CONSUMER WATCH
This Christmas season will be marked by a growing divide between high and low earners, according to a study from Deloitte LLP.
The survey, released Wednesday, shows that 11.5% of U.S. holiday shoppers say they plan not to spend anything on gifts and services this holiday. That’s up from 4.9% in 2020 and 2.9% the previous year. It’s the highest in at least 10 years, according to Rod Sides, a vice chairman of Deloitte.
For those who don’t plan to spend, almost two-thirds make less than $50,000 a year, according to Deloitte. About one in eight of the non-spenders make $100,000 or more. (…)
Deloitte has forecast 7% to 9% growth in holiday sales this year. The expansion will mostly be fueled by wealthier consumers who have seen their savings rise during the pandemic. Spending among lower-income Americans, meanwhile, is expected to fall 22% compared to last year.
Through Oct. 15, spending remains strong according to the Chase Spending Tracker:
Housing starts fell 1.6% during September (+7.4% y/y) to 1.555 million (SAAR) from 1.580 million in August, revised from 1.615 million. Starts have declined from 1.725 million in March. A September increase to 1.620 million starts was expected in the Action Economics Forecast Survey.
The decline in starts overall in September was due entirely to a 5.0% drop (+38.5% y/y) in multi-family starts to 475,000, reversing half of the August rise. Starts of single-family homes held steady in September at 1.080 million (-2.3% y/y), revised from 1.076 million. Single-family starts fell 2.9% in August and 4.2% in July. Starts last month were 13.9% below the March high.
Building permits fell 7.7% to 1.589 million in September (0.0% y/y) from 1.721 million in August, revised from 1.728 million. Permits to build single-family homes eased 0.9% (-7.1% y/y) to 1.041 million, the fifth decline in six months. Permits to build multi-family homes fell 18.3% (17.1% y/y) in September to 548,000, a decline which reversed all of an outsized August increase.
By region, housing starts fell 27.3% (-4.8% y/y) in the Northeast to 120,000 following a 139.1% August increase. Starts in the South were down 6.3% last month to 835,000 (+9.4% y/y) following a 1.0% decline. Offsetting these shortfalls was a 6.9% gain (3.3% y/y) in the Midwest to 217,000 following a 10.9% increase. Starts in the West surged 19.3% (9.7% y/y) to 383,000 after falling 21.7% in August and 7.0% in July.
Waller: If Inflation Doesn’t Cool by Year-End, Fed Could Bring Rate Increases Forward Federal Reserve Gov. Christopher Waller said the central bank could move forward the timeline for raising short-term interest rates to restore price stability if high levels of inflation don’t start cooling soon, adding that he supports the Fed slowing its asset buying stimulus effort starting next month.
Traders are betting that the Bank of Canada will be forced into raising interest rates earlier than expected, posing one of the stiffest tests yet for Governor Tiff Macklem.
Bets in the overnight swaps market are increasingly tilting toward a move early next year, well ahead of the U.S. Federal Reserve. Traders have now priced in three hikes in Canada by the end of 2022, which would bring the policy rate to 1% from the current 0.25%.
That’s about 50 basis points higher than markets were expecting just a month ago. The shift in pricing is increasingly at odds with Macklem’s guidance that borrowing costs won’t increase until slack is absorbed and inflation returns sustainably to its target range.
The bank has said repeatedly it doesn’t see that happening until the second half of next year. (…)
“If Macklem capitulates around an early rate hike when he thinks spare capacity might still exist then the whole exit framework will turn into a dumpster fire,” Derek Holt, an economist at Bank of Nova Scotia in Toronto, said by email. “It could make forward guidance a very weak tool in future and magnify risks to policy efficacy.” (…)
On Monday, the Bank of Canada’s quarterly business outlook survey revealed a record 45% of respondents expect inflation above 3% over the next two years. More than 85% see prices rising faster than the bank’s 2% target. (…)
The bank’s next decision is due Oct. 27. No move on borrowing costs is expected, but Macklem will likely pare back weekly purchase of Canadian government bonds to C$1 billion ($810 million) from the current pace of C$2 billion. All eyes will be on any changes in language on rate guidance, as well as the inflation outlook in the latest quarterly economic forecasts. (…)
HIGHER FOR LONGER
Malaysian electronics firms central to the supply of basic chips that drive the world’s cars, smartphones and home devices say big-name customers are beating on their doors to lock in take-or-pay, longer-term deals – and happy to pay more if need be. (…)
At factories in Malaysia, operators like chip packaging firm Unisem (UNSM.KL) say that drive is leading buyers that sell chips on to auto and electronics manufacturers to become willing to sign up for big price hikes, some even asking for as many assembled chips as plants can produce – whatever the cost.
But Malaysia’s chip assembly industry, accounting for more than a tenth of a global trade worth over $20 billion, warns that shortages – exacerbated by years of under-investment in basic chip production, while high-end semiconductors were favoured – will last at least two years. (…)
Wong Siew Hai, President at the Malaysia Semiconductor Industry Association, warns the shortage is likely to last for years. Some customers are ordering more than they need to lock in supplies, Wong said, while long-term contracts that range from one to three years have now become a new industry norm.
“For the capacity to match demand, (it will take) at least two to three years from now,” Wong told Reuters. (…)
A labour dispute at Germany’s public-sector banks deepened on Wednesday after a third round of talks failed to reach agreement, with inflation fears prompting unions to stand firm over demands for higher wages. (…)
Workers at public-sector banks have staged warning strikes to underscore union demands for a 4.5% wage increase and rights for working outside the office. (…)
Annual inflation in Germany was 4.1% in September, highlighting growing price pressures as Europe’s largest economy recovers from the COVID-19 pandemic and its companies face with supply shortages.
Oliver Popp, spokesperson for the DBV union, said inflation concerns were playing a big role in the union demands. (…) “Salaries are just enough to get by” and energy prices are “crazy”, he said. (…)
Earlier this year, employees at Deutsche Bank call centres, some of whom were paid 12 euros ($13.95) an hour, went on strike for higher wages and eventually reached a pay deal after a months-long dispute.
The deal envisages the gradual introduction of a 13th month of pay [+8.3% implemented gradually], a one-time payment and wage increases that average out to be around 2.7% per year. (…)
Initially, workers sought a 6% pay increase, while the bank offered pay increases of 1.5% in two rounds.
In the USA, the strike at John Deere is the biggest of the pandemic era, with 10,000 workers on the picket line calling for better pay and benefits, Axios’ Courtenay Brown writes. (…)
The agricultural sector is thriving. Farmers are more willing to shell out money for new equipment than they have been in years, so demand is robust.
All of it helps deliver the record profits John Deere executives told Wall Street to expect this year. Workers want a piece of that. (…)
The strike is “part of a broader trend for labor to reclaim some of its lost bargaining power over the past 30 years,” says De Maria, who adds it will help set the tone for unions with contracts up in the near term.
John Deere executives and union leaders are back at the negotiating table as of yesterday, a UAW spokesperson said in an email.
For context, DE’s net margins reached 13% over the last 12 months. Since 1993, their cyclical peak was 9% in 2013 and 2008.
China’s New Home Prices Fall for First Time in Six Years as Rules Bite Average prices in 70 major cities edged down 0.08% in September from August, the first such month-on-month decline since 2015
(…) In all, 27 of the 70 cities recorded a month-on-month price increase in September, according to the statistics bureau—down from 46 cities in August and the lowest such number since February 2020, when the Covid-19 pandemic froze activity across the country.
Prices of new homes in China’s so-called third-tier cities fell 0.2% from the previous month, after remaining unchanged in August, the statistics bureau said. (…)
Compared with a year earlier, average new home prices rose 3.26% in September, slowing from August’s 3.70%. New home prices rose in 59 of 70 cities in September from a year earlier, the same as in August. (…)
- Xi Faces Pushback on China’s Bid to Tax Property Chinese President Xi Jinping is facing strong resistance over a nationwide property-tax plan meant to help curb housing speculation, and he is now settling for a more limited rollout, people familiar with the matter said.
(…) Many officials contend that such a levy could crush housing prices, cause consumer spending to plunge and severely harm the overall economy. (…)
More than 90% of urban Chinese families own their homes, and property-related industries account for nearly a third of the country’s output. Meanwhile, up to 80% of China’s household wealth is tied up in real estate; a drop in property values could make homeowners feel poorer and less willing to spend. (…)
Some retired senior party members also petitioned against imposing the new tax, saying they themselves couldn’t afford to pay any additional taxes. “So many people, including party members, own more than one property,” said one of the people familiar with the deliberations. “The tax proposal is becoming a potential social-stability issue.” (…)
One idea under discussion is to gradually test the tax plan in big cities, including Shanghai and the sprawling municipality of Chongqing in central China, which both have levied an annual charge on second homes or high-priced ones since 2011. Other places under discussion include the southern boomtown of Shenzhen and the province of Hainan, both designated by Mr. Xi as the testing ground for building a socialist market economy. (…)
Meanwhile, local governments, which get roughly a third of their revenue from selling land to property developers, worry that a property tax would cause demand for land to drop and hurt their revenues, which amounted to more than $1 trillion last year. (…)
Based on transactions data from 100 cities, Rhodium’s analysis shows that land sales plunged 43% in the first three weeks of September from a year earlier. The drop is adding to the financial strains on many localities across the country. (…)
- What Is Xi Jinping Thinking? In this issue of Sinology, we explain why it is unlikely that the recent regulatory crackdown is Chinese Party chief Xi Jinping’s attempt to roll back China’s private sector.
SENTIMENT WATCH
Resistance to Buying Stocks Is Becoming Evermore Futile Fund managers’ equity allocations are higher than they were during the dot-com boom, even as economic growth fades.
(…) The latest GDPNow index from the Atlanta Federal Reserve suggests that the U.S. economy is now growing at an annualized rate of barely 0.5%. The “reflation trade” and “post-pandemic boom” that we were all looking forward to have been deferred:
(…) A few months ago, fund managers were expecting an “inflationary boom,” with both growth and inflation well above average. They still expect the inflation, but are no longer so optimistic about the growth:
(…) The question is now all about the old-fashioned issue of how far interest rates will rise and how quickly (…).
With yields low and inflation on the horizon, bonds are regarded as unbuyable. The BofA survey finds that more asset allocators are underweight bonds than at any time since they started asking the question some 20 years ago:
It’s worth looking at how some of the previous extremes of pessimism toward bonds worked out. None were justified, as the steady historic fall in bond yields continued throughout. (…) So it may not be safe to assume that bond yields are heading upward, but fund managers are more convinced that the trend is about to turn than they have ever been before. (…)
This chart smooshes together holdings by households and foreign investors with those of U.S.-based institutions, and finds equity allocations have recently overtaken the all-time high set just before the dot-com bubble burst in 2000:
(As with the numbers on bond pessimism, it’s worth noting what happened after the last such peak in equity weightings; it’s not necessarily a healthy sign.) That demonstrates the steady shifting of the tectonic plates in favor of the optimism that accompanies equities. For a more current number that demonstrates serious risk appetite, there’s bitcoin. (…)
What is strange about this, and disconcerting, is that the optimism is reaching these peaks in a situation where confidence in growth has declined, and fears of rising inflation and rates are back. Bonds indeed don’t look like a buy — but a lot is being built on the notion that they leave us no alternative but to buy something more risky.
Fearless
VIX is approaching post corona lows, but note the 2/8 futures spread collapsing in a much more extreme fashion. Nobody wants short term protection. (The Market Ear)
We’re almost through dangerous October, about to enter the seasonally strong period…