Fed to Signal It Has Stomach to Keep Rates High for Longer Firmer price pressures could lead longer-term rates to rise as investors continue paring back expectations of cuts
(…) officials are likely to emphasize that they are prepared to hold rates steady, at a level most of them expect will provide meaningful restraint to economic activity, for longer than they previously anticipated.
With no new economic projections at this meeting and minimal changes expected to the Fed’s policy statement, Fed Chair Jerome Powell’s press conference will be the main event on Wednesday. (…)
Powell is likely to repeat a message he delivered two weeks ago, when he said recent data had “clearly not given us greater confidence” that inflation would continue declining to 2% “and instead indicate that it’s likely to take longer than expected to achieve
that.” (…)
The Fed’s rate outlook hinges on its inflation forecast, and the most recent data raises two possibilities. One is that the Fed’s expectation that inflation continues to move lower but in an uneven and “bumpy” fashion is still intact—but with bigger bumps. In such a scenario, a delayed and slower pace of rate cuts is still possible this year.
A second possibility is that inflation, rather than on a “bumpy” path to 2%, is getting stuck at a level closer to 3%. Without evidence that the economy is slowing more notably, that could scrap the case for cuts altogether.
Powell is likely to acknowledge that officials have less conviction about when and how much to reduce interest rates. (…)
At the same time, Fed officials have indicated that they are broadly comfortable with their current stance. This makes a hawkish pivot toward entertaining rate increases unlikely.
“Policy is well-positioned to handle the risks that we face,” Powell said on April 16. If inflation continues to run somewhat stronger, the Fed will simply keep rates at their current level for longer, he said.
As financial-market participants anticipate fewer cuts, longer-dated bond yields will rise. In effect, this achieves the same kind of tightening in financial conditions that Fed officials sought when they raised interest rates last year. Higher yields across the Treasury yield curve should ultimately hit asset values, including stocks, and slow the economy’s momentum. (…)
But a hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.
A key measure on wages will be released Tuesday morning by the Labor Department, which will report the employment-cost index for the first quarter. Fed officials consider that measure the most comprehensive measure of pay growth. Signs that wage pressures have continued to ease would likely allay concerns about stickier service-sector inflation. (…)
If and when the FOMC thinks about raising rates further, somebody will likely flash this chart during the meeting. Times have changed, haven’t they?
Source: BofA Global Research
China Manufacturing PMI: Business conditions improve amid fastest rise in new work in 14 months
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) rose to 51.4 in April, up from 51.1 in March. This indicated a sixth successive monthly improvement in the health of the sector, with growth the most pronounced in 14 months.
Underpinning the latest acceleration in manufacturing sector growth was better demand conditions. Incoming new orders expanded at the fastest pace in over a year, supported by improvements in underlying demand conditions and marketing efforts from manufacturers. Additionally, new orders from abroad expanded at the fastest pace for nearly three-and-a-half years. Global market demand improved at the start of the second quarter, according to panellists.
In turn, Chinese manufacturers raised their production levels at the fastest pace since May 2023, though that still resulted in additional backlog accumulation. Sub-sector data revealed that the investment goods sector recorded the fastest growth across the measures of new orders, output, and backlogs.
Purchasing activity meanwhile rose in line with higher production, further contributing to higher stocks of purchases in April. Anecdotal evidence revealed that some manufacturers also raised their holdings of raw material and semi-finished items for safety stock building. The level of post-production inventories similarly rose in April. Although marginal, this marked the first increase in warehouse goods in three months.
Despite rising new work inflows and capacity pressures, Chinese manufacturers remained cautious with hiring. Employment levels fell for an eighth straight month in April amidst resignations and redundancies due to restructuring efforts.
Additionally, average charges also declined alongside export charges even as input price inflation renewed in April. The rate at which average input costs rose was the fastest since October 2023 with higher metals, oil and other input material costs often mentioned by panellists. However, increased competition and promotional efforts aimed at supporting sales limited Chinese manufacturers’ pricing power. Intense market competition led businesses to slash prices, resulting in output prices declining for the fourth straight month.
Finally, sentiment among Chinese manufacturers remained positive at the start of the second quarter with firms staying hopeful that sales can rise as economic conditions improve. That said, the level of confidence eased from March to a four-month low amidst concerns over rising costs and increased competition.
- China’s Factory Activity Keeps Growing But Loses Some Steam China’s official manufacturing purchasing managers index fell to 50.4 in April from 50.8 in March
(…) Tuesday’s official data also show that production rose in April from March, while total new orders declined over the period and new export orders also fell, though both stayed in expansionary territory. (…)
If you only read the official PMI, you are missing the clear upturn in world manufacturing demand revealed by S&P Global’s survey. This is the WSJ’s headline today: China’s Factory Activity Keeps Growing But Loses Some Steam. S&P Global’s data on new orders and new export orders suggest exactly the opposite. The goods inventory down cycle is over and consumers keep buying goods amid this “very restrictive monetary policy”.
Bloomberg illustrates the different PMI gauges but new orders would better reflect what’s really going on.
Goldman has a longer term chart:
It is also interesting that China’s National Bureau of Statistics specified that “equipment manufacturing and high-tech manufacturing PMIs were 51.3 and 53.0, respectively” and that “they continued to be in the expansion range and were both higher than the overall manufacturing industry”. High-end manufacturing maintained rapid development.”
President Xi Jinping’s call to boost growth through green and IT industries is showing rapid success.
China Hints at Rate Cuts, Property-Market Support Leaders warned of rising uncertainty and signaled a new campaign to revive the country’s flagging economy.
At a Tuesday meeting, the Communist Party’s elite Politburo warned of “significantly rising external uncertainties,” an apparent reference to global geopolitical and economic frictions. It said it would gather the party’s top 370 or so officials for a plenary meeting, or plenum, in July to discuss economic development and reforms.
In a statement issued after Tuesday’s meeting and carried by the state-run Xinhua News Agency, the 24-member Politburo pledged to issue ultra-long-term special treasury bonds and local government special-purpose bonds more quickly and called for them to be put into use as soon as possible to provide a fiscal boost to the economy.
Both types of bonds are usually used to fund government-led infrastructure investment projects. Beijing said in March that it would issue ultra-long-term special treasury bonds equivalent to $138 billion as well as local government special-purpose bonds worth $539 billion.
The Politburo also said the government could use interest rates and bank-reserve requirement ratios to slash financing costs and offer more support to the economy. People’s Bank of China governor Pan Gongsheng signaled in March that the central bank could cut banks’ reserve requirement ratio to release more liquidity into the financial system, though no such easing policies have materialized since then.
On real estate, leaders said the government would study new measures to “digest existing homes” while optimizing incremental housing amid a prolonged property downturn. (…)
Cheaper Teslas? China Says ‘You Ain’t Seen Nothing Yet’ Despite a brutal price year, China’s large automakers are in surprisingly good shape. That means the EV price war will continue.
(…) Despite enormous overcapacity, the largest Chinese automakers still have big cash cushions. And gross margins at BYD, China’s market leader, actually rose last year. That means the global EV price war will continue—and probably get worse. (…)
BYD took the competition up a gear in February when it priced some of its plug-in hybrids at around $11,000, cheaper than equivalent gasoline-powered cars. Tesla responded by slashing prices by nearly $2,000 for its cars in China this month. Its Model 3 now starts at around $32,000 there. [$39k in USA, +22%] (…)
Around half of cars sold in China in the first three weeks of April were new-energy vehicles, which include plug-in hybrids, according to the China Passenger Car Association.
Moreover, price cuts last year were partly offset by plunging costs of raw materials such as lithium and nickel. Deeper cuts this year could be more painful with more stable commodity prices.
Yet the price war will likely still drag on for a while. Goldman Sachs estimates that BYD makes around 8,100 yuan, the equivalent of $1,118, per car, compared with 2,600 yuan for the whole EV industry in China. That means BYD has room to cut prices 7% while still being profitable.
And further cost savings and better economies of scale may give the company even more leeway. BYD is vertically integrated, making its own batteries and even chips, which allows it plenty of ways to shave costs. BYD actually improved its gross margin to 20% last year, from 17% a year earlier. (…)
Goldman says the top 13 listed Chinese automobile manufacturers, which represented 69% of the total passenger-car market, had 315 billion yuan of net cash at the end of 2023. Some of those are also state-owned.
Many Chinese EV makers will target exports, which command a price premium, to soothe the pain at home, especially since capacity has risen so fast over the past couple of years. Automobile manufacturing utilization rates fell below 65% in the first quarter, compared with 76% in the previous quarter.
Cheaper EVs are good news for consumers, and the green transition. But they are terrible news for most Western carmakers, especially those that are lagging behind.
How the TikTok Law Could Intensify the US-China Tech Spat The law is almost certain to lead to a Supreme Court case and retaliation against US interests in China.
(…) A ban of the immensely popular app has for years seemed like a long shot to overcome the effective lobbying and congressional dysfunction that have stifled nearly every other attempt to impose stricter regulations on tech companies. Then, improbably, the forces that govern the process of legislating in Washington suddenly aligned, and the provision was approved as part of an emergency bill authorizing tens of billions of dollars in aid to Ukraine, Israel and Taiwan. On April 24, President Joe Biden signed it.
This set up an inevitable legal challenge, probably on First Amendment grounds. “Make no mistake, this is a ban, a ban on you and your voice,” Shou Chew, the Singapore-based chief executive officer of TikTok, said in a video on the app the day the bill was signed. “Politicians may say otherwise, but don’t get confused. Many who signed the bill say the TikTok ban is the ultimate goal.” It also raised the chances that China will retaliate against a US company or industry. This spat over an app best known for silly dancing videos could be a pivotal moment in an escalating rivalry between the world’s two superpowers.
TikTok has about 170 million users in the US, and they spend significantly more time on it than people do on Instagram or Snapchat, according to app monitoring firm SensorTower. A Chinese company operating a giant consumer internet service in the West had always suggested an uncomfortable double standard. US-owned apps such as Facebook, Google, Instagram, Signal and WhatsApp aren’t allowed in China. (…)
In a flurry of classified briefings between that bill’s introduction in March and its inclusion in the foreign aid package, senior officials from the FBI and other federal agencies warned that the app is subject to Chinese national security laws that require turning over data and algorithms to the government in Beijing. They raised the possibility that the app could influence American politics. (…)
The proliferation of pro-Hamas videos on the app after the Oct. 7 attacks on Israel also swayed some lawmakers, as did a series of alerts TikTok sent in March, urging its adult users to contact their representatives to express opposition to the bill. The alerts triggered plenty of angry phone calls to Capitol Hill offices, but the maneuver may have backfired on TikTok by proving that the app could in fact manipulate the behavior of Americans, according to Representative Mike Gallagher, the Wisconsin Republican who until recently chaired the House China committee.
With no organized resistance from US tech companies, which could benefit from the elimination of a robust competitor, the TikTok provision was a last-minute addition to the foreign aid bill, the culmination of what one aide describes as the “thunder run,” a military term for sending a line of tanks into enemy lines with no warning. Combining the bills effectively forced the hand of skeptical senators, many of whom felt they couldn’t risk jeopardizing much-needed aid to Ukraine. (…)
ByteDance figures Beijing officials would oppose the sale of TikTok’s prized source code and recommendation algorithms, according to two people familiar with its thinking, who asked not to be named talking about politically sensitive matters. Executives are instead mapping out legal strategies and betting they can get an injunction to avoid an immediate shutdown, according to one of the people. (…)
The still hypothetical legal dispute, TikTok v. US, would almost certainly head to the Supreme Court, which would have to weigh the government’s security concerns against the free speech and “expressive interests” of both its users and the app’s corporate owner. The government would have some precedent on its side: The US has long restricted foreign ownership of media companies, radio stations and telephone networks. “If the question is ‘will this thing hold up in court?’ I think it’s more likely than not that it will,” says Alan Rozenshtein, a law professor at the University of Minnesota and former adviser to the Justice Department on cybersecurity and foreign intelligence.
It’s all but certain that China will retaliate against the US, say China watchers. The country could restrict US access to critical minerals or other key components of the tech supply chain. It also could go after companies such as Apple, Microsoft or Tesla, which have significant manufacturing facilities in the country and sell to Chinese companies and consumers. Apple Inc.’s dependence on China, where it gets one-fifth of its sales, makes it particularly vulnerable, though its contributions to the Chinese economy could protect it from reprisal. (…)
BTW, FYI:
- TikTok, Tesla Show US-China Battle Over Data Is Just Beginning Data fight threatens to reshape US-China trade relations
(…) New technology is creating new risks. Modern devices are becoming ever smarter, gaining unprecedented abilities to generate and transmit data. Cars collect information on drivers and passengers, while medical devices can parse and process personal healthcare intelligence. Washing machines, port cranes and even clothes connect to some sort of remote server. The AI era only promises to magnify those capabilities. (…)
Meanwhile, there is also a crucial war for talent:
The Global AI Talent Tracker 2.0
(…) what’s certain is that a large chunk of the tech world’s capital and talent will be deployed toward bringing AI applications to the real world. If anything, the competition among countries in this arena will be fiercer than ever—and much of that competition will be over the indispensable input of an AI ecosystem: talent.
Talent also happens to be one of the most clearly quantifiable inputs, which is why we are assessing the global balance and flow of top AI researchers and scientists.
Key Takeaways of 2023 Update
1. The United States remains the top destination for top-tier AI talent to work. Within US institutions, researchers of American and Chinese origin (based on undergraduate degrees) comprise 75% of the top-tier AI talent, up from 58% in 2019. Moreover, the United States remains far and away the leading destination for the world’s most elite AI talent (top ~2%) and remains home to 60% of top AI institutions.
2. Beyond the United States and China, the United Kingdom and South Korea, along with continental Europe, have slightly raised their game as destinations for top AI researchers to work. When it comes to AI researcher origin (based on undergraduate degrees), India and Canada have seen relative declines.
3. Meanwhile, China has expanded its domestic AI talent pool over the last few years to meet the demands of its own growing AI industry. Because China produces a sizable portion of the world’s top AI researchers—rising from 29% in 2019 to 47% in 2022—it is no surprise that more Chinese talent are working in domestic industry.
4. A similar dynamic appears to be taking place in India. While India remains a significant exporter of top-tier AI researchers, its ability to retain talent is growing. In 2019, nearly all Indian AI researchers (based on undergraduate degrees) opted to pursue opportunities abroad. But in 2022, one-fifth of Indian AI researchers ended up staying to work in India.
5. These developments in China and India seem to reflect a broader pattern over the last few years: top-tier AI researchers appear to exhibit less mobility overall. Just 42% of top-tier AI researchers in 2022 are foreign nationals currently working in a different country, down 13 percentage points from 2019—meaning more top-tier talent are staying put in their home countries.
Portion of top-tier AI researchers (top ~20%) working abroad vs. staying home
