CONSUMER WATCH

Spending per household was up 2.2% year-over-year (YoY) in December, following the 0.6% YoY rise in November, according to Bank of America aggregated credit and debit card data. December’s growth was the second-fastest YoY spending growth in 2024. And spending per household rose a healthy 0.7% month-over-month (MoM) on a seasonally-adjusted (SA) basis in December.

Spending on services was strong in December, with seasonally-adjusted Bank of America card spending per household on services including restaurants up 0.5% MoM. Notably, retail saw a bounce in December, with spending on retail, excluding restaurants and gas, up 1.3% for the same period – the biggest monthly rise of 2024 in this category.

The strength in retail was broad-based. Spending growth for clothing, up 8.5% MoM, was particularly strong in December. And gas spending growth accelerated in December, up 3% MoM. However, the rise does not appear to be due to higher gasoline prices, but more reflective of consumers continuing to travel through the end of the year.

Looking across income cohorts, higher-income households’ card spending in December continued to grow at a faster rate than that of their middle- and lower-income counterparts, though the recent relative recovery in lower- and middle-income households’ spending means the difference is small.

Of course, a major factor in consumer spending is the strength of the labor market. After-tax wage growth, based on Bank of America deposit data was 3% YoY last month across all income cohorts, with a broad-based uptick in growth.

  

At the start of 2025, wage growth, particularly among lower-income households, may be supported by minimum wage increases occurring across 21 states. Many state-level minimum wage increases are linked to the rate of consumer price inflation. Additionally, retirees’ income growth may also be supported by the 2.5% cost-of-living increase to social security benefits effective from January.

Bank of America card data does not currently show that consumers are increasing their share of card spending on large big-ticket items to get ahead of potential price increases.

Canada Plots Broad Tariff Retaliation If Trump Starts Trade War One proposal would touch most products the US sells to Canada

(…) One list being circulated internally includes nearly every product the US exports to Canada, said one government official, with the general aim of going “dollar for dollar” on tariffs. (…)

Canada is the world’s largest national buyer of US goods, having imported about $320 billion worth in the first 11 months of last year — slightly less than the European Union, which bought $341 billion. The US trade deficit on goods with Canada was $55 billion during that period of time, according to US Commerce Department data. (…)

Under a 25% tariff by the US, Canadian gross domestic product would take a hit of as much as 3.8%, according to calculations by Bank of Nova Scotia economists. If Canada chooses “full retaliation,” that cost rises to as much as 5.6%, though it would take a number of years for that damage to accumulate.

“The GDP hit is higher if we retaliate than if we don’t. Of course, that is a cost that might be worth paying, since retaliation also increases the economic cost in the US,” Trevor Tombe, a University of Calgary economics professor, said by email. (…)

Another option that has been examined by Trudeau’s government is using export taxes on strategic commodities, such as oil, uranium and potash. This would be an extreme step, but such a move would put immediate pressure on American energy prices. (…)

Trump complained that the U.S. “subsidizes” Canada to the tune of US$200 billion in trade saying “we don’t need anything” that Canada trades with the U.S..

The reality is that the entire trade deficit stems from oil and gas imports from Canada. Excluding energy, the U.S. has had a trade surplus for 20 years.

But why would the U.S. import oil from Canada when it is a net exporter of crude oil?

Because many U.S. refineries, particularly in the Midwest and Gulf Coast, are specifically designed to handle heavy crude oil from Canada’s oil sands. They can’t use the light oil that gushes from American wells.

Canadian oil is thus critical in supplying refineries producing 24% of U.S. oil products. The only alternative is Venezuela, not as cost effective and not as close a friend as Canada is…

From the American Petroleum Institute:

From 2010 through 2019, total petroleum trade volume between the United States and Canada doubled from approximately 1.0 to 2.0 billion barrels annually. Most of the volume growth over this period came from increased trade in crude oil, driven by U.S. imports of heavy crude oil by pipeline and rail from Western Canada (…).

(…) driven by discounts on heavy crude grades, many U.S. refineries have equipped their facilities with the additional processing and treatment capacity needed to transform heavy, high-sulfur crude oil into high-value end products. (…)

Given the limited global supply of heavy oil and the landlocked locations of many U.S. heavy oil refiners, the United States is not able to easily replace Canadian heavy oil with supply from other sources.

U.S. refining of Canadian heavy crude oil contributes to the economic output of several U.S. States. ICF estimates that, in 2019, U.S. refiners enhanced refinery margins (product revenues minus crude costs) by approximately $6.1 billion by processing Canadian heavy oil instead of regionally available replacement grades.

These enhanced margins contribute directly to value added in the industrial sector, which in turn contributes to U.S. Gross Domestic Product (GDP) and to the Gross State Product (GSP) of 21 states. Most of these benefits—approximately $5.0 billion—accrued to refiners in the U.S. Midwest/Midcontinent region (Petroleum Administration for Defense District [PADD] 2), where approximately 70% of all Canadian heavy oil barrels were imported and where low-cost, cross-border pipelines reduce the delivered cost of Canadian crude.

BTW:

The Era of Free Government Is Over Rising bond yields around the world signal new fiscal realities.

The WSJ Editorial Board:

Say what you will about 2025, the year is off to a rocky start for anyone who needs to figure out how to fund a government. Bond yields are rising across the developed world, raising some awkward questions about when politics will catch up with new economic realities. (…)

As go U.S. bonds, so go borrowing costs in the rest of the world. The 10-year Japanese government bond, at nearly 1.2%, is at a level last seen in 2011. The German 10-year bund, the eurozone’s benchmark, is at a five-month high above 2.5% after a steep ascent in the past month.

You can pick from among several theories to explain this, all of which may play some role. In the U.S., a benign explanation is that investors expect stronger economic growth under President-elect Trump’s tax and regulatory policies. Less benign is concern that the Fed has cut rates too much, too soon and is willing to accept more inflation than its 2% target. (…)

Interest repayments on federal debt already are higher than defense spending. Ultralow interest rates allowed the enormous spending expansion of the post-2008 era, and the dollar’s status as a reserve currency gives Congress more leeway to borrow than is healthy. Presumably this privilege isn’t limitless. (…)

No one is immune from a widespread repricing of risk, no matter how safe they think their balance sheets are. It’s still possible to imagine the U.S. economy will come safely through higher bond yields and macroeconomic uncertainties, but markets are sending a message that the era of “free” government is over.

AI Chip Curbs Trigger Rare Public Fight: Tech Giants vs. China Hawks Silicon Valley battles both Biden and Republicans in clash over chip trade

Tension between national-security hawks and the biggest American technology companies over China policy has burst out into the open.

The trigger: a Biden administration plan to limit the global sale of advanced artificial-intelligence chips. It seeks to ensure the U.S. keeps control over the future of AI by blocking Beijing from accessing AI technology through third countries.

The plan drops the “mother of all regulations” and “does more to achieve extreme regulatory overreach than protect U.S. interests,” said an Oracle executive vice president, Ken Glueck, in a blog post. On the other side, a Republican-led House committee urged the administration to go through with tough curbs, calling it a “once-in-a-generation moment” to block Beijing’s ambitions. (…)

In October 2022, the Biden administration placed restrictions on the export to China of high-end American chips and some tools used to make them. It also prohibited other countries from selling those goods if they used any U.S. technology to produce them. It followed by expanding the curbs several times, most recently in December when it banned the export to China of certain memory chips essential to the training of AI algorithms.

Both sides in the current dispute agree the rules were a milestone in American policy and have at least hindered China’s AI ambitions by making it hard for Chinese entities to buy the most advanced chips from AI leader Nvidia and others.

The hawks say the rules have been well-intentioned, but left backdoor routes for China to access U.S. technology. Some say U.S. officials moved so slowly that Beijing was able to stockpile much of the banned technology.

Many tech companies counter that the regulations so far risk hobbling America’s industry leadership.

Even before the public clash this week, tensions had bubbled beneath the surface. Weeks after the first round of U.S. export controls, Nvidia released new chips for the Chinese market that were modified so they didn’t require a U.S. export license. A year later, the U.S. updated its controls, and Nvidia updated its China chips so they would again avoid the export ban.

Such moves drew the wrath of U.S. officials, who felt that Nvidia wasn’t aligning itself with the spirit of the law, according to people familiar with the matter. Nvidia says the company complies with all applicable export-control laws and requires its customers to do the same. (…)

Now tech companies are openly fighting back against policymakers.

A “last-minute rule restricting exports to most of the world would be a major shift in policy that would not reduce the risk of misuse but would threaten economic growth and U.S. leadership,” Nvidia said. (…)

Industry officials say if U.S. companies had to go through red tape in Washington every time they tried to sell an advanced chip or server overseas, customers would get fed up and opt for more stable and reliable Chinese alternatives, even if inferior.

That, they said, would give the Chinese industry the foothold it needs to catch up and dominate the AI business globally, replicating Chinese companies’ lead in high-tech areas such as electric vehicles and solar panels.

Lawmakers and former White House staffers under both Trump and Biden say that any time advanced American AI technology is sold abroad, it could end up in China’s hands and needs to be regulated for that reason, just as the U.S. wouldn’t allow an American jet fighter sold to Saudi Arabia to be resold to China. (…)

Trump hasn’t recently detailed his position on export controls, but in his first term he blocked Chinese telecommunications equipment leader Huawei and other Chinese civilian tech companies from accessing U.S. technology.

The Trump transition team has yet to reach out to Alan Estevez, the top Commerce Department official, to discuss export controls, U.S. officials say. That leaves less than two weeks for the incoming administration to coordinate on AI and China export controls. Raimondo, however, has spoken to Trump’s nominee to succeed her, Howard Lutnick. A Commerce spokesman didn’t immediately respond to a request for comment.

Trump’s personnel picks, including incoming national security adviser Michael Waltz, are known for their tough views on China. Jacob Helberg, Trump’s choice as the State Department’s top economic policy and trade official, is a founder of a consortium of tech investors and lawmakers concerned about the rise of China.

“The American people elected President Trump to stand up to China, enforce tariffs on Chinese goods, and Make America Strong Again. He will deliver,” said Karoline Leavitt, a spokeswoman for the incoming administration, in an email.

Xi Jinping to send top-level China envoy to Donald Trump’s inauguration Unusual diplomatic overture comes as Beijing braces for escalating tensions with new administration

(…) China has previously been represented by its ambassador in Washington. (…)

The envoy would also hold substantive discussions with Trump’s team, several people said. (…)

Mike Waltz, Trump’s incoming national security adviser, and his deputy Alex Wong are both viewed as being very tough on China. Trump has also named Republican US Senator Marco Rubio, one of Congress’s most vocal China hawks, to be his secretary of state.

Trump said this week that his team was already in contact with Beijing. “We’ve been talking through their representatives,” Trump said in an interview with the Hugh Hewitt radio show, when he also blamed China for the Covid-19 pandemic in 2020.

Chinese Developers Begin New Year With Deepening Debt Woes

Chinese property developers are starting 2025 facing liquidation petitions, sliding share prices and mountains of debt, as the nation’s real estate crisis enters its fifth year with little sign of improvement.

On Friday morning, shares of defaulted Chinese builder Sunac China Holdings Ltd. fell as much as 30% in Hong Kong, the most since Oct. 8. That was after the company, a white knight to a major peer a few years back, received another winding-up petition.

Sunac, whose projects including high-end residential complexes in Beijing, restructured its offshore debt in 2023, but has been hit by concerns about its ability to meet new repayment obligations.

Meanwhile, China Vanke Co., one of the country’s largest property developers, has $4.9 billion of debt coming due this year as worries grow about its liquidity and whether it will be able to find new financing to avoid defaults. Vanke’s 3.5% dollar bond due 2029 is down about 7 cents year to date, falling to its lowest level since September, Bloomberg-compiled data show. (…)

On Friday, a key offshore subsidiary of China Evergrande Group was ordered to liquidate by a Hong Kong court. Three other major developers including Country Garden Holdings Co. and Times China Holdings Ltd. are also set to defend against liquidation petitions in Hong Kong this month. (…)

Country Garden just proposed new terms with key banks that would slash its debt and lower borrowing costs, but a key bondholder group isn’t on board, people familiar with the matter said.

Defaulted developer Logan Group Co. also recently unveiled a revised term sheet for its $8 billion offshore restructuring.

But without a significant recovery in the sector, developers will continue to struggle meeting repayment deadline. Chinese builders who were previously affected by the property crisis will be the biggest source of defaults in Asia in 2025, according to analysts at JPMorgan Chase.

2024 was Earth’s hottest year on record, exceeding Paris target

Last year was Earth’s warmest on record, eclipsing 2023’s record and for the first time exceeding the Paris target of 1.5°C above preindustrial levels, the Copernicus Climate Change Service announced Thursday. (…)

• Studies show that if warming exceeds 1.5°C relative to preindustrial levels, the odds of potentially catastrophic impacts, such as the shutting of key ocean currents and melting of Arctic and Antarctic ice sheets, would increase considerably.
• Regarding exceeding the 1.5°C marker, Copernicus’ news release stated: “Global temperatures are rising beyond what modern humans have ever experienced.”

US Consumer Borrowing Drops on Plunge in Credit-Card Balances

Total credit dropped $7.5 billion after a revised $17.3 billion gain in October, according to Federal Reserve data released Wednesday. The median estimate in a Bloomberg survey of economists called for a $10.5 billion advance. The figures aren’t adjusted for inflation.

Outstanding credit-card and other revolving debt decreased $13.7 billion, the most since early in the pandemic, after surging a month earlier. Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $6.2 billion, the Fed’s report showed.

The data suggest consumers are making an effort to pay down credit-card balances as borrowing rates remain near a record well above 20%. (…)

Meanwhile, the rise in non-revolving credit likely reflected stronger auto sales, which accelerated in November at the fastest pace in more than three years, based on Ward’s Automotive Group data. They continued to rise in December as lower auto-loan rates and more manufacturer incentives helped lure buyers to showrooms. (…)

Fed Minutes Suggest Officials Will Hold Rates Steady for Now Central bank cut rates last month, but saw risks of somewhat firmer price pressures this year due to potential tariff increases by President-elect Trump

Federal Reserve officials saw risks of higher-than-expected inflation, due in part to potential tariffs by President-elect Donald Trump, when they made a “finely balanced” decision last month to lower interest rates, according to minutes of the meeting published Wednesday.

The written account of the Dec. 17-18 policy meeting showed officials thought inflation was likely to continue moving down to the central bank’s 2% target, but “the process could take longer than previously anticipated” due in part to possible changes to trade and immigration policy.

The “vast majority” of the 19 officials who participated in that meeting thought a quarter-point rate cut was appropriate, the minutes said. But some officials thought there was merit in keeping rates unchanged last month, and a majority had indicated the decision to cut rates was a close call, according to the minutes.

The minutes further suggest officials were broadly comfortable holding rates steady at their coming meeting at the end of this month. “Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the minutes said. Officials thought under their current outlook for economic activity, the Fed could continue to cut rates at a slower pace than they had in recent months. (…)

“Almost all participants judged that upside risks to the inflation outlook had increased,” the minutes said.

The economic forecast prepared by the Fed’s staff of economists also incorporated some initial assumptions about changes to tariffs that would lead inflation to be higher than previously anticipated in 2025 before resuming its recent decline after that. (…)

Investors in interest-rate futures markets expect the Fed to stay on hold until May or June, according to CME Group. (…)

So, the increase at the December meeting in the median core PCED inflation projection of the FOMC participants from 2.2% to 2.5% was really because of the tariffs threats.

The minutes also noted that some participants said risks were tilted to the labor market, not inflation. The FOMC is more worried about rising unemployment than inflation.

Yesterday’s claims data showed that initial jobless claims fell to 201,000 for the week ended January 4, the lowest since last February 2024. But while the data are seasonally adjusted, notice the mini-seasonality that troughed in January in both 2023 and 2024…

US Dockworkers, Employers Reach Deal to Avert Strike

“We are pleased to announce that ILA and USMX have reached a tentative agreement on a new six-year ILA-USMX Master Contract, subject to ratification, thus averting any work stoppage on Jan. 15, 2025,” the International Longshoremen’s Association and US Maritime Alliance said in a joint statement on Wednesday. (…)

The deal also preserves the 62% pay raise agreed to in October and continues to bar fully automated terminals. (…)

China Consumer Prices Weaken Further, Adding to Deflation Worries Consumer inflation decelerated for fourth straight month

The consumer price index rose 0.1% in December from a year earlier, in line with the median forecast of economists surveyed by Bloomberg. Factory deflation extended into a 27th month, though the producer price index recorded a slower drop of 2.3%, the National Bureau of Statistics said Thursday. (…)

In a more encouraging sign for policymakers, core CPI — which excludes volatile food and fuel prices — picked up for a third month to 0.4% from a year ago, reaching the highest level since July. (…)

Non-food CPI inflation rose to +0.2% yoy in December from 0.0% yoy in November. After excluding food and energy prices, core CPI inflation edged up to +0.4% yoy in December (vs. +0.3% in November). Our core goods inflation measure edged up to +0.2% yoy in December (vs. +0.1% yoy in November). Services inflation also inched up to +0.5% yoy in December from +0.4% yoy in November. (GS)

AI CORNER

Wall Street Job Losses May Top 200,000 as AI Replaces Roles Back, middle office roles at risk, Bloomberg Intelligence says

Chief information and technology officers surveyed for BI indicated that on average they expect a net 3% of their workforce to be cut, according to a report published Thursday.

Back office, middle office and operations are likely to be most at risk, according to Tomasz Noetzel, the BI senior analyst who wrote the report. Customer services could see changes as bots manage client functions, while know-your-customer duties would also be vulnerable. “Any jobs involving routine, repetitive tasks are at risk,” he said. “But AI will not eliminate them fully, rather it will lead to workforce transformation.”

Nearly a quarter of the 93 respondents predict a steeper decline of between 5% and 10% of total headcount. (…)

In 2027, banks could see pretax profits 12% to 17% higher than they would otherwise have been — adding as much as $180 billion to their combined bottom line — as AI powers an increase in productivity, according to BI. Eight in ten respondents expect generative AI to increase productivity and revenue generation by at least 5% in the next three to five years. (…)

Citi said in a report in June that AI is likely to displace more jobs across the banking industry than in any other sector. About 54% of jobs across banking have a high potential to be automated, Citi said at the time.

Still, many firms have stressed that the shift will result in roles being changed by technology, rather than replaced altogether. Teresa Heitsenrether, who oversees JPMorgan’s AI efforts, said in November that the bank’s adoption of generative AI was so far augmenting jobs. (…)

• RBC partners with Cohere to develop AI platform for bank employees

Royal Bank of Canada and artificial-intelligence company Cohere Inc. are building a bank-wide generative AI platform for financial services, a step that the country’s largest lender says is the first for a Canadian bank.

Canada’s biggest banks have increasingly been adopting AI to help employees do their jobs more efficiently. But generative AI has largely been restricted to more niche operations or testing programs.

On Thursday, RBC and Toronto-based Cohere launched an exclusive partnership to co-develop and deploy across the bank’s operations a customized version of the company’s new generative AI platform.

The platform, called North for Banking, will help employees complete tasks and find information, including searching for answers and solutions specific to customers’ needs. Generative AI allows employees to submit the context of the individual’s or the client’s circumstances in the assessment, which enables the platform to solve problems and provide advice. (…)

In October, the bank was ranked in the top three in the world for artificial intelligence maturity among 50 global financial institutions in the Evident AI Index. Canada’s five largest lenders were on the list, with Toronto-Dominion Bank ranking in ninth place.

Cohere, founded in 2019, builds large language models (LLMs) that power chatbots and generative AI platforms, which analyze text and media to create responses. Businesses can tailor Cohere’s North for Banking to their own needs, such as assessing procedure and policy documents, answering questions and automating processes. (…)

In the case of RBC’s work with Cohere, all the data will be powered and stored internally within the bank’s systems.

The process of building LLMs is costly and requires a significant amount of computing power from graphic processing units, or GPUs, which trains AI systems with large amounts of data. While Cohere has computing resources, RBC will be using its own system to run the internal platform.

In recent years, RBC has built one of the largest GPU farms among Canadian businesses, Ms. Agrafioti said. (…)

Ms. Agrafioti said that much of the risk with data and privacy breaches stems from generative AI systems predominantly running on cloud platforms or shared services.

“Bringing all of that infrastructure onto our premises in our data centers is what addresses that risk off the bat in a definitive way,” she said. “It’s a very complex equation but you’re immediately removing that factor out of it, and all of a sudden that opens a ton of opportunity.”

Better than DOGE, here’s how to cut the U.S. health care costs per the NY Post via ADG:

Residents of Belcastro in the southern region of Calabria — one of the poorest regions in Italy — are “ordered to avoid contracting any illness that may require emergency medical assistance,” a decree from Mayor Antonio Torchia stated.

The ordinance also instructs residents not to take risks or get in accidents that could end up endangering their health, local media reported.