CBO Warns 2025 Debt Interest Costs to Exceed World War II Levels

(…) Net interest payments will climb to 3.1% of gross domestic product next year, the highest level in records going back to 1940, and then go on to hit 3.9% in 2034, the CBO said in its latest outlook for the federal budget.

“Net interest costs are a major contributor to the deficit, and their growth is equal to about three-quarters of the increase in the deficit from 2024 to 2034,” CBO Director Phillip Swagel said in a statement. (…)

Federal Reserve Chair Jerome Powell said last week that “it’s probably time, or past time” for politicians to work on getting the government “back on a sustainable fiscal path.” (…)

US debt held by the public is expected to reach $45.7 trillion, or 114% of GDP by 2033, according to the CBO’s latest forecasts. That’s actually down from the 118% projection for 2033 released a year ago.

But the nonpartisan arm of the US legislature also forecasts the average rate of interest the government pays on its debt will rise to 3.4% over the next 10 years, from the 3% predicted last year. (…)

“By next year, we’ll spend more on interest than on defense and nearly all other national priorities.” (…)

Medicare spending is expected to grow to 4.2% of GDP in 2034 from 3.1% in 2023, and Social Security outlays increase to 5.9%, from 5% last year. (…)

Wednesday’s CBO forecasts show the budget deficit reaching $1.58 trillion this year — down from $1.68 trillion 2023 — but swelling over time to $2.56 trillion by 2034. (…)

One particular assumption looks already under severe strain: that individual tax cuts included in former President Donald Trump’s 2017 Tax Cuts and Jobs Act will expire, as scheduled, at the end of 2025. That assumption boosts revenues from 2026 in the CBO’s projections.

But some Republicans, including Trump, have already vowed to make the cuts permanent. Biden has said he would extend the cuts for those earning less than $400,000 a year, but would match that with new revenue.

America’s Most Expensive Home for Sale Hits the Market for $295 Million If it fetches that asking price, the roughly 9-acre compound in Naples, Fla., would shatter the U.S. home sale record.