Empire State Manufacturing Survey: Activity Drops Sharply in January The diffusion index for General Business Conditions fell to -43.7 from -14.5 in December.

(…) After falling twenty-four points last month, the general business conditions index shed another twenty-nine points, coming in at -43.7, its lowest level since May 2020.

  (Ed Yardeni)

CONSUMER WATCH

More Americans Focused on Paying Down Debt in NY Fed Survey

Asked what they would do if they got an unexpected 10% increase in income, 38.4% of households said they would use the extra money toward debt payments. That’s the highest reading since August 2016.

Meanwhile the share of respondents who would spend or donate the windfall dropped to the lowest on record since the series began in August 2015.

The results signal increasing financial pressures for US households, who have been relying more and more on credit cards in recent months.

Asked what they would do if faced with an unexpected loss of income, a record share of respondents said they would have to increase borrowing.

Rather than reduce spending…

Americans are actually pretty happy with their finances

Americans overall have a surprising degree of satisfaction with their economic situation, according to findings from the Axios Vibes survey by The Harris Poll. (…

63% of Americans rate their current financial situation as being “good,” including 19% of us who say it’s “very good.” Neither number is particularly low: They’re both entirely in line with the average result the past 20 times Harris Poll has asked this question. (…)

66% think that 2024 will be better than 2023, and 85% of us feel we could change our personal financial situation for the better this year.

(…) a substantial majority of renters are happy renting, with 63% of them saying they’re not interested in homeowning and having a mortgage. (…

More than half of Americans say that if they lost their job tomorrow they’d be OK; that they could find an equivalent or better job quickly; and that “my employers need me more than I need them.” 63% of respondents describe their job security as “a sure thing.” (…)

From The Transcript:

• “The way we see it, the consumer is fine. All of the relevant metrics are now effectively normalized. And the question really, in light of the fact that cash buffers are now also normal, but that that means that consumers have been spending more than they’re taking in, is how that spending behavior adjusts as we go into the new year in a world where their cash buffers are less comfortable than they were.” – JPMorgan Chase ($JPM ) CFO Jeremy Barnum
• “The financial health of our consumers remained strong. While average deposit balances per customer continue to decline from their peak, they remained above pre-pandemic levels as wage growth has more than offset increased spending. Having said that, there are cohorts of customers that are more stressed. Consumer spending remained strong. Credit card spend was up 15% for the year and was remarkably stable throughout the year, with growth rates strong across all categories, except fuel, which was impacted by lower gas prices. Debit card spending was up 1% for the year. Discretionary spend growth slowed from a year ago while non-discretionary spend was stable.” – Wells Fargo ($WFC ) CEO Charles Scharf
• “The consumers of Bank of America have had access to credit and not borrowing irresponsibly. Their balance sheets are generally in good shape and while impacted by higher rates, remember, many of them have fixed rate mortgages and remain employed, so they’ve shown great resilience.” – Bank of America ($BAC ) CEO Brian Moynihan (…) The point we’ve made is that our consumer deposit balances at Bank of America remain 30% higher than pre-pandemic…In the lower average balance size accounts, the balances in there still remain at multiples of pre-pandemic levels, nearly 3 years past the last stimulus. They are modestly declining. The deposit outflows you’ve seen in consumer have largely been driven by the higher balance accounts, who moved their excess balances into the markets to seek higher yields. We capture those with our leading wealth platform” – Bank of America ($BAC ) CEO Brian Moynihan

This chart plots nominal and inflation-adjusted deposits:

Canada Inflation Accelerates to 3.4% in December

The consumer-price index fell 0.3% in December from the previous month and increased 3.4% from a year earlier, the government statistics agency said Tuesday. That compares with November’s 0.1% monthly gain and represents a quickening after annual inflation held steady at 3.1% that month. (…)

Core prices, which strip out volatile food and energy items, also rose 3.4% in December from a year earlier, a slight moderation from the prior month’s 3.5% annual increase, Statistics Canada said.

Still, the Bank of Canada may take less comfort from an acceleration in two measures of annual core inflation it closely monitors. Weighted median and trimmed mean CPI rose an average 3.65% in December from a year earlier compared with 3.55% growth in November. (…)

Stripping out gas, headline inflation slowed to 3.5% for the month from 3.6% in November, still well ahead of the central bank’s goal. (…)

For the year, the CPI rose 3.9% on an annual average basis, sharply cooler than the 40-year high increase of 6.8% in 2022, Statistics Canada said. (…)

U.K. Inflation Unexpectedly Rebounds U.K. consumer prices rose 4% in December, driven by new taxes on tobacco products, and likely pushing out calls for rate cuts at the Bank of England.

Lagarde Says It’s Likely ECB Will Cut Rates in Summer

• Villeroy Says Premature to Know When in 2024 ECB Will Cut Rates
• Eurozone wages ticked up to 3.9% y/y in Dec based on the latest Indeed wage tracker data. The sticky wage gains suggested by that will likely bolster the hawks in January. But remember, the ECB’s own wage forecast is at 4.6% for 2024… We need (controlled) catch-up wage gains (@OliverRakau)

China Growth Rate Slows to One of Lowest in Decades A festering property-market meltdown offsets much of the benefit of a postpandemic recovery in the world’s second-largest economy.

Gross domestic product in China expanded 5.2% in the fourth quarter and for the full year in 2023, according to data released by the National Bureau of Statistics on Wednesday. The reading confirmed a number uttered by Premier Li Qiang a day earlier at the World Economic Forum in Davos, Switzerland—an unusual disclosure of a high-profile data point by a senior leader before its formal release. (…)

This year’s outcome was flattered in part by comparison with the relatively low base of 2022, when harsh pandemic lockdowns swept the nation, crimping growth. (…)

Forecasts for China’s growth rate this year among several global investment banks range from 4% to 4.9%. (…)

Official statisticians said China’s population shrank by 2.08 million people last year, falling to 1.410 billion, after declining in 2022 for the first time in decades. (…)

Full-year economic data released by China on Wednesday showed retail sales, a key gauge of consumer spending, gained 7.4% in December and rose 7.2% for the full year compared with the respective year-earlier periods. Retail sales had fallen 0.2% for the full year in 2022. (…)

Fixed-asset investment growth slowed last year, rising 3.0% for the full year compared with a 5.1% expansion in 2022. Private-sector investment, too, remained weak, falling 0.4% in 2023 compared with a year earlier as policy uncertainty spooked entrepreneurs. Private-sector investment had risen 0.9% in 2022. (…)

Average new home prices in December fell 0.45% from November, and 0.89% when from a year earlier, according to calculations by The Wall Street Journal based on data released by the statistics bureau. The pace of both declines was worse than in November.

For the full year, property investment fell 9.6%, while new construction starts dropped 20.4% and home sales by value declined 6.0%.

The surveyed urban unemployment edged up to 5.1% in December, from 5% in November. Economists have cast doubt on the accuracy of official statistics on joblessness in large part because the survey leaves out the country’s nearly 300 million migrant workers. (…)

On Wednesday, China’s statistics bureau said that it would publish a new urban youth unemployment figure each month for people age 16 to 24 that excludes students. The reading was 14.9% in December. (…)

On a quarter-by-quarter basis, however, GDP grew 1.0%, slowing from a revised 1.5% gain in the previous quarter.

• China’s property market slide worsens despite government support

New home prices in December logged their steepest drop since February 2015, while property sales measured by floor area fell 23% in December from a year earlier, data from the National Bureau of Statistics (NBS) showed on Wednesday. (…)

Overall for 2023, property investment dropped 9.6%, roughly the same as the slide in 2022. (…)

Of the 70 cities in the NBS home price data, 62 reported a fall in prices in monthly terms, up from 59 in November.

Home prices in December declined at the fastest pace in nine months, down 0.4% year-on-year after a 0.2% fall in November.

For the home resale market, prices among 70 cities all fell year-on-year for the seventh straight month in tier-one, tier-two and tier-three cities. (…)

Source: Rhodium Group  Read full article

…. while household deposits continue to rise.

Source: @WSJ Read full article

SENTIMENT WATCH

• US equity positioning remains quite stretched to the long side, per Goldman. (@Mayhem4Markets)

• I suppose the equity market is betting on that the Empire Fed survey is an aberration… (@MikaelSarwe)

US producer prices unexpectedly fall; goods deflation seen persisting

(…) The producer price index for final demand dipped 0.1% last month, the Labor Department’s Bureau of Labor Statistics said. Data for November was revised to show the PPI falling 0.1% instead of being unchanged as previously reported. The PPI has now declined for three consecutive months. (…)

Goods prices dropped 0.4%, with a 12.4% decline in the cost of diesel fuel accounting for half of the decrease.

Goods prices fell 0.3% in November. They have dropped for three straight months. Excluding food and energy, goods prices were unchanged after edging up 0.1% in November.

The weakness also suggested that goods deflation remained in force despite an uptick in consumer goods prices in December following two straight monthly decreases. (…)

In the 12 months through December, the PPI increased 1.0% after advancing 0.8% in November. (…)

The narrower measure of PPI, which strips out food, energy and trade services components, rose 0.2% in December after gaining 0.1% in the prior month. The so-called core PPI rose 2.5% on a year-on-year basis after increasing 2.4% in November. (…)

Based on the CPI and PPI data, economists estimated the PCE price index excluding food and energy rose 0.2% in December after gaining 0.1% in November and October. In the 12 months through December, the so-called core PCE price was forecast increasing 3.0%. That would be the smallest year-on-year gain since March 2021 and follow a 3.2% rise in November.

The overall PCE price index is also seen climbing 0.2% in December, with the annual increase forecast to come in at about 2.6%, unchanged from November’s advance. (…)

• Atlanta Fed boss warns US progress on inflation is likely to slow Raphael Bostic believes rates need to stay on hold until at least summer to prevent prices from rising again

• Goolsbee Says Investors Got Ahead of Fed on Rate-Cut Bets

• @RBAdvisors: Both today’s #PPI and yesterday’s #CPI troughed 6-7 months ago. Yet the #Fed is apparently signaling “Mission Accomplished.”

Bank of Canada surveys show weak business environment, lower inflation expectations

The central bank’s Business Outlook Survey for the fourth quarter of 2023 found Canadian companies are experiencing slowdowns in sales and increased competition. As a result, fewer businesses are planning larger-than-normal price increases in the coming year.

A separate survey of consumers found that Canadians are growing more pessimistic about the economy and pulling back on spending. (…)

The survey of about 100 companies, conducted in the second half of November, shows a weakening business environment. Nearly 40 per cent of the survey respondents saw outright declines in sales over the past year. And indicators of future sales – including order books, advance bookings and sales inquiries – remained subdued.

The dour outlook for demand is feeding into weaker investment intentions and hiring plans.

“Most firms do not feel the need to add new staff and are experiencing less-intense labour shortages than 12 months ago,” the Bank of Canada said.

Companies still expect to raise wages faster than normal over the next year as a result of cost-of-living adjustments. However, three-quarters of the survey respondents expect wage growth will be back to pre-COVID-19 norms by 2025.

Over all, business expectations of future inflation continued to ease in the fourth quarter, albeit very slightly. About one-quarter of the companies surveyed said inflation won’t return to the Bank of Canada’s 2-per-cent target in the next four years. (…)

“Consumers continued to report feeling the negative impacts of high inflation and high interest rates, and more than last quarter are cutting their spending in response. Further spending adjustments are expected, with many mortgages coming up for renewal in the near term,” the Bank of Canada said.

Survey respondents reported feeling worse about their personal finances and more wary about the job market. People saw a higher likelihood of losing their jobs and a lower chance of switching jobs voluntarily. (…)

Consumer beliefs about near-term inflation have barely budged in recent quarters, with people consistently expecting inflation to be around 5 per cent in a year’s time. However, expectations for inflation five years out have now fallen below prepandemic levels.

Consumers increasingly expect inflation to moderate for key goods such as food and gas. But they think service prices, especially rents, will continue to rise quickly, and that “may be slowing progress in returning overall inflation expectations to where they were before the COVID‑19 pandemic,” the bank said. (…)

China’s Ping An Bank Names 41 Developers in Funding Support List

Major Chinese lender Ping An Bank Co. has put 41 developers on a list of builders eligible for its funding support, a shift toward more lending to a property sector in crisis following government steps to stanch the pain.

The bank decided to adjust criteria related to extending credit lines to meet builders’ reasonable funding demands, people familiar with the matter said, requesting anonymity discussing private matters. That mirrors a task that authorities set out in a major annual government economic conference last month, and comes after regulators drafted their own list of builders to guide financial institutions as they weigh more lending. (…)

“It’s hard to say how much benefit companies on that list will receive from the bank’s lending, but companies not on that list will be regarded by investors as abandoned by the bank,” said Shujin Chen, analyst at Jefferies Financial Group. “Ping An Bank’s exposure to property sector is not small, so its list can also be seen as a signal for the sector.” (…)

More than half of the builders on the current list are state-backed companies including Poly Property Group Co. and Beijing Urban Construction Group Co. The rest cover private-sector peers such as Longfor Group Holdings Ltd., China Vanke Co. and Gemdale Corp. (…)

Ping An Insurance (Group) Co., parent of Ping An Bank, had previously said it’s trying to reduce exposure to the sector, and regulators have been encouraging insurers to focus on their core business. The latest list marks a shift in strategy and may see other banks follow suit.

The bank told its departments and branches that they should extend full lending support to developers on the list operating normally, and refrain from cutting or suspending credit lines, said the people. The lender also urged them to use maturity extensions and rescheduling payment arrangements to alleviate builders’ liquidity pressure, the people added. (…)

Ping An Bank ranked as the country’s 13th-biggest bank by assets last year, according to local media citing a league table from the China Banking Association. (…)

• Latest Stress Testing on Chinese Banks Highlights Rising Capital Pressure The latest stress test on Chinese banks shows persisting capital pressure across the sector, including some of the domestic systemically important banks (D-SIBs), although individual banks’ capability to withstand an external shock varies significantly.

(…) The stress test shows that, in a mild economic downturn, the 19 D-SIBs’ average capital-adequacy ratio (CAR) would drop to 14.5% by end-2025 from the reported CAR of 16.3% at end-2022. This is a more severe capital deterioration than in last year’s macro-stress testing results, where the average CAR would decline to 14.8% by end-2024 from 16.1% at end-2021. The latest testing assumes more pessimistic economic forecasts than in previous years, likely indicating the rising risks faced by the Chinese economy. (…)

A more severe scenario, with GDP growth assumptions at 1.1%, 2.9% and 3.2% in 2023, 2024 and 2025, respectively, which are higher than our hypothetical stress scenario of growth slowing to 1.5% and 2.0% in 2024 and 2025, respectively, found that the 19 D-SIBs’ average CAR would drop to 12.7% by end-2025 and remain above the minimum requirement. However, we believe if such a severe stress scenario were to materialise, it would trigger rising downside risks to banks’ operating environment and their standalone Viability Ratings. (…)

The vulnerability revealed by the latest stress tests reinforces our base case that a reversal of financial reforms or sharp, broad-scale credit growth is unlikely as such outcomes could further undermine loss absorption capacity at banks and increase risks to financial stability. Instead, we expect the authorities to continue a targeted credit allocation approach, with regulators guiding selected banks in channelling credit to strategic sectors, especially given the government’s focus on maintaining systemic stability and pushing forward risk resolutions at small and medium-sized banks.

As I reported last week (China: Here We Go!) China is using the Fed’s QE playbook (Chinese Cities Buy Housing With PBOC-Tied Loans, Report Says).

As Dallas Cowboys quarterback Dak Prescott says just before the snap: “Here we go!”. Finally a concrete measure to begin to really address China’s real estate problem. A Chinese version of the Fed’s Quantitative Easing program: the central bank provides low cost funds to cities to purchase vacant apartment buildings from troubled developers or, even better, from troubled LGFVs, thereby transferring bad debt up to the PBOC.

The PBOC should provide an update on the use of its tools later this month, potentially confirming that banks have tapped the funds for the rental program. Look for the $14B program to repeatedly be extended.

EARNINGS WATCH

We have 29 reports in: the beat rate is 93% and the surprise factor is +2.4%.

• All 12 consumer-centric companies beat with surprise factors of +5.8% (staples) and +13.5% (discretionary)
• 6 of 7 Financials beat but the surprise factor was only +0.1%

Trailing EPS are now $220.06 and full year 2024 $243.51.