Fed’s Powell Says Rates Are Just Below Neutral Range

(…) Investors welcomed his remarks because they appeared to retreat from a comment he made in early October describing the Fed’s benchmark rate as a “long way” from a neutral level—which implied to some listeners that Mr. Powell planned to keep raising rates for a while. His remarks Wednesday appeared to suggest to this audience that he might stop sooner or move more slowly. (…)

On Wednesday, Mr. Powell pointed to the range of neutral-rate projections submitted by 15 Fed officials at their policy meeting in September, varying from 2.5% to 3.5%. The Fed’s benchmark federal-funds rate since then has been between 2% and 2.25%—or just below the lowest estimate. (…)

“There is no preset policy,” he said. “We will be paying very close attention to what incoming economic and financial data are telling us.” (…)

“It removes concerns of a Fed dead set on tightening up to a point where rates would intentionally slow down the economy,” said Roberto Perli, an analyst at Cornerstone Macro, in a report Wednesday. (…)

“We know that moving too fast would risk shortening the expansion,” Mr. Powell said. “We also know that moving too slowly—keeping interest rates too low for too long—could risk other distortions in the form of higher inflation or destabilizing financial imbalances.” (…)

Compared with his recent predecessors, Mr. Powell, who became Fed chairman in February, has more regularly noted that the past few expansions ended with bursting financial bubbles rather than surging inflation.

Two Powell puts: Mr. Market is seeing an eventual Powell put in this move from “long way” to “just below” and “economic and financial date dependence”. At the same time, Powell puts Trump on notice that the Fed is not really the problem for Mr. Market.

‘Bring Me Tariffs’—How Trump and Xi Drove Their Countries to the Brink of a Trade War In the corridors of power, officials from the U.S. and China maneuvered and often miscalculated

Long but interesting article in the WSJ covering the very difficult trade talks between confused Chinese and divided American negotiators. The last sentence sets the stage for the next few days:

The Chinese still aren’t sure which Trump will show up when the two leaders get together—the leader who surprised China with his determination to see tariffs through, or the deal maker Chinese leaders thought they knew.

• Why Xi Won’t Cave to Trump at G-20 China’s leader, convinced of the course he has set, has little incentive to appease a wounded and unpopular U.S. president.

(…) Xi knows China’s debt-addicted economy needs to upgrade from thin-margin exports of basic consumer goods and industrial commodities to high-tech sectors that can create new markets and higher incomes.

(…) Xi can only conclude that relying on the West is too dangerous and his country must develop and control its own key technologies. (…)

But the trade war is spiraling into something much bigger — a clash of perceived national interests. Xi won’t sacrifice what he believes is mission critical for China’s future to appease a wounded, erratic and unpopular U.S. president. Only when Trump wakes to that reality can the trade war be brought to an end.

• A New Cold War With China? No, Thanks The U.S. can defend its interests without making Beijing an enemy.

(…) With neither side willing to compromise, the dispute runs the risk of causing a complete breakdown in U.S.-China relations, and poses the single biggest threat to global peace and stability. (…)

• American Retailers Squeeze Chinese Suppliers as Tariffs Start to Hurt Walmart, Amazon among those looking for ways to combat tariffs and hope for a trade truce

Big American retailers are getting tough with Chinese suppliers as import tariffs bite, cutting orders, negotiating down prices and demanding faster turnarounds. (…) In China, manufacturers of handbags, lighting, footwear and other products say they are feeling the strain. Many are trying to find new customers outside the U.S., and some have resorted to offering discounts in a bid to halt a slide in orders. (…)

In interviews, dozens of Chinese manufacturers reported constricted sales. Sunshine Leisure Products, a maker of camping chairs in the eastern province of Zhejiang, said orders are down about 30% even as it lowered prices by as much as 7%. A supplier of LED decoration lights in the eastern province of Shandong said orders for next year—typically settled by November—were still in abeyance, as American customers have been asking it to bear the 10% tariff. In the southern city of Shenzhen, a sales manager for furniture maker Homegard International said orders have fallen by half. (…)

At a recent trade fair in Guangzhou, exhibitors reported fewer American buyers. That is spurring Chinese suppliers to look for other sources of revenue, they said, such as more aggressively targeting European customers. (…)

Home Depot anticipates price rises if additional tariffs of 25% go in place as planned, adding in a conference call with analysts that washing-machine prices rose when tariffs were applied earlier in the year.

Walmart’s merchants are combing through a list of items affected by tariffs, working with suppliers to bring costs down, Walmart finance chief Brett Biggs said in an interview.

“If we get tariffs as discussed in January prices are going to go up,” he said.

• Trump Says GM Plant Closings May Justify New Car Tariffs President tweets ‘Because of the G.M. event’ new car tariffs ‘being studied now’

(…) In his tweets, Mr. Trump noted that pickup trucks and work vans have long been protected by 25% tariffs, compared with a 2.5% tariff on cars. He suggested that a higher rate on more vehicles could help U.S. companies preserve production in those segments as well.

“The reason that the small truck business in the U.S. is such a go to favorite is that, for many years, Tariffs of 25% have been put on small trucks coming into our country,” the president tweeted.

“If we did that with cars coming in, many more cars would be built here….. and G.M. would not be closing their plants in Ohio, Michigan & Maryland,” he added. (…)

Mr. Trump didn’t say how long he would be willing to wait before pulling the trigger on car duties. US-EU trade talks are scheduled to resume early next year, as are similar negotiations with Japan, which also faces the threat of the new vehicle export restrictions. (…)

• Trump administration to study tools to raise U.S. tariffs on Chinese autos U.S. Trade Representative Robert Lighthizer said on Wednesday that he was examining all available tools to raise U.S. tariffs on Chinese vehicles to the 40 percent duties that China is now charging on U.S.-produced vehicles.

Lighthizer said in a statement criticizing China’s “egregious” tariffs on U.S. autos that he was taking such action at the direction of President Donald Trump. (…)

Automotive duties on both sides have been increased by tit-for-tat tariffs. The United States imposed a 25 percent tariff on Chinese vehicles on top of the 2.5 percent it normally charges.

China had lowered tariffs for all other countries to 15 percent, but imposed an additional 25 percent retaliatory tariff on U.S. vehicles.

Chinese auto exports to the United States are relatively small. It exported 53,300 vehicles to the U.S. market last year and imported 280,208 U.S. manufactured vehicles, according to data from the China Automotive Technology and Research Center (CATARC), a government-affiliated think-tank. (…)

Volvo, which is owned by Chinese carmaker Geely, plans to move most of the production of its best-selling XC60 SUV for export to the U.S. market away from its Chengdu plant in China to Torslanda in Sweden. (…)

Volkswagen planning new North America factory for electric vehicles Volkswagen is deciding where to locate a new factory in North America to build electric vehicles for the U.S. market, the German automaker’s new head for the Americas said on Wednesday.

Personal Income and Outlays, October 2018

The consumer stats remain strong with both disposable income and spending up in the 4.5-5.0% range and core inflation slowing below 2.0% YoY and below 1.5% at annualized rates over the last 3 and 5 months:

U.S. New Home Sales and Prices Remain Sluggish

New single-family home sales fell 8.9% (-12.0% y/y) in October to 544,000 (SAAR). It was the fourth decrease in the last five months and carried sales down to their lowest since March 2016. Revisions to previous months’ sales were positive, however: those in September, originally reported at 553,000, were revised to 597,000, and those in August, which had been reported last month at 585,000, were revised to 591,000. The October result did undershoot the expectations in the Action Economics Forecast Survey, which had estimated 585,000 sales. These sales transactions are recorded when sales contracts are signed or deposits are made.

The median price of a new home fell 3.6% (-3.1% y/y) in October to $309,700 from $321,300 in September. The average price of a new home rose, however, to $395,000 (+0.3% y/y) from $379.000 in September.

By region, the largest percentage decline last month was in the Midwest, where sales fell 22.1% (-16.7% y/y) to 60,000. Those in the Northeast dropped 18.5% m/m (-46.3% y/y) to 22,000. In the South, sales were off 7.7% in October (-11.6% y/y) to 313,000, while those in the West eased 3.2% (-6.3% y/y) to 149,000. (…)

  

Evergrande: China’s biggest property developer faces debt crunch Investors wonder if company will be left out in cold from ‘frigid winter’ forecast for market

Housing is China’s Achille’s heel and Evergrande is the mother of risk there. As the FT points out, Evergrande had $208B in total liabilities at the end of June, the most of any Chinese developer, with $43B maturing over the next year which represents 61% of all Chinese developers maturities combined next year. “Ratings agency Standard and Poor’s named Evergrande in a list of 11 developers with “weak” or “less-than-adequate” liquidity profiles. But Evergrande was the strongest among this list with a rating of B plus and a positive outlook.”

Evergrande needed to accept 11% for 2Y dollar bonds last week, up from 8.75% on 8Y bonds last June, now trading on a yield-to-worst basis of 13.35% according to Grant’s.

This is not only China’s risk as J Capital’s Anne Stevenson-Yang explains:

Once the debt crisis comes, it will likely to be deflationary for the world. China will have little choice but to depreciate the currency in the face of demand for dollars, and that will force prices lower across the world. It is clear from recent weeks that the exchange value of the renminbi is now in the eye of a fiscal hurricane as it has not been for years.

Cash-Strapped Millennials Are Turning to Installment Plans to Pay for T-Shirts and Jeans Finance apps Afterpay and Affirm approve applicants in seconds and say their algorithms minimize default risk.

(…) Affirm and Afterpay say they’re targeting millennial shoppers by filling a gap between credit cards and store credit, which require lots of paperwork and a strong credit rating. (…)

Consumers apply online or via app and learn whether they’ve been approved in seconds. They click a button at checkout on the websites of participating retailers if they want to pay by installment. Cotton On, which sells inexpensive apparel, began offering U.S. installments through Afterpay in August. E-commerce chief Brendan Sweeney says 20 percent of buyers are already using the feature, which breaks up bills into four equal parts spread over six weeks and charges no interest.

“I was kind of skeptical that there would be a market for people interested in installments, but there clearly is,” he says. “We’ve seen a remarkable uptake from millennial customers.” Sweeney says shoppers spend $50 on average per order. (…)

The company charges no interest, instead collecting a fee of as much as 6 percent of a sale from the retailer. Afterpay works with 20,000 merchants globally—including 1,000 now online in the U.S. where the company has signed up Urban Outfitters, Anthropologie and Free People. Based on its recent monthly performance, Afterpay says it has a global sales run rate of more than $3 billion a year.

Afterpay is betting American millennials will be just as keen on its service as their Australian counterparts. The company says 65 percent of the U.S. cohort don’t have a credit card, are 30 on average and are intrigued by using installments to pay for merchandise. Leslie Parrish, a senior analyst at researcher Aite Group, says the simplicity of installments is at the heart of the appeal. “You know precisely when you’ll pay off that loan,” she says. “That gives you more discipline.” (…)

Affirm charges retailers a fee or consumers interest, which can be as much as 20 percent. Repeat customers, who have shown they can repay loans, typically pay lower interest. Those who default may be turned away next time. (…)

Affirm and Afterpay typically approve more than 80 percent of applicants, compared with about 50 percent for store credit. (…)

Afterpay and Affirm brush off such concerns, arguing that their technology analyzes hundreds of variables, even how fast a person is typing , to determine credit-worthiness. (…)

There will be blood!

Bond Indexes Bend Under Weight of Treasury Debt The surge in government borrowing is beginning to warp bond indexes, posing a challenge for investors looking for the best returns amid rising interest rates.

(…) as the government steps up borrowing to fund last year’s tax cuts, index funds end up holding more Treasurys, squeezing out the securities that pay higher rates of interest.

The U.S. government is borrowing $129 billion this week, up 28% from the same series of note auctions a year ago. The increased borrowing means Treasurys now amount to almost 40% of the value in the leading bond market investment benchmark—the Bloomberg Barclays U.S. aggregate index—which fund managers use to gauge their success. That is up from around 20% in 2006, before the start of the financial crisis. (…)

As issuance increases, funds that use the Bloomberg Barclays aggregate index as a guidepost for portfolio composition will wind up owning increasingly large amounts of Treasury debt. Independent bond analyst David Ader predicts Treasurys will make up half of the U.S. bond market and the indexes that track it by 2028. (…)