Consumers Boosted Spending in August U.S. consumers are digging deeper into their wallets to cover rising costs of essentials such as rent and utilities as inflation spreads.

Another rather poor (biased) account from the WSJ:

Household spending rose by a solid 0.4% in August after dropping a revised 0.2% in July, the Commerce Department said Friday. The August increase was just 0.1% after accounting for inflation.

The personal-consumption expenditures price index rose 6.2% year-over-year in August, down from a 6.4% in July, according to Friday’s report. On a monthly basis the index rose 0.3%, up from a 0.1% decline the prior month.

But the core PCE-price index, which strips out volatile food and energy categories, accelerated on both an annual and monthly basis, rising 4.9% in August from a year ago, compared with a 4.7% increase in July, and 0.6% from the prior month.

Spending on services such as rent, utilities, transportation and healthcare picked up strongly in August, and goods spending declined for the second month in a row as gasoline prices fell. (…)

Revised figures on saving habits in recent months showed households’ financial buffers—boosted by stimulus and limited opportunities to spend earlier in the Covid-19 pandemic—have recently dropped more substantially as consumers dip into savings to pay for everyday items.

The personal saving rate was 3.5% in August for the second month in a row, up from a recent low of 3% in June. That was down from 9.5% a year ago and close to levels last seen during the 2007-2009 recession. (…)

In truth, there was nothing solid in this Income and Outlays report:

• Wages and Salaries rose 0.3% in August, half the average rate of the previous 6 months.
• Growth in nominal personal income slowed from 6.1% annualized in Q2 to 3.6% in July/August.
• Real disposable income has declined in 10 of the last 13 months. It is down 4.5% YoY and 0.9% below its pre-pandemic level. It is up only 0.7% annualized in the last 5 months.
• Unsurprisingly, real expenditures are slowing down rapidly: Q1: +3.2% a.r.; Q2: +1.7%; July/August: +0.2% a.r. using all available decimals. July was revised down from +0.2% to -0.1%.
• The savings rate was unchanged at 3.5% in August but up from 3.0% in June. It was 8.7% in Q4’19. Accounting for inflation, the level of personal savings is 63% lower than before the pandemic.
• Real expenditures on Goods continued to decline: -0.2% MoM in August. They are down 3.5% a.r. since February.
• This past week, CarMax Inc. shares sank after the used-car retailer flagged that high prices, paired with high broader inflation and rising interest rates, have slowed demand. The company’s profit fell 50% in its most recent quarter and its sales leveled off at 2% growth, both worse than analysts expected. “This points to some deterioration in per unit pricing and profitability in the coming quarters, as rising interest rates and economic conditions affect demand,” said Thomas King, president of the data and analytics division at J.D. Power. (WSJ)
• Real expenditures on Services are not taking the slack: they rose 0.2% MoM in August after 0.0% in July. They had increased 4.4% a.r. in Q1 and 3.8% in Q2.
• Last, but not least, core PCE inflation jumped 0.6% in August after being unchanged in July. It is up 4.9% YoY. Inflation on Goods was -0.3% MoM (+8.6% YoY) thanks to lower gas prices. Durable Goods prices were up 0.5% (+5.3% YoY) after declining 0.2% in July. The cost of Services rose 0.6% (+5.0% YoY).

Bank of America’s consumer spending in hardline categories per its credit card tracking through Sept. 24: “We observe a softening trend in most hardline categories on a YoY basis. (…) discretionary demand remained pressured.” (via @MikeZaccardi)

Americans’ propensity to spend is being severely challenged by rapidly slowing nominal income growth, inflation and real personal savings at the 2008 level. Good luck during the holidays season.

• Higher Rates Will Put the Kibosh on Consumption Growth There was nothing in Friday’s report to give pause to the Fed’s plans to keep pushing rates higher. Futures market implied odds of Fed policy makers raising rates by another three-quarters of a point at their meeting in early November, rather than a half point, increased after Friday’s report. (…)

• Goldman Sachs’ baseline forecast calls for the Fed to deliver a 75bp rate hike in November, a 50bp hike in December, and a 25bp hike in February, for a peak rate of 4.5-4.75%. GS has 4 scenarios: “In a non-recession outcome, we see the Fed as most likely to follow roughly our baseline path (30% subjective odds), but we also see a meaningful risk of an upside scenario in which the Fed hikes more than we expect (20%). In a recession outcome, we see the Fed as most likely to cut substantially (30%), but we could imagine more limited cuts if inflation proved stickier in a downturn than we would expect (20%).”

Home Builders Offer to Sell Homes in Bulk at Discount to Investors As mortgage rates hit a 15-year high and individual buyers back away, builders look to unload both planned and completed homes

(…) There were 14% more homes under construction this August than there were a year ago when the sales market was more robust, according to U.S. Census Bureau figures. Major home builders, including Lennar Corp. and KB Home, have reported walking away from contracts to buy thousands of lots for future building projects. (…)

Dean Myerow, co-founder of Fort Lauderdale, Fla., rental owner and developer Southern Waters Capital, said he is in contract to buy 20 new homes a month from a builder in Florida. The builder’s retail business has dried up in recent months amid higher interest rates, Mr. Myerow said. He estimated the discount to retail he will receive on the homes is between 15% and 20%.

“We think rental rates will remain very strong,” he said. (…)

Buying homes in bulk next to each other instead of scattered is easier to manage, investors said. (…)

OPEC+ to Weigh Production Cut to Bolster Oil Prices The group is considering an output reduction of 1 million barrels a day, its biggest cut since the pandemic began, as the economic slowdown hurts demand.

• Oil Output Cut Will Underwhelm Without a Big Change An OPEC+ output cut will be diluted by its members’ chronic underperformance — unless baselines are changed or Saudi Arabia acts alone.

(…) OPEC+ can’t keep things as they are and retain credibility. The amount the group pumps and its theoretical target have become increasingly estranged from each other over the course of the year, with output lagging behind the planned volume by more than 3.5 million barrels a day in August, according to figures compiled by Bloomberg.

That big gap is going to dilute the effects of any cut decided on Wednesday, unless they can agree to redistribute targets among themselves to reflect the inability of most members to pump as much as they’re allowed.

Even a reduction of 1 million barrels a day, shared pro rata among the members, would require just six countries to make actual cuts. All the rest are pumping so far below their individual targets that a step-down would have no impact. The resulting reduction would be just 337,000 barrels a day — and that’s assuming, perhaps optimistically, that all six stick to the plan.

A contraction of 500,000 barrels a day would see just five countries needing to pump less and would deliver shrinkage in actual supply of just 126,000 barrels a day.

Any reduction will come a month before European Union sanctions on Russian crude exports come into effect on Dec. 5, complicating the outlook. Russia is a powerful and valued member of OPEC+, so despite the group’s self-declared role of balancing oil supply and demand, don’t expect other members to rally round and make up for any shortfall in global availability resulting from the EU embargo.

Seaborne crude shipments to Europe from Russia are currently running at about 820,000 barrels a day, but the sanctions could hit wider flows, with the EU also set to ban the provision of insurance and other services to tankers carrying Russian crude, no matter where they’re headed.

(…) [Saudi Arabia] can always make another of its voluntary additional cutbacks. With production now running at about 11 million barrels a day, the kingdom could certainly afford to trim output, and some of its oil infrastructure might benefit from a rest. (…)

The fact that ministers have agreed to meet face to face suggests something more meaningful than a pro-rata cut in output targets is on the table.

U.K. Makes Major U-Turn on Tax Cuts Treasury chief, Kwasi Kwarteng, ditched a plan to cut the 45% top rate of income tax, scrapping a key economic policy after turmoil in the country’s financial markets, an intervention by the Bank of England and the threat of large scale rebellion by Conservative Party lawmakers.

China Property Stocks, Bonds Rally After Report of $85 Billion Lifeline

(…) The buying spree comes after the People’s Bank of China and the China Banking and Insurance Regulatory Commission told the six largest banks to each offer at least 100 billion yuan ($14.1 billion) of financing support, including mortgages, loans to developers and purchases of their bonds, people familiar with the matter told Bloomberg News. (…)

Some doubt whether the measures announced so far will be sufficient enough to reverse the property slump.  

The funding news is in line with policies announced via various regulators in the past six to nine months to support the sector, according to Zhi Wei Feng, a senior analyst at Loomis Sayles Investments Asia. “The intention is good, but the effectiveness is uncertain as the market is getting from bad to worse since the beginning of 2022 and there is no sign of any recovery.” (…)

Fed Rate Hikes Are Pushing Credit Market Toward Dysfunction, Bank of America Says

(…) Leveraged finance markets are reeling this week after the Fed’s latest rate hike in its aggressive campaign to tame inflation. US junk bonds are headed for worst year-to-date losses on record, while banks were forced to shelve a buyout deal in the leveraged loan market after struggling to attract demand from investors.

Investors fled risky assets over fears of a recession, pulling $3 billion from high-yield bonds and $1.9 billion from leveraged loans in the week ended Sept. 28, according to data from Refinitiv Lipper.

Spreads in the high-yield market could rise to around 600 to 650 basis points if the Fed continues with its pace of rate hikes, said BofA. Average high-yield spreads stand at 561 basis points on Friday, according to Bloomberg data.

• Bank CDS pricing also ticking up

(@topdowncharts)

John Authers: As of the end of August, the global central bank rate climbed to 2.97% based on NDR’s calculation, the highest level in the post-Global Financial Crisis period though well below the roughly 5% peak seen in 2001 and 2007. For now, the rate is simply mildly restrictive for global growth; but given the 4.00% expectation by early next year, NDR suggests things might take a turn for the worse.

This would put the rate in the most restrictive mode for the global economy, increasing the risk of severe global recession. As we’ve noted numerous times in the past, severe recessions are usually associated with more pronounced equity bear markets. 

A $1 Trillion Burden Looms for World Borrowers Refinancing Debt Governments and companies around the world are facing unprecedented costs to refinance bonds, a burden that’s set to deepen fissures in debt markets and expose more vulnerabilities among weaker borrowers.

A corporate treasurer or finance minister looking to issue new notes now would likely have to pay interest that’s about 156 basis points higher on average than the coupons on existing securities, after that gap surged to a record in recent days. That all adds up to about $1.01 trillion in additional costs if all those securities were refinanced, according to calculations using a Bloomberg index tracking some $65 trillion of government and corporate debt across currencies. (…)

Concerns are also growing that liquidity is draining out of the world financial system as interest-rate swaps — one of the world’s deepest markets — fluctuate wildly. The gap between the floating- and fixed-rate legs of longer-dated swaps tied to the US Secured Overnight Financing Rate swung in some recent days by the most on record for the index, which was rolled out in October 2020 as a replacement for the London interbank offered rate.

Six US-based borrowers tracked by S&P Global Ratings defaulted in August, as signs mount that higher rates are already taking a toll on stretched borrowers’ ability to keep issuing new debt to pay off old. (…)

Steps by speculative-grade companies to push out debt maturities when markets were favorable should prevent a sharp rise in global corporate defaults, according to a September report by Moody’s Investors Service. The 12-month trailing global speculative-corporate default rate was 2.3% in August and will rise to 3.8% by August 2023 in a baseline scenario, which is still below historical averages. In more pessimistic scenarios laid out in the report, the default rate could rise much more. (…)

It’s not only interest rates. Liquidity’s tanking!

The following chart shows an exercise by Hartnett at BofA to sum changes in central banks’ balance sheets across the world. On this basis, the tightening pressure is on a scale never before seen:

Credit Suisse Shares Fall on Financial-Health Concerns The Swiss bank’s shares fell a day after it tried to assuage fears about its health in a memo to employees and phone calls to investors and clients.

John Authers in Bloomberg:

The economy is not as yet giving the Fed a compelling case to stop hiking, let alone pivot. But there is another outcome that might force a reversal: a financial crisis. (…)

It’s never healthy when a CEO has to offer reassurance like this. But it’s certainly true that the day-to-day stock price performance implies great concern. (…)

Deutsche Bank and Credit Suisse are both now trading at less than 25% of their book value, but Credit Suisse has set a new low (unlike Deutsche), and for the first time since before 2008 now has lower book multiple (…).

Credit Suisse’s CDS has risen to levels to match anything that hit it in the post-Lehman era, and it now far exceeds the implicit default risk of UBS. Debt and share prices like this only make sense if these is a significant move in both the equity and credit markets to position for the risk of a default by Credit Suisse. Any such event would open the possibility of Lehman-style damage (…).

In my opinion, the scenario of a bankruptcy would be so damaging that it could not be allowed to happen; a bailout that marks another huge reverse for tighter money, however, is conceivable. A scenario in which the authorities decide that their best policy is allowing inflation to inflate the banks’ problems away could yet happen, and it wouldn’t be pretty. (…)

Morgan Stanley Says Likely Fed Pivot Won’t End Earnings Pain

Michael J. Wilson, one of Wall Street’s biggest equity bears, says a Federal Reserve pivot to dovishness is becoming likely amid falling money supply, but such a move won’t allay concerns about earnings.

“We find M2 growth in what we call the ‘danger zone’ -– the area where financial/economic accidents tend to occur,” Wilson, Morgan Stanley’s chief US equity strategist, wrote in a note on Sunday, referring to the Fed’s broadest measure for money supply. (…)

Wilson, who predicted this year’s equities selloff, wrote that the year-on-year rate of change in money supply in dollars for the US, China, the Eurozone and Japan has turned negative for the first time since March 2015, a period that immediately preceded a global manufacturing recession. Such tightness is unsustainable “and the problem can be fixed by the Fed, if it so chooses,” he wrote.

The strategist said last week that US equities are in the “final stages” of a bear market and could stage a rally in the near term going into the earnings season before selling off again.

Wilson has said that he sees an eventual low for the S&P 500 coming later this year, or early next, at the 3,000 to 3,400 point level. That implies a drop of as much as 16% from Friday’s close.

BoA’s Mike Harnett also sees a forced pivot: “we are tactical bears…“short twos & spoos” ‘til Halloween…SPX 3333 to force “policy panic” (Nov 16th G20), then rally; “Big Low” not ‘til Q1 when recession/credit shocks = “peak Fed”, “peak yields”, “peak US$”; trade of ‘23 short $, long EM, small cap, cyclicals.”

Hartnett has caught every move perfectly. His reasoning regarding the oversold entry level is basically buying some 20% below the 200 day moving average: currently at 3374. This has worked over the past century (except 1931/37/74 and 2008). He adds: “…monster undershoot requires monster credit event & recession”. (via ZeroHedge)

Runaway Bear Market Blows Past Everything Meant to Slow It Down

(…) Bulls still point to signals that the bottom could be nigh, yet the pattern of past market cycles suggests the pain for American equities can easily persist.

Take a simple accounting of prior bear markets, where the average selloff hit 39% over 20 months. That would imply another 19% drop from here. Or look at how past tightenings have coincided with stock moves. While not all Fed hiking cycles spelled doom for equities, those that did typically failed to find a floor until the central bank reversed its course — a prospect no one on Wall Street can take seriously anytime soon until price pressures subside.

“Inflation is a major constraint because any attempt to rescue markets or international financial stability issues are likely to be inflationary,” said Steve Chiavarone, senior portfolio manager at Federated Hermes. “The market is forced to reckon with the possibility that the central-bank put is not in place.” (…)

Amid the relentless selling, bulls are yielding one after another. Retail traders, one of the most steadfast dip buyers since the 2020 pandemic crash, are bailing on stocks.

JPMorgan Chase & Co. strategist Marko Kolanovic is the latest to succumb to the gloom, citing the risk of policy errors at central banks and an escalation of war following the destruction of the Nord Stream pipelines in Europe.

“The most recent increase of geopolitical and monetary policy risks puts our 2022 price targets at risk,” Kolanovic wrote in a note Friday. “While we remain above-consensus positive, these targets may not be realized until 2023 or when the above risks ease.”

The firm’s year-end target for the S&P 500 is 4,800, a 34% gain from Friday’s close. (…)

During the previous six bear markets, all bottoms formed when the Fed was lowering rates. That’s a long way off considering bond traders currently don’t expect Fed rates to peak until April 2023. (…)

SENTIMENT WATCH

Goldman Sachs:

Hedge funds, mutual funds, and retail traders have slashed equity exposures YTD. However, investor equity positions remain elevated vs. a longer-term history and we forecast further selling in 2023.

Since the start of 2020, households have been the largest source of equity demand, buying $1.2 trillion in equities. However, household demand turned slightly negative in 2Q. Higher frequency mutual fund and ETF flow data also show evidence of slowing demand in recent weeks (see pg. 23). This selling in combination with falling equity prices has led to a sharp drop in household equity allocations (Exhibit 5).

The sharp decline in margin balances over the last 12 months is one indication that retail traders have been largely washed out of the market this year as the fast growing and speculative stocks that they favor have suffered alongside rising interest rates. Our Retail Favorites basket (GSXURFAV) has lagged the S&P 500 by 18 pp YTD.

Both hedge funds and mutual funds remain highly exposed to equities relative to the past decade. Similarly, household equity allocations stand at the 96th%-ilesince WWII, indicating further room to cut exposure should the macro environment continue to deteriorate.

Not quite there yet:

VALUATION WATCH

My June 21 Desperately Seeking The Low remains valid:

• The worst case is 2700-2900 if a crisis or stagflation.
• The Rule of 20 Fair value is in the 3300-3500 range.
• Watch inflation and the Fed, particularly if the economy slows measurably. Slower inflation might bring the doves back and a good buying opportunity along.
• Using Price/Book and ROE: 3250-3375.
• All in all, current fair value falls in the 3300-3500 range. But watch inflation…and the Fed.

As of Friday’s close:

• The S&P 500 median trailing P/E is now 17.2 (17.7 last week, 18.7 two weeks ago). On forward: 15.1 (15.7 and 16.8).
• The 6 largest stocks by weight (21.4% of the index) have an average P/E of 45.8 (47.0 and 50.2). On forward: 29.0 (29.9 last week).
• 41% of the companies have a P/E below 15.0 (39% and 37%. On forward: 49% (48%).
• 21.6% (19.6% and 16%) are below 10x. On forward: 22.2% (20.0%).

Factset:

During the third quarter, analysts lowered EPS estimates for the quarter by a larger margin than average. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 6.6% (to $55.51 from $59.44) from June 30 to September 29.

In a typical quarter, analysts usually reduce earnings estimates during the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 2.3%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.3%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.8%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.8%.

Thus, the decline in the bottom-up EPS estimate recorded during the third quarter was larger than the 5-year average, the 10-year average, the 15-year average, and the 20-year average. The third quarter also marked the largest decrease in the bottom-up EPS estimate during a quarter since Q2 2020 (-37.0%).

While analysts were decreasing EPS estimates in aggregate for the third quarter, they were also decreasing EPS estimates in aggregate for the fourth quarter. The bottom-up EPS estimate for the fourth quarter declined by 4.5% (to $58.01 from $60.73) from June 30 to September 29. 

In addition, analysts lowered earnings estimates for CY 2023 during this time, as the bottom-up EPS estimate for CY 2023 decreased by 3.5% (to $241.83 from $250.60) from June 30 to September 29.

PLAYING THE ODDS GAME?

Stats and charts are invading the blogosphere, to suggest the lows are near or lower or further out. (Via Callum Thomas)

@MacroAlf

• The 24-month Williams%R Oscillator is showing up increasingly extreme oversold…albeit, the early-2000’s shows how the market can stay oversold, and 08/09 shows how the market can get even more oversold!

@CalebFranzen

• Of the 26 S&P 500 lows since 1932, nine (35%) were in October and 5 (19%) in March. How can it be that only 2 months account for more than half of the lows? That’s no random walk, is it? My guess is that it has to do with earnings expectations which are often reset in October (after Q3 results) and/or March (after year-end). But, interestingly, a casual survey reveals that 15 of the 20 declines in Fed funds rates between 1957 and 2019 occurred either in the fall (10) or in the spring (5). The current consensus is for the dovish Fed to return next spring.

@AriWald via @SamRo

Two Putin allies ridicule Russia’s war machine in public

The withdrawal of Russian forces from a strategically important town in eastern Ukraine has prompted two powerful allies of President Vladimir Putin to do something rare in modern Russia: publicly ridicule the war machine’s top brass.

Russia’s loss of the bastion of Lyman, which puts western parts of Luhansk region under threat, touched a nerve for Ramzan Kadyrov, the leader of the southern Russian republic of Chechnya.

[Kadyrov] suggested that Russia should consider using a small tactical nuclear weapon in Ukraine in response to the loss. (…)

Such public contempt for the generals running Russia’s war is significant because it indicates the level of frustration within Putin’s elite over the conduct of the war while also piercing the Kremlin’s carefully controlled narrative. (…)

Brazil’s Leftist Former President Wins First Round of Election The result means current President Jair Bolsonaro and Luiz Inácio Lula da Silva, who served two terms but was jailed on a corruption charge, will face each other in an Oct. 30 runoff.

Mr. da Silva, a standard-bearer of the Latin American left who is widely popular among the poor despite having been jailed on a corruption conviction in 2018, clinched 48.2% of the vote. The tally was just shy of the majority he needed to win outright, with 99.1% of votes counted Sunday night, according to Brazil’s electoral court.

Brazil’s right-wing leader notched 43.4% of the vote, nearly 51 million and far more than the 36%-37% support that polls from Datafolha and Ipec said that the ex-army captain would garner. Allies of Mr. Bolsonaro also swept to victory in an election that included votes for members of congress and state governors. (…)

A victory by Mr. da Silva in Brazil, home to 215 million people, would mean that every major country in South America, from Argentina to Venezuela, would be led by a leftist government. (…)

Iran Protesters Circumvent Internet Disruptions They are finding new ways to challenge the Islamic Republic after the government imposed sweeping disruptions to the internet that have affected the movement’s ability to use social media to spread its message.

(…) Some activists are trying to skirt internet disruptions that started almost two weeks ago by using secure connections, such as virtual-private networks, say residents in Tehran. These people say they are turning to Farsi-speaking satellite broadcasts such as London-based Iran International, which publishes footage of the protests and provides updates on planned demonstrations.

(…) in private, some officials have shown understanding for the protesters’ grievances over Ms. Amini’s death. “But the government is stuck,” said an Iranian official. “It has made the veil a foundation of the system so it can’t backtrack.”

• Khamenei Slams Protests as Security Forces Target Universities University campuses were a critical driver of the 1979 revolution and students formed a core part of opposition groups that toppled the Shah of Iran. The Islamic Republic has always heavily controlled and suppressed political activity at universities.

U.S. Jobless Claims Fall to Five-Month Low Applications for unemployment benefits have fallen below the prepandemic average as employers hold on to workers in a tight labor market

This chart shows unemployment claims with the scale set to reflect levels between 2014 and 2019. The horizontal line is the average for that period. The low in claims was in March.

• Why Are Companies Still Hiring When GDP Is Shrinking? A persistent economic puzzle is why the labor market is still strong amid slowing growth and high inflation. Many employers say they continue to struggle with staffing shortages and are reluctant to cut head count.

(…) Layoffs and other involuntary discharges, at 1.4 million in July, were about 20% below their average monthly level in 2019, when GDP was growing more quickly. (…)

“Inflation is a challenge, but we can measure it. We can work to overcome it. Not having enough people in the supply chain—that has proven to be much more difficult,” [Raytheon] chief executive Greg Hayes told analysts this summer. “The only thing that’s going to solve labor availability, I hate to say this, is a slowdown in the economy because right now, there just simply aren’t enough people in the workforce for all of our suppliers.” (…)

But even employers not seeking to raise head count have to keep hiring to fill vacancies caused by historically high rates of turnover. In July, 2.7% of workers quit their jobs, up from 2.3% in February 2020, when the jobless rate matched a half-century low. (…)

“We just keep hiring and replacing, hiring and replacing—wash, rinse, repeat,” said Ms. Henry. “Efficiency goes to hell when you continuously hire since the person who is training them isn’t going at their normal pace because they’re stopping to explain things,” she said. Many new hires leave before that training yields return, she added. (…)

Construction industry layoffs are still below prepandemic levels, though new home sales have fallen sharply this year and housing starts have dropped because of higher mortgage rates. Residential builders are struggling with the legacy of job cuts undertaken during the housing crisis of 2007-09, with employment in residential construction 12% below its 2006 peak. (…)

The Fed’s concern on employment is about wages so it wants to reduce job openings to ease the pressure. According to the Atlanta Fed’s wage tracker, wage growth in the last 12 months was highest in Leisure and Hospitality (6.3%), Trade & Transportation (6.2%) and Manufacturing 5.9%) vs the U.S. average of 5.5%. These sectors have not shown much slowdown in their respective openings compared with their pre-pandemic levels.

On the other hand, the unemployment rate in Leisure and Hospitality is 6.1% while it is 4.3% in Trade & Transportation. Manufacturing is at 3.3%, below the national average of 3.8%.

U.S. GDP Growth is Unrevised in Q2’22, Posting Second Straight Quarterly Decline

Real GDP growth during Q2’22 was unrevised at -0.6% (+1.8% y/y) after declining an unrevised 1.6% in Q1. The latest figure matched expectations in the Action Economics Forecast Survey. GDP increased at a 2.1% annual rate from 2016 to 2021, up 0.2 percentage points from the earlier estimate.

The Q2 gain in corporate profits after-tax was revised up to 7.4% (7.7% y/y) from 6.1%. Domestic nonfinancial profits rose 7.9% (9.8% y/y). Financial sector earnings declined 9.0% (-10.2% y/y) while foreign sector profits rose 5.8% (21.8% y/y).

Real personal consumption expenditure growth last quarter was revised up to 2.0% (2.4% y/y) from 1.5%. Durable goods outlays fell 2.8% (-3.7% y/y) while nondurable spending declined 2.4% (-1.1% y/y). Services outlays rose 4.6% (4.8% y/y). Business fixed investment growth was revised lower to 0.1% (2.4% y/y). Residential investment declined 17.8% (-7.2% y/y), revised from -16.2%.

Government spending fell 1.6% (-1.3% y/y) last quarter, revised from -1.8%. Federal government spending declined 3.4% (-4.0% y/y), revised from -1.9%. Defense spending rose 1.5% (-3.9% y/y). State & local government spending weakened 0.6% (+0.5% y/y).

The contribution of inventory investment was revised minimally to a 1.9 percentage point subtraction from GDP growth. (…)

The GDP price index was revised higher to 9.0% (7.6% y/y) from 8.9%. This remained the fastest pace of GDP price inflation since Q1’81. The rise in the PCE price Index was revised to 7.3% (6.6% y/y) from 7.1%. The PCE price index less food & energy increased 4.7% (5.0% y/y), revised from 4.4%, and has risen at about that rate for roughly a year. (…)

The WSJ has this important info :

The report, which included five years of benchmark revisions, also revised downward gross domestic income—a measure of corporate profits, wages and benefits, self-employment income, interest and rent—to a 0.1% increase in the second quarter. That largely closed a gap between output and income that had pointed to a stalling economy rather than a recession.

But Axios did the digging to explain:

One driver behind the downward GDI revision was slower labor compensation than initially reported. In other words, worker wage growth wasn’t as hot as we thought.

In Q1, inflation-adjusted GDI increased by 0.8%, lower than the initial estimate of 1.8%. The latest estimate of Q2 GDI shows it increased 0.1%, not the 1.4% the government first reported.

For 2021, the change in GDI was revised down, while GDP was revised up slightly. That brings the gap between the measures to -0.6% last year. That’s a much more normal discrepancy than the -2.3% gap previously reported.

Nike warns of inventory glut, price cuts (CNBC)

Mortgage Rates Rise to 6.7%, Highest Since 2007 Mortgage rates are more than double where they were a year ago, adding pressure to the already cooling U.S. housing market.

(Haver Analytics)

Homes in Canada Have Never Been So Unaffordable, RBC Says

• CMHC Cuts Home-Price Outlook, Projecting Drop as Deep as 15%
• “Our G10 home price model suggests sizable nominal home prices declines from the peak of around 15% in Canada, 5-10% in the US, and under 5% in the UK. The declines are larger for real home prices at just over 20% in Canada, just over 10% in the US, and 10% in the UK.” We view the risks to these estimates as tilted to the downside because of a sharp deterioration in our descriptive home price outlook scores and evidence of strong mean reversion in regional data. (Goldman Sachs)

China’s Service Sector Slows in Latest Economic Warning Sign Chinese economic activity remained feeble, with the services sector slipping into contraction, offering fresh evidence of the damage that Beijing’s Covid-prevention measures and a real estate slide are inflicting on the economy.

(…) A subindex measuring the services sector fell to 48.9 in September from 51.9 the previous month, China’s National Bureau of Statistics reported Friday. The poor performance in the services sector dragged the broader official nonmanufacturing purchasing managers index down to 50.6 in September, from 52.6. A reading below 50 indicates contraction. (…)

As of Friday, cities under some form of Covid restrictions accounted for 25% of gross domestic product, down from 28% a week earlier, according to Goldman Sachs. (…)

The official manufacturing purchasing managers index ticked up to 50.1 in September from 49.4 the previous month, according to official data. The reading followed two consecutive months of contraction. (…)

A subindex of the official manufacturing PMI tracking new export orders showed overseas demand continuing to weaken in September. The subindex slipped to 47, the lowest level in four months, the data showed.

Separate data released on Friday by Caixin Media Co. and S&P Global, focused on smaller-scale and private-sector manufacturers, pointed to weaker factory activity as new orders contracted for a second straight month. The China Caixin manufacturing purchasing managers index fell to 48.1 in September from 49.5 a month earlier. (…)

On Thursday, China’s central bank said it would allow some cities that are suffering from falling home prices to further slash mortgage rates for first-time home buyers, adding to previous administrative measures aimed at stabilizing the faltering market. (…)

S&P Global’s China PMI:

Business conditions across China’s manufacturing sector deteriorated modestly in September, as efforts to contain the COVID-19 virus weighed on performance. Total new business dropped for the second month in a row, which led to a renewed fall in output, while firms also trimmed their purchasing activity and inventories. Reduced demand for inputs placed further downward pressure on prices, with input costs falling at the quickest rate since the start of 2016. Companies often looked to pass on any cost savings to clients to help improve sales, which led to the quickest fall in selling prices since December 2015.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) declined from 49.5 in August to 48.1 in September, to signal a back-to-back deterioration in the overall health of the sector. The reading was consistent with only a mild rate of contraction, however.

A key factor driving the headline index lower was a faster fall in new orders during September. New business fell for the second month in a row, and at the quickest rate since April, with panel members often commenting that restrictions around travel and operations had dampened customer demand. Foreign sales also fell again, and at a solid rate that was the fastest for four months. (…)

  

Eurozone Inflation Hits 10% as Power Suppliers Scramble for Reserves Consumer prices in the currency area are now rising at a much faster pace than in the U.S., with the ECB set for a series of interest rate rises

(…) According to Eurostat, household energy prices were 40.8% higher in September than a year earlier.

The higher energy costs facing most businesses are percolating through the economy. Prices of services were 4.3% higher than a year earlier, driving a pickup in core inflation to 4.8% from 4.3%. (…)

The Organization for Economic Cooperation and Development on Monday said it now expects the average rate of inflation in the eurozone to be 8.1% this year, up from 7% when it last released forecasts in June. In the U.S., it expects average inflation to be 6.2%, up from 5.9% in June. In 2023, it expects eurozone inflation to average 6.2% and U.S. inflation to average 3.4%. (…)

Taiwan Warns Exports to Struggle in Rest of 2022 as Demand Slows

(…) Growth in overseas shipments might slump to single-digits in the fourth quarter of 2022, Su said in an interview in Manila on Friday. (…)

August export growth slowed to just 2%, the slowest pace in more than two years, prompting Ministry of Finance chief statistician Beatrice Tsai to warn at the time that “winter is coming” earlier than expected. She also cautioned that September exports could even shrink by as much as 3% from a year earlier.

Export orders have also slowed. While orders gained 2% in August, reversing a decline in July, purchases from China and Hong Kong fell more than 25% last month. Almost 40% of Taiwan’s exports went to Hong Kong and China for the first eight months of the year, data from the finance ministry showed. (…)

According to Garry Evans, Chief Strategist, Global Asset Allocation at BCA Research, the current trend in the business cycle indicates that global earnings growth will slow into negative territory by January 2023, and continue further into May 2023.

SENTIMENT WATCH

Investors dump global bond and equity funds on recession risks

Global bond and equity funds witnessed massive outflows in the week ended Sept. 28 as worries about a recession grew, with the U.S. Federal Reserve determined to keep interest rates higher to tame inflation pressure. (…)

Investors offloaded a net $22.07 billion worth of global bond funds, in their biggest such weekly net sales since June. 22, data from Refinitiv Lipper showed.

John Authers: Gatsby, the Dollar, and Staring Blankly at the World Falling Apart

(…) The dollar has never regained its pre-Plaza highs from early 1985. But now, wishful thoughts are returning to the Plaza Accord once more. As the chart shows, the dollar is still far below its 1985 high in nominal terms. On a real effective basis, taking account of inflation, Citibank’s index show that it is almost back to its high since inception in 1989, after the accord was reached. (…)

Interventions by three of the four largest economies outside the US in the space of a week show that the dollar’s strength is beginning to cause real stress. But there are at least two sides to any currency trade, and no meaningful limit to the dollar is possible without willing participation by the US. (…)

According to the IIF’s estimates of fair value, the euro and the pound are still overvalued and have further to fall, despite the damage they have already sustained. That might vitiate any Plaza-style attempt to limit the dollar. And it also confirms that this dollar surge is likely to create more pain in western Europe than in the emerging world. (…)

While US inflation is elevated, it seems difficult to countenance why the US would proactively participate in an inflationary dollar policy, and without US participation, we see little chance of success. (…)

We think that policymakers are aware of a hard truth: They don’t have enough FX reserves to make a sustained difference. Back in 1985-87, the last time we had a coordinated intervention to weaken USD, daily FX turnover was near US$200 billion per day (on a net-gross basis) but, as of the last reported BIS figure in 2019, daily turnover is over 40 times higher at US$8.3 trillion per day. The G10 collectively has US$2.8 trillion in FX reserve assets (deposits and securities, so excluding gold). (Morgan Stanley) (…)

China’s Rival Aircraft to Boeing, Airbus Jets Wins Certification China is angling to disrupt the dominance of Boeing and Airbus in commercial jetliner manufacturing. However, it’s not clear when, if ever, the C919 will be a competitive threat to the duopoly. Comac hasn’t attracted much interest for its products overseas, and the nation’s airlines still favor Airbus and Boeing as the workhorses of their fleets.

(…) Comac has said it already has 815 orders from 28 Chinese customers for the C919, though the majority aren’t confirmed and many are from aircraft lessors yet to place the jet with an airline. China’s so-called big three — China Eastern, Air China Ltd. and China Southern Airlines Co. — and Hainan Airlines have 2,241 Boeing and Airbus narrowbody aircraft between them, and at least 546 on order. (…)

For now, the plane will only be allowed to fly within China until it is certified by foreign regulators. (…)