Pending Home Sales Plummet 7.1% in August
The index plummeted 7.1% in August to 71.8, a larger decline than the expected -0.8% decrease. This is the lowest reading for the index since April 2020 and is the second lowest figure in the historical series. Pending home sales are down 18.7% compared to one year ago. (…)
UAW Joins Wave of Union Strikes Looking for Big Wins The U.S. has lost seven million workdays to walkouts so far this year, the most in more than two decades.
(…) Eight strikes involving more than 1,000 workers each affected employers in August, matching the highest number since 2005, according to the Labor Department. The U.S. lost more than seven million workdays because of labor disputes this year through August, more than any full year since 2000—and the figures don’t include the United Auto Workers strike that started earlier this month. (…)
And more walkouts could be coming. On Tuesday, the union representing 53,000 housekeepers, bartenders and other workers in Las Vegas voted to authorize a strike to demand higher wages and better working conditions.
Roughly 75,000 workers at healthcare giant Kaiser Permanente could go on a three-day strike next week for increased pay and higher staffing levels. And last month, more than 26,000 flight attendants at American Airlines voted to authorize a strike as talks continue with the carrier over a new contract. (…)
Polls show a revival in public support for unions. Last year, 71% of Americans approved of labor unions, the highest share since 1965, according to Gallup. That number dipped slightly to 67% this year. (…)
Union members accounted for roughly 6% of private-sector workers last year, down from roughly 19% in 1981.
Strikes are proliferating as workers see them succeed. (…)
“Is this the other bookend to the [1981] air-traffic-controllers’ strike, where organized labor can really say: ‘We’re back?’ ” said Michael Lotito, a lawyer with Littler Mendelson who represents companies on workplace matters. (…)
- At Stake in the Strikes The Impact of the UAW Strikes on Output, Jobs and Inflation
(…) Even after the escalation, the total number of autoworkers striking today is fewer than half the number involved in the GM strikes of 2019. So why is the economic angst so high that for the first time ever a sitting president is visiting picket lines? The answer has to do with the fact that a well-capitalized union and an unusually tight labor market set things up for a potentially long standoff and adds a fresh headwind to current efforts to reduce inflation without crippling growth.
As we explain in this report, the longer the strike, the worse the impact on the economy. The near-term effects can be seen easily in terms of output measures such as auto assemblies and inventories. Longer term, higher labor costs mean more expensive vehicles, repairs and related services, which complicates the Federal Reserve’s job of getting inflation in check. (…)
The strike could also damage auto suppliers, particularly with some parts facilities now directly in the crosshairs. In looking at the biggest inputs used in motor vehicle & parts production, the top 10 manufacturing industries that supply to the auto sector represent about 5% of total value add in the economy (chart).
The expansion of the strikes at the end of last week targets this vulnerability. The UAW orchestrated walk-outs of all 38 parts-distribution centers operated by General Motors and Stellantis in 20 states. Ford has been excluded from further shutdowns for now as the UAW rewards the Blue Oval for progress in negotiations. (…)
The union is paying striking workers $500/week. Because the UAW has an $825M strike fund, if push came to shove, it could afford to keep up those payments to all the big-three members for 11 weeks. (…)
The latest ask from the UAW is reported to be a 30% pay increase over four years. It has left the automakers’ offers for approximately 20% pay bumps over four years on the table, suggesting that the ultimate wage increase will be at least about 5% annualized—above the 3-3.5% wage rate consistent with inflation returning to 2% over time, assuming the recent trend in productivity persists.
Furthermore, the UAW has asked for the reinstatement of automatic cost of living adjustments (COLAs), already conceded to by Ford, which would push nominal pay growth even higher and further impede wage growth from returning to a pace conducive to the Fed’s inflation target.
(…) the UAW’s initial demands would more than double the Detroit automakers’ average hourly labor costs up from $66 to $136. (…)
Evergrande’s Stalled Turnaround Plan Casts Doubt on Corporate Restructuring in China The embattled property giant is at risk of being broken up or liquidated after regulators in Beijing blocked key parts of its proposed turnaround plan, a foreboding sign for other troubled real-estate companies in China.
(…) “There are signs of a break in patience,” said John Han, attorney at Kobre & Kim in Hong Kong. “It only takes a few breakaway creditors to wind up a company, and the more surprises we see like this, the more likely it is that creditors will opt out in favor of a liquidation.” (…)
Evergrande submitted an application to approve some of its restructuring plan with the China Securities Regulatory Commission, the country’s primary securities regulator, according to people familiar with the matter. However, the regulator rejected the company’s application to issue new stock, stating that the company isn’t eligible to sell shares under commission rules, according to the people.
Days later, Evergrande said in a securities filing that commission rules may prohibit it from issuing new debt because its property development arm is under investigation by local authorities. (…)
Without the ability to swap old debt for a mix of new stock and debt, Evergrande’s restructuring is now effectively impossible to execute, according to the people. Evergrande’s offshore bondholders are likely to swallow some $15 billion in losses and seek its liquidation, likely netting them only a few pennies on the dollar in recoveries, the people said. (…)
With limited options available to them, companies like Evergrande could face liquidation by their foreign creditors, who can sue to take control of offshore parent companies in jurisdictions like the Cayman Islands or the Bahamas.
After taking over control of offshore companies, creditors can move to exercise their authority and attempt to replace the boards of mainland China companies and push for them to be broken up and sold for parts.
Courts in China recently have started to recognize the legal authority of liquidators from jurisdictions like Hong Kong, where Evergrande’s parent company is located. In 2022, a Shenzhen court recognized a Hong Kong court-appointed liquidator’s authority in the reorganization of Samson Paper.
However, in the Samson case, the Shenzhen court insisted that it sign off on any proposed asset sales that would involve the transfer of property abroad, throwing a potential obstacle in offshore creditors’ path if they can’t get judges’ signoff on their liquidation plans.
“Powers of liquidators once granted are subject to judicial oversight,” wrote a team of attorneys at Sidley Austin analyzing the court case. “Offshore creditors should not assume they can realize the onshore assets and remit the proceeds offshore.”
It looks like Beijing is letting Evergrande fail with foreigners taking the hit without being able to access the mainland assets. The government could then step in and organize a controlled liquidation over many years in order to protect the housing market.
As I showed yesterday (China Stopping Domino Effect), measures are already taken to prevent a domino effect from an Evergande bankruptcy.
The bad news is that the long-expected, slow moving accident is happening in real time now.
The good news is that Beijing seems ready to prevent a collapse.
BlackRock CEO Larry Fink Sees US 10-Year Yields Heading Above 5%
BlackRock Inc.’s CEO Larry Fink expects 10-year Treasury yields to top 5% as shifts in geopolitics and supply chains make inflation more persistent.
“My opinion is we’re going to have 10-year rates at least at 5% or higher because of this embedded inflation,” Fink said at the Berlin Global Dialogue forum on Friday. “We’re underestimating the change in geopolitics is so structurally inflationary.”
Fink is the latest Wall Street pundit to warn this week of the risk of higher rates and bond yields. Jamie Dimon, CEO of JPMorgan Chase & Co., said US interest rates could surge as high as 7% in a worst-case scenario, while Pershing Square Capital’s Bill Ackman is eyeing 30-year Treasury yields at 5%. (…)
On politics, Fink said politicians should provide more hope to voters to help bolster confidence. Asked whether he’d run for president, the 70-year-old joked: “I’m too young.”
Canada: Soft data does not suggest a soft landing at all
This morning, the CFIB released the results of its survey, which do not bode well for a strengthening of the economy in Q4 after the recent soft patch. The confidence index fell by 6 points in September, the biggest drop in 14 months. During the month, no fewer than 8 out of 10 provinces with the two largest provinces (Ontario and Quebec) showing the worst outlook.
At the sectoral level, 9 out of 13 sectors posted declines, also suggesting widespread economic weakness for the coming months. (…)
As today’s Hot chart shows, both consumer and SME confidence are now at recessionary levels. It’s true that the latest inflation data was enough to raise eyebrows, and the Bank of Canada may be tempted to raise rates again. In the minutes of its September decision, members agreed that weak demand would not be enough to convince them to lower their guard, and that confirmation was needed that the slowdown in demand was easing inflationary pressures.
This approach carries a high risk of overkill, given that the economy has yet to feel the full impact of the rate hikes already implemented. Let’s hope that the Bank of Canada will be patient by considering the significant weakening of the economy and the tightening of financial conditions brought about by higher global interest rates.
Encouraging drop in eurozone inflation in September but concerns remain
As expected, inflation fell in September – not just the headline rate but the core as well, which saw a strong decline from 5.3 to 4.5%. Base effects from government support last year ended, which was the main reason for the fall, but the good news is that the sharp decline was more than anticipated, as current price developments have become more benign.
Using our own seasonal adjustment, non-energy industrial goods inflation was negative month-on-month in September. Services inflation may have ticked up MoM and remains elevated although businesses in the service sector do indicate that pricing power is diminishing as demand for services weakens.
There are big differences between countries at the moment in large part driven by how energy translates to consumer prices, but also by differences in wage growth and economic performance. Spain saw inflation increase from a low base on the back of the increasing energy prices, while Germany, Netherlands and Belgium experienced sharp drops.
Higher oil prices are a concern for the inflation outlook. Energy prices did not fall as much as expected in recent months and are now set to contribute positively again to inflation as the oil price has risen above US$90 per barrel. We expect that this will mainly push eurozone inflation higher at the start of next year, and a contribution of one percentage point to headline inflation is not unimaginable.
This is well below last year’s impact, but still sizable enough to prevent headline inflation from hitting the European Central Bank’s 2% target as soon as forecast.
A big question is if this will again spark significant second-round effects. In the current, much weaker economic environment, businesses are indicating that pricing power is weakening. This seems to limit any significant resurgence of inflation.
Still, higher energy costs and high wage growth – in combination with current weak productivity – should continue to put upward pressure on inflation in 2024. With demand currently alleviating pressures, we do expect inflation to continue to gradually trend down. But as uncertainty about the pace of the normalisation of inflation will persist for some time, higher-for-longer interest rates from the ECB are definitely a realistic scenario despite September’s very promising drop in inflation.
Apple, China Met to Discuss Beijing’s Crackdown on Western Apps Country’s push to register foreign apps threatens to remove Facebook, Instagram and X from iPhone App Store in China.
Officials told Apple that it must strictly implement rules banning unregistered foreign apps, people familiar with the discussions said. Apple employees expressed concern over how the rules would be implemented and affect its users.
China’s move to restrict the apps would close a loophole in the Great Firewall that allows Chinese iPhone users to download popular Western social-media apps such as Instagram, X (formerly called Twitter), Facebook, YouTube and WhatsApp.
While China has for years blocked web access to those sites, iPhone users who download the services’ apps can engage on the platforms if they log on through a virtual private network, or VPN, that connects them to an internet server outside the country. Many users, especially younger people, do this even though China bans the use of unauthorized VPNs.
Combined, those five social-media apps have been downloaded from Apple’s app store more than 170 million times in China over the past decade, according to estimates by Sensor Tower, a market insights company. Some apps such as X were used to spread information and videos of protests against Covid rules in China that erupted late last year.
By next July, Apple will no longer be able to offer such apps in its China app store unless the app operators are registered with the government, under new rules issued by China’s Ministry of Industry and Information Technology in July this year.
Analysts say those operators are unlikely to register with the Chinese government because they could then have to comply with data transfer and censorship requirements, leaving Apple no choice but to remove them or face legal punishment.
(…) The Cupertino, Calif.-based company is likely to be among those most affected given its app store has more than 1,000 unregistered foreign apps. Chinese companies including smartphone makers Huawei Technologies and Xiaomi have updated their app store rules recently, urging app developers to complete registration procedures.
Apple hasn’t said anything publicly on the new rules, which investors say pose a threat to its services business in China. The services segment, which includes app-store transactions, plays an important role in Apple’s profitability. Anything disrupting the Chinese app store could eat into profits for its business in the country.
Apple has been making concessions in China for years to comply with the country’s increasing censorship and tightening rules on data security.
Beijing has increasingly been giving priority to national security over economic interests and is clamping down on cross-border information flows.
Apple has previously removed apps from its China store based on Beijing’s edicts, including thousands of videogame apps booted in 2020 after Chinese officials cracked down on games software without a government license. (…)
In Apple’s exchanges with officials, which haven’t been previously reported, the company was told the new rules are needed to crack down on online scams, pornography and the circulation of information that violates China’s tough censorship rules, people familiar with the discussions said. (…)
Last year, China’s top internet watchdog started requiring app stores to file their business details to it and to review apps and their developers before publishing them. The regulator this week said 26 app stores have passed through its registration process, including Samsung. Apple wasn’t one of them.
Some foreign companies are taking action after the latest app registration rules were released. In August, Amazon.com’s China business urged app operators who are using its network services in China to complete the registration. Apps could lose access to Amazon’s network services if they don’t follow the new government rules, Amazon China said in a statement posted online.
- U.S.-China Talks Pave Way for Xi-Biden Summit Both governments are discussing Washington visits by a senior Chinese economic-policy official and the foreign minister.