The Fed’s Next Challenge: $100 Oil Saudi output cuts and record demand have pushed crude prices 26% higher this quarter

(…) Record levels of oil demand—fueled by unexpected economic strength—have outstripped production. As a result, traders and petroleum refiners are draining oil stockpiles at a rapid clip. Many analysts expect crude prices to keep rising, which would feed into higher fuel bills, quicker inflation—and, potentially, higher interest rates. (…)

One of Wall Street’s most bearish oil analysts, Edward Morse of Citigroup, said in a note that Brent could surpass $100 a barrel for a short while. But he said higher prices now make lower prices likely next year by encouraging higher output and denting demand. Saudi Arabia could boost supplies if prices get too high, he added. (…)

Saudi Energy Minister Abdulaziz bin Salman on Monday said the OPEC+ cartel sought to reduce volatility and make energy markets more predictable.

“OPEC conduct is nothing different from what a central bank, or a group of central bankers, is doing,” Abdulaziz said, describing the cuts as soft-touch market regulation.

Analysts say China, where refiners have stocked up on cheap Russian and Iranian oil for much of the year, could switch tack to a policy of lower imports and higher exports now prices are on the rise. In the U.S. shale patch, oil and gas producers are standing up new drilling rigs at the fastest rate since last November, according to Baker Hughes. (…)

For oil consumers outside the U.S., crude’s advance is particularly problematic. Crude prices are typically denominated in dollars, and the greenback has strengthened since mid-July. The Reserve Bank of India said on Monday that the oil-price rise poses a risk to global financial stability and threatens to juice inflation unless an economic downturn knocks energy demand.

Giovanni Serio, head of research at giant oil trader Vitol, said stockpiles are currently shrinking at a pace of nearly 2 million barrels each day. One of the reasons is that demand in China has been stronger than its weak economy would suggest. But there may be relief ahead. Serio expects higher output in North and Latin America to bring global production and demand more into balance in the fourth quarter.

The Fed and most economists tend to measure inflation excluding food and energy. But energy costs, oil in particular, influence prices of services. The correlation between CPI-Services and WTI prices is not perfect (like with wages) but oil price trends do seem to have a bearing on trends in services prices (e.g. transportation, heating).

PMI PREVIEWS

Last week, we got the NY Fed Manufacturing Survey showing that business remains very volatile at a low level:

We also got the Business Leaders Survey covering service firms in New York, northern New Jersey, and southwestern Connecticut. Business activity has improved but only because it is not quite as bad.

Employment growth has stopped to a crawl while wages keep rising.

Amazon plans to hire 250,000 US workers for holiday season

Amazon (AMZN.O) said it plans to add 250,000 U.S. workers for the holiday shopping season, 67% more than the number of people it hired for the past two years, as it scrambles to expand next-day delivery for shoppers.

Amazon’s plans contrast with other U.S. retailers, who say they will hire fewer people in stores and warehouses this year on expectations for reduced consumer spending in 2023. Forecasters expect holiday sales to come in at half of last year’s rate due to concerns about higher prices.

Seasonal hiring is expected to drop to its lowest since 2008, according to researcher Challenger, Gray and Christmas, due to higher costs and weak consumer confidence.

Target (TGT.N) on Tuesday said it would hire 100,000 employees for the holiday shopping season, flat year over year. Target also plans to begin offering discounts in October.

Macy’s (M.N) said it would hire more than 38,000 full and part-time workers for the upcoming holiday season, a decline from the previous year.

U.S. retail giant Walmart (WMT.N) has not yet announced holiday hiring plans. However, it hired 40,000 seasonal workers in 2022.

Amazon’s boost in hiring comes after it added 50 new fulfillment centers, delivery stations and same-day delivery in the United States, and as it prepares for its expanded fall Prime Event, scheduled for Oct. 10-11. (…)

New seasonal workers hired to pick, sort, pack and ship orders will get a sign-on bonuses between $1,000 and $3,000 in select locations, compared to associates who received $3,000 bonuses in 2022 and 2021 in some locations, it said.

Amazon said it will pay its seasonal workers $17 to $28 per hour on average depending on their jobs and locations, compared to the $19 hourly wage workers were offered last year. (…)

“A fulfillment or transportation employee who starts with us today will see a 13% increase in pay over the next three years —likely more, including our annual wage investments,” John Felton, Amazon senior vice president of worldwide operations, said in a statement.

Amazon earlier this year laid off 27,000 staffers, or about 9% of its workforce, in its advertising, cloud computing and human resources departments following a string of tech lay offs.

America’s Biggest Landlords Can’t Find Houses to Buy High borrowing costs and the shortage of properties for sale have slowed home buying by Wall Street’s rental giants, limiting their ability to grow at the same time suburban rents are climbing.

(…) Prices have pushed past what big landlords, including AMH and Invitation Homes can pay and still meet profit targets.

There has rarely been a better time to own tens of thousands of single-family rentals. Record home prices, the highest mortgage rates in a generation and limited properties for sale are pushing homeownership beyond the reach of many Americans and leave plenty of room for rents to rise and still be cheaper than owning, analysts say. (…)

“We write hundreds of offers every week at price points that we’d be willing to transact at,” Invitation Chief Executive Dallas Tanner told investors this summer. “We’re striking out quite a bit.”

Landlords with 1,000 properties or more accounted for 0.4% of U.S. home purchases during the second quarter, down from a peak of 2.4% in late 2021, according to John Burns Research & Consulting. (…)

Sidelined landlords are a sign that the Federal Reserve might be closing in on the magic number for interest rates needed to shift the housing market down from overdrive and slow the breakneck spending that accompanies billowing property values.

Invitation, which owns about 83,000 houses, has been selling properties that have appreciated to the point that they are yielding less than 4% and putting the proceeds in the bank, where the cash is earning more than 5%.

Executives say they are amassing money to spend when pools of homes are offered by motivated sellers, such as the property fund that sold Invitation 1,870 houses in July for $645 million. That was less than seller Starwood Real Estate Income Trust paid for the houses during the 2021 frenzy, according to securities filings and people familiar with the matter.

Before that bulk purchase, Invitation had added just 470 houses in 2023, mostly straight from builders. It sold 675 in the first half and executives said they expect to sell more aggressively in the second.

AMH, formerly known as American Homes 4 Rent and owner of about 59,000 houses, was also a net seller during the first half of 2023. It sold nearly 1,100 while adding 780, mostly built in house.

AMH plans to build more than 2,200 houses total in 2023 and has bought land to add 13,000 more down the road. Yields are greater with houses that AMH builds specifically to rent than those it can buy, especially now that lumber prices have fallen back from their pandemic surge, CEO David Singelyn told investors at a conference last week.

The same dynamics that are making it hard to buy houses make it a great time to be renting them out. (…)

AMH’s Singelyn estimates that AMH’s rents, which have averaged $2,063 a month, could rise more than 30% before they reach the cost of buying comparable houses.

“The reality is the rental-rate increases, as aggressive as they’ve been, have not kept up with home-price appreciation,” he said.

Since the pandemic, homes have appreciated 45% on average while CPI-Rent is up 19%. And home prices have turned back up…

But we will likely hear Mr. Powell today tell us that rents are falling…

Canada Inflation Quickens to 4%, Driven by Higher Gas Prices BoC’s preferred 3-month core measure rises by a full point

The consumer price index rose 4% in August from a year ago, the quickest pace since April, after a 3.3% increase in July, Statistics Canada reported Tuesday in Ottawa. That’s faster than the median estimate of 3.8% in a Bloomberg survey of economists. On a monthly basis, the index rose 0.4%, double expectations.

Excluding gasoline, the index held steady at 4.1% in July and August.

Two key yearly inflation measures that filter out components with extreme price fluctuations and are tracked closely by the central bank — the so-called trim and median core rates — also increased, averaging 4% from an upwardly revised 3.75% a month earlier, exceeding the 3.7% pace expected by economists.

A three-month moving average of the measures that Governor Tiff Macklem has flagged as key to his team’s thinking rose by a full percentage point to an annualized pace of 4.49%, according to Bloomberg calculations.

Traders in overnight swaps upped bets the central bank will resume tightening, with odds of another rate hike in October rising to about a coin flip, from about a third before the release. (…)

In a separate report Tuesday, Statistics Canada said the job vacancy rate — or the number of vacant positions as a proportion of total labor demand — fell to 4.4% in the second quarter, the fourth consecutive quarterly decline. (…)

Shelter prices were up 6% in August compared with a year earlier, after increasing 5.1% in July. Faster growth in shelter prices was led by the rent index, which rose 6.5% after a 5.5% gain in July, as a higher interest-rate environment raised barriers to homeownership. (…)

In August, services inflation held steady at 4.3%.

FYI, rent inflation was +0.7% MoM in August after +0.4% in July.

National Bank’s economists add:

But the resurgence of inflation in Canada this summer is not confined to energy. From July to August, all 8 major categories were rising at an annualized rate above the Bank of Canada’s target, a third occurrence in three decades.

The widespread nature of price rises is also reflected in the core inflation measures favored by the central bank. Both the CPI trim and the CPI median increased by 0.44% m/m, which translates to the strongest average monthly pace since May 2022. On a three-month annualized basis, the average of the two core measures now stands at 4.5% after evolving in the 3.5%-4.0% band since last August, a situation that was already making the central bank uncomfortable.

However, it is interesting to note that other measures of underlying inflation are evolving at a much less worrying pace. Indeed, still on a three-month annualized basis, CPI excluding food and energy and CPI excluding the eight most volatile components are rising by 3.6% and 3.2% respectively.

This morning’s report presents the BoC with a complex dilemma, as inflation is accelerating while the Canadian economy is starting to bend its knees. Given the lag in transmission and the extremely restrictive level of monetary policy, we still believe that further rate hikes are perilous.

Indeed, the underlying economic weakness, especially the less tight labour market, should eventually ease inflationary pressures. We are also comforted by the fact that deflation in China could mean weak goods inflation in 2024. However, given the BoC’s hawkish bias, the likelihood of it pulling the trigger again increased substantially this morning.

  

• UK rental prices (OOH) rise at fastest pace since records began

Housing Starts Declined in August Higher Interest Rates Intensify the Headwinds for Residential Construction

Total housing starts dropped 11.3% to a 1.28 million-unit pace in August. The monthly decline was broad-based, with single-family and multifamily starts falling by 4.3% and 26.3%, respectively. The surprising pull-back in starts stands in contrast to a strong gain in both single-family and multifamily building permits. (…)

Single-family permits rose 2.0% during August. The monthly gain indicates that a relatively deep pool of potential buyers who have been boxed out of the resale market are leading builders to press ahead despite higher mortgage rates.

A second consecutive pullback in builder sentiment suggests builders may be starting to reassess plans to scale up production in light of the recent rise in 30-year mortgage rates, which are now hovering above 7%. The NAHB Housing Market Index fell to 45 in September, the lowest reading since April. (…)

Meanwhile, multifamily construction continues to shift to a lower gear. Multifamily starts declined 26.3% during August. The 342K-unit pace hit during the month was 41.6% below the same pace registered a year ago.

Multifamily permits picked up 15.8% during August. Multifamily data tends to highly volatile, and substantial monthly swings in starts and permits are not unusual. On balance, however, multifamily construction has trended significantly lower this year as apartment vacancy rates have moved higher, financing costs have increased and lending has become more restrictive.

Higher mortgage rates are exerting renewed pressure on single-family affordability, which could help bolster rental demand in the months ahead. While not quite as robust as recent years, apartment demand has partially bounced back from the drop-off seen in 2022.

Thought the U.S. Office Market Was Bad? Try China China is facing a more basic real-estate problem than the U.S.’s shift toward hybrid work: Developers simply built too much supply, and now the economy is too weak to absorb it.

Nearly 24% of the office-tower space in 18 major Chinese cities was unoccupied as of June, according to CBRE, the real-estate services firm. That is worse than the U.S., where office vacancy rates hit a 30-year-high of 18.2% in June. (…)

China is facing a more basic real-estate problem: Developers simply built too much supply, and now the economy is too weak to absorb it. (…)

A wave of new office towers will hit the market this year, adding to the market gloom. 

“We are closer to the bottom but we aren’t seeing it just yet,” said Henry Chin, head of research for Asia Pacific at CBRE. (…

Most office assets are owned by domestic investors such as real-estate developers, insurance firms and technology giants like Tencent, but some big foreign firms are in China’s commercial property market, too, including BlackRock and U.S. developer Tishman Speyer. (…)

Soho China, one of China’s largest commercial real-estate developers, reported a 93% drop in net profit to around $1.9 million in the first half of the year, and said rents and occupancy rates will be “under continuous pressure” as more projects enter the market in the next three years. (…)

Tencent, which has been renting 15 floors in a Shenzhen office building since 2011, terminated the lease three years ahead of schedule, said the lessor, Netac Technology, in a filing this January. The early end of the contract was due to “intensifying downward pressure on the economy” and slowing consumption growth, Netac said. (…)

Ford Avoids Strike at Canada Plants With Late-Night Union Deal

Unifor, the Canadian autoworkers’ union, pushed for improved pension benefits, higher wages and support for workers during the electric-vehicle transition.

“When faced with the prospect of an all-out strike by 5,600 Unifor members at every single one of Ford’s facilities in Canada, the company made a significant offer to the union,” the union said in a statement.

“The gains achieved were hard fought for over weeks of negotiations at every subcommittee, local and main economic bargaining table,” it said. “This painstaking work has resulted in fundamental, transformative gains that addressed our core priorities of pensions, wages and the EV transition.” (…)

Fain has rejected a Stellantis offer of a 21% raise for UAW members. “It’s definitely a no-go,” Fain said Sunday on CBS’s Face the Nation. “We’ve made that very clear.”

In Canada, rather than negotiating with all three major automakers at once, Unifor selected Ford as the “target” company for bargaining. (…)

Uber makes first operating profit after racking up $31.5bn of losses

Global Economy Poised to Slow as Higher Rates Bite, OECD Says Central banks must remain restrictive to tame inflation: OECD

Growth will ease to 2.7% in 2024 after an already “sub-par” expansion of 3% this year, according to the latest OECD forecasts. (…)

Moreover, the Paris-based the organization warned that risks to its prediction are tilted to the downside as past rate hikes could yet have a stronger impact than expected and inflation may prove persistent, requiring further monetary tightening. It called China’s struggles a “key risk” for output around the world. (…)

The OECD cautioned against easing up, with core-price gains remaining stubborn in many countries even as headline gauges head lower. There’s limited scope for any rate cuts until “well into 2024,” it said. (…)

While US expansion will be stronger than predicted in June, it will slow to 1.3% in 2024 from 2.2% in 2023. (…)

NAHB Housing Market Index: Builder Confidence Weakened by High Mortgage Rates

The latest reading fell 5 points from last month to 45, the index’s second consecutive monthly decline and its lowest level since April. Builder confidence continued to weaken in September largely as a result from rising mortgage rates moving above 7%.

The red line above is the most important one. Traffic has turned back down to a historically low level.

Cass Freight Index – Shipments

The shipments component of the Cass Freight Index® rose 1.9% m/m in August, or 0.8% m/m seasonally adjusted (SA).

• On a y/y basis, the index was 10.6% lower in August, after an 8.9% decline in July.
• The freight market downcycle is now 20 months old, which compares to a range of 21 to 28 months in the past three downcycles.
• Part of the large y/y decline is the comparison to the extraordinary time last summer when destocking was creating freight demand as retailers shipped out stale inventory.
• The current downcycle is similar to the peak-to-trough declines in two of the three downcycles in the past dozen years. The third ended with the pandemic.

Yardeni Raising Odds of a Recession a Tad

(…) Today, in response to several new developments, we are raising the odds of a recession before the end of next year from 15% to 25%.

We remain in the rolling-recession-and-recoveries camp for now. However, the 30% increase in a barrel of Brent crude oil since June 27 is a concern. (…) If the price of oil breaches $100 per barrel and the price of gasoline rises solidly above $4.00 a gallon and both remain above those levels for a while, they could trigger a renewed wage-price spiral and higher inflationary expectations.

That scenario would be reminiscent of the 1970s, when the first wave of inflation was followed by a second wave and both triggered recessions. That is not the scenario we consider most likely, but it is the risk to our happier outlook. It’s partly because of this risk that we’ve raised our subjective odds of this alternative scenario to 25%. (…)

The big difference we are forecasting between now and then is that productivity growth, which collapsed during the 1970s, will be improving significantly over the rest of the decade. The average annualized five-year growth rate of productivity peaked at a record high of 4.5% during Q1-1966, then proceeded to plunge to a record low of 0.1% during Q3-1982. This time, productivity growth bottomed at 0.4% during Q4-2015. It rose to 1.4% during Q4-2019 just before the pandemic. It soared during the lockdowns and fell when quits rose sharply during the pandemic. Now it is settling down, with a 1.6% increase during Q2-2023.

But we expect that our measure of productivity growth will resume its pre-pandemic ascent to 4.0% by the end of the decade. That may seem farfetched, but that would be consistent with the peaks in the previous three productivity growth cycle booms. This time, we expect to see the plethora of technological innovations boosting productivity in many more companies in many more industries than ever before. In this sense, all companies are now technology companies.

The collapse in productivity growth combined with rapidly rising compensation caused unit labor costs inflation (ULC) to soar during the 1970s. There actually were three peaks in this inflation rate, which closely tracks the headline CPI inflation rate. This time, ULC inflation peaked last year at 7.0% y/y during Q2 and fell to 2.5% during Q2-2023. The headline CPI inflation rate peaked at 9.1% last summer and fell to 3.7% during August. (…)

It isn’t just the recent upturn in oil prices that’s caused us to raise the recession warning flag a bit higher. We are also concerned about the widening federal budget deficit, with the government’s net interest outlays soaring. Bond yields might have to rise higher to attract buyers for the mounting supply of Treasuries, especially if there is an inflation scare along the way. More immediate concerns are the United Auto Workers’ strike and the likelihood of a government shutdown at the end of the month. (…)

The first chart plots annual productivity growth YoY with the red line at 4%.

This next chart is quarterly productivity growth YoY:

I have an immense respect for Ed Yardeni but I just want to point out that the decade post GFC was the worst decade for productivity growth since 1960 and the “ascent to 4.0%” was only realized in 2020, the first pandemic year. Annual productivity growth was 1.9% in 2019 with the quarterly measure peaking at 2.6% in Q4’19.

We shall see how AI and ChatGPT et al. improve overall productivity, particularly if oil prices breach $100 like they did between 2011 and 2014 (see what happened to productivity during the 1970s).

A 2003 study by the Max-Planck Institute for Demographic Research concluded that

In general, the evidence suggest that productivity tend to follow an inverted U-shaped profile, where significant decreases take place from around 50 years of age.

An important cause of these age-related productivity declines is likely to be reductions in cognitive abilities across the life span. Some abilities, such as perceptual speed, show relatively large decrements from a young age, while others, like verbal abilities, show only small changes throughout the working life.

Although older individuals have longer experience, they learn at a slower pace and have reductions in their memory and reasoning abilities. In particular are senior workers likely to have difficulties in adjusting to new ways of working.

The International Institute for Applied Systems Analysis concurred in 2008:

The findings suggest that productivity tends to increase during the initial years in the labour market before it stabilizes and often declines towards the end of the working life. Productivity reductions at older ages are strongest in job tasks where problem solving, learning and speed are important, while for work tasks where experience and verbal abilities matter more, there is less or no reduction in productivity among elderly workers.

The International Monetary Fund in 2016:

But two recent papers by IMF economists suggest that there are limited prospects for productivity to come to the rescue. That’s because not only is the overall population aging, so are those still in the workforce. And the aging workforce is holding down productivity growth in both Europe and Japan.

The decline in productivity in Japan and Europe manifested itself in what economists call Total Factor Productivity, which is the portion of economic growth that is not the result of changes in inputs (such as capital and labor). Total factor productivity measures how efficiently capital and labor are used in the production process and is affected by such things as innovation, institutions and the quality of the workforce.

Productivity generally increases until workers are in their 40s, then tails off until they stop working. (…) The story is similar for 28 countries in Europe. (…)

Under current demographic projections, the future will be worse. From 2014 to 2045 workforce aging will intensify in Europe and could reduce annual total factor productivity growth by 0.2 percentage points.

The U.S. Census Bureau in June 2023: America Is Getting Older

The nation’s median age increased by 0.2 years to 38.9 years between 2021 and 2022, according to Vintage 2022 Population Estimates released today by the U.S. Census Bureau.

“As the nation’s median age creeps closer to 40, you can really see how the aging of baby boomers, and now their children — sometimes called echo boomers — is impacting the median age. The eldest of the echo boomers have started to reach or exceed the nation’s median age of 38.9,” said Kristie Wilder, a demographer in the Census Bureau’s Population Division. “While natural change nationally has been positive, as there have been more births than deaths, birth rates have gradually declined over the past two decades. Without a rapidly growing young population, the U.S. median age will likely continue its slow but steady rise.”

These charts are from the Congressional Budget Office (2023)

  

American Business Confidence in China Slumps U.S. companies are painting the bleakest picture in decades over doing business in China as tensions between Beijing and the West are compounded by a deteriorating environment for their operations.

Just over half of 325 members surveyed by the American Chamber of Commerce in Shanghai were optimistic about their five-year business outlooks, the lowest since the survey began in 1999, the group said Tuesday. As recently as 2021, the figure stood at 78%.

While sectors such as pharmaceuticals, legal services and retail reported slightly higher levels of optimism, they were lower in logistics, technology and management consulting because of factors such as China’s crackdown on due-diligence firms, the annual survey said. (…)

Less than half of respondents saw their 2022 revenue increase compared with the previous year, the lowest in more than 15 years. Some 68% of respondents said they were profitable last year, the lowest rate since the survey began, while just 37% saw their operating margins grow from the previous year, the lowest since 2008.

The European Union Chamber of Commerce in China echoed many of the same sentiments in a position paper also released Tuesday that reflected the views of its more than 1,700 member companies. The group cited concerns over the country’s anti-espionage and data-security laws, among other challenges. (…)

Among the problems is that China’s policy environment is highly inconsistent, Jens Eskelund, the European chamber’s president, said.

He cited uncertainty over what constitutes violations of the country’s anti-espionage laws, confusion over data-security rules and the government’s suspension of releasing economic data, such as the youth unemployment rate.

The red lines regarding what is and isn’t allowed are “blurred,” he said, adding that some of the chamber’s social-media postings on Chinese platforms have been censored, though he was unsure why. (…)

• China’s Worst Capital Outflow in Years Spells More Yuan Pressure Outflow from capital account was the largest since 2015

• BlackRock Strategists Downgrade China Stocks on Growth Concerns “Structural challenges imply deteriorating long-term growth”
• A Chinese Property Developer Has, Finally, Restructured Its Debt

Sunac China has become the country’s first big property company to get final signoff from investors to restructure its debt. It received approval from investors holding 98.3% of its foreign bonds.

It has also filed for chapter 15 bankruptcy protection in the U.S., reducing the risk it can be sued by other creditors in American courts.

Sunac owes international bondholders more than $10 billion in principal and interest payments. It had around around $138 billion of liabilities by June 30, including homes it has sold but not delivered, the money it owes to suppliers and its bank debt. Most of its debts are due within a year.

The company focused on wealthy cities including Beijing, Chongqing and Hangzhou. The opposite approach was taken by Country Garden, another developer which has had recent discussions with foreign bond investors.

• Troubled Chinese Trust Company Brings In State Help Zhongrong Trust’s recent financial struggles rekindled debates over China’s ‘Lehman moment’

China’s Zhongrong International Trust, a shadow-banking giant whose financial troubles have rattled investors, broke its silence late Friday and said it is working with two state-owned institutions to address its problems.

The domestic asset manager last month failed to make payments on high-yielding investment products that it had sold to many companies and wealthy individuals. That sparked concerns that the country’s worsening property downturn was developing into a wider financial-sector contagion.

Zhongrong Trust acknowledged late Friday that it had missed payments on some products, and said it would bring in two large state-owned trust companies to help with operations and management.

“Due to multiple internal and external factors, some of the company’s trust products could not be paid on schedule,” it said. Zhongrong Trust said it has engaged CITIC Trust, owned by state conglomerate CITIC Group, and CCB Trust, owned by China Construction Bank, to work with it for a year. 

The asset manager indicated the arrangement isn’t a government bailout. It said the two state-backed firms won’t be responsible for paying for its trust products, and the arrangement could be terminated early or extended.

Since Zhongrong Trust’s troubles bubbled up around the middle of this year, investors have grown concerned that China’s $2.9 trillion trust industry could be the next casualty of the country’s property crisis. (…)

In 2022, Zhongrong’s trust funds had 11% of their assets in the property sector, according to the company’s annual report. (…) The full scope of its financial difficulties isn’t known. The privately held company had the equivalent of $108 billion in assets under management at the end of 2022. (…)

Its biggest shareholder is a state-owned company called Jingwei Textile Machinery, which last month said it wanted to delist its shares from Shenzhen Stock Exchange. The company cited “significant uncertainties in its operations” due to “market changes,” without providing specifics. 

Trust funds in China had about $155 billion in exposure to the property sector at the end of the first quarter, according to data from the China Trustee Association. That portion is “under great threat,” Nomura analysts said last month. Trust funds also have larger exposures to financial markets, which increases the risk of contagion, they said.

TECHNICALS WATCH

The S&P is chugging along with fewer members participating

For more than a month, the S&P 500 has held more than 5% above its 200-day moving average. But no more than 60% of its member stocks have held above their own 200-day averages by any amount. This is highly unusual and is one of the longest divergence streaks since 1928. (…)

It’s not that breadth is bad per se; it just hasn’t been all that great. One of the hallmarks of healthy markets is that long-term trends within stocks in the S&P 500 should remain robust for prolonged periods. More than 60% of stocks in the index should consistently hold above their 200-day moving averages. When the market dips and fewer than 40% of stocks (or close to it) are above their averages, buyers should see an opportunity and return.

We have definitely seen the latter over the past 11 months. We have not seen the former.

One of the nice things about the new backtesting feature is the ability to add multiple indicators to a single chart. Below, we can see the S&P 500, its deviation from its 200-day moving average, and the percentage of stocks in the index above their own 200-day moving averages. The index has held more than 5% above its average for weeks, while fewer than 60% of members are above their own averages by any amount.

This is unusual – since 1928, when the S&P 500 has been more than 5% above its 200-day moving average, a median of 81% of its stocks were also above their own moving averages. Lately, more than 25% fewer stocks than average have been maintaining their long-term trends. (…)

The “weak breadth” gang has been tilting at windmills for nearly a year. The weaknesses of their “weakness” argument have been fairly obvious, but it’s getting less so. While most major indexes have been holding up very well, fewer members are doing the same.

It has reached a point where the last month has seen a lack of stocks managing to hold their long-term uptrends, which is highly unusual given how well the S&P 500 index has been holding up. The precedents for similar behavior are somewhat troubling. It would be a lot more worrisome, however, if we get to a point where fewer than 40% of S&P stocks are holding above their 200-day averages, and bulls show little interest in using that as a buying opportunity.