The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

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YOUR DAILY EDGE: 15 October 2024

EDGE AND ODDS’ Almost DaiLY CHAT (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): October 15, 2024

Israel Assures U.S. It Will Not Strike Iran’s Oil and Nuclear Facilities, Officials Say U.S. has sought to contain planned Israel counterattack on Tehran, hoping to head off wider Middle East war

(…) Some analysts say Biden should be wary of Netanyahu’s assurances about its attack.

“This wouldn’t be the first time he’s floated what Biden wanted to hear, then did an about face when he got blowback from the right,” said Frank Lowenstein, a State Department official in the Obama administration, adding that hard-liners in the Israeli government “are still pushing for an attack on the nuclear sites, or at least the oil facilities.” (…)

The U.S. signaled its support for Israel’s plans Sunday when it announced it was sending a missile-defense system designed to shoot down ballistic missiles to Israel. The decision marked a significant step in American efforts to bolster Israel’s defenses, putting U.S. soldiers on its territory.

The U.S. Army-operated Terminal High Altitude Area Defense, known as Thaad, is expected to begin arriving in the coming days, along with roughly 100 soldiers to operate it.

Bloomberg’s account:

Israel said it’s weighing the Biden administration’s misgivings over its planned counter-strike on Iran, after a report suggesting Prime Minister Benjamin Netanyahu may spare Tehran’s nuclear and energy facilities to limit potential escalation.

The Jewish state, though, also asserted it’s free to act how it sees fit after more than a year of battling Iranian proxy groups on its borders and fending off two direct long-range attacks from the Islamic republic, whose regional clout and nuclear aspirations Netanyahu casts as an existential threat. (…)

CHINA’S “WHATEVER IT TAKES MOMENT”

Behind Xi Jinping’s Pivot on Broad China Stimulus A bevy of bad news prompted action from the leader—but not a full U-turn

After resisting calls to take forceful steps to prop up the economy for two years, Xi relented in late September and ordered a barrage of interest-rate cuts and other measures to put a floor under growth.

But Xi didn’t give his economic mandarins a blank check. According to officials and government advisers close to decision-making, he wanted to bail out indebted Chinese municipalities on the brink of collapse and revive the stock market, without veering too far from his focus on letting the state drive China’s transformation into an industrial and technological powerhouse.

For Xi, the officials and advisers say, the near-term goal isn’t to massively stimulate demand but to fend off a brewing financial crisis—or “derisking,” in official lingo, thereby helping to stabilize the overall economy and achieve the 5%-or-so growth target for this year. (…)

The shift, tactical rather than strategic, is centered on the central bank and the state coffer providing liquidity support for local governments and big banks, the backbone of funding for the Chinese economy.

Another focus of the policies is to rescue China’s stock market, which has been on a losing streak for nearly four years. The People’s Bank of China is taking the unprecedented step of encouraging brokerage firms, insurers, and listed companies to tap central-bank or commercial-bank funding to buy stocks.

Support for household consumption has mainly come from a reduction in mortgage rates, part of a new push to arrest the multiyear downturn in the property market. Analysts estimate that the cut can save homeowners about 150 billion yuan, roughly $21 billion, in interest payments, a meager relief given the trillions of dollars in annual household consumption in China. (…)

“There is a severe shortage of cash among local governments,” said one of the people familiar with the situation. “Something has to be done to avoid a full-blown crisis.” (…)

The breadth of the easing measures taken by the central bank surprised even some financial officials in Beijing.

Notably, Pan Gongsheng, governor of the People’s Bank of China, announced plans to set up a facility aimed at guiding commercial banks to lend to listed companies for the purpose of share buybacks. Confused smile (…)

For investors and analysts, the ensuing trading frenzy has become reminiscent of what became known as the “Uncle Xi bull market” of 2015, when a government push to encourage stock investing resulted in an epic stock rally in the first half of that year. A big question now is whether the gains will take hold—or turn into a crash just as the 2015 market boom did. (…)

The Finance Ministry’s briefing on Saturday reignited hopes that some sizable fiscal support is in the offing.

“The unprecedented series of press conferences by Xi’s policy team demonstrates that Xi now recognizes that China’s economy is on the wrong track,” said Andy Rothman, China strategist at Matthews Asia, a U.S.-based fund manager, “and that a pragmatic course correction is urgently needed.” (…)

During his press conference on Saturday, Finance Minister Lan Fo’an indicated that a new round of fiscal support from the central government will be focused on backfilling local-government budget shortfalls, helping localities swap maturing debt for new borrowing, and beefing up the capital base of major state banks.

Absent from the measures are any significant moves to boost consumption. People close to the ministry say such measures are in the works but nothing substantial is imminent. (…)

The officials and advisers close to Beijing’s decision-making say the central government is putting budget constraints on some heavily indebted localities in exchange for them getting funding support from the center. While the move shows an attempt at much-needed financial discipline from Beijing, it could also lead to those localities reducing spending, potentially worsening the nation’s deflationary problems. (…)

Yesterday I wrote:

The Chinese government is now serious: it recognizes the size and scope of the problems and has adopted its own “whatever it takes” policies.

But so far, it has only thrown cash to the problems: more loans or loan guarantees to local governments, capital boosts to banks and large purchases of equities.

  • Local governments are expected to use the cash to buy the huge housing overhang from developers. This has been tried earlier this year on a smaller scale, only to find few actual transactions because the bids are deemed too low. Then there is the problem of what to do with those unfinished homes. Local governments are not housing developers.

  • Banks may be willing to lend but they need willing borrowers. Business and consumer confidence is at a historical low, not only on the economy but on the government itself. The healing will be slow.

  • China has but a flimsy social safety net. Chinese were saving some 29% of their income pre-Covid. It’s now 33%.

  • Artificially boosting equity markets may help confidence and create the beginning of a wealth effect but only for a very tiny slice of the population. For most Chinese, the 15-25% decline in their real estate investment has deflated their long-term dreams. The latest data offer no hope of a stabilization, let alone a recovery.

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  • Deflation is a real risk as shown above, complicating the necessary consumption revival. How many cash vouchers will be needed to restart demand?

  • The PBOC keeps cutting interest rates but inflation keeps declining, leaving real rates around 2.0%, the same as in 2021.

China Weighs $853 Billion Debt Swap to Rescue Local Governments Local bonds said to be issued through 2027 as part of stimulus

China is considering allowing local authorities to issue as much as 6 trillion yuan ($853 billion) in bonds through 2027 mainly to refinance their off-balance-sheet debt, people familiar with the matter said, a key part of the government’s plan to shore up the world’s second-largest economy.

Officials are weighing the proposal to let provincial-level governments replace so-called hidden debt — borrowing through companies and other financing vehicles — with new official bonds carrying lower interest rates, people familiar with the matter said, asking not to be identified discussing private information. The International Monetary Fund estimated these entities held over 60 trillion yuan of debt as of last year. (…)

While the debt swap wouldn’t address market calls for more central government borrowing and consumer stimulus, it would help free up cash at local governments to spend on everything from employee salaries to construction projects. (…)

David Li Daokui, a professor at Tsinghua University in Beijing and a government adviser, told Bloomberg Television that a debt swap that helps local governments pay back their delayed payments to companies and employees would be the “biggest economic stimulus,” putting the amount at 10% of gross domestic product.

Local governments’ expenditures — including spending on infrastructure — have shrank to 36% of GDP from 41% previously because they’re running out of cash, Li said in an interview Monday.

“Local governments have been using short-term debt and loans to finance 20-year, 30-year, long-term infrastructure projects,” he said, referring to the borrowing binge through financing vehicles, known in short as LGFVs. “So it is irrational, even crazy or draconian, for local governments to pay back their debt in the coming one or two years. This is a self-inflicted wound.” (…)

Simply making hidden debt visible…

A price war is spreading among offices, which are offering ever lower rents to retain tenants eager to move to cheaper towers. Others are resorting to giving out subsidies to lure back companies.

China’s office market predicament stems from an economic slowdown and a swelling supply. Major cities that were immune to challenges weighing on the commercial real estate sector abroad — such as rising interest rates and work from home — are now facing the strain. That’s adding to woes for developers and investors still contending with an unprecedented housing slump. (…)

“Insufficient leasing demand under economic weakness is a systematic issue hindering an office recovery,” said Lu Ming, a research director at Colliers International Group Inc. “When vacancy stays at an elevated level, such as above 20%, it’s hard to see office rents reaching a bottom in the near term.” (…)

It’s not just individual buildings that are emptying. Beijing’s city-wide vacancies jumped to 20.6% in the second quarter, the highest in at least 15 years, Colliers data show. In suburban Tongzhou, an emerging financial district that sought aspiration from London’s Canary Wharf, 65% is empty, Cushman & Wakefield Plc said. (…)

Shanghai office vacancies climbed to 21.5% in the third quarter, the highest in about two decades, according to CBRE Group Inc. They risk rising further this year on a supply pipeline that’s set to be the highest in five years. (…)

Across China’s major cities, net absorption of office space — a measure of occupancy — has only recovered to less than half of the pre-pandemic level in the first half, according to CBRE.

Weaker leasing demand has prompted developers to delay the construction and delivery of new stock. (…)

All this in an economy growing 4-5%!!

Single-day second-hand home sales in Shanghai exceeded the 1,000-unit threshold for the first time in four months yesterday, thanks to the latest real estate supporting policies introduced by the Chinese central government.

Some 1,334 pre-owned houses changed hands in Shanghai yesterday, according to the eastern Chinese city’s official data platform. (…)

During the seven-day National Day holiday ended Oct. 7, over 2,130 second-hand homes were sold in Shanghai, doubling the figure from a year earlier, according to data from Centaline Property’s local branch.

Shanghai’s second-hand home market continued to recover after the holiday, with sales in the following five working days nearing 900 units, up more than 60 percent from the five working days before the holiday, according to the Linping Residential Big Data Research Institute.

The total number of pre-owned home sales in Shanghai reached 7,949 units this month as of Oct. 13, up 7.7 percent from the same period in September and more than 75 percent from a year earlier. (…)

Even though the number of second-hand houses sold in Shanghai is increasing, the overall transaction volume remains insufficient, so there are no conditions for price increases, insiders told Yicai, adding that it will take some time for prices to rise again. (…)

IMF Warns Rise In Government Debt Could Be Sharper Than Anticipated If budget policies are unchanged, the IMF estimates that large increases in borrowing by the U.S., China and others will drive a rise in government debt to $100 trillion this year

Government debts are set to match the annual output of the global economy by the end of this decade, and could cross that threshold much sooner if economic growth is weaker or interest payments are higher than expected, the International Monetary Fund said Tuesday.

In its twice-yearly report on government finances, the Fund said spending cuts and tax rises of an unprecedented size would be needed over the coming five to seven years to stabilize or reduce debt.

“It’s time for governments to get their house in order,” said Era Dabla-Norris, deputy director for fiscal affairs at the IMF. “For all countries, a strategic pivot is needed to reduce debt risks.”

If budget policies are unchanged, the IMF estimates that large increases in borrowing by the U.S., China and others will drive a rise in government debt to $100 trillion this year, equivalent to roughly 93% of the world’s annual production of goods and services. The Fund expects government debt to rise further, and almost match annual world output by the end of the decade.

But that could happen sooner if government projections underestimate the rise in debt, as they have done in the past. The IMF said government debts tend to be six percentage points of economic output higher than anticipated after three years. (…)

In an extreme scenario, government debt could hit 115% of global output in 2026, while U.S. government debt could reach 150% of the country’s gross domestic product. According to the Fund’s calculations, U.S. government debt started the century at less than 60% of GDP, a proportion that has more than doubled already. (…)

In addition to the U.S. and China, the IMF expects to see increases in government debt in Brazil, France, Italy, South Africa and the U.K.. It said delaying action in those countries will make the cuts in spending and tax rises needed to stabilize borrowing even larger.

The new French government Thursday unveiled a budget that aims at narrowing France’s deficit to 5% of economic output by the end of 2025, and 3% by 2029 from 5.5% in 2023.

As it is, the IMF estimates that average cuts in spending and tax rises of between 3% and 4.5% of gross domestic product will be needed to stop the rise in debt at “high probability.” Those adjustments are larger than planned, and also larger than previous adjustments. (…)

Uncertainty about the future path of U.S. budget policy is likely to have a big impact on other governments, the IMF said. Increasingly, changes in the interest rates that governments pay are driven not by changes in their own circumstances, but by changes to the outlook for U.S. budget policy and the interest rates set by the Federal Reserve. (…)

But while spending pressures are on the rise, the Fund noted that “political redlines on taxation have become more entrenched.” (…)

Countries are likely to default more frequently on their foreign currency debt in the coming decade than they did in the past due to higher debt and an increase in borrowing costs, agency S&P Global Ratings warned in a report on Monday.

Sovereigns’ credit ratings overall have also weakened globally in the past decade. (…)

S&P Global Ratings analyzed defaults over the past two decades and found that developing countries are now relying more heavily on government borrowing to ensure foreign capital inflows. But when that reliance was paired with unpredictable policies, a lack of central bank independence and shallow local capital markets, trouble repaying often followed.

Higher government debt and fiscal imbalances prompted capital flight, which in turn intensified balance-of-payment pressures, depleted foreign exchange reserves and eventually cut off their ability to borrow – essentially a doom spiral that led to default.

It also warned that debt restructurings are taking significantly longer now than in the 1980s – with big consequences. (…)

Interest payments in soon-to-default countries tended to approach or even exceed 20% of government revenue in the year before default, and the countries also typically entered recession, while inflation rose to double digits, making life tougher for people there. (…)

In case you wonder, I found that the U.S. federal government interest payments are now 11.9% of revenues. They reached 14.1% in 2007 and 22.2% in 1998.

AI CORNER

Google Backs New Nuclear Plants to Power AI Startup Kairos Power plans to build small reactors to help supply electricity to the tech company’s data centers, in a first-of-its-kind deal in the U.S.

Google will back the construction of seven small nuclear-power reactors in the U.S., a first-of-its-kind deal that aims to help feed the tech company’s growing appetite for electricity to power AI and jump-start a U.S. nuclear revival.

Under the deal’s terms, Google committed to buying power generated by seven reactors to be built by nuclear-energy startup Kairos Power. The agreement targets adding 500 megawatts of nuclear power starting at the end of the decade, the companies said Monday.

The arrangement is the first that would underpin the commercial construction in the U.S. of small modular nuclear reactors. Many say the technology is the future of the domestic nuclear-power industry, potentially enabling faster and less costly construction by building smaller reactors instead of behemoth bespoke plants.

“The end goal here is 24/7, carbon-free energy,” said Michael Terrell, senior director for energy and climate at Alphabet’s Google. “We feel like in order to meet goals around round-the-clock clean energy, you’re going to need to have technologies that complement wind and solar and lithium-ion storage.” (…)

Last month, Constellation Energy and Microsoft strucka deal to restart the undamaged reactor at Pennsylvania’s Three Mile Island, the site of the country’s worst nuclear-power accident. Earlier this year, Amazon purchased a data center at another Pennsylvania nuclear plant.

The 500 megawatts of generation that would be built by Kairos for Google is about enough to power a midsize city—or one AI data-center campus.

The agreement answers questions that have bedeviled smaller-reactor designs: What customer would pay the higher price for a first-of-a-kind project? And who would order enough to get an assembly line started? The concept, which remains to be proven, is that building the same thing over and over in a factory would drive down costs.

Kairos plans to deliver the reactors between around 2030 and 2035. Financial terms weren’t disclosed, but the companies entered into a power-purchase agreement, similar to those used between corporate buyers and wind- and solar-energy developers. (…)

Instead of water, which is used in traditional reactors, the Kairos design uses molten fluoride salt as a coolant. The units for Google will include a single 50-megawatt reactor, with three subsequent power plants that would each have two 75-megawatt reactors, Kairos said. That compares with about 1,000 megawatts at reactors at conventional nuclear-power plants.

Kairos will have to navigate complex approvals through the U.S. Nuclear Regulatory Commission, but already has clearance to build a demonstration reactor in Tennessee, which could start operating in 2027. (…)

Nearly 20% of U.S. power comes from nuclear plants, but the pipeline of big, new projects has been halted because of high costs and long timelines. (…)

In the near term, analysts expect more natural-gas-fired power plants to be added to fuel the country’s appetite for data centers, new manufacturing, heavy industry and transportation.

See also: Power Play

VW, BMW and Mercedes Are Getting Left in the Dust by China’s EVs

Ryan Xu was a dream customer for Germany’s automakers. The Guangdong-based entrepreneur and her husband own a Porsche 911 and a Mercedes-Benz G-Class and were among the first buyers of the electric Porsche Taycan.

But her views on German cars have soured as Chinese consumers increasingly favor tech refinement over traditional selling points like horsepower and handling. The software systems in the Taycan, which costs well over $100,000, were “terrible,” the 36-year-old mother of three said. It was “just an electrified Porsche — and that’s it.” (…)

After dealing with braking and other quality issues, the Xu family sold their Taycan and bought an ET5 from Chinese brand Nio Inc. The car was about a third cheaper than a Mercedes EQE, which Xu also considered, but offered a more luxurious interior design, smooth voice controls, and greeted their kids by name as they climbed in.

“German cars can hardly match” that level of technology, said Xu, who runs a business with her husband. Mercedes, BMW and Audi “can hardly be seen as luxury cars now.” (…)

While German automakers still control nearly 15% of the Chinese market, that’s down from a quarter before the pandemic and worse yet, their share of EVs is less than 10%. Without a quick turnaround, the slump risks turning into a rout and tipping German’s Big Three into an existential fight. As it is, VW, Mercedes and BMW are each only worth about half of BYD’s stock-market value. (…)

Even more than other international peers, Germany’s automakers have gone all in on China. While some rivals have cut their losses, the Germans aren’t giving up, shifting more resources in an effort to claw back market share. But it looks like an uphill fight as Beijing actively seeks to build up its own manufacturers. (…)

As a group, Germany’s carmakers operate a network of over 40 factories — more than in their homeland. That’s too much investment to simply give up on — and explains why they oppose the European Union’s plans to levy tariffs on China’s cheap electric cars. (…)

A few weeks after the auto show, VW Chief Executive Officer Oliver Blume ousted the head of software unit Cariad in the latest effort to accelerate and improve technology. Alongside new Chinese partnerships for autonomous driving, infotainment and user experience, VW also invested in Guangzhou-based Xpeng to underpin a plan to build cars using the startup’s EV expertise.

After a profit warning in September, one of the first actions by Mercedes CEO Ola Källenius was to fly to China to check on progress in reshaping its presence there including tapping CATL for batteries and Tencent Holdings Ltd. for digital services. BMW responded by joining forces with Great Wall Motor Co. to build EVs for its Mini brand.

The cumulative result is that German cars will become progressively less German in their largest market. The expansion is also exactly the opposite of the government’s aim to reduce exposure to China, according to Gregor Sebastian, an analyst at Rhodium Group.

Clinging to their position in China is “a huge gamble,” he said, noting that the German state might need to bail them out if it all goes wrong. “They’re hoping they’re too big to fail.” (…)

EVs are essentially large ipads on wheels. It’s the software, stupid!

New EV manufacturers built their own software from A to Z while legacy manufacturers attempt to fit their old, limited software into EVs and plug add-ons or third-party software hoping they will integrate smoothly. They just don’t.

TRULY AMAZING:

This chart shows the U. Michigan consumer expectations index by party affiliation. (The Daily Shot)

Source: @TheTerminal, Bloomberg Finance L.P.

YOUR DAILY EDGE: 14 October 2024

New feature: EDGE AND ODDS’ DaiLY CHAT.

Most days, I will provide a link to an AI generated chat on the day’s post courtesy of Google’s NotebookLM. Not totally satisfying but worth offering to readers on the go. No support charts however and some AI generated conclusions not really mine….

And there is much more on the blog itself.

And if you sense hallucinations, editorializing and patronizing, I will totally fault AI Winking smile.

October 11, 2024

October 14, 2024

CONSUMER WATCH

US Households in Great Shape

US households have experienced significant gains in stock prices and home prices over the past 15 years, and Fed hikes have generated significant cash flows to owners of fixed income.

As a result, the debt-to-income ratio looks much better for US households compared with other countries, including Canada and Australia, see the first chart below.

At the same time, credit card debt for US households is at very low levels and declining.

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U.S. consumers remain resilient with solid spending in the third quarter, two of the country’s biggest lenders said on Friday, although there are signs higher inflation has stretched some Americans on lower incomes.

Strong earnings from JPMorgan Chase JPM.N and Wells Fargo WFC.N and upbeat comments from their top executives should further ease investor worries that elevated borrowing costs were weighing on consumers and pushing the economy to the cusp of a downturn, even as JPMorgan hiked provisions for soured loans.

“Overall, we see the spending patterns as being sort of solid,” said Jeremy Barnum, chief financial officer of JPMorgan, the country’s largest lender and a bellwether for the U.S. economy, adding spending had normalized from a post-pandemic bounce when Americans splurged on travel and eating out.

Barnum said spending patterns were “consistent with the narrative that consumers are on solid footing and consistent with a strong labor market and the current central case of a kind of ‘no-landing’ scenario economically.”

Wells Fargo Chief Financial Officer Michael Santomassimo told reporters that spending on credit and debit cards, while down a little from earlier this year, was still “quite solid.”

The bank reported debit card purchase volumes and transactions were up nearly 2% year-on-year, while credit card point-of-sale volumes were up 10%. At JPMorgan, year-on-year debit and credit card sales volumes were up 6%. (…)

Where it’s not so strong:

Another Huge Federal Deficit in Fiscal Year 2024 Despite Surging Corporate and Other Tax Collections

The federal government’s budget deficit was $1.8 trillion in fiscal year 2024 (which ended in September), according to preliminary analysis by the Congressional Budget Office (CBO)— lower than the $1.9 trillion deficit CBO forecast in June as tax revenue came in slightly higher and spending slightly lower than expected.

Nonetheless, this marks the third largest deficit ever recorded in nominal terms, after the pandemic deficits of 2020 and 2021, which were $3.1 trillion and $2.8 trillion respectively.

The deficit in FY24 was about 6.4 percent of GDP after accounting for recent revisions and expected economic growth, larger than any deficit in records going back to 1930 except the years around World War II, the 2008 financial crisis, and the pandemic.

A major source of the growing deficit is net interest on the public debt, which grew 34 percent to $950 billion in FY24. Interest on the debt is now the second largest federal expenditure after Social Security, which costs $1.5 trillion, surpassing defense spending of $826 billion and Medicare spending of $869 billion.

As currently measured, interest paid on the debt in FY24 was about 3.3 percent of GDP, which (after adjustments for comparability) would be the highest since 1992 and nearly the highest in records going back to 1940. Interest on the debt as a share of GDP is set to enter unchartered territory in the new fiscal year, surpassing the high-water mark set in the early 1990s. (…)

Overall, CBO estimates spending grew 10 percent in FY24 to $6.8 trillion. At about 23.4 percent of GDP, federal spending in FY24 was above the prior 20-year average of 22.0 percent of GDP.

Federal tax collections grew 11 percent to $4.9 trillion, topping the previous all-time high in 2022. As a share of the economy, federal tax collections reached about 17.1 percent of GDP—higher than the prior 20-year average of 16.6 percent and roughly matching the average over the 20 years prior to the 2017 Tax Cuts and Jobs Act (TCJA). Federal tax collections since the TCJA have averaged about 17 percent of GDP.

The largest source of revenue, individual income taxes, grew 11 percent to $2.4 trillion in FY24, while payroll taxes grew 6 percent to $1.7 trillion. By far the fastest-growing source of revenue was corporate income taxes, which grew 26 percent to $529 billion—$109 billion higher than the prior year and higher than any other year on record. Other receipts grew 12 percent to $255 billion.

As CBO notes, part of the reason both corporate and individual income taxes grew so much in fiscal year 2024 is because tax deadlines were postponed from fiscal year 2023 due to federally declared disaster areas. However, the growth in corporate tax revenues stands out, even after adjusting for the shift. Average corporate tax collections over the last two years reached $474 billion, $49 billion higher than the previous record high of $425 billion in 2022. (…)

How can it be that corporate tax collections now meet or exceed the average levels seen before TCJA, when a major part of that law reduced the corporate tax rate from 35 percent to 21 percent?

The main reason is that TCJA not only reduced the corporate tax rate but also substantially broadened the corporate tax base. TCJA limited deductions for net interest expense, net operating losses, and fringe benefits, required R&D expenses to be amortized over 5 or 15 years, repealed the domestic production activities deduction, and reformed international taxes. In total, these offsets were estimated by the Joint Committee on Taxation (JCT) to raise more than $1 trillion over a decade, offsetting more than three-quarters of the $1.3 trillion cost of reducing the corporate tax rate. (…)

Another reason corporate tax collections have grown so much is that TCJA reforms boosted economic growth and profits while encouraging companies to report more profits for tax purposes. (…)

Nonetheless, growth in spending, particularly interest on the debt, has swamped much of these gains, producing another year with an alarmingly high deficit.

U.S. Producers’ Selling Prices Held Flat in September

The producer-price index was unchanged last month compared with August, versus the 0.1% increase economists polled by The Wall Street Journal had expected. Over the past 12 months, producer prices have risen by 1.8%.

In September, a 0.2% increase in producers’ services prices offset a 0.2% decline in goods prices. (…)

China’s Deflation Problem Worsens on Weak Consumer Prices Producer prices have declined for 24 straight months

The consumer price index inched up 0.4% from last year, although that was boosted above zero only by a jump in fresh vegetable prices. Core CPI rose 0.1% in September, the lowest since February 2021, while producer inflation fell for a 24th straight month, according to data from the National Bureau of Statistics on Sunday. Producer inflation fell 2.8%, year-over-year, slightly more than the 2.6% drop economists had predicted.

Overall food inflation climbed 3.3% in September from a year ago, while the cost of fresh vegetables surged 22.9% after gaining 21.8% in August, boosting inflation by 0.48 percentage point. Adverse weather and seasonal demand ahead of a weeklong holiday in China likely pushed up prices for fruits and vegetables. (…)

China is facing the longest period of deflation since the 1990s, with a broad measure of economy-wide prices falling for five straight quarters through June — a stretch that likely continued through September. (…)

Weak consumption and a rapid rise in output have led to intense price wars in sectors including electric vehicles and solar. Prices of so-called transportation facilities including cars dropped 5.3%, while automobile manufacturers saw their sale prices decline 2.3%.

Falling prices are a bad sign for the economy. Deflation could lead to a vicious circle by driving down spending and investment, which in turn lead to weaker economic growth and higher unemployment.

  • On a MoM basis, non-food CPI fell 0.2% in September after +0.2% in August.
  • Core CPI was +0.1% YoY in September after +0.3% in August.
  • On a monthly basis, China’s PPI dropped 0.6% in September, compared with a 0.7% month-on-month decline in August. Goldman Sachs’ calculations put the annualized decline at 9.0% after –5.6% in August.
  • Nonfood prices in China fell 0.2% on year last month, reversing a 0.2% rise in August due to a bigger fall in energy prices.
  • PPI-Consumer Goods was down 1.3% in September vs –1.1% in August.

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Beijing, we have a big demand problem!

Local governments will be allowed to use special bonds to buy unsold homes, Finance Minister Lan Fo’an and his deputies announced at a briefing Saturday, without giving an amount. Lan hinted at room for issuing more sovereign bonds and vowed to relieve the debt burden of local governments, signaling a possible rare revision to the budget that could come in the next few weeks.

“The central government still has quite large room to borrow and increase the deficit,” Lan said, without providing a time frame. (…)

Officials said China will also issue special sovereign notes to boost capital at its largest state-owned banks, a move expected to spur lending to lift the economy. (…)

Pang and some other economists expect more details of fiscal stimulus to be published after a meeting of top lawmakers in the coming weeks, including the sale of more treasury debt and a mid-year revision of the budget. (…)

“The tone is positive — the MOF will likely add new quota of treasury and local bonds,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “We expect 1 trillion yuan of ultra-long treasury and 1 trillion yuan of local bonds to be announced.”

Ahead of the event, investors and economists surveyed by Bloomberg expected the government to commit as much as 2 trillion yuan in new fiscal stimulus. (…)

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc., said allowing the use of the bonds for more purposes is “significant” because it could lead to as much as 1 trillion yuan of cash currently idling to trickle through the economy. (…)

And while he didn’t give an amount, Lan said the size of the one-off effort to raise the local government limit to swap off-balance sheet debt will be the “largest in recent years.”

Goldman Sachs Group Inc. economists led by Lisheng Wang expect policymakers to enlarge the local government debt swap plan to around 5 trillion yuan for multiple years. This compared to about 1.5 trillion yuan for a similar initiative last year, according to an earlier estimate by UBS AG economist Wang Tao.

Fiscal support has been the biggest missing piece in a stimulus package Beijing started to deploy in late September, in an unprecedented push led by the central bank that ranged from interest-rate cuts to aid for the property and stock markets.

More expansionary public spending is deemed crucial to reviving the world’s second-largest economy, which is in deflation and risks missing the government’s 2024 growth target of around 5%.

Still, the MOF offered only limited direct boost for consumption at the briefing and no indication of cash handouts to families on a large scale — something Beijing has long resisted due to concerns over what it calls “welfarism.”

“There’s still a long way to go to see the government shifting its stimulus focus to consumption,” said ANZ’s Xing. “Between boosting growth and preventing risks, the government looks to be picking the latter at this stage.”

The Chinese government is now serious: it recognizes the size and scope of the problems and has adopted its own “whatever it takes” policies.

But so far, it has only thrown cash to the problems: more loans or loan guarantees to local governments, capital boosts to banks and large purchases of equities.

  • Local governments are expected to use the cash to buy the huge housing overhang from developers. This has been tried earlier this year on a smaller scale, only to find few actual transactions because the bids are deemed too low. Then there is the problem of what to do with those unfinished homes. Local governments are not housing developers.
  • Banks may be willing to lend but they need willing borrowers. Business and consumer confidence is at a historical low, not only on the economy but on the government itself. The healing will be slow.

  • China has but a flimsy social safety net. Chinese were saving some 29% of their income pre-Covid. It’s now 33%.
  • Artificially boosting equity markets may help confidence and create the beginning of a wealth effect but only for a very tiny slice of the population. For most Chinese, the 15-25% decline in their real estate investment has deflated their long-term dreams. The latest data offer no hope of a stabilization, let alone a recovery.

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  • Deflation is a real risk as shown above, complicating the necessary consumption revival. How many cash vouchers will be needed to restart demand?
  • The PBOC keeps cutting interest rates but inflation keeps declining, leaving real rates around 2.0%, the same as in 2021.

China Exports Growth Slows in Blow to Economy’s Bright Spot Shipments to many markets fall, US and EU demand slows

Exports climbed just 2.4% in dollar terms from a year earlier to almost $304 billion, the lowest level since May, the customs administration said Monday. Shipments to key markets including Japan, South Korea and Taiwan all fell, while exports to the European Union and the US marked their slowest rise in at least four months as politicians ramped up tariffs.

Russian purchases of Chinese goods soared to a record $11 billion, as Beijing continues to shield Moscow from economic isolation after Western companies producing everything from cars to phones quit President Vladimir Putin’s nation due to sanctions to punish his military aggression. (…)

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Chinese exports have powered the economy this year with shipments through September soaring to the second highest value on record. Weak consumer spending at home, however, has dampened the appetite for foreign products spurring a record trade surplus, and prompting US President Joe Biden and others to impose trade curbs.

Exemplifying that problem, imports inched up just 0.3%, leaving a trade surplus of almost $82 billion for September and $690 billion for the first nine months of this year. (…)

BTW, Goldman calculates that exports sequential growth (seasonally adjusted by GS) was -3.5% non-annualized in September vs 1.6% in August. Imports sequential growth (seasonally adjusted by GS): 0.2% non-annualized in September vs. -1.9% in August.

Boeing to Cut Workforce by 10% as Strike Eats Into Reserves

The cuts translate to roughly 17,000 positions and will include executives, managers and employees, Chief Executive Officer Kelly Ortberg told employees in a memo on Friday. The company also plans to delay the introduction of its first 777X jetliner, and separately announced that it expects third-quarter sales to come in well below Wall Street estimates. (…)

“The workforce reductions are what we have seen across smaller suppliers earlier this week, signaling more to come across” in the industry, she said. (…)

Boeing has made two offers for higher wages, both of which have been rebuffed by the union representing hourly factory workers across the west coast. About 33,000 employees have been on strike for a month now, devastating production and draining Boeing’s reserves. (…)

Businesses Anticipate Slower Price, Wage Growth, Bank of Canada Survey Says Nearly three-quarters of companies now anticipate inflation will hover around 1% to 3% over the next two years, up sharply from the previous quarter

Nearly three-quarters of Canadian businesses believe inflation over the next two years will hover between the Bank of Canada’s target range of 1% to 3%, according to a quarterly central bank survey, marking a sharp turnaround in price expectations from the previous three-month period.

The Bank of Canada’s business-outlook survey, published Friday, indicated that nearly half of companies anticipate a deceleration in worker pay raises over the next 12 months and a further softening in price increases for their goods and services due to weak consumer demand. The central bank said that for some businesses, “discounts are becoming necessary to attract an increasingly budget-constrained consumer.” (…)

Overall, the quarterly survey results suggest that “demand is weak, firms have excess capacity, and price growth continues to slow,” the Bank of Canada said. A gauge of business sentiment remains in negative territory, despite a slight improvement, as managers fret about elevated interest rates, soft demand, and the high costs for goods and services. Investment and hiring intentions remain weak, the survey said.

“The survey points to an economy clearly in need of rate relief, and leans towards the Bank of Canada needing to take a larger step,” like a half-point cut, said Ali Jaffery, an economist at CIBC Capital Markets. Traders in the overnight-index swap market are placing a 54% likelihood of a half-point cut later this month, said Karl Schamotta, chief market strategist at Corpay, a foreign-exchange and global payments company.

Jobs data for September, also released Friday, indicated net employment grew by a stronger-than-expected 46,700, and the unemployment rate dropped to 6.5% from 6.6%. On a year-over-year basis, the ranks of the unemployed grew 19.5% in September versus a 1.5% gain in net new jobs. (…)

The share of firms expecting inflation to be 3% or higher over the medium term declined sharply in the third quarter, to 15% from the previous 41% print. (…)

Inflation slowed to 2% in August, Statistics Canada reported, and some economists expect September’s data, scheduled for release next week, to show prices rose less than 2% from a year ago.

EARNINGS WATCH

From LSEG IBES:

29 companies in the S&P 500 Index have reported revenue for Q3 2024. Of these companies, 65.5% reported revenue above analyst expectations and 34.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.

In aggregate, companies are reporting revenues that are 0.4% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.

The estimated earnings growth rate for the S&P 500 for 24Q3 is 4.9%. If the energy sector is excluded, the growth rate improves to 7.3%.

The estimated revenue growth rate for the S&P 500 for 24Q3 is 4.0%. If the energy sector is excluded, the growth rate improves to 4.8%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 12.2%. If the energy sector is excluded, the growth rate improves to 14.6%.

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CEOs and Analysts Are at Odds About S&P 500’s Earnings Outlook Company guidance is optimistic while analysts are bearish

Data compiled by Bloomberg Intelligence show analysts expect S&P 500 firms to report a 4.2% increase in third-quarter earnings versus a year earlier, down from a 7% forecast in mid-July. Guidance by the firms, on the other hand, implies a jump of about 16%.

Gina Martin Adams, chief equity strategist at BI, said the dichotomy was “unusually large,” and the significantly stronger outlook suggests “companies should easily beat expectations.” (…)

Momentum on earnings-per-share guidance has also turned positive, with a BI model showing a score of 0.14 for the three months through September, compared with a post-Covid average of 0.03.

Meanwhile, a Citigroup Inc. index of earnings revisions showed strong negative momentum in September, dipping to its lowest level since December 2022. Despite analysts’ fears, the S&P 500 hit another record high on Friday and is up 22% in 2024, its best start to a year since 1997. (…)

Investor focus will eventually turn to the Magnificent Seven group of stocks that largely fueled the rally this year, including Apple Inc. and Nvidia Corp. Consensus expects their profits to rise about 18% from a year ago, a slowdown in the pace of growth — at 36% — seen in the second quarter. The group has underperformed since the second-quarter reporting season and has been trading sideways more recently as the S&P 500 rally broadened.

“The fundamental reason for the underperformance of Mag 7 could simply be the deceleration in EPS growth from the very strong pace last year,” said Morgan Stanley’s Wilson. “If earnings revisions show relative strength for the Mag 7, these stocks will likely outperform once again and market leadership may narrow — like it did during the second quarter and all of 2023.”