CONSUMER WATCH
From The Transcript:
- “The consumer remains resilient and consumer spending remains robust. As we look at both macro factors as well as Mastercard’s own data, we see that spending is quite healthy…Here in the US, we look at wage growth relative to CPI or inflation. And generally, as long as wage growth is higher than CPI, we believe consumers have purchasing power. And so far, that theory has been proven. (…) We see that charge-offs and delinquencies are now back to pre-pandemic levels but are leveling off. We certainly see a strong consumer sentiment.” – Mastercard (MA ) President Linda Kirkpatrick
- “I feel that we say the same thing over and over the last number of quarters, but the consumer continues to be very resilient through a time where I think we all would have thought there would have been more weakness at this point…We were saying before the conference, you go out and you go out to dinner, restaurants are packed. You travel. The plane I was coming on down here last night, was packed, not a seat on the plane. And so you see the signs that are out there that it’s still very, very active and I think that’s what you see in the underlying spend data.” – Wells Fargo (WFC ) CFO Mike Santomassimo
- “Consumers are doing what they do best, which is to consume…And importantly, all the credit numbers, the balance sheet side of the consumers is very strong” – American Express (AXP ) CFO Christophe Y. Le Caillec
- “And we’re seeing most of these on sales still selling front to back, meaning most expensive tickets to least. So we’re seeing strong demand at all price points….If we really have the best per-cap on-site spending right now at our theaters and clubs, just given it’s Q1, those numbers continue to be strong and show year-on-year growth. So all fronts are showing strong consumer demand globally” – Live Nation (LYV ) CFO Joe Berchtold
Eurozone economy moves closer to stabilisation in February as service sector ekes out growth
The seasonally adjusted HCOB Eurozone Composite PMI Output Index remained in sub-50.0 contraction territory in February. That said, having risen from 47.9 in January to an eight-month high of 49.2, the index signalled a near-stabilisation of the euro area economy. A rejuvenation in the service sector was evident, where activity levels rose for the first time since July last year. The downturn in the manufacturing sector, albeit cooling, continued to offset this, however.
There were noteworthy differences in economic performance across the countries included in the eurozone PMI. Solid expansions were seen in Ireland and Spain. (…) Italy also contributed positively, although the expansion here was mild. That said, these upturns were counteracted by the euro area’s two largest economies, France and Germany, which remained mired in contraction. Although France’s downturn eased, Germany saw its rate of decline quicken to the sharpest since last October.
The near-stabilisation of eurozone economic activity was in part due to a less marked reduction in new business intakes. Although private sector order books shrank, they did so to the softest degree since the slump in demand started in June last year. Better trends were apparent at the sector level, with both manufacturers and service providers seeing slower declines than at the beginning of the year. The greatest drag continued to come from export markets, however, with new business from non-domestic customers falling at a faster pace than seen for order books overall.
A slower rate of deterioration in demand caused the pace of backlog depletion to slow during February. Outstanding business volumes fell solidly, but to the weakest extent in eight months. Companies in the manufacturing sector continued to drive the reduction, sector data showed. Nevertheless, job creation picked up midway through the first quarter, despite the absence of capacity pressures. The rate of employment growth, albeit modest, was at a seven-month high and fractionally quicker than seen across the survey history on average. (…)
As for price trends, February survey data signalled an intensification of pressures across the eurozone. Input costs continued to rise, with the rate of inflation accelerating to a ten-month high. Steep increases in service sector costs were to blame, sector data showed, although manufacturing costs declined at a weaker rate than at the turn of the year. In turn, prices charged for eurozone goods and services increased at the fastest pace since last May.
The HCOB Eurozone Services PMI Business Activity Index for February provided a positive signal for the services sector as it moved into growth territory for the first time since last July. At 50.2, the index was up solidly from 48.4 in January and indicated a fractional improvement in output levels compared with the previous month.
The pick-up in activity coincided with a broad stabilisation of demand, with the respective index posting below but close to the neutral 50.0 threshold. Steadier sales performances were accompanied by a stronger uplift in service sector employment across the euro area. The rate of job creation quickened to an eight-month high in February. (…)
As has been the case over the past three years, inflationary pressures in the service sector were elevated during February. While not as severe as seen between 2021 and 2023, the rate of increase in costs did edge up to a nine-month high and was well above its long-term average. Similarly, prices charged rose at a sharp and accelerated pace.
China: Business activity increases modestly during February
The seasonally adjusted headline Caixin China General Services Business Activity Index edged down from 52.7 at the start of 2024 to 52.5 in February, to signal an increase in services activity for the fourteenth month in a row. That said, the rate of expansion was the softest seen since last November and modest overall. The upturn was also below the long-run series average.
The slower rise in business activity coincided with a further mild upturn in overall new work placed with Chinese service providers during February. New order growth was little-changed from January and remained slower than the average seen over 2023 as a whole. In contrast, services companies registered a solid and accelerated increase in new work from overseas. Notably, the improvement in foreign demand was the most pronounced since June 2023 amid reports of firmer customer demand across external markets.
After rising marginally in the prior two months, payroll numbers across China’s service sector fell in February. Though modest, the rate of job shedding was the quickest seen in over a year, with a number of monitored companies lowering their headcounts due to relatively subdued demand conditions. (…)
Average input price inflation meanwhile quickened from the start of the year, with firms often linking the latest rise in expenses to higher raw material and fuel costs. That said, the rate of increase was modest overall and remained slow by historical standards.
After a slight reduction in January, prices charged by Chinese services companies increased in February as firms looked to pass on additional expenses to customers. Though mild, the rate of charge inflation was the quickest seen since May 2023. (…)
The Composite Output Index was unchanged from January’s reading at 52.5 in February, to signal an expansion of overall Chinese business activity for the fourth straight month. Underlying data indicated that a slightly softer rise in service sector activity was offset by a quicker increase in manufacturing output, though rates of expansion were identical across both sectors and modest overall. (…)
China Sets Ambitious Growth Target for 2024 The 5% target signals Beijing’s confidence in the economy—or its willingness to roll out stimulus.
(…) For this year, achieving expansion of about 5% would require quarter-over-quarter annualized growth to average 5.3%, up from 4.2% in 2023 that excluded the first quarter’s reopening surge, analysts from Capital Economics wrote in a note last week, cautioning that Beijing might be underestimating the challenge of maintaining the same target as last year. (…)
In a sign of more direct support from Beijing, Li announced a plan to issue 1 trillion yuan of ultralong special central government bonds in 2024, which won’t be included in the fiscal deficit, marking the fourth such sale in the past quarter-century.
Beijing last issued these bonds in 2020, raising 1 trillion yuan worth of funds to support an economy then still reeling from the initial pandemic outbreak. Li said Tuesday that Beijing plans to issue more such bonds in the next few years to fund strategic priorities.
According to a separate report published Tuesday, the government said it would boost fiscal spending by 4% this year, less than last year’s target of 5.6%, while fiscal revenue was expected to grow by 3.3% this year, less than last year’s target of 6.7%. Officials are aiming for a fiscal deficit of 3% relative to GDP this year, lower than the revised 3.8% in 2023 but in line with initial plans for 3% from last year. (…)
Fiscal transfers from Beijing to local governments are set to rise to 10.2 trillion yuan, equivalent to about $1.4 trillion this year, up 4.1% from last year. Beijing will allow localities to issue a combined 3.9 trillion yuan worth of local government special-purpose bonds, which are mainly used to fund infrastructure projects, up slightly from last year’s 3.8 trillion yuan. (…)
Separately, China plans to increase military spending by 7.2% to 1.67 trillion yuan, equivalent to about $232 billion, mirroring the previous year’s increase, according to a draft budget report released Tuesday. Li said in his work report that the military would “devote great energy to training under combat conditions” as the country seeks to defend its interests and sovereignty.
On China’s most sensitive territorial question—the status of self-ruled Taiwan, which Beijing claims as part of China—Li reiterated the leadership’s pledges to “resolutely oppose separatist activities aimed at ‘Taiwan independence’ and external interference.”
Notably, Li’s report dropped references to “peaceful unification” with Taiwan contained in previous reports.
China to Mobilize Nation as It Fights US for Tech Supremacy The central government will raise R&D spending by about 10%
Beijing hammered home a longstanding goal to break an American stranglehold on key spheres, according to government work reports submitted to the nation’s legislature on Tuesday. The central government will increase spending on scientific and technology research by 10% to 370.8 billion yuan ($51.5 billion) in 2024, promote national champions and grant enterprises a central role in spearheading advances, according to the documents, which are closely scrutinized for clues to President Xi Jinping’s thinking.
Under Xi’s watch, China has expanded state control of strategically critical areas from semiconductor manufacturing to quantum computing. His deputies have initiated a so-called “whole nation” approach to driving tech advances, essentially coordinating a nationwide effort to funnel resources into breaking US strangleholds on key technology. The country as a whole spent 3.3 trillion yuan on basic research last year — about 2.6% of gross domestic product, according to the report. (…)
“We will pool our country’s strategic scientific and technological strength and non-governmental innovation resources to make breakthroughs in core technologies in key fields and step up research on disruptive and frontier technologies.” (…)
Against that backdrop, Beijing has endorsed the efforts of local champions such as Huawei Technologies Co., which stunned the US last year by designing and making a chip more advanced than Washington had thought possible. The government continues to support the emergence of homegrown tech leaders such as SMIC through subsidies and policy. (…)
BTW:
A wave of patriotic buying from Chinese consumers is helping local brands outdo foreign counterparts like Apple, whose market share fell below 16% in the first six weeks of the year, down from 19% a year ago, according to figures from Counterpoint Research. China’s homegrown champion Huawei is getting a larger slice — more than 16% now versus 9.4% a year ago. While competition and geopolitics are one side of the coin, a broader market malaise is also undermining Apple’s iPhone sales in China, which sank 24% over the first six weeks of this year. Apple’s shares have lost about 9% in 2024, missing out on the Big Tech rally. (Bloomberg)
Chinese patents surpass U.S.
For the first time, the number of international patents filed from inventors in China has surpassed applications from the U.S., according to a new report.
Patent data is a key indicator of science and technology prowess — and the economic and national security strength that comes with it.
- “[We’ve] never seen a country grow its patenting both at the rate and the volume” as China has, says Robert Atkinson, president of the Information Technology and Innovation Foundation (ITIF).
- It is a “pretty serious indicator” and “should be a wake-up call.”
Inventors in China applied for roughly 68,600 patents in 2022 through the Patent Cooperation Treaty, which allows inventors to file across many countries at once, according to a report published today from the National Science Foundation’s National Center for Science and Engineering Statistics (NCSES).
- There were about 58,200 U.S.-based applications the same year — the most recent year for which the data has been compiled.
- In 2015, the U.S. had twice as many applications as China, and in 2020 China pulled even with the U.S.
The growth patterns reflect the different growth rates of economies and science and engineering institutions, says report author Carol Robbins, a senior analyst at NCSES. Those rates sped up for some, like China, while others slowed down.
- There’s been “resilience in middle-income countries and in the developing world over the past several years,” Robbins says.
AI-related patents saw tremendous growth. In 2012, AI inventors in China were granted 650 worldwide utility patents — those given for non-obvious inventions. By 2022, that number climbed to more than 40,000.
- U.S.-associated AI patents also grew from about 920 to 9,400 during the same time.
- They encompassed different AI techniques (for example, machine learning), applications (i.e. computer vision or robotics) and fields where they might be used (life sciences, banking and others). This was all before ChatGPT stormed the scene at the end of 2022.
- According to the congressionally mandated report, China had the highest number of patents in the top three categories of patents issued — machine learning, computer vision, and personal devices and computing.
Utility patents are counted from the patents issued in a particular country, and the standard may differ.
- China “systematically over patents and the patents are not necessarily good,” Atkinson says.
- One factor is financial incentives in the country to file for patent protection.
For the first time, the biennial report looked at patenting in critical and emerging technologies identified in the CHIPS and Science Act.
- These include AI, advanced materials, semiconductors, quantum information science and tech, and biotech.
- About 190,000 USPTO utility patents were granted in these technologies — about 45% overall were granted to U.S. inventors.
- For many of the technology fields, the share granted to U.S. inventors was roughly 50%, but for some, it was less: 31% for energy-related technologies and 35% for advanced materials.
“Patents are an output, not an outcome,” Atkinson says. An abundance of patents doesn’t necessarily translate to a successful product or technology.
The report looks at invention and innovation around the world through several metrics.
- Patents are treated as a reflection of invention at the earliest stages of technology development.
- Trademarking is a measure of the other end of the development pipeline — inventions that have developed into innovations with real-world applications. China’s trademark activity in the U.S. grew massively between 2011, when there were about 2,500 trademarks assigned to China, and 2022, when there were more than 120,000.
Instead of focusing on how to address the rest of the world’s advances, the emphasis should be on “a renewed commitment to make sure the United States leads” in workforce, patenting, investment, education and innovation, says Dario Gil, director of IBM Research and a member of the National Science Board.
“The competitive environment for tech innovation is way tougher than it was” a decade ago, Atkinson says.
Data: Invention, Knowledge Transfer, and Innovation report from the National Science Foundation; Chart: Axios Visuals
SENTIMENT WATCH
JPMorgan Sees ‘Froth’ in US Stocks, While Goldman Says Rally Justified
The sharp rally in US stocks this year has left strategists at JPMorgan Chase & Co. and Goldman Sachs Group Inc. divided about whether a market bubble is forming.
To JPMorgan’s chief market strategist Marko Kolanovic, the dramatic rally in US equities and Bitcoin’s quick surge above the $60,000 mark signal yes. He sees those advances as indicative of accumulating froth in the market — conditions that typically precede a bubble when asset prices rise at an unsustainable pace. (…)
Meanwhile, David Kostin at Goldman Sachs is among those who thinks the risk-on mood is warranted, arguing Big Tech’s lofty valuations are supported by fundamentals. (…)
“Equities have moved up this year, even as bond yields rose and rate cut expectations unwound,” he said. “Investors may be assuming that the increase in yields is reflective of economic acceleration, but earnings projections for 2024 are coming down and the market appears too complacent on the cycle.” (…)
In contrast, Goldman’s Kostin said this time is different from other periods in history when stock prices have moved abruptly, typically beyond their value. Unlike prior such instances, the breadth of “extreme valuations” is far more contained this time, with the number of stocks trading at those multiples down sharply from the peak in 2021.
Moreover, in contrast to the “growth at any cost” mentality in 2021, “investors are mostly paying high valuations for the largest growth stocks in the index,” he wrote in a note Friday. “We believe the valuation of the Magnificent 7 is currently supported by their fundamentals.” (…)
So far, financial results are justifying the moves. Earnings per share for the cohort rose a combined 59% in the fourth quarter from a year earlier, compared with expectations of 47%, data compiled by Bloomberg Intelligence show.
But to Kolanovic, the environment is a head-scratcher, reflecting investor complacency and an underappreciation of risk.
The continued climb in stocks “may keep monetary policy higher for longer, as premature rate cutting risks further inflating asset prices or causing another leg up in inflation,” he said.
The 13-34w EMA trend: extended but unwavering…
Looking at net inflows to the dollar from abroad since the turn of the century, we get an inkling as to why the US has outperformed the rest of the world so convincingly since the GFC. Previous outflows turned into huge net inflows to the dollar. The growing problems with the Chinese economic model, in particular, seem to have spurred this:
Howell sums up as follows:
The S&P 500 looks extended in absolute terms when measured by US domestic liquidity flows, but it looks far more comfortably placed when Global Liquidity is the benchmark. Plainly, US equities have got much further to run if we can reassure ourselves that Wall Street has become the ‘World market’ for stocks. Indeed, this might be plausible given the dominance of US firms in tech and AI-applications?
The corollary is that anything that halts the flows into the US (such as change of course by the Bank of Japan or some intensification of the trade war) could imperil the bubble. That hasn’t happened, yet. His conclusion: Stay invested.
The bigger picture points to the kind of calm that can propagate bubbles. If stability begets instability (as proposed by the economist Hyman Minsky), then conditions look set fair for the market to go further. The Fathom Risk-Off Gauge (or FROG) in the chart below, calculated by London’s Fathom Consulting, incorporates changes in the macro cycle, market liquidity, and the correlation between bond and equity markets to derive a probability that markets are in a “risk-off” regime (in which bonds are favored over stocks). At this point, all looks set fair:
A move to make money cheaper has lit the touch paper for several explosions of past speculation. Several rate cuts are still, of course, expected before the end of this year. But much depends on whether they prove to be merited. As this chart from James Reilly of Capital Economics demonstrates, cuts that are not quickly followed by a recession tend almost invariably to push the stock market higher over the next year. When they’re followed by a recession, then in general they cannot save the stock market from a loss:
There’s no particular evidence that lowering rates into a slowing economy would do much to boost share prices. Cuts when the economy is OK are different; the cuts in late 1998 after the Russian default and the meltdown of Long-Term Capital Management were followed by a 38% gain.
This time, Fed rate cuts aren’t “a necessary condition for the stock market bubble to inflate further,” says Reilly. “After all, most measures of equity risk premia have scope to fall as hype around AI grows.” And, he points out, this stock market rally has gained strength even as bond yields have rebounded higher.
That might well be because the Fed’s pivot late last year has already done the job. Ed Cole of Man Group in London suggests that what has changed to allow stock prices to rise so fast is that the Fed “signaled a change in its reaction function,” so that is symmetrical again, rather than strongly focused on bringing inflation down.
That has been interpreted as a sign that the Fed “has our back again” and will even tolerate a bubble. And, he points out, financial conditions have already responded dramatically by getting much easier. Following Bloomberg’s financial conditions index, the backdrop has grown more lenient even as rate expectations have grown more hawkish: (…)
The IPO market gives a great clue as to whether exuberance has become irrational. Generally, newly floated companies don’t perform well for their first year or two, but investors still clamor to get a stake. Nicholas Colas of DataTrek International suggests this makes the level of excess on IPO days a great measure of whether sentiment is truly bubbly.
Thus, in 1999, the 476 IPOs (a record) saw an average first-day gain of 71% (a record by a massive margin, as this number had never before reached 25%). As Colas put it: “Scarcity value doesn’t explain the first day moves. Irrational exuberance does.”
In the post-pandemic bubble of 2020 and 2021, the average first day gains were 42% and 32%. There were 311 IPOs in 2021, the most since the top of the previous bubble in 2000. Last year, by comparison, saw only 54 IPOs with an average first-day gain of 12%. This market rally is about paying, perhaps overpaying, for quality.
Finally, a necessary word of caution. Valuation is more or less irrelevant when trying to predict the next year, but it’s everything you need to know to predict the next decade. That’s only a slight exaggeration. Subramanian’s note raising her target for 2023 also included this chart looking at price/earnings ratios compared to subsequent 10-year returns. The correlation is above 80%:
Following this to its conclusion, there is powerful reason to believe that the next 10 years won’t be very good. As there’s also pretty good reason, as we’ve seen, to expect share prices to rise healthily for a while longer. The implication is that after this rally, or bubble, reaches a peak, the market is set to go down for a while. The logic that might lead you to jump in to a potentially forming bubble will also require you to keep looking over your shoulder to decide when to sell.
