Fed Signals Plan to Slow Rate Cuts, Sending Stocks Lower Having reduced rates by a full percentage point since September, officials penciled in just two cuts next year

(…) “Today was a closer call, but we decided it was the right call,” Powell said at a news conference after the meeting. He later added, “From here, it’s a new phase, and we’re going to be cautious about further cuts.” (…)

New projections released Wednesday show Fed officials expect inflation to be stickier next year than previously anticipated, possibly because of policy changes by President-elect Donald Trump. The projections show officials expect to make fewer rate reductions, with most penciling in two cuts for 2025, down from four at their meeting in September. (…)

“There is an inconsistency” in cutting rates while anticipating firmer inflation “that is difficult to square,” Michael de Pass, global head of rates trading at Citadel Securities said.

The magnitude of the revision to the inflation forecast was broad-based among the 19 officials who participate in policy meetings and incredible given how little officials changed their forecasts for the labor market and growth, said Omair Sharif, founder of the research firm Inflation Insights.

“This wholesale change in their views are clearly tied to uncertainty and risks around as-yet-enacted tariff and immigration policies and have far less to do with changes to the economic landscape,” he said. (…)

Powell said recent data, and not just potential policy shifts, warranted a change in the inflation forecast. The labor market has also been a little sturdier than officials thought it would be when they started cutting in September. (…)

Powell repeated his view that it was possible but too soon to tell if the current situation would differ from an episode in 2018-19, when Trump launched a trade war with China after imposing tariffs on steel and aluminum more broadly.

Back then, inflation was low, and businesses had little experience pushing cost increases along to customers. The inflation shock of 2021-22 means that the psychology regarding inflation might have changed in ways that make companies and workers more comfortable passing along higher prices and demanding higher wages, respectively. (…)

Powell said officials were ready to slow down cuts because of uncertainty over how restrictive their policy stance would be after having made a full percentage point in cuts. (…)

The one thing that comes out of Mr. Powell’s presser is that the Fed has become worried about inflation. The focus has moved back from the labor market to inflation.

• “inflation is higher this year. It’s also higher in the forecast next year.”
• “I think that the lower—the slower pace of cuts for next year really reflects both the higher inflation readings we’ve had this year and the expectation inflation will be higher.”
• “You saw in the SEP that risks and uncertainty around inflation we see as higher.”
• “Uncertainty around inflation, I pointed out, is actually higher.”
• “our forecast for inflation for this year, I think, are five tenths higher than they were in September.”
• “that might be the single biggest factor, is inflation has once again underperformed relative to expectations.”

And it’s mainly because of potential tariffs:

• “So the overall picture, the story of why inflation should be coming down, is still intact, in particular the labor market. Look at the labor market. It is cooler by so many measures now, modestly cooler than it was in 2019, a year when inflation was well under 2 percent. So it’s not a source of inflationary pressures.”
• “overall you’re not getting inflationary impulses of any significance from the labor market.”
• “What the committee’s doing now is discussing pathways and understanding, again, the ways in which tariff-driven inflation can affect—tariffs can affect inflation in the economy, and how to think about that. So we’ve done a bit of—good bit of work, all of us have, each of us has. And, you know, it puts us in position, when we finally do see what the actual policies are, to be—to make, you know, a more careful, thoughtful assessment of what might be the appropriate policy response.”

The word “uncertainty” came out 12 times during the presser. Powell summed it up like this:

• “It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

Particularly if you know somebody is about to move the furniture around.

For investors, this is reassuring because, apart from a recession, the main risk is inflation.

• “So the outlook is pretty bright for our economy.”
• “So we and most other forecasters still feel that we’re on track to—you know, to get down to 2 percent. It might take another year or two from here. But I’m confident that that’s the path we’re on. And, you know, our policy will do everything it can to assure that that is the case.”

My yesterday post was interesting coming just before the policy announcement:

• Over the past three months, control-group sales increased an annualized 5.6%, boding well for fourth-quarter GDP.
• The headline S&P Global Flash US PMI Composite Output Index rose from 54.9 in November to 56.6 in December, signaling the fastest expansion of business activity since March 2022.
• Activity levels were expanded at an increased rate in December in response to strengthening demand. New orders rose at the sharpest rate since April 2022.
• New orders for services rose at a rate not witnessed since March 2022
• Average prices charged for goods and services rose only very modestly, increasing at the slowest rate since prices began rising in June 2020.
• The latest easing pushed the rate of inflation further below the pre-pandemic long-run average, with an especially low rate of inflation again evident in the services economy, where charges rose only marginally and at the slowest rate since May 2020.
• Input cost inflation also slowed when measured across both goods and services, dipping to the lowest for ten months.
• lower cost growth in services was in part due to weaker wage growth
• The service sector expansion is helping drive overall growth in the economy to its fastest for nearly three years, consistent with GDP rising at an annualized rate of just over 3% in December.

• Business Inflation Expectations Decreased to 2.0 Percent

Mr. Powell also said: “Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.”

The very people who actually decide to raise prices are currently not expecting inflation to perk up, are they?

Looking back, by about what percent did you change prices over the last 12 months? Looking ahead, by about what percent do you expect to change prices over the next 12 months?

John Authers today:

(…) Higher yields attract yet more fund flows into the dollar. The Fed’s hawkish tone means that there is no end to that pressure in sight. (…)

That at present is causing particular pain for Brazil, whose stock market is now down more than 30% for the year in dollar terms. The central bank hiked by a full percentage point last week, and has since intervened by auctioning off dollar reserves, yet that hasn’t stopped a serious run on the Brazilian currency and bonds:

Brazil’s problem is rooted, as Points of Return explained earlier this week, in a serious fiscal deficit, and a crisis of confidence in President Luiz Inacio Lula da Silva, who emerged from brain surgery at the weekend to say that the economy’s only problem was that interest rates were too high. The rise in yields since then shows that the market emphatically disagrees, and is alarmed by an apparent lack of grip. (…)

Like Brazil, the US also has a concerning fiscal deficit, a political setup that seems incapable of dealing with it, and an elderly head of state whose judgment is now widely questioned (with a successor lined up to take over who isn’t much younger). Trump followed his advisers Elon Musk and Vivek Ramaswamy in venting opposition to a congressional compromise designed to thwart a government shutdown, heightening the sense of severe political uncertainty. (…)

In today’s WSJ editorial Good Riddance to the 118th Congress:

(…) All of this speaks to the lack of any spending discipline on Capitol Hill even as annual payments on the national debt now exceed the entire Pentagon budget. If the U.S. dollar weren’t the world’s reserve currency, we’d be a banana republic. (…)

Ed Yardeni:

Investors might also have been upset to learn that the circus is still in town in Washington, DC. The continuing resolution (CR) that would extend federal budgets to March 14, 2025 is running into severe headwinds in Congress. Conservative Republicans in both houses, plus President-elect Donald Trump, and DOGE co-heads Elon Musk and Vivek Ramaswamy have come out against the 1,547-page CR, which almost no one has read. Without a CR, the government will shut down on Friday.

We think that the stock market might remain sloppy through January. Some investors might be planning to take their substantial profits early next year rather than now to defer capital gains taxes. There could be a longshoreman’s strike in mid-January because they oppose automation at the ports. Trump publicly declared that he agrees with the dockworkers. Furthermore, on day one of Trump 2.0, a blizzard of executive orders will likely include a bunch imposing tariffs and authorizing deportation of illegal migrants.

We can’t rule out a 10% stock market correction, but we would view that as a buying opportunity rather than as a reason to panic out of the market since we don’t expect a recession or a bear market. We are still targeting 7000 on the S&P 500 by the end of next year.

The S&P 500 is now sitting on its 50-d m.a.. The more solid 100-d and 200-d m.a. are at 5745 and 5535 respectively.

At 5745, the forward P/E would be 21.8 and the Rule of 20 P/E 24.2. At 5535: 21.0 and 23.3 respectively. At today’s preopening of 5890: 22.4 and 24.8 respectively.

Goldman Sachs:

Congressional leaders released a “continuing resolution” Dec. 17 that would extend government spending until March 14, 2025 and provide more than $100bn in disaster and agricultural aid, among other provisions. Republican support for that legislation in the House already looked relatively weak before President-elect Trump’s statement this afternoon opposing the bill as it currently stands.

Trump’s opposition was unrelated to the main components—he stated support for the spending extension, and the disaster and agricultural aid—so it is possible that a revised package could still pass before the Dec. 20 deadline. Alternatively, congressional Republicans could also attempt to pass a “clean” spending extension to avoid a shutdown, though this would push more items like disaster relief onto the early 2025 agenda, which does not appear to be in either party’s interest.

Despite Trump’s insistence, the odds appear to be against a near-term debt limit increase. Although the debt limit suspension expires Jan. 2, 2025, we expect that the Treasury will be able to continue to borrow under the limit until Q3, so there is little urgency in addressing the issue now, and adding a debt limit increase to the spending extension would likely reduce Republican support for the measure.

That said, the unexpected focus on the debt limit highlights the incoming Trump administration’s motivation to address the issue early.

There are two potential paths to do so. First, if Congress extends spending authority to March 2025, Republicans could attempt to add a debt limit increase to the spending bill they pass at that next deadline. However, at that point the practical deadline for the debt limit will still be a few months away and Democrats are unlikely to support a debt limit increase without important policy concessions (e.g., extension of ACA insurance premium subsidies at a cost of $20bn/yr).

Second, Republicans could add a debt limit suspension to an early-2025 budget reconciliation bill focused on funding immigration enforcement. That said, it isn’t yet clear whether Republicans will follow this two-step strategy—passing a reconciliation bill dealing with immigration and a few other issues early in the year, followed by a second reconciliation bill mid-year to extend tax cuts and make bigger fiscal changes—but this looks more likely than a single bill at the moment.

While the latest developments raise the odds of a near-term government shutdown, we don’t think a protracted shutdown is likely (a short, technical shutdown is clearly possible given the limited time left before the deadline). That said, should a shutdown occur we estimate it would reduce GDP growth in the quarter by 0.15pp for each week it lasted, and would boost GDP growth by the same amount in the quarter following government reopening.

US Retail Sales Strengthen on Jump in Motor Vehicle Purchases

US retail sales increased at a firm pace in November, bolstered by a surge in car purchases and solid online shopping that masked more mixed spending elsewhere.

The value of retail purchases, not adjusted for inflation, increased 0.7% after upward revisions to the prior two months, Census Bureau data showed Tuesday. Excluding autos, sales climbed a more modest 0.2% for a second month.

Auto sales in November, as tracked by Ward’s Automotive Group, were the strongest in over three years as interest rates came down and dealerships deployed deep year-end discounts. Analysts also attributed the boost to increased demand for replacement vehicles in the wake of Hurricanes Milton and Helene. (…)

So-called control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — increased 0.4% in November following a drop in October. The measure excludes food services, auto dealers, building material stores and gasoline stations.

Over the past three months, control-group sales increased an annualized 5.6%, boding well for fourth-quarter GDP. (…)

Wells Fargo has the details:

U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Economics

These numbers are not inflation adjusted. My retail inflation proxy is down 0.4% YoY in November, although in rose 0.37% MoM after –0.25% in October.

Online sales were up 7.9% YoY, a lot of volume! Spending on autos was another bright spot, up 2.8% m/m and 2.0% y/y.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2024 is 3.1 percent on December 17

Yet:

US Industrial Production Unexpectedly Drops on Mining, Utilities Manufacturing output rose a disappointing 0.2% in November

US industrial production unexpectedly declined for a third month in November on weaker utility output and mining.

The 0.1% decrease in production at factories, mines and utilities followed a downwardly revised 0.4% drop a month earlier, Federal Reserve data showed Tuesday. The median estimate of Bloomberg survey of economists was for a 0.3% increase.

Manufacturing output rose a disappointing 0.2% after a downwardly revised 0.7% slide a month earlier. Despite resolution of a machinists’ strike at Boeing Co., aerospace equipment output declined, largely due to a decrease in aircraft parts production, the Fed said.

Manufacturing, which accounts for three-fourths of total industrial production, has struggled this year as many companies limited capital spending amid high borrowing costs. Looking ahead, domestic manufacturers may remain challenged by sluggish global export markets and a strong dollar.

In addition to aerospace equipment, factory output was also restrained by fabricated metals, apparel and computer equipment. On a brighter note, carmakers stepped up production after two months of declines to meet stronger demand.

Excluding motor vehicles and parts, factory output decreased for a third straight month, the Fed data showed. (…)

FLASH PMIs

USA: Output growth ends 2024 on 33-month high amid service sector surge, but manufacturers report falling output and higher prices

The headline S&P Global Flash US PMI Composite Output Index rose from 54.9 in November to 56.6 in December, signaling the fastest expansion of business activity since March 2022. The PMI has now recorded continual growth since February 2023, with especially robust growth recorded over the second half of 2024. Activity levels were expanded at an increased rate in December in response to strengthening demand. New orders rose at the sharpest rate since April 2022.

Growth was once again uneven across the economy, however, with a further surge in service sector activity – which rose at a rate not seen since October 2021 – contrasting with the steepest fall in manufacturing production since May 2020.
If pandemic months are excluded, the latest service sector expansion was the strongest recorded since March 2015, while the latest manufacturing downturn was the sharpest since the global financial crisis in August 2009.

A similar sector divergence was seen in demand conditions. New orders for services rose at a rate not witnessed since March 2022, but new orders for goods placed at factories fell sharply and for a sixth successive month.

The survey’s forward-looking sentiment indicators suggest that growth could become more balanced in the coming year. Optimism about output in the next 12 months improved further in December from the pre-election low recorded in September, striking the highest since May 2022. Service sector confidence was the highest in just over two-and-a-half years and, although cooling slightly, manufacturing confidence remained among the highest seen over the past year.

A clearing of uncertainty following the Presidential Election has been accompanied by improved prospects for the year ahead, according to anecdotal evidence provided by survey respondents, linked to expectations of a more business friendly administration under the Trump Presidency, especially in terms of looser regulation and heightened protectionism. However, some companies, notably in manufacturing, have expressed concern over the weak demand environment and the potential for tariffs to add to inflation.

The improved outlook helped drive a return to hiring. Employment edged higher in December, up for the first time in five months, reflecting a second successive monthly rise in manufacturing jobs and the first increase in service sector employment since July. The increase in both sectors was only modest, however, reflecting ongoing caution with respect to payroll numbers as many firms sought to keep costs as low as possible, while other firms often reported difficulties finding or replacing staff.

Inflationary pressures meanwhile cooled further at the headline level in December, albeit with a jump in input cost inflation in manufacturing. Average prices charged for goods and services rose only very modestly, increasing at the slowest rate since prices began rising in June 2020.

The latest easing pushed the rate of inflation further below the pre-pandemic long-run average, with an especially low rate of inflation again evident in the services economy, where charges rose only marginally and at the slowest rate since May 2020.
Manufacturing selling prices rose at a rate unchanged on November’s pace, thereby running slightly above the pre-pandemic long-run average.

Input cost inflation also slowed when measured across both goods and services, dipping to the lowest for ten months. However. slowing in cost growth in the services economy to a four-and-a-half year low contrasted with a spike in input cost inflation in the goods-producing sector to the highest for just over two years. While lower cost growth in services was in part due to weaker wage growth, higher materials prices in manufacturing were commonly linked to supplier-related price hikes and increased shipping rates.

The S&P Global Flash US Manufacturing PMI fell from 49.7 in November to 48.3 in December, signaling a deterioration in business conditions within the goods-producing sector for a sixth successive month with the rate of deterioration accelerating to the fastest since September.

Production fell at the fastest pace since May 2020, with new orders and inventories also falling at increased rates. While employment rose, the increase was only marginal and weaker than November’s gain. Suppliers’ delivery times meanwhile lengthened, adding support to the PMI (longer lead-times often indicate busier supply chains), though the degree of lengthening moderated slightly compared to November. However, the lengthening of lead times was in part due to negative factors, including a lack of staff.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“Business is booming in the US services economy, where output is growing at the sharpest rate since the reopening of the economy from COVID lockdowns in 2021. The service sector expansion is helping drive overall growth in the economy to its fastest for nearly three years, consistent with GDP rising at an annualized rate of just over 3% in December.

“It’s a different picture in manufacturing, however, where output is falling sharply and at an increased rate, in part due to weak export demand.

“Encouragingly, confidence in the 12-month outlook has lifted to a two-and-a-half year high, suggesting the robust economic upturn will persist into the new year and could also become more broad-based by sector. However, some of the high spirits seen after the election in the manufacturing sector have been checked over concerns surrounding tariffs and the potential impact on inflation resulting from the higher cost of imported materials. December saw raw material prices spike sharply higher amid supplier-led price rises and higher shipping costs, in a reflection of busier supply chains in advance of threatened protectionism in the new year.”

Americans’ continued splurge on goods has had no impact on domestic manufacturing since most consumer goods are imported. All of the growth in manufacturers’ sales since the onset of the pandemic was prices (e.g. car prices +20%).

(Goldman Sachs)

Eurozone: Employment falls at fastest pace in four years as output decreases

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, was below the 50.0 no-change mark for the second consecutive month in December to signal a further reduction in business activity at the end of 2024. At 49.5, however, the latest reading was up from 48.3 in November, pointing to a softer and only marginal fall in output.

A marked reduction in output in the manufacturing sector just outweighed a renewed increase in the much larger service sector. December saw services activity rise modestly, following a slight fall in November, with the pace of growth similar to those seen in September and October. Manufacturing production, meanwhile, decreased to the largest extent since the corresponding month last year.

Companies in the Eurozone continued to face challenges securing new orders in December. New business decreased for the seventh consecutive month, with falls recorded in both manufacturing and services. The rate of contraction was solid, albeit weaker than in November.

New export orders (which include intra-Eurozone trade) fell again, and even more quickly than total new business. New business from abroad was down markedly, but to the least extent since August as both monitored sectors saw rates of contraction ease from the previous month.

With new orders and business activity falling, companies reduced their staffing levels again in December, the fifth month running in which this has been the case. Although remaining modest, the pace of job cuts quickened to the most pronounced in four years. A solid reduction in manufacturing employment was accompanied by a near-stagnation in the service sector. Workforce numbers decreased in Germany and France, but continued to increase across the rest of the Eurozone.

Meanwhile, backlogs of work decreased for the twenty-first consecutive month. The pace of depletion remained solid, despite easing to the weakest since July.

Input prices increased at a marked pace in December, and one that was the fastest in four months. The rate of inflation was broadly in line with the pre-pandemic average. Rising costs reflected a sharp and accelerated increase among service providers. Manufacturing input costs continued to fall, albeit only marginally and at the slowest pace in the current four-month sequence of reduction.

The pace of output price inflation also accelerated at the end of the year, quickening for the third month running to the fastest since August, but remaining well below the peak seen in 2022. As was the case with input costs, the rise in charges was centred on the service sector.

Eurozone manufacturers reduced their purchasing activity again in December, with the sharp decline in input buying the most pronounced of any month in 2024. Further marked declines in inventories of both purchases and finished goods were also registered. In fact, the rate of depletion in stocks of finished goods was the strongest since July 2021. Meanwhile, suppliers’ delivery times lengthened only marginally.

After dropping to a one-year low in November, business confidence regained some ground in December but remained weaker than the series average. Optimism in the 12-month outlook for output strengthened in both the manufacturing and services sectors, with service providers remaining more confident than their manufacturing counterparts. Sentiment in Germany and France was much weaker than seen in the rest of the euro area, although optimism was signalled across the board.

ECB Set to Lower Key Rate Further as Protectionism Threatens, Says Lagarde While inflation is set to cool, economic growth in the eurozone has been weaker than expected, she says

The European Central Bank is likely to continue to lower its key interest rate as the threat of U.S. tariffs clouds already weak growth prospects, President Christine Lagarde said Monday.

“The direction of travel is clear and we expect to lower interest rates further,” she said.

ECB policymakers had been concerned by rapid rises in service prices, which they associated with increases in wages that have been faster than over recent decades.

But Lagarde said there are recent indications that measures that strip out base effects suggest services inflation has “dropped steeply recently.”

The ECB also expects wage rises to cool to 3% in 2025 from 4.8% this year, a rate of increase Lagarde said was “consistent with our target.”

While inflation is set to ease, economic growth in the eurozone has been weaker than the ECB expected. Business surveys released Monday, pointed to another decline in activity in early December, although the services sector returned to growth.

Lagarde said the inertia in consumer spending had been striking, with consumers continuing to save a large proportion of their incomes.

Also, there are new threats to growth on the horizon, with U.S. President-elect Donald Trump having proposed higher tariffs on imports from Europe.

“Increasing geopolitical uncertainty could create new dents in household sentiment,” Lagarde said. “In particular, if the U.S.—our largest export market—takes a protectionist turn, growth in the euro area is likely to take a hit.” (…)

While Europe faces the threat of new barriers to trade with the U.S., Lagarde said it persists with national rules and regulations that are equivalent to high tariffs on sales of goods, and even higher tariffs on services.

“We have to look at those barriers and hurdles that we have inflicted on ourselves,” she said. “Remove the barriers. We have so much of it.”

Canada Inflation Cools to 1.9% in November Price pressures unexpectedly ease even as core measures of consumer inflation remain sticky

The consumer price index was unchanged last month, where economists expected a 0.1% advance after an acceleration to 0.4% growth the month before, Statistics Canada said Tuesday. That left annual inflation to cool slightly to 1.9% from 2% in October, where economists had expected it to remain.

Headline inflation has now been inside the 1% to 3% window the Bank of Canada seeks to maintain for 11 straight months and at or below the targeted midpoint four months running. That supports the case the central bank has largely gotten inflation under control, and defends its decision to again lower the bank’s policy interest rate an outsize half percentage point last week to stimulate household spending and business investment.

The easing in price growth last month was broad based, though helped by Black Friday and other seasonal discounting across a range of items. Shelter costs and grocery prices remained elevated for Canadians but the pace of increases in both mortgage-interest costs and food in stores continues to decelerate. (…)

Traditional core inflation excluding volatile food and energy costs eased in November but the trimmed mean and weighted median CPI gauges preferred by the central bank were steady at 2.65%. On a monthly basis, the two indicators of underlying inflation for a second straight month showed strong 0.3% gains. (…)

Bond Traders Target Deeper 2025 Fed Rate Cuts Than Market Expectations SOFR options bets anticipate more than half-point of 2025 cuts

Bond traders have been boosting options and futures wagers that the Federal Reserve is about to signal deeper interest-rate cuts next year than the market anticipates.

A quarter-point rate reduction is seen as practically a lock on Wednesday, so a key focus will be the Fed’s update of its quarterly projections. In September, officials’ median forecast of their policy path — dubbed the dot plot — indicated a full percentage point of total rate cuts both this year and next.

With inflation proving sticky, however, Wall Street banks have started to anticipate that the Fed will forecast perhaps one fewer cut next year, meaning three-quarters of a point in total. And some predict the central bank may pencil in just a half-point, a level that’s broadly in line with what swaps markets are pricing in.

But in interest-rate options, some traders are betting that the market’s view is too hawkish, and that the Fed will hew more closely to what it projected in September: the equivalent of four quarter-point cuts in 2025, driving the implied fed funds target rate down to 3.375%.

These traders may have in mind how potential signs of labor-market fragility could boost wagers on steeper Fed easing, and how Treasuries rallied earlier this month on data showing an unexpected jump in the jobless rate. (…)

Along with this, traders are increasing positions in fed funds futures. Open interest has risen to a record in the February maturity, pricing on which is closely linked to the Fed’s December and January policy announcements. Recent flows around the tenor have skewed toward buying, indicating fresh wagers that would benefit from a December rate cut and then additional easing priced into the following decision on Jan. 29.

The bullish activity seemed to get a boost from Morgan Stanley’s buy recommendation this month on the February fed funds contract. Investors should position for a higher market-implied probability of a quarter-point cut on Jan. 29, strategists said. There’s now a roughly 10% chance priced in for such a move next month, assuming the Fed delivers what’s expected on Wednesday. (…)

China’s Premier Calls for Urgency in Implementing Economic Work Li asks ministries to carry out plans ‘as early as possible’

But Chinese bond investors are still gloomy, actually gloomier:

The problem is domestic demand. And it’s not only housing, it’s also that labor income has stalled as Bloomberg reports:

A gloomy wage outlook fueled widespread debate on social media on Tuesday, with users expressing dismay over salaries they said have fallen back to levels seen a decade ago under the topic “era of 3,500 yuan ($480) a month.”

The discussion trended on Weibo before the platform removed it as a hot topic to prevent it from spreading more widely. It was triggered by a blogger who shared examples of highly-educated young people failing to find jobs with decent pay in a video, which spurred others to share their struggle in the job market.

“It’s the same for the civil engineering industry. I earned 4,500 yuan when I graduated 12 years ago, and my company is paying fresh graduates they hired this year the same,” one person wrote. “But living costs and especially home prices are not the same with 12 years ago.”

A commentary in the Communist Party mouthpiece People’s Daily on Tuesday said economic goals play a strong guiding role. “Maintaining a certain level of economic growth is crucial to resolving various contradictions and problems in development,” according to the article.

Will this work?

• China to boost direct fiscal support to consumers

China will promote stable growth in household income in 2025 by stepping up direct fiscal support to consumers and boosting social security, the state-run Xinhua news agency said on Monday.

China has set expanding domestic demand as a top task to spur growth next year, as significant pockets of weakness in the crisis-hit property sector continue to forestall a full-blown revival.

To boost consumption, China will “greatly increase” funds from ultra-long special bonds to support the industrial upgrades and consumer goods trade-in scheme next year, Xinhua said, quoting an official of the Central Financial and Economic Affairs Commission.

Steps will focus on boosting household income through greater fiscal spending on consumption, better social security, job creation, wage growth mechanisms, higher pensions for retirees, better medical insurance subsidies, and policies to spur childbirth, Xinhua said.

Policymakers are weighing inclusion of more products in high demand and with potential for replacement in the scheme, as this programme had a “very good” effect this year, it added, without stating the size of 2025 funding and products to be included.

This year, 150 billion yuan ($20.60 billion) from such bonds was allocated to support consumer goods, including fridges and TVs trade-ins, with overall sales revenue driven by the scheme topping 1 trillion yuan so far.

“From the current economic operation, we expect annual economic growth at around 5%,” the unidentified official told Xinhua.

Expecting the housing market to stabilise further, the official called for policy measures with direct impact on stabilising the real estate market to be adopted as soon as possible, with local governments getting greater autonomy to buy housing stock. (…)

Biden ratchets up AI chip war

The Biden administration is readying dramatic last-minute steps to preserve a crucial advantage in its AI arms race with China: supply of the world’s most advanced chips, Axios’ Dave Lawler and Alison Snyder write.

The chips needed to develop cutting-edge AI are the most valuable pieces of hardware on Earth, and the best chips Chinese firms can produce lag about five years behind the top end of the market.

A pending executive order could cap sales of AI chips to countries all over the world, not just China, according to The Wall Street Journal — with a particular focus on Southeast Asia and the Gulf.

Biden has already imposed limitations on the advanced chips that companies like Nvidia can export to China. But there are concerns that Chinese firms are able to buy or access them in other countries or from smugglers. There’s a thriving black market for Nvidia chips in China.

The new order would attempt to close that back door. It could also further divide the world along technological lines, with some countries likely getting unfettered access to U.S. tech and others facing limitations.

Details of the rule, which is pending regulatory review, haven’t been made public. But U.S. chipmakers and tech firms have been waging an intense behind-the-scenes campaign to prevent more restrictions.

The Western advantage in chipmaking tools (such as the extreme ultraviolet lithography machines built by Dutch firm ASML) is so vast that China has little chance of narrowing it over the next five years, says Chris Miller, a professor at Tufts and author of “Chip War.” (…)

The intrigue: While Trump’s administration-in-waiting is packed with China hawks, some incoming officials (including Trump himself) have indicated they also want to cut deals with Beijing. One piece of leverage in any such negotiations could be access to chips.

SENTIMENT WATCH

Databricks’ Ghodsi after $10B fundraising round: “It’s peak AI bubble”

“It’s peak AI bubble,” DataBricks’ CEO Ali Ghodsi told Dan Primack at Axios’ AI+ Summit in San Francisco.

Earlier on Tuesday, AI company Databricks announced it had secured up to $10 billion in new funding — one of the largest investment rounds in Silicon Valley history — at a $62 billion valuation.

“When you get billion dollar valuations on companies that have nothing, that’s a bubble,” Ghodsi said, referring to other companies.

When asked why he raised now, when he sees the market in a bubble, the CEO said that the decision came down to timing. (…)

The 11-year-old company initially intended to raise $3 billion to $4 billion, at approximately a $55 billion valuation, Ghodsi said. But as the press reported on news of the fundraise, investors started calling and the prices went up, he told Primack.

• At one point, he said, there was $19 billion of interest in the funding in the company, which has $3 billion in ARR.
• “It started around 80 bucks a share, and ended up at $92.50 so, yeah,” he said, noting that they cut back the investors and took about half the interest.
• The funding came from Thrive Capital and also includes investments from Andreessen Horowitz, DST Global, Abu Dhabi-based MGX, Wellington Management, and Capital Group, among other existing investors. (…)

  CATL Aims to Expand Battery Swap Network on Subscription Basis

The world’s largest maker of electric-vehicle batteries on Wednesday unveiled two standardized products of its swappable battery pack, dubbed Choco, which will enable an EV to replace its depleted battery with a charged one in as quickly as 100 seconds.

The company also announced a subscription package that allows customers to drive up to 3,000 kilometers (1,864.1 miles) for a starting price of 369 yuan ($51) a month, or drive an unlimited range from as low as 469 yuan. Customers can also opt for a separate battery insurance at 500 yuan with the battery maker’s insurer partners. (…)

Battery swapping is seen as key to free EV drivers from the range anxiety. However, the huge investment needed for construction and operation of such stations, as well as the long capital return period, tend to pose challenges for companies.

CATL, which supplies many big name carmakers including Tesla Inc., will keep working on the standardization of battery sizes, said Zeng.

Contemporary Amperex Energy Service Technology Ltd., a unit of CATL, plans to build the first 1,000 battery swap stations, according to its Chief Executive Officer Yang Jun, as part of a vision to eventually reach 30,000 to 40,000 stations and serve 20 million cars. (…)