Producer Price Index: July Headline Inches Up to 0.8%
The Producer Price Index for final demand increased 0.3 percent in July, seasonally adjusted. Final demand prices were unchanged in June and declined 0.3 percent in May. On an unadjusted basis, the index for final demand advanced 0.8 percent for the 12 months ended in July.
In July, the increase in final demand prices was led by a 0.5-percent rise in the index for final demand services. Prices for final demand goods edged up 0.1 percent.
The index for final demand less foods, energy, and trade services moved up 0.2 percent in July, the largest increase since a 0.3-percent rise in February. For the 12 months ended in July, prices for final demand less foods, energy, and trade services advanced 2.7 percent.
PPI-Core Services at +0.5% MoM in July is a warning that wage increases have yet to be fully passed on:
Core Services inflation reaccelerated to +0.4% m/m from +0.3% m/m in July amidst ongoing wage pressures. ‘Supercore’ Services inflation, which includes labor-sensitive categories like Recreation, reaccelerated from +0.1% m/m to +0.4% m/m. We continue to see labor as the number one inflationary risk this cycle, given the fact that unemployment is now at just 3.5% and wage growth is still running at four to five percent annualized. At the same time, shelter inflation held steady at+0.4% m/m, which is roughly half of the +0.8% m/m gain recorded in February. We look for shelter inflation to remain moderate for at least the next several months. (KKR)
The Scary Math Behind the World’s Safest Assets Washington has laid the seeds of a crisis that Wall Street can no longer ignore
(…) Now, though, the government’s pile of debt has swelled following the War on Terror, the global financial crisis and the Covid-19 pandemic. Low interest rates and Fed bond buying masked the strain: Interest costs recently were no higher than in the early 1990s as a share of federal spending. But the Treasury barely seized the opportunity to lock in rock-bottom rates by issuing more long-term notes and bonds.
Now it is too late. The Congressional Budget Office regularly updates its long-term budget forecasts and says that U.S. debt held by the public will surpass gross domestic product this fiscal year and that interest on that debt will equal about three-quarters of discretionary, nondefense spending. By 2031, it will be as large.
Medicare, Social Security and, of course, interest are legally nonnegotiable. Military spending isn’t really optional either. (…)
Yet the CBO’s forecast actually looks too optimistic. It envisions the net interest rate paid on that debt barely topping 3% in coming years even though short-term bills and notes yield more than 5% today. The swelling pile of debt means minor changes in assumptions now have major consequences.
Consider that around three-quarters of Treasurys must be rolled over within five years. Say you added just 1 percentage point to the average interest rate in the CBO’s forecast and kept every other number unchanged. That would result in an additional $3.5 trillion in federal debt by 2033. The government’s annual interest bill alone would then be about $2 trillion. For perspective, individual income taxes are set to bring in only $2.5 trillion this year.
Compound interest has a way of quickly making a bad situation worse—the sort of vicious spiral that has caused investors to flee countries such as Argentina and Russia. Having the world’s reserve currency and a printing press that allows it to never actually default makes America’s situation far better, though not consequence-free. (…)
A harder-to-quantify complication of a future fiscal squeeze would be Washington’s limited room to maneuver as interest costs become uncomfortable. The ability to do things such as bail out banks, underwrite lifesaving vaccines, subsidize cutting-edge technologies or even fight a war would be curtailed. An America with tight purse strings would be one with a more volatile economy, diminished international prestige and, ultimately, less-attractive assets. (…)
- Why Fitch’s Downgrade Matters U.S. debt is in much riskier territory than when S&P lowered its rating in 2011
Fitch Ratings’ decision to strip the U.S. of its triple-A credit rating last week was widely dismissed as meaningless. After all, Standard & Poor’s had done the same back in 2011 and bond yields declined—implying more, not less, appetite for Treasury debt.
This time, though, bond yields rose. That suggests Fitch’s action deserves our attention, not because it tells us anything new but because it joins the stack of evidence of how profoundly different, and risky, the nation’s fiscal situation is now. (…)
When S&P downgraded the U.S. back in 2011, the deficit was equivalent to 8.4% of gross domestic product, close to a post-World War II high. But in the wake of the 2007-09 recession, such deficits were both easy to finance and necessary. Private investment was subdued, unemployment at 9%, underlying inflation below the Federal Reserve’s 2% target and interest rates stuck at around zero.
Without federal borrowing, all of that—a combination later labeled “secular stagnation”—would have been worse.
Today’s circumstances are just the opposite. Private investment is healthy, unemployment near a 53-year low at 3.5%, and interest rates above 5% as the Fed combats inflation roughly double its 2% target. No one talks about secular stagnation now. This is when spending restrictions and tax increases should be in vogue.
Instead, the Congressional Budget Office on Tuesday upped its estimate of this year’s deficit to $1.7 trillion, or 6.5% of GDP, compared with 5.5% last year. In May, President Biden struck a deal with House Republicans that barely alters the trajectory of rising debt.
The variable that best captures the change in circumstances is the real Treasury yield—what investors expect to earn on a 10-year note after inflation. It was around zero in August 2011, soon to go negative. Today, it is 1.7%, near the highest since 2009. (…)
Adding central bank transactions and new government borrowing, independent economist Phil Suttle estimates private investors will be asked to absorb government debt worth 7.7% of developed economies’ GDP this year and 9.2% next, more than double the 4.3% of 2011. Private borrowers thus face competition from governments for capital, which in the long run hurts investment and growth. We got a taste of that last week when yields jumped on news of larger-than-expected quarterly Treasury auctions. (…)
The second takeaway is that interest rates have gone from a stabilizing to a destabilizing factor for government finances. When the real interest rate is below the rate of future economic growth, the debt tends to fall relative to GDP. In 2011, that gap reached 2.5 percentage points.
Because this made debts more sustainable, it is one reason governments felt no pressure to reduce them. Indeed, it was part of the mind-set that led the Biden administration to implement a blowout $1.9 trillion stimulus package in 2021.
Today, with rates higher and future growth lower than in 2011, the gap between real rates and growth is around zero. That makes interest expense a growing source of deficits, climbing from 1.9% of GDP last year to 3.7% in 2033, according to the CBO.
One reason for Fitch’s downgrade was the absence of any political will to deal with the main drivers of the deficit: spending programs for older Americans, including Social Security and Medicare, and repeated cuts to tax rates for most households.
Fitch noted how much worse U.S. fiscal metrics are than its peer countries. To give one example: The U.S. is on track to spend 10% of federal revenue on interest by 2025, compared with just 1% for the average triple-A rated country and 4.8% for double-A-rated. Why, then, isn’t the U.S. rating even lower? Because the reserve status of the dollar and the size and safety of Treasury debt gives the U.S. unprecedented borrowing ability. (…)
Richard Bernstein Advisors in March 2023:
The notion that 2011’s near-default was a non-event has proven totally false. (…) the US economy has nonetheless paid higher interest costs and experienced slower growth because of 2011’s fiasco. (…)
(…) The markets re-priced Treasuries to account for the downgrade of US debt by Standard & Poors in 2011. The cost to the US government has more consistently been between 100-200 bps higher yield relative to German Bunds than it was prior to the downgrade.
In other words, the 10-year T-note yield has carried a consistent risk premium to German Bunds since the downgrade of US government debt in 2011. Because all US debt prices off US Treasuries’ yields, the downgrade and subsequent increased risk premium means US corporate, municipal, and mortgage debt has also had an imbedded risk premium and higher associated interest costs.
One should not downplay the potential damage of a growing risk premium despite generally lower absolute interest rates. US rates actually fell in absolute terms after the US downgrade because the economy weakened. The chart points out, however, that the US nonetheless experienced relatively higher rates which ultimately detracted from US competitiveness.
Credit default swaps (CDS) are market-traded insurance against default. Bonds considered more likely to default have higher credit default swap costs. CDS is priced in basis points (bps), so a CDS spread of 100 bps for a bond suggests the costs to insure against default will cost 100bps. The bond buyer agrees to pay the insurer 100bps in exchange for protection against the bond defaulting.
The US government 1-year CDS spread (i.e., insuring against default in the forthcoming year) is now higher than it was when US debt was downgraded in 2011, which suggests the markets feel the risk of default is higher than it was in 2011, and another US debt downgrade would likely further increase interest costs to the US government and to the overall US economy. (…)
US Treasuries are clearly not the same safe haven asset they were prior to 2011’s downgrade of US debt, and we fully recognize a US government default could not only further jeopardize Treasuries’ status, but could also result in still higher relative US interest costs and the associated further loss in global competitiveness.
(…) But even with the bonds sold for a yield of 4.189%, the highest since 2011, the amount allotted to primary dealers was the largest since February, a sign of weak demand. Afterward, 30-year yields jumped as high as 4.26% late in New York.
The sale was the biggest test of this week’s auctions, when the Treasury sold a combined $103 billion of new 3-, 10- and 30-year debt, because the long maturity securities usually appeal to select investors such as pension funds and insurers. The size of the 30-year bond sale was $2 billion larger than last new-issue offering in May, and the market expects further increases given the expected deficits the US government is facing. (…)
Thankfully, the corporate and household sectors have been more fiscally responsible this cycle (Axios):
Data: Federal Reserve via FRED; Chart: Axios Visuals Data: IMF via FRED; Chart: Axios Visuals
Ray Dalio via LinkedIn (good read BTW) (my emphasis):
(…) Does it matter that the central governments and central banks have such bad balance sheets and income statements if the real economy is in pretty good shape? Of course it does! As with people and companies, governments that borrow have debt service payments and eventually have to pay back principal, which is painful.
The only differences in their finances are that governments can confiscate wealth through taxes and print money via the central bank (so that’s what we should expect to happen). Will this be a big problem? The answer is probably not much over the near term but probably a lot later. (…)
Over the near term, if there isn’t a big supply/demand imbalance in which the amount of government debt sold overwhelms the amount of demand for these debt assets, it appears that a period of tolerably slow growth and tolerably high inflation (a mild stagflation) is most likely.
Of course, there is a significant range of uncertainty around that because what we don’t know is greater than what we do know about a lot of influences (e.g., politics, geopolitics, the environment, and technology’s impact).
However, over the long term, from looking at history and penciling out what is likely, it is virtually certain that central governments’ deficits will be large, and it is highly probable that they will grow at an increasing rate as the increasing debt service costs plus increasing other budget costs compound upward, and, as they increase, governments will need to sell more debt, so there will be a self-reinforcing debt spiral that will lead to market-imposed debt limits while central banks will be forced to print more money and buy more debt as they experience losses and deteriorating balance sheets. (…)
Back to the corporate sector with Axios:
Even highly indebted companies who fund themselves with junk bonds (as opposed to leveraged loans) aren’t too worried for the time being — their debt mostly isn’t coming due for years.
Data: BofA Global Research, ICE Data Indices LLC; Chart: Axios Visuals
However, small is currently not beautiful. The squeeze in small companies’ finances (+$147B in annual interest expense) could meaningfully derail employment:
The chart showing Corp net interest payments declining is burning up the financial blogosphere. That data come from the BEA’s NIPA accounts. Here is 1q data from S&P. The difference is every company that’s too small to make it into the top 500. Those companies are filing for bankruptcy at the fastest pace since 2009. The collapse in Int Payments is no mystery. And it’s emphatically NOT a good sign. (@spomboy)
FYI, total private employment is up 0.5% since March 2023 but the Paychex Small Business Jobs Index is down 0.6% during the same period.
EARNINGS WATCH
- Through August. 11, 456 companies in the S&P 500 Index have reported revenue for Q2 2023. Of these companies, 62.9% reported revenue above analyst expectations and 37.1% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 29% missed estimates.
- In aggregate, companies are reporting revenues that are 1.8% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.2%.
- The estimated earnings growth rate for the S&P 500 for 23Q2 is -3.8%. If the energy sector is excluded, the growth rate improves to 2.5%.
- The estimated revenue growth rate for the S&P 500 for 23Q2 is 0.4%. If the energy sector is excluded, the growth rate improves to 4.3%.
- The estimated earnings growth rate for the S&P 500 for 23Q3 is 1.3%. If the energy sector is excluded, the growth rate improves to 7.1%.
Trailing EPS are now $216.34. Full year 2023e: $219.43, up 0.6% vs 2022. Forward EPS: $231.67e. 2024e: $245.55.
Corporate guidance is not great this time:
Valuation Matters:
- Two Valuation Indicators, One Conclusion: Not to belabor the point too much, but if you look at absolute valuations for the S&P500 (PE ratios — this chart is showing the average of the forward PE, trailing PE, CAPE vs history) they are clearly expensive, and if you look at the equity risk premium (shown inverted — which basically shows the relative value of equities vs bonds) it’s also showing stocks as expensive (vs bonds). You might argue that both indicators have been higher in the past, but overall the risk/reward balance gets worse as these indicators go higher.(@Callum_Thomas, including several of the following charts)
Source: Chart of the Week – US Equity Risk Premium Risks
- S&P IT P/E is meeting resistance:
The Super-7 vs Next 4: Turns out the famed super-7 Big Tech stocks of the USA are larger than the next 4 largest country weightings in the MSCI All Countries World Index (main global equities benchmark). Probably something to be said here about passive investing, concentration risk, and diversification…
Source: @DuncanLamont2
Leveraged ETF Players: another interesting observation in the context of the correction is how leveraged long US equity ETF Assets Under Management had soared back to the heights, while leveraged short/inverse ETFs had exhibited clear signs of capitulation.
- Speculative stocks are under pressure. (The Daily Shot)
Inventory Glut Catches Up to Industrial Companies Destocking is spreading from consumer goods and memory chips to a much broader swath of the manufacturing sector, causing cuts to sales outlooks.
The list of industries not facing pressure from reductions in inventories, or destocking, is becoming much shorter. What started as pockets of pressure in consumer goods and memory chips has spread to chemicals, home generators, roofing shingles, life sciences, residential air conditioners and heating systems, restaurant-grade kitchen supplies, fire and security products, factory automation technologies and electrical equipment, to name a few. Economists from JPMorgan Chase & Co. and Bank of America Corp. and the staff at the Federal Reserve have backed off calls for a recession over the course of this earnings season. But the growing prevalence of destocking has led to a worrying number of cuts to industrial companies’ sales outlooks.
An “unusually large cohort” of manufacturing companies fell short of Wall Street’s revenue expectations in the most recent quarter, with 12 out of the 31 companies tracked by Wolfe Research analyst Nigel Coe missing sales estimates and most of their stocks underperforming as a result. Dover Corp., whose products range from garbage trucks to gas station fuel pumps and industrial coding and printing technologies, was one of them. The company lowered its full-year sales outlook and didn’t sign enough new orders to fully offset what it shipped out from its backlog in the second quarter. “I think that what has changed in the first half of the year is the realization that the carrying costs of inventory in the channel have gone up exponentially” as interest rates have climbed, Chief Executive Officer Richard Tobin said on the company’s earnings call last month.
Allegion Plc, which makes deadbolts and electronic-access doors, trimmed the high end of its 2023 organic revenue guidance, just three months after raising its outlook. (…)
Orders slid 8% in Parker-Hannifin Corp.’s North American industrial business in the three months ended June 30, the second consecutive quarter of declines for this division. The backlog for this business covers more than 30% of annual sales, roughly double historical levels, but it is shrinking. “We continue to constantly pressure-test this and analyze it, and we’re not really seeing any major pushouts or cancellations,” CEO Jennifer Parmentier said on a call this month to discuss the company’s results. The destocking that the company is seeing is most pronounced in Germany, Austria and Switzerland, countries that are heavily dependent on exports to a Chinese economy that has rebounded much more slowly than expected.
Electrical-equipment company Hubbell Inc. said orders in its utility business were down in second quarter as customers take a breather after an aggressive buildup of the backlog on supply-chain snarls. Shares of distributor Wesco International Inc. tumbled almost 15% on Aug. 3 after the company cut its 2023 sales guidance amid “unprecedented supply chain rebalancing in the electrical industry” and weaker demand for commercial construction and manufactured structures. International Flavors & Fragrances Inc., which supplies the food and beverage, personal care and household products industries with ingredients and scents, fell by the most since 1980 earlier this week after it too chopped its revenue forecast on an extended period of destocking.
At a certain point, the pivot toward whittling down excess inventories rather than placing new orders starts to look like a trend. One of the harder lessons to learn in the Covid era from an industrial economy perspective has been that this time isn’t actually that different. The recovery largely followed normal historical patterns, moving from the consumer to manufacturing companies with shorter sales turnarounds to those that make heavy-duty equipment with longer waiting periods, and now the downshift is playing out similarly. Amid all the talk about a manufacturing super-cycle powered by “megatrends” and government stimulus that would decouple the sector from the broader economy, it turns out that chemical companies and industrial distributors are still important indicators and that a string of profit warnings from the former and slowing sales at the latter were rightfully interpreted as yellow flags. Daily sales growth at Fastenal Co. in June dropped to the slowest pace in two years and continued to decelerate in July. (…)
Rockwell Automation Inc. trimmed its outlook for fiscal 2023 orders and its year-end backlog and lowered the high end of its organic growth forecast. As lead times for supply-chain inputs improve, machine builders don’t need to place unusually large advance orders to guarantee availability, even though underlying demand remains strong, CEO Blake Moret said in an interview. Still, Rockwell is experiencing an uptick in cancellations from China and among e-commerce customers that have realized they don’t need quite as many fulfillment centers right now. The overall cancellation rate remains low. Bookings at Emerson Electric Co. grew by just 3% in the quarter ended June 30 compared with those in the period a year earlier amid a slide in demand from discrete manufacturing customers. What started as weakness primarily in German automotive and packaging markets in the previous quarter broadened out “significantly” with softness in the US and Asia as well, dragging discrete automation orders down by a high-single-digit percentage, CEO Lal Karsanbhai said in an interview. “It’s a demand issue at this point,” he said.
Orders in Siemens AG’s digital industries unit slumped 35% year-over-year on a comparable basis in the most recent quarter. Siemens lowered its 2023 sales outlook for this business on the expectation that “intensified” destocking trends would continue for the next few quarters.
(…) investors have paid outsize attention to companies such as Rockwell whose backlogs exploded amid the supply-chain logjams and regard those unfilled orders with a degree of reverence that has never been afforded to companies that always sit on large backlogs, such as aerospace engine manufacturers. (…)
New orders are the corporate lifeblood. J.P. Morgan’s July Global Manufacturing PMI revealed that
(…) The downturn at global manufacturers was driven by several factors, including weak new order intakes, deteriorating international trade flows and a correction in stock levels in response to the weak demand environment. The level of new work placed has fallen in each month since July 2022, with the latest rate of decline the steepest for six months. Among the major industrial regions covered by the survey, lower new order inflows were seen in the US, the euro area, Japan and China. The downturn in the eurozone was especially steep, being the second-fastest since May 2020.
New export business fell for the seventeenth successive month, with the rate of contraction the fastest in the year-so-far. (…)
Inventories of both raw materials and finished goods were depleted, with some companies noting they were over-stocked in relation to current demand needs.
Other forward-looking indicators highlighted the risk of the downturn continuing in coming months. Backlogs of work fell again, while the new orders-to-inventory ratio remained at a level signalling contraction.
In the USA:
US manufacturers signalled a further decline in the health of the sector during July, according to the latest PMI survey from S&P Global. The downturn stemmed from another monthly contraction in new orders, as domestic and external demand conditions remained muted. A challenging sales environment led firms to scale back their input buying, causing inventory holdings to be depleted strongly. (…)
Goods producers continued to run down their stock levels, as weak demand and a further solid improvement in lead times led to greater material availability. Subsequently, a sharp contraction in input buying was recorded as firms reined in spending in line with lower new orders.
July was also difficult in China:
Firms signalled a marginal fall in production amid a fresh decline in overall new business. Muted foreign demand was a key factor weighing on total sales, with new export orders down noticeably in July. (…)
Companies often commented that relatively sluggish market conditions both at home and overseas had impacted customer demand. Notably, new export business contracted at a solid pace that was the fastest since September 2022.
- #SouthKorea | Exports down 15.3 pct during first 10 days of Aug. – Yonhap (…) exports of semiconductors moved down 18.1 percent over the period to $2.45 billion. Outbound shipments of steel and mobile electronics fell 22.4 percent and 4.2 percent, respectively, to $967 million and $540 million. (…) exports of automobiles shot up 27.2 percent to $535 million. Exports to China, the biggest trade partner of Asia’s No. 4 economy, decreased 25.9 percent to $2.87 billion. Shipments to the United States edged down 0.8 percent to $1.92 billion. (…) It is also the first time since 2020 that exports have declined for nine months in a row.
An additional challenge for goods producers is that goods prices are seriously deflating as Ed Yardeni’s PPI chart illustrates. Falling demand + falling prices = falling margins unless costs get quickly cut.
Based on Yardeni’s data, producers’ costs were rising 1.7% YoY in July while the PPI-Finished Goods was down 3.1%.
On the cost side, manufacturing jobs are still rising (+1.0% YoY in July though flat monthly since February) and wage costs are up 5.1% (+7.2% annualized in the last 3 months!):
According the The Detroit News, the UAW is seeking a 46% wage increase over 4 years in its negotiations with the Detroit three automakers, including a 20% general wage increase upon ratification. It also requests “restoration of traditional pensions, cost-of-living increases, reducing the work week to 32 hours from 40 and increasing retiree benefits, according to the people.”
Also, since the end of June, WTI is up 18% and natural gas 9.5%.
Industrials’ profits have boomed in recent quarters and analysts remain pretty upbeat even though they have significantly cut their revenue growth rates from +10.9% YoY on average in the last 4 quarters (+7.8% in Q2) to +2.1% and +2.2% in Q3 and Q4 respectively. Based on the above, I would be cautious on these profit forecasts.
It gets even worse for Chinese manufacturers who are additionally losing market share as the WSJ reported Saturday:
China accounted for 13.3% of U.S. goods imports during the first six months of this year, below a peak of 21.6% for all of 2017. The current level is the lowest since 12.1% for the year in 2003, two years after China’s accession to the World Trade Organization.
Meanwhile, domestic demand suffers from both a corporate investment strike and a personal spending strike post the COVID shock, both significantly aggravated by the severe housing crisis to which the clueless government has, so far, applied but ineffective band-aids:
(via Adam Tooze)
Interestingly, China’s manufacturing sector is being fractured by global corporate insecurity, including Chinese entrepreneurs as Adam Posen, head of the Peterson Institute, explains in Foreign Affairs:
If CCP policies continue to diminish people’s long-term economic opportunities and stability, discontent with the party will grow. Among those of means, some are already self-insuring. In the face of insecurity, they are moving savings abroad, offshoring business production and investment, and even emigrating to less uncertain markets. Over time, such exits will look more and more appealing to wider slices of Chinese society.
Chinese Property Giant Sends Another Distress Signal Country Garden expects to post its worst loss since going public and said it has been attempting a “self-rescue.”
(…) The 31-year-old company said it expects to post its worst loss since going public 16 years ago, and estimated the red ink could be as much as the equivalent of $7.6 billion for the first half of 2023. The developer also said its contracted sales slumped 60% in July from a year earlier—a much bigger decline than in previous months. (…)
Foshan-based Country Garden said its profit margins have shrunk, property projects have lost value, apartment sales have declined for four consecutive months and refinancing has become much harder. Earlier this week, Country Garden missed $22.5 million in interest payments on its dollar bonds. It has a 30-day grace period to come up with the money.
The company said late Thursday that it has been working “to carry out [a] self-rescue by all means,” and that it is navigating an unprecedented and extremely difficult period for the industry. (…)
“The systemic risks are dramatically larger than previously anticipated,” he added. (…)
Last week, China’s central bank hosted a meeting with privately run enterprises that included property developers such as Longfor Group Holdings and CIFI Holdings. Country Garden wasn’t listed among the attendees.
Chinese state media on Friday reported that China’s securities regulator organized an online meeting with property developers and financial institutions to try to figure out what they are facing and what they might need. (…)
Country Garden’s large size means its credit distress is likely to spill over to China’s property and financial markets and delay the housing sector’s recovery, Moody’s Investors Service said Friday. The credit-rating firm noted that the developer has about $10 billion in outstanding dollar bonds, and said its financial problems could make home buyers more concerned about the stability of other developers.
“These developments would likely drive potential homebuyers away from privately owned developers to state-owned developers—if not from the property markets—in the near term,” Moody’s said, adding that property prices in parts of China where Country Garden has a big presence could also come under pressure.
China’s new bank loans tumbled in July and other key credit gauges also weakened , even after policymakers cut interest rates and promised to roll out more support for the faltering economy.
Chinese banks extended 345.9 billion yuan ($47.80 billion) of new yuan loans in July, tumbling 89% from June to the lowest since late 2009 and falling far short of analysts’ forecasts, data from the People’s Bank of China showed on Friday. (…)
The reading was also much lower than 679 billion yuan in July 2022. (…)
Household loans, mostly mortgages, contracted by 200.7 billion yuan in July, after rising 963.9 billion yuan in June, as a debt crisis in the property sector deepened, while corporate loans slid to 237.8 billion yuan last month from 2.28 trillion yuan in June, central bank data showed. (…)
Now, the spillover effect:
Missed payments on multiple high-yield investment products by a major Chinese shadow lender may trigger a “vicious cycle” for property developers’ financing and more delinquencies for trust products, JPMorgan Chase & Co. warns.
Liquidity stress is intensifying for indebted developers and their non-bank creditors after a unit of Zhongzhi Enterprise Group Co., one of China’s largest private wealth managers, failed to deliver on-time payments for multiple products, the US bank’s analysts including Katherine Lei wrote in a report Monday.
About 2.8 trillion yuan ($386 billion), or 13% of China’s total trust assets, may see rising default risks, given their exposure to the property industry and local government debt, the report says. Up to 80% of local government financing vehicles may not be able to repay their debt principals, JPMorgan estimated.
“The trust defaults may set off a vicious cycle on POE (privately-owned enterprise) developers’ onshore debt,” the analysts wrote. “This follows that rising concern of developer defaults weakens investment sentiment and, as a result, trust companies may not be able or willing to roll over existing real estate-related products.” (…)
Risks are also on the rise for banks as they could be asked to offer support for some housing projects amid the industry’s cash crunch, JPMorgan analysts wrote.
“The probability of banks bailing out trust investors is low, in our view. But if funding support from trusts on work-in-progress housing projects recedes, banks may be asked to fill the funding gap,” the analysts wrote. “We consider this another form of national service risk for banks.”
- China’s Worsening Economy Is Hurting Corporate America Caterpillar and DuPont are among the big companies that are lowering their expectations for a postpandemic boom.
Did you miss last week’s The China Syndrome?