THE DAILY EDGE: 22 NOVEMBER 2023

BLACK FRIDAY SALE!

Every service I subscribe to is currently offering Thanksgiving discounts.

Seeking to better my “competition”, after 15 years, here’s the first ever Edge and Odds Thanksgiving sale.

Any new or existing subscriber, any new reader or non-reader, even anybody with zero interest in the blog, will get 50% off the regular price which, remarkably, has not change in 15 years!

This offer will remain valid until next Thanksgiving and will be retroactive to January 3rd, 2009, the launch date, even for those who found me later, or never found me.

And for my numerous non-American readers, for fairness sake, they will be allowed to apply the very same discount, no discrimination, during any other holiday period of their choice, valid until any other holiday period of their choice, and retroactive as far back as they wish.

To take advantage of this offer, simply do nothing. The discount will be automatically applied to your account, even if you don’t have one.

Please allow a reasonable number of days, weeks or months. We have been short-staffed here since day one.

The problem is that I only hire on a profit-sharing scheme and that has yet to appeal to anybody since I still refuse to embellish the blog with ads and pop-ups.

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My real Thanksgiving!

Sincere thanks are hereby given to all of you who have helped the blog with donations, large or small, occasional or regular.

I truly appreciate your mark of appreciation and altruistic generosity given that you are a minority helping all Edge and Odds readers.

Getting older, slower and sloppier, busy with 5 children and 11 grand-children, some in other biz with me (or rather me with them), and being short-staffed for reasons given or not above, I often cannot find the time/energy to send a thank you note. I apologize and I will try to improve on that even though I know I should not commit to that.

Rightly or wrongly, I always decide to work on the blog rather than use time to send thank you notes.

But here it is: Marc, Larry, Rick, Patrick, Joseph, Denis, John, Steven, Richard, David, just to name some of the recent donators, I hereby sincerely thank you all and salute your generosity.

To all other free riders, thank you for reading me, a very nice compliment in itself.

Denis

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The Fed Wants More Evidence Before Changing Rate Stance Officials highlighted risks of stronger-than-anticipated inflation and weaker-than-expected growth at their recent meeting

Federal Reserve officials were unwilling to conclude they were done raising interest rates when they decided earlier this month to extend a pause in rate increases.

But minutes of their most recent policy meeting suggested they might be comfortable holding rates steady for at least the rest of the year.

“All participants agreed that the committee was in a position to proceed carefully,” said the minutes of the Oct. 31-Nov. 1 meeting released on Tuesday. “Participants expected that the data arriving in coming months would help clarify the extent to which” a slowdown in inflation was continuing amid higher borrowing costs, the minutes said.

Since officials last met, none have made a strong case to lift rates at their next meeting, Dec. 12-13, even though several have said it was too soon to change their view that another rate increase is more likely than a rate cut.

The minutes said officials then generally saw the risks of raising rates too much versus raising them too little as better balanced than earlier this year. They continued to see risks of higher-than-expected inflation and lower-than-expected growth, the minutes said. (…)

The minutes said officials needed to see more evidence to “be confident that inflation is clearly on a path” to the Fed’s 2% target, which is calculated using a separate inflation gauge from the Commerce Department. (…)

Home Sales Fell to a New 13-Year Low in October

Existing-home sales for the full year in 2023 are on track to be the lowest since at least 2011, according to economist forecasts.

Existing-home sales, which make up most of the housing market, decreased 4.1% in October from the prior month to a seasonally adjusted annual rate of 3.79 million, the lowest rate since August 2010, the National Association of Realtors said Tuesday. October sales fell 14.6% from a year earlier. Sales have been near 2010 levels in recent months. (…)

The national median existing-home price rose 3.4% in October from a year earlier to $391,800, NAR said. (…)

Nationally, there were 1.15 million homes for sale or under contract at the end of October, up 1.8% from September and down 5.7% from October 2022, NAR said. That was the lowest inventory level for any October in data going back to 1999, Yun said. At the current sales pace, there was a 3.6-month supply of homes on the market at the end of October. (…)

The typical home sold in October was on the market for 23 days, up from 21 days a year earlier, NAR said. (…)

About 29% of October existing-home sales were purchased in cash, up from 26% in the same month a year ago, NAR said. (…)

(CalculatedRisk)

Shoppers Are Dipping Into Their Savings This Holiday Season Data company sees higher spending in November and December

Spending will rise 0.4% on a monthly basis during the holidays, according to an economic outlook from Caden, a data platform that pays 50,000 users to track their real-time spending. While that’s lower than recent months, it shows that consumption is still on the rise.

Higher outlays are predominantly being fueled by personal savings instead of debt, Caden’s findings show. The trend “is a response to the economic reality that people’s incomes are struggling to keep pace with the escalating costs of goods and services due to inflation,” according to a summary of the study’s findings from the company. Leftover balances from the economic stimulus packages of the pandemic have encouraged consumers, according to John Roa, Caden’s chief executive officer.

The problem is that this trend won’t last.

“The question is when the party runs out and those savings run out, where is it going?” Roa said. “We are seeing a paycheck-to-paycheck world. It’s not going to take long for that to dwindle.” (…)

From my Nov. 6 post Really Slowing?

Could savings save the day? Unlikely this time.

The savings rate fell to 3.4% in September, meaningfully lower than the 6.5% pre-pandemic average. It has very, very, very rarely, been lower…

…but even more rarely if we also account for consumer interest payments.

This next chart plots personal expenditures plus interest payments as a % of disposable income. It was 95.4% in September, very uncomfortably high looking at the last 30 years and significantly higher than pre-pandemic levels.

Total spending has already unusually diverged from disposable income (left chart) which is now 4% lower than expenditures. Whatever excess savings (deposits) remain, they are illusory since their purchasing power has been totally eroded by inflation.

• Best Buy’s sales slumped as demand for consumer electronics wanes. (Reuters)
• American Eagle and Abercrombie & Fitch also provided cautious guidance [yesterday] following similar remarks from other retailers that recently reported earnings. (Ed Yardeni)

Chicago Fed: Economic Growth Declined in October

The Chicago Fed National Activity Index (CFNAI) dropped to -0.49 in October from -0.02 in September. All four broad categories of indicators used to construct the index decreased from September and all four categories made negative contributions in October. (…)

The next chart highlights the +0.7 and -0.7 levels. The two callouts explain the significance of these parameters according to the Chicago Fed. (…)

Bloomberg

Canada’s inflation rate slowed to 3.1% in October, but rents surge

The Consumer Price Index rose 3.1 per cent in October from a year earlier, down from 3.8 per cent in September, Statistics Canada said Tuesday in a report. The result matched analysts’ expectations and was largely driven by gasoline prices, which tumbled 6.4 per cent over the month. Adjusted for seasonality, the CPI fell 0.1 per cent on a monthly basis. (…)

Prices for services rose at an annual pace of 4.6 per cent in October, accelerating from 3.9 per cent in September. (…)

Rents jumped by an annual rate of 8.2 per cent in October, up from 7.3 per cent in September. (This was the largest 12-month increase since Statscan changed its methodology for tracking rents in early 2019.) (…)

Excluding housing costs, the CPI increased by just 1.9 per cent annually in October. (…)

Goldman Sachs:

Excluding food and energy, CPI edged up by 0.2pp to +3.4% yoy. BoC-preferred CPI-Trim and CPI-Median declined respectively to +3.5% and +3.6% on a yoy basis and to +3.2% and +2.7% on a three-month average annualized basis.

On a seasonally adjusted monthly basis, headline CPI inflation declined to -0.1% in October from +0.1% in September. Monthly CPI inflation ex food and energy rose to +0.3% (vs. +0.2%), reflecting an acceleration in rent inflation, one-off adjustments in property charges, and an uptick in travel-related categories from low levels.

Today’s print confirmed the stepdown in sequential underlying inflation and should keep the BoC on hold in December and 2024H1.

NBF:

Canada’s record housing supply imbalance, caused by an unprecedented increase in the working-age population (874,000 people over the past twelve months), means that there is currently only one housing start for every 4.2 people entering the working-age population, a 5 standard deviation from the historical ratio of 1 housing unit started for every 1.8 people.

Under these circumstances, people have no choice but to bid up the price of a dwindling inventory of rental units. The current divergence between rental inflation (8.2%) and CPI inflation (3.1%) is the highest in over 60 years.

As today’s Hot Chart shows, there is no precedent for the peak in rental inflation to exceed the peak in headline inflation. Unless Ottawa revises its immigration quotas downward, we don’t expect much relief for the 37% of Canadian households that rent.

In the USA where immigration is not as problematic:

Eurozone property debts worse than pre-financial crisis, warn ECB

Commercial property companies in the eurozone have worse debts than they had before the global financial crisis in 2008, the European Central Bank (ECB) has said, as it warned the sector could struggle for years under the weight of high interest rates.

A commercial real estate boom is now unravelling in countries like Germany and Sweden, the ECB outlined in a report that examines the impact of the currency bloc’s record high interest rates, which stand at 4pc.

It said eurozone banks have around 10pc of loans exposed to the commercial property sector, which is grappling with declining profitability as it faces “a higher likelihood of facing debt servicing challenges” compared to the residential market, which is supported by a strong employment. (…)

The report added that commercial property could “play a significant amplifying role in the event of broader market stress” as larger firms grapple with debt levels “close to or above pre-global financial crisis levels”.

It comes as deep cracks emerged in the property market of the eurozone’s largest economy, Germany, where the construction of one of the country’s tallest buildings has suddenly halted midway after the developer stopped paying its builder. (…)

• German Budget Chaos Puts Industry’s Green Overhaul at Risk Spending freeze is blocking funds for EVs, steel plants

Germany’s emergency spending freeze is blocking funds for next-generation auto-industry and steel plants, jeopardizing the push to re-engineer Europe’s economic engine.

Berlin halted new spending authorizations this week after Germany’s top court ruled that some €60 billion ($65.7 billion) can’t be transferred into a green-technology fund. The money was earmarked for a range of projects including decarbonizing steel production and major semiconductor works led by Intel, TSMC and Infineon.

Sweden’s Northvolt AB was also due to receive part of pledged subsides from the climate fund for an EV battery plant in northern Germany, according to two people familiar with the situation. (…)

Germany is forecast to be the weakest alongside Italy among major euro-zone nations this year, and the spending issues are sowing further uncertainty. (…)

Last week’s ruling cast doubt on Germany’s entire financing plans, and senior officials have canceled some public appearances to deal with the upheaval. (…)

China Growth Accelerates in November China Services Looking Good. Manufacturing Lagging

The Chinese economy appears to be on the move again. Significant growth is evident in the Services sector. And Manufacturing, despite some companies still impacted by the after effects of Covid, is becoming more positive about the future.

The Services sector results from the latest Sales Managers Survey are very positive. The Market Growth Index is at a 25 month high. The Sales Growth Index is also up at an 8-month high, but more important, the Index registered a very high reading of 54.7 indicating rapid month on month expansion.

A recovery in confidence is also evident from the significant growth in November in job recruitment, with the Index now at a 26-month high.

Finally, the overall Services Index, which brings together the various readings from the individual indexes, is also reflecting significant growth, with the November reading at a 21 month high.

The Manufacturing survey results continue to suggest that the sector has problems, with a considerable number of companies citing some Covid related supply problems. But the rising Business Confidence Index, now at an 8-month high, suggests that a resumption of growth is likely in the early part of 2024.

Furthermore, price inflation seems to be a thing of the past, with the Manufacturing Price Index remaining below the 50 “no growth” line. And finally, the overall Sales Managers Manufacturing Index is now over the 50 “no growth” line and into positive territory.

In summary, the Chinese economy has some way to go before it’s growth starts to recall the heady days of 6%+ annual GDP growth. But there seems little doubt that in November, the large Services sector grew rapidly, and the Manufacturing sector is once again off the ground, with growing confidence building in many areas.

• Less than 30% of Japanese firms plan China expansion – survey

The number of Japanese firms planning to expand in China has fallen to less than 30% for the first time, according to a survey published on Tuesday, with economic slowdown, increasing competition and geopolitical tension putting many off.

The waning appetite for Japanese businesses to augment operations in Japan’s biggest trade partner, alongside the United States, underscores fraught bilateral ties between the east Asian neighbours.

In an annual survey by the Japan External Trade Organisation, a semi-governmental export promotion agency, 27.7% of 710 companies said they were expecting to expand operations in China in the next a year or two.

The percentage declined from 33.4% last year and 40.9% in 2021.

Some 31 firms attributed their downsizing to economic uncertainty and a sluggish market, while 15 blamed a slump in Japanese auto sales in China, the world’s top car market. (…)

Seven firms also noted rising geopolitical risks, with bilateral relations, rarely smooth, have been particularly strained over recent months.

China last month arrested a Japanese executive, an employee of Japanese drugmaker Astellas Pharma (4503.T), on suspicion of espionage. The arrest has had a chilling effect on business, Japanese officials say. (…)

• China Puts Country Garden on Draft List of Builders to Support Move signals financing help for defaulted real estate firms.

Country Garden Holdings Co. and Sino-Ocean Group have been included on China’s draft list of 50 developers eligible for a range of financing support, according to people familiar with the matter, signaling a pivot by Beijing to help some of the nation’s most distressed builders.

CIFI Holdings Group Co., another builder that has missed debt payments, was also included on the so-called white list, the people said, asking not to be identified because the matter is private. Regulators are set to finalize the roster and distribute it to banks and other financial institutions within days, the people said, adding that some details could change. (…)

• Chinese Developer Sunac Gets Loan From Huarong as Support Ramps Up

Sunac China Holdings Ltd. secured funding for one of its property units from a government-backed asset manager, in a further sign of support for the beleaguered real estate sector in China.

Shanghai Haolong agreed to a three-year loan of up to 3.5 billion yuan ($490 million) for a homebuilder half-owned by a Sunac subsidiary, according to an exchange filing Tuesday. Haolong is partially backed by China Huarong Asset Management Co., one of China’s biggest bad-debt managers. (…)

Sunac, the nation’s third-largest developer in 2021, was among the developers that defaulted, and this week became one of the first to complete a debt restructuring. The firm won court approval for a plan that covers an estimated $10.2 billion of creditor claims, $5.7 billion of which would be compensated with new dollar bonds. (…)

In Monday’s CHINA IMPLODING? NO, EXPLODING!, I noted President Xi’s first ever visit to the PBOC on Oct. 24 as well as the same day visit of vice premier He Lifeng to the China’s sovereign wealth fund. These were not impromptu courtesy visits, signs of an orchestrated strategy to seriously address the housing crisis.

Binance Founder Pleads Guilty, Steps Down as CEO Changpeng Zhao pleaded guilty to violating criminal U.S. anti-money-laundering requirements. Binance admitted wrongdoing and agreed to pay fines totaling $4.3 billion.

The chief executive of Binance, the largest global cryptocurrency exchange, stepped down and pleaded guilty to violating criminal U.S. anti-money-laundering requirements, in a deal that might preserve the company’s ability to continue operating, according to court documents.

Changpeng Zhao appeared in Seattle federal court Tuesday and entered his plea, according to court records. Prosecutors accused Binance, which Zhao owns, of facilitating transactions with sanctioned groups. Binance encouraged U.S. users to obscure their location so the firm could avoid complying with U.S. anti-money-laundering laws, prosecutors said. (…)

Zhao has agreed to pay a criminal fine of $50 million, although that amount might be reduced based on separate civil penalties he has agreed to pay, court records show. Zhao’s plea agreement isn’t publicly available yet. (…)

Zhao faces a maximum prison sentence of 18 months under federal sentencing guidelines. He will be sentenced at a later date.

The outcome resembles an earlier case that prosecutors brought against the executives of BitMEX, an exchange for trading crypto derivatives that was based in the Seychelles. Its former chief executive, Arthur Hayes, pleaded guilty to violating anti-money-laundering law and was later sentenced to two years of probation, avoiding a possible prison term of six to 12 months. (…)

The deal announced Tuesday doesn’t include a settlement with the Securities and Exchange Commission, which sued Binance and Zhao in June and alleged it violated U.S. investor-protection laws, the people said. Major crypto exchanges such as Binance have decided to litigate with the SEC, believing they can show that cryptocurrencies don’t qualify as the kinds of investments overseen by the SEC. (…)