BROAD WEAKENING
China’s Economy Struggling Across All Sectors, Beige Book Says
China’s economy in the third quarter was the weakest it has been this year, according to the China Beige Book, with manufacturing, property and the services sectors all worsening, even as borrowing picked up.
Manufacturing revenue, profits, volumes and sales prices fell by double-digit paces from the previous three months, although borrowing remained at its highest level, according to the quarterly report.
“Retail and services stood out mostly for how incapable they were at picking up the slack,” the report said. (…)
While a drop in exports was a factor, most of the decline was due to “considerably slower sales price growth,” according to the report. Prices at the factory door stopped rising in June and then fell in July and August, which can hurt companies’ profits, limiting their ability to invest and service debt.
The services sector continued to underperform, with both revenue and profits dropping from the same period last year. Hiring also slowed, which means that “if manufacturing does have to shed a large number of jobs, services has shown no capacity to absorb them,” the report said. (…)
Goldman Sachs’ CAI index for China suggests “subdued but stable” growth. My rectangle highlights China’s CAI since early 2018 which implies a decline in growth from the 7.5% level top the 5.5% level:
GS’ CAI for the USA suggests growth has declined from the 4.2% level to 1.5%.
The U.S. economy is currently firing only on the consumer cylinder. For how long?
Markit’s Flash PMI for the USA yesterday:
Subdued business activity growth reflected a continued soft patch for client demand during September, with some survey respondents linked to less favorable underlying economic conditions. Moreover, the rate of private sector new business growth was the weakest since the series began in October 2009.
Latest data also signalled a sharper decline in backlogs of work, thereby suggesting a lack of pressure on business capacity. Some companies responded to subdued demand conditions by cutting back on staff hiring in September. The latest survey pointed to a drop in private sector payroll numbers for the first time since January 2010. At the same time, business expectations for the next 12 months picked up only slightly from the seven-year low seen in August. (…)
At current levels, the survey employment index is indicative of non-farm payroll growth falling below 100,000.
The Conf. Board’s just release survey is not optimistic. The survey also revealed the largest decline in expectations for rising income since 1990.
Nor is the Richmond Fed’s workweek data:
All this just before the most important period of the year for consumer spending.
Meanwhile, this suggests that France’s IP is about to sink. If so, given that Germany seems to be in recession…
Source: Pantheon Macroeconomics
Banks Flood the Fed With Demand for Two-Week Loans Banks on Tuesday flooded the Federal Reserve Bank of New York with demand for new two-week loans—more than twice what the central bank was offering—in a sign banks could need more cash than Fed officials anticipated.
In its latest effort to calm short-term lending markets, the Fed offered $30 billion of two-week cash loans and received $62 billion in demand from banks offering collateral in the form of Treasury and mortgage securities. In a second offering, the Fed received $80.2 billion of demand for $75 billion of shorter-term overnight loans.
Tuesday’s operations marked the sixth and seventh times the Fed has intervened in the short-term lending market known as the repurchase, or repo, market after lending rates spiked as high as 10% early last week.
The actions came at an important time for banks because regulators regularly check at the end of the fiscal quarter to make sure they have enough cash and liquid assets to protect against potential losses.
Trying to carry banks into the next quarter, the Fed on Tuesday offered multiday loans for the first time after previously offering just overnight loans. Demand from banks suggested officials may need to increase the amount of loans when conducting further operations later this week, analysts said. (…)
Recent volatility in the repo market reflects different pressures, analysts say. Those include a shortage of reserves in the banking system, which has made it more difficult for banks to handle a deluge of new Treasurys entering the market as the government funds a growing budget deficit.
The amount of reserves in the financial system has declined in recent years as the Fed has reversed some of its massive stimulus in the wake of the financial crisis, when it bought trillions of dollars of bonds.
The Treasury continues to drain private-sector deposits by boosting its cash balance at the Fed. (The Daily Shot)
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Why I’m Worried About the Repo Market It’s hard to predict how the financial system will handle shocks.
Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
(…) To understand what’s going on, let’s return to a simple model. Suppose there’s only one big bank. It has a choice of what to do with most of its assets: It can keep them on deposit at the Fed, earning the interest rate that the central bank pays on excess reserves; or it can take more risk and earn more return by investing in securities or loans. In this world, all the assets earn the same “risk-adjusted” return, which the Fed effectively determines by setting the interest rates on excess reserves.
Now let’s take a step closer to reality. There are two groups of banks, “tight” ones that hold few excess reserves, and “flush” ones that hold a lot. Flush banks can lend reserves to tight banks in the federal funds market, a focal point of the Fed’s monetary policy. As long as this lending happens freely, all assets will still have the same risk-adjusted return, and the one-bank model will still be a good indicator of how the many-bank world will respond to the Fed’s policies and to various shocks.
In recent days, though, that crucial free-lending condition hasn’t held. On the contrary, a convergence of events — a deadline on corporate-tax payments and the settlement of a big Treasury auction — created a sudden and severe shortage of reserves. As a result, interest rates diverged sharply in markets where they should be the same. In the repo market, where participants borrow and lend against the collateral of Treasuries and other securities, they shot up above 5%. And in the federal funds market, they breached the upper bound of the Fed’s 2%-to-2.25% target range.
The deeper issue is that, since the 2008 crisis, regulatory reforms — such as requirements that banks hold a certain amount of liquid assets, and maintain a minimum leverage ratio (equity capital as a percent of total assets) — have constrained the ability of flush banks to lend, and of tight banks to borrow. Such constraints interact in complicated ways with financial market conditions. For example, European banks must report their leverage ratios as of the last day of each quarter, so they reduce their repo activity to make those ratios look better. As a result, even when excess reserves seem abundant, funding costs for banks may exceed the interest rate that the Fed controls. (…)
What’s harder to understand is how money markets will respond to future shocks. As the experience of the past couple weeks has shown, the simple single-bank model no longer works. Reserves are siloed in the flush banks, so the financial system is acting more like it has $1.3 billion in excess reserves than the actual $1.3 trillion. The design of regulation has disrupted some of the system’s most basic functions. The people who oversee it all should be far from sanguine about what the repercussions might be.
This chart suggests that excess reserves of U.S. depository institutions lead the U.S. dollar by 3 months.
Picture source: Financial Times (via Isabelnet)
(Nordea and Macrobond)
(Nordea and Macrobond)
