Durable Goods Orders Unexpectedly Rise in August
New orders for manufactured durable goods unexpectedly rose in August, coming in at $284.75B. This is a 0.2% increase from the previous month and is better than the expected 0.5% decline. The series is up 3.5% year-over-year (YoY). If we exclude transportation, “core” durable goods were up 0.4% from the previous month and up 1.1% from one year ago. (…)
Great chart by VettaFi showing the impact from Transportation and Defense while Capex have flattened over the past 12 months.
- More CFOs Pull Back Spending Plans Due to Higher Interest Rates Forty-one percent of finance chiefs said current rates have pushed them to scale back capital expenditures
In the survey [by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Atlanta and Richmond], 41% of finance chiefs said current rates have forced them to pull back capital spending, while 42% said they have cut costs in other areas such as travel or advertising.
An additional 21% of respondents said they would curb capital spending, and 15% would pull back on other types of operational costs, if rates remain at current levels for another year or climb higher.
The remainder said their businesses aren’t sensitive to changes in rates, or that they weren’t sure at what rate they would pull back spending. The poll, conducted between Aug. 21 and Sept. 8, included CFOs from 320 companies.
The quarterly survey shows that CFOs are growing more concerned about higher borrowing costs. The last time the survey included the same question, in the fourth quarter of 2022, 32% of finance chiefs said they had pulled back on capital investments, while 29% said they had reduced other expenses.
Still, most finance chiefs have a positive outlook on the U.S. economy. When asked to rate their optimism about the economy on a scale of 0 to 100, CFOs on average provided a ranking of 56, up from 53 a year earlier. (…)
Government Nears Brink of Shutdown as Standoff Persists Speaker Kevin McCarthy rebuffed a bipartisan funding bill from the Senate in favor of a House plan driven by conservatives, as dim prospects for a deal raised the likelihood of a partial government shutdown.
- A Last-Minute Deal Averting Government Shutdown Is Unlikely Republican disarray weakens ability get concessions from Biden.
Canada Sees Fastest Population Growth Since 1957 on Influx of Immigrants Temporary residents grew by 46%, largest jump on record
The country’s population rose 2.9% in the 12-month period ending July 1, one of the world’s fastest growth rates, bringing the number of residents to 40.1 million. The jump was driven by the largest recorded increase in temporary residents in data going back to 1971. (…)
The number of non-permanent residents in Canada — a category that includes people on work or study permits as well as refugees — is now 2.2 million, or more than 5% of the total. (…)
The growth in the non-permanent population is “extraordinary” and was not planned by the government, Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by email. The increase can’t be sustained by the available supply of affordable housing, he said.
The last time Canada’s population grew faster was in 1957, nearly the height of the postwar baby boom and a period when the country was accepting Hungarian refugees who were fleeing Soviet repression. (…)
France looks at windfall levy to ‘take back control’ of energy prices
More to come…
John Authers: Rounding Up the Usual Suspects After a New Low Markets were supposed to have hit their bottom last October. Yet here we are again, with nowhere to hide. Now what?
Whose Fault Is This?
As ever, there’s a desire to apportion blame. Even more importantly, there’s a desire for a clear explanation, a narrative that is comprehensible. So it’s time to round up the usual suspects:
- Oil
(…) The latest numbers on inventories at Cushing, Oklahoma, published by the Department of Energy, showed a seventh successive weekly fall in the oil stockpile. The drawdown has been steady throughout the summer, and leaves the country vulnerable to further supply disruptions from sources beyond control, such as a cold winter or a hurricane in the Gulf of Mexico. (…)
- A Possible US Government Shutdown
- Derivatives
Colleague Lu Wang has a fascinating piece on a $16 billion JP Morgan fund that holds put options (conferring the right to sell for a given price, and used as protection against falling prices) that are on the verge of being triggered at the end of this week. If that happens, those on the other side of the options would be obliged to buy stocks, unwillingly. To guard against this, it makes sense for them to hedge by selling some stocks short, in a bet that they’ll fall. That will provide some profits to offset the losses they have to take.
When markets fall, there is always the risk that derivatives positions will mean that some individuals will take outsize losses. It’s difficult to blame an entire bear market on derivatives markets.
- The Federal Reserve
(…) the package of projections, in combination with the words of Chair Jerome Powell, sent the market into a funk. The 10-year bond yield has gained 50 basis points in the five trading days since that FOMC. Its three big jumps this month, marked on the chart below, were caused by the non-farm payroll data, the FOMC meeting, and Wednesday’s news on oil inventories.
(…) If the Fed wants some bang for its rate rises, it needs to leave them where they are for a while. It’s only recently that the notion has sunk in that the Fed really means it about keeping rates high for longer, and that is a problem. (…)
- The Yen
Foreign exchange, a series of zero-sum games in which someone has to win at someone else’s expense, offers the clearest fault lines. The greatest attention now focuses on Japan and China. The yen has dropped below 149/dollar. The level of 150, another bottom that appeared to have been reached last October, triggered intervention by the Japanese authorities last year. It’s difficult to see how much further the yen can be allowed to fall.
The greater issue for both Japan and China, however, might be the exchange rate between their own currencies. The yen has dropped to a level of 20 to the offshore yuan on two occasions in the last decade. The first time, in the summer of 2015, China responded with a poorly handled devaluation. The second time, in October 2022, Japan intervened to force its currency upward. Now, some move by Japan looks hard to avoid. As it’s still the world’s largest source of very cheap money, higher rates or bond yields there could be an issue elsewhere.
- Emerging Markets
The other typical victim of a strong dollar is the emerging markets complex. When the dollar exchange rate goes up, dollar-denominated debt gets more expensive to finance. (…) Now, the JPMorgan EM foreign exchange index, a popular benchmark, has dropped to fresh lows. There are inevitable risks in this.
- Banks
It was duration that precipitated the regional bank failures in March, as banks that had heavily invested in longer bonds were unable to access liquidity without taking losses. Judging by the share price of regional banks, which only made an unconvincing recovery and are sagging again, and even of the much larger Bank of America Corp., which is seen as vulnerable to further falls in bond prices, worries that duration will cause more financial accidents are still with us. (…)
At 4250:
- The S&P 500 is up 18.6% from its Sept. 30 2022 close when its trailing P/E was 16.2 and its Rule of 20 P/E was 22.5.
- Since then, trailing EPS have declined 2.5%, bringing the trailing P/E to 19.6 and the R20 P/E to 23.9.
- Ten year Ts were at 3.8%, now 4.6%.
- Core CPI was +6.3%, now 4.3%.
- Oil was $79/bbl, now $93/bbl.
China’s way to prevent a domino effect
Chain of events:
- Reuters on Sept. 7, 2022: China state firms takeover Evergrande’s $1.1 bln holding in Shengjing Bank
State-owned companies of the Chinese northestern city of Shenyang bought China Evergrande Group’s shareholding in Shengjing Bank in an auction for 7.3 billion yuan ($1.05 billion), Alibaba auction platform showed on Wednesday.
In July, Evergrande, the world’s most indebted property developer, said its unit, Evergrande Nanchang, had been ordered to pay an unamed guarantor 7.3 billion yuan for failing to honour debt obligations.
The unit has provided counter-guarantees in the form of a pledge of a total of 1.3 billion shares that it held in Shenyang-based Shengjing Bank, the firm said at the time. (…)
The 1.3 billion shares account for a 14.6% stake in Shenjiang Bank. Evergrande, which held 36.4% in the bank at the end of 2020, has been selling down its holdings in the bank since it slid into a debt crisis in the second half of last year.
- Reuters on Nov. 1, 2022: China Evergrande unit gets notice for $4.48 bln loan from Shengjing Bank
Debt-laden property developer China Evergrande Group said on Tuesday its unit received a notice of enforcement for unrecoverable funds from Shengjing Bank Co Ltd.
The bank said it failed to recover funds totalling 32.595 billion yuan ($4.48 billion), which was provided to the unit from 2020 to 2021, according to Evergrande. (…
- Buried within Reuters yesterday: China’s Shengjing Bank in $24 billion deal to sell assets to government-backed entity
Chinese regional lender Shengjing Bank (2066.HK) said on Wednesday it has agreed to sell a portfolio of assets, including certain loans and investments, among others, for 176 billion yuan ($24.07 billion) to Liaoning Asset Management.
Liaoning Asset will fund the purchase of assets by issuing special-purpose notes to the bank, the lender said.
Over 70% of the assets to be disposed are loans and the remainer include asset management plans, corporate bonds and deposits with banks, Shengjing bank said.
Liaoning Asset, which focuses on transactions of non-performing assets of financial institutions, is a unit of Liaoning Financial Holding owned by the finance authority in the Chinese province of Liaoning, where Shengjing Bank is based.
Last month, Shengjing Bank reported a 21.8% drop in its net profit attributable for half-year to 737.9 million yuan.
So, state-owned companies bought Evergrande’s stake in a bank that was a lender to Evergrande. Two months later, the bank called its $4.5B loan to Evergrande, which is unable to oblige.
The now distressed bank is “selling” a bunch of non-performing loans ($24B!!!) to another “government-backed entity”, getting paid, not with cash, but with “special-purpose notes” that will conveniently find their way to “performing loans”.
Voilà!
More to come.
- Finally, There’s More Money Than Fools in China Investors have become risk averse, shunning the markets in favor of bank deposits.
(…) For evidence of that changing sentiment, look no further than consumers’ savings data and the central bank’s quarterly urban survey. As of August, household deposits totaled a record 132 trillion yuan ($18 trillion), blowing past China’s entire gross domestic product last year. People keep on putting money into banks even as the People’s Bank of China cuts deposit rates.
It’s well-known the Chinese have been hoarding cash since the pandemic. But this behavior started as early as 2018. By then, households had already gone through a rollercoaster ride of excitements and disappointments. In fact, their preference for buying investment products, such as stocks, bonds and trusts, has been on a steady decline since the 2015 crash, according to the central bank survey.
This risk-off mentality creates a big headache for the government, in that it inevitably dampens new policies aimed at boosting market sentiment. (…)
The Shanghai Composite Index hovers at around 3,100, more than 40% below its record high in 2007. In the property market, existing home prices have fallen by at least 15% from their peak in more than half of China’s tier-2 and tier-3 cities. (…)
People have realized that taking risks doesn’t benefit them, at least not in the current political economy. They have money, but prefer sitting on the sidelines.
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