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 .

October 8, 2024

October 9, 2024

CONSUMER WATCH

Overall, in our view, the consumer continues to show modest forward momentum. Bank of America aggregated credit and debit card spending per household fell 0.9% year-over-year (YoY) in September, following a 0.9% YoY rise in August. But the timing of Labor Day impacted the YoY comparisons over August and September. Seasonally adjusted spending rose 0.6% month-over-month (MoM) in September, following a 0.2% decline in August.

Looking at quarterly averages, Services spending growth remains very persistent, with no clear direction to retail spending growth.

Hurricane Helene, which resulted in a tragic loss of life and widespread displacement of communities, occurred relatively late in the month, so the impact on overall credit and debit card spending was limited at the national level. However, in the last week of September, card spending was down sharply in impacted states.

Bank of America internal data on after-tax wages and salaries growth continues to be supportive of consumer spending. Though higher-income growth has made notable gains over the past six months, lower-income wage growth remains strongest at 3.5% YoY in September.

Americans’ home equity as a percentage of home values is at its highest since the 1950s, according to Federal Reserve data. This is a product of many factors. For one, house prices have increased sharply over the past five years. And at the same time, the level of housing transactions has been low, with many homeowners reluctant to move given rising mortgage rates and often being ‘locked in’ to much lower, fixed rates.

Wage Growth and Labor Market Tightness

Just released by the NY Fed:

Good measures of labor market tightness are essential to predict wage inflation and to calibrate monetaryvpolicy. This paper highlights the importance of two measures of labor market tightness in determiningvwage growth: the quits rate and vacancies per effective searcher (V/ES)—where searchers include bothvemployed and non-employed job seekers.

Amongst a broad set of indicators of labor market tightness, wevfind that these two measures are independently the most strongly correlated with wage inflation and alsovpredict wage growth well in out-of-sample forecasting exercises.

Conversely, transitory shocks to productivity have little impact on wage growth.

The Heise-Pearce-Weber (HPW) Tightness Index uses both the quits rate and V/ES jointly:

Figure 3 demonstrates the fit of the HPW Index visually by plotting it against wage growth, measured using a 3-period moving average of the 3-month growth in the ECI (both series are normalized to have a mean of zero and variance of one for ease of comparison). We compare our measure against a common measure of labor market tightness: the Conference Board’s survey measure of consumers’ perception of job availability.

Both the Conference Board measure and the HPW index track wage growth well in the prepandemic period. However, in the pandemic period, our measure performs significantly better.

Having shown the ability to predict contemporaneous wage growth, we now turn to a forecasting exercise where we leverage the quits rate and V/ES to make predictions on wage growth.

Based on our methodology, we predict an annualized 3-month ECI reading of 3.33 percent in 2024:q3 (0.82 percent compared to the previous quarter), after 3.41 percent annualized in 2024:q2.

FYI, the ECI wage growth was 4.0% YoY in Q2, down from 4.3% in Q1 and 3.0% in Q4’19. On a QoQ basis, ECI-Wages slumped from +1.1% in Q1 to +0.8% in Q2. In 2019, ECI-Wages growth averaged +0.74% per quarter.

Also FYI, the Atlanta Fed Wage Growth Tracker was at 4.6% YoY in August (3m m.a.):

German Government Slashes Economic Forecasts Germany has struggled to recover from the economic hit from Russia’s full-scale invasion of Ukraine

The German economy should contract 0.2% this year, Germany’s economy ministry said in a fall economic projection, considerably lower than the 0.3% rise it anticipated in April.

That would mean Germany’s economy would shrink for the second-straight year—it contracted 0.3% in 2023—for the first time since the early-2000s. That marks a contrast with other developed economies, such as the U.S., which grew 2.9% last year and 3% in the second quarter of this year on an annualized basis.

Germany has struggled to recover from the economic hit from Russia’s full-scale invasion of Ukraine, which caused energy prices to spike, scarring its energy-intensive manufacturing sector that has yet to recover its pre-pandemic output.

Europe’s largest economy is also weakly placed as a typically export-driven nation amid the recent global economic slowdown, with demand for German goods in China tailing off.

The economy minister, Robert Habeck, said Wednesday that Germany also has less leeway to stimulate the economy than other leading nations, including the U.S., due to a constitutionally enshrined fiscal rule that prohibits large deficits. (…)

Berlin expects gross domestic product to rise 1.1% in 2025 and 1.6% in 2026, as private consumption and a recovery of exports help boost growth. (…)

Germany’s government expects inflation to fall from an average of 5.9% last year to 2.2% in 2024 and 2.0% in 2025—the latter matching the ECB’s target.

• French government to present 2025 belt-tightening budget

France’s government is to deliver its 2025 budget on Thursday with plans for 60 billion euros ($65.68 billion) worth of tax hikes and spending cuts to tackle a spiralling fiscal deficit.

Prime Minister Michel Barnier’s new government is under increasing pressure from financial markets and France’s European Union partners to take action after tax revenues fell far short of expectations this year and spending exceeded them.

But the budget squeeze, equivalent to two points of national output, has to be carefully calibrated to placate opposition parties, who could not only veto the budget bill but also band together and topple the government with a no-confidence motion.

Lacking a majority by a sizeable margin, Barnier and his allies in President Emmanuel Macron’s camp will have little choice but to accept numerous concessions to get the budget bill passed, which is unlikely before mid to late December. (…)

Barnier has said he will spare the middle class and instead target big companies with a temporary surtax and people earning over half a million euros per year.

All taxpayers will nonetheless be hit by plans to restore a levy on electricity consumption to where it was before an emergency reduction during the 2022-2023 energy price crisis.

The government has said the budget bill will reduce the public deficit to 5% of gross domestic product (GDP) next year from 6.1% this year – higher than almost all other European countries – as a first step towards bringing the shortfall into line with an EU limit of 3% in 2029.

China Wages End Two Quarters of Gains, Adding Deflationary Risks Salaries offered to new hires decrease 0.6% from a year ago

Average monthly salaries offered by companies to new recruits in 38 key Chinese cities fell 0.6% in the third quarter from a year ago to 10,058 yuan ($1,423), according to data provided by online recruitment platform Zhaopin Ltd. and compiled by Bloomberg. The decrease follows a modest uptick of 2.2% and 0.5% in the first and second quarters, respectively.

The figures add to other recent data in revealing a worsening job market that’s discouraging residents from spending more and deepening a cycle of price and wage declines. (…)

The Q3 earnings season begins.

Ed Yardeni:

The stock market rally continues to broaden as more stocks participate. The percentage of S&P 500 companies with positive y/y price changes is at 85% (chart).

The stock market has rallied even as the 10-year Treasury bond yield rose from 3.62% on September 16 to 4.07% today (chart). That surprised plenty of bond investors who expected the Fed’s 50bps cut in the federal funds rate (FFR) and very dovish forward guidance to push yields lower.

We weren’t surprised because the backup in the bond yield confirms our view that the Fed is stimulating an economy that doesn’t need additional stimulus. Today’s reading of the Atlanta Fed’s GDPNow tracking model shows a 3.2% (saar) increase in Q3’s real GDP, following Q2’s 3.0% (chart). In other words, real GDP also continues to notch new record highs. (…)

We think the FOMC will leave rates unchanged next month. None-and-done is still our outlook for the rest of this year.

From Goldman Sachs:

  

The much stronger-than-expected September employment report accelerated the adjustment higher in UST yields as the market quickly reduced the likelihood of large Fed cuts, and we think the upward pressure on rates has room to run. While the adjustment has so far played out most prominently in front-end rates, we continue to think that, over the medium term, further accumulation of good growth news should drive yields higher across the curve.

The strong employment report also further boosted the broad Dollar, and we think the report is sufficient to put a floor under the Dollar, which should also continue to benefit from its safe-haven status.

Further escalation in the Middle East conflict has continued to raise questions about the growth and market impacts of a broader war in the region. We continue to think that the biggest impacts of such a scenario would come through a disruption in energy supplies, with a potential disruption to Iranian oil production likely to lead to a further rise in oil prices.

Indeed, we estimate that Brent prices could rise by $10-20/bbl by 2025 in the event of a 1mb/d persistent disruption or 2mb/d 6-month disruption to Iran supply, with the ultimate impact depending on whether OPEC chooses to offset the production losses by deploying spare capacity.

In both disruption scenarios, we caution that a potential reversal in speculative positioning—which currently sits in the lowest 1% of history—may increase the upward pressure on prices and risk premia.

On the gas front, we estimate that a full, sustained disruption to Israel’s Leviathan and Tamar gas fields this winter would tighten the global LNG market by around 2%, which would leave European markets vulnerable to price spikes, especially this winter.

AI CORNER

Internet Hype in the ’90s Stoked a Power-Generation Bubble. Could It Happen Again With AI? The current electricity boom has echoes of—but also important differences from—an earlier boom-bust cycle

(…) Hugh Wynne, co-head of utilities and renewable-energy research at SSR, worked at a power-project development company from the mid-1990s to 2001. He said developers at the time assumed that the long-term power price would match the long-run marginal cost of new power-plant capacity, covering both variable operating costs as well as capital costs. In fact, Wynne said, after the aggressive build-out resulted in a surplus of capacity in many markets, power prices fell sharply, covering only the operating costs of these power plants—not enough for the companies to pay off the debt they raised to build them.

Could the current market face similar problems? Likely not in quite the same way. For one thing, the drivers of electricity-demand growth are more tangible this time around. Tech companies are spending real money on building out AI infrastructure, and the Chips Act contains clear incentives for nearshoring chip manufacturing. At the same time, energy demand from transportation and industrial applications—including fracking equipment—is steadily shifting to electricity.

Secondly, the industry today is more familiar with how competitive power markets work. Independent power producers and the financiers backing their projects were burned enough by the last gold rush that they aren’t likely to invest in new power plants without some kind of long-term power-purchase agreement, Wynne said. Always-available power is important for data centers, and tech companies have been willing to sign long-term contracts at premium prices. (…)

Notably, utilities’ long-term demand forecasts have changed a lot over the past few years and are likely to keep being revised. In early 2021, utilities in aggregate expected load to grow 8.2% by 2035 compared with 2021 levels, according to analysis by the Rocky Mountain Institute. As of June 2024, the expected growth was 23.9%. (…)

Independent power producers might not be the only beneficiaries of rising electricity demand. Regulated utilities have been teaming up with tech companies to develop new generation, including Berkshire Hathaway-backed NV Energy and Duke Energy. Utilities in certain states aren’t allowed to own their generation, but some have said they would push for legislation to change that.

The power industry has matured a lot in the past two decades. But the same fundamental lesson holds: High-voltage expectations can lead to painful burns.

Related: Power Play

• Amazon Unveils AI Tool to Help Drivers Find Packages Faster Technology will shorten typical delivery route by 30 minutes

The technology projects a green circle on packages to be delivered at each stop and red Xs on those to be delivered later, Amazon said Wednesday at a Nashville media event focused on its logistics and online shopping initiatives.

Called Vision Assisted Package Retrieval and in development since 2020, the tool will be deployed in 1,000 Amazon vans next year and will shorten the typical delivery route by about 30 minutes, the company said.

The tool uses computer-vision technology initially developed in Amazon warehouses to identify products without using barcode scanners. The technology was adapted for vans’ cramped cargo areas and integrated with delivery-route navigation software.

“Delivery drivers will no longer have to spend time organizing packages by stops, reading labels or manually checking key identifiers like a customer’s name or address to ensure they have the right packages,” Amazon said in a release. “They simply have to look for VAPR’s green light, grab and go.”

• OpenAI may be a tech darling but data indicate it won’t actually turn a profit until 2029, The Information reported. Losses are expected to be as high as $14 billion in 2026. (Bloomberg)

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 .

October 8, 2024

October 9, 2024

US Small-Business Optimism Little Changed Ahead of Election NFIB index restrained by pullback in capital spending plans

The National Federation of Independent Business optimism index edged up 0.3 point to 91.5 after declining in August by the most in more than two years. The group’s uncertainty index rose 11 points to a record high as small-business owners await the outcome of the November election.

Three of the 10 components that make up the optimism index fell, while five increased and two held steady. The share of firms planning capital expenditures slid by 5 points to 19%, the lowest reading since April 2023. Some 34% of firms reported job openings they couldn’t fill, the smallest share since the start of 2021.

While a net 15% of owners said they plan to create jobs in the next three months, up 2 percentage points from the prior month, hiring plans are still below the levels seen the last time the economy experienced solid growth, NFIB said.

Among those reporting lower profits, 37% blamed weaker sales and 14% said the decline was due to prices of materials. Labor costs were cited by another 13%, and 11% singled out lower selling prices.

• The sales rating is still recessionary!

• Comp and prices remain at the high end of the range.

• Profits are plummeting.

• Who would hire in these condition?

• Great chart suggesting 4.5% wage growth ahead.

@StephaneDeo

• Inventories are very, very low. No confidence.

• Inflation still the biggest problem.

• Maximum uncertainty.

• Same for consumers!!!

Is it really only about the elections?

Meanwhile, as seen in most consumer spending data, demand is sustained. Large businesses keep ordering lots of goods … from abroad…

@RobinMacNab

• The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 3.2 percent on October 8, up from 2.5 percent on October 1.
• After recent releases from the US Census Bureau, the Institute for Supply Management, the US Bureau of Labor Statistics, and the US Bureau of Economic Analysis, the nowcasts of third-quarter real personal consumption expenditures growth, third-quarter real gross private domestic investment growth, and third-quarter real government spending growth increased from 3.0 percent, 0.8 percent, and 1.7 percent, respectively, to 3.3 percent, 3.4 percent, and 2.2 percent.

Mexico Wants to Curb Chinese Imports With Help From U.S. Companies Government seeks to strengthen domestic supply chains amid rising trade tension between Washington and Beijing

Mexico wants to reduce its dependence on imports from China and is asking some of the world’s biggest manufacturers and tech firms operating in the country to identify Chinese products and parts that could be made locally.

The administration of leftist President Claudia Sheinbaum, who took office last week, wants U.S. carmakers and semiconductor manufacturers as well as global giants in the aerospace and electronics sectors to substitute some goods and components manufactured in China, Malaysia, Vietnam and Taiwan, said Deputy Trade Minister Luis Rosendo Gutiérrez.

“We want to focus on supporting our domestic supply chains,” Gutiérrez said in an interview. Talks with foreign companies have been informal, he said. (…)

The initiative comes as the Sheinbaum administration gears up for a review of the U.S.-Mexico-Canada Agreement in 2026. Consultations on the trade pact are set to begin in the second half of 2025, according to the document.

The talks among the three North American trading partners are expected to be more complex than in 2018 when the USMCA was signed to replace its forerunner Nafta, according to the presentation. Subjects to be discussed are expected to include trade with China and requirements for increased North American content in goods imported tariff-free into the U.S.

U.S. legislators and industry groups have raised concerns about China using Mexico as a back door to circumvent U.S. import tariffs. Mexican officials say that there is no evidence supporting such claims. “Mexico isn’t a springboard from Asia to the U.S.,” Gutiérrez said. (…)

Another executive at one of the firms approached by Mexican authorities said there is one big challenge: Mexico lacks basic infrastructure to substitute some high-end Chinese goods and components. That includes securing enough water and electricity to power up industrial parks. (…)

Federal Deficit Hit $1.8 Trillion for 2024, CBO Says U.S. budget shortfalls fueled by interest costs, Social Security, Medicare

(…) In all, the government collected $4.92 trillion in revenue and spent $6.75 trillion, putting the deficit at $1.83 trillion for the year that ended Sept. 30, according to the Congressional Budget Office, which issued its estimates ahead of the official administration tallies expected later this month.

The deficit in 2023 was officially $1.7 trillion, but it was actually larger than that. That is because the government recorded more than $300 billion in spending for student-debt cancellation in 2022 and recorded a similar-size spending cut in 2023 when the Supreme Court blocked President Biden’s program.

After making that adjustment, the deficit was slightly smaller in 2024 than in 2023. Overall, the deficit was 4% smaller than CBO had projected in June. (…)

The latest deficit reading is about 6.4% of gross domestic product. The U.S. has run larger budget deficits before, both in dollars and as a share of GDP. But the country set those records during wars, economic crises and the coronavirus pandemic, not during a period like today’s low unemployment and solid growth. (…)

All estimates carry uncertainty, but Trump’s fiscal proposals would increase budget deficits by $7.5 trillion beyond what would happen if Congress does nothing, according to an analysis from the Committee for a Responsible Federal Budget, or CRFB, which favors deficit reduction. (…)

Democrats, including Harris, say they will use tax increases on top earners and corporations to pay for new programs and reduce deficits. But the CRFB estimated that Harris’s proposals would increase deficits by $3.5 trillion. (…)

China Finance Ministry Calls Press Briefing, Firing Up Stimulus Hopes Sentiment in Chinese equities markets had softened after an earlier briefing by the country’s top state planner offered few concrete measures

The minister will introduce measures to “intensify countercyclical adjustment of fiscal policy,” the notice said, without providing additional details. (…)

Fiscal packages in China are typically designed and announced by the Ministry of Finance and approved by the National People’s Congress rather than the NDRC, CreditSights analysts noted.

“We think that it is too early to rule out any additional fiscal stimulus, but the scale may again fall short of market expectations,” CreditSights’ Zerlina Zeng and Karen Wu said in a note.

Bloomberg:

In a nod to the concerns of the private sector and investors, Chinese Premier Li Qiang on Tuesday vowed to “listen to the voice of the market” when formulating economic policies. His remarks echoed recent calls by China’s top decision-making Politburo to “face the difficulties squarely,” underscoring Beijing’s renewed urgency to shore up confidence after the economy grew at its slowest pace in five quarters.

Keep in mind that declining government spending has been a drag on economic activity. China’s broad budget expenditure shrank 3% in the first eight months of this year from a year ago.

The problem in China is not a lack of credit, rather a lack of demand as consumers and corporations have very low confidence and are saving and deleveraging. Real estate prices need to clearly stabilize before any lasting recovery in consumption begins.

The Chinese government is clearly aiming at boosting confidence. State controlled media carry positive headlines such as:

• In another tentative sign of stronger consumer sentiment, retail sales during the National Day holiday rose 9% from the same period in 2023, the official Xinhua news agency reported Tuesday, citing data from the State Taxation Administration.
• “The pattern since reopening has been stronger consumption during holidays, only to fade afterwards,” he said.
• #China’s consumption vouchers are boosting spending and may lift retail numbers in October and through 4Q, according to a report in the Securities Daily. *Shanghai saw double-digit growth in offline catering spending during the Golden Week holiday following two rounds of dining voucher issuance, official data show.

But the reality is different when looked in the proper perspective:

• China Holiday Spending Lags Pre-Covid Era, Showing Stimulus Need

Chinese tourists shelled out less money during their long holiday that ended Monday than before the pandemic, even as signs emerged that spending is stabilizing after a barrage of stimulus recently unveiled by the government.

While travelers made 10.2% more trips during the Golden Week break than in 2019, spending only increased by 7.9%, according to data released by Ministry of Culture and Tourism. That means per-trip expenditure actually dropped 2.1% from five years earlier, according to Bloomberg calculations based on the ministry’s figures.

Goldman Sachs illustrates how domestic tourism is rather stable:

Goldman also sets the record straight on recent housing trends:

Despite recent housing easing efforts, property transactions in large cities remained subdued during the National Day Golden Week, although property sales tend to be weak amid long holidays in China.

Based on our estimates, daily average primary market (new) home sales volume was 64% below year-ago level during the National Day Golden Week, and daily average secondary market (existing) home sales volume was 11% below year-ago level during the National Day Golden Week, although anecdotal evidence pointed to an improving sentiment in some cities.

We caution the data quality issue for home transactions during long holidays as some local housing authorities may publish their data in a delayed manner.

Young Chinese found confidence in last week’s vows to stimilate.

• “It’s absolutely going nuts today,” said Liying Wang, director at a local stock brokerage firm in the southern city of Chengdu, who started working in the industry in 1994.
• Her brokerage floor was packed with people rushing to open new accounts, many of whom were born in the late 1990s and early 2000s, and with little patience to wait.
• The outstanding amount of margin debt in Shanghai and Shenzhen exchanges rose to 1.54 trillion yuan ($218 billion) on Tuesday, up 7.4% from the last trading session on Sept. 30, according to data compiled by Bloomberg. That’s the fastest pace since at least 2013, when data shows an abnormal spike.
• A gauge tracking transfers from savings accounts into stock accounts by the Industrial & Commercial Bank of China more than tripled on Tuesday from Sept. 30 levels, media reports show.

That was before yesterday’s re-opening.

AI CORNER

Google Talks to Utilities About Nuclear Power for Data Centers AI boom has caused demand for energy to surge globally

Google is working with utilities in the US and other countries to assess nuclear power as a possible energy source for its data centers, underscoring surging interest in using atomic energy to feed the artificial intelligence boom.

“In the US, in highly regulated markets where we don’t have the opportunity to directly purchase power, we are working with our utility partners and the generators to come together to figure out how we can bring these new technologies — nuclear may be one of them — to the grid,” said Amanda Peterson Corio, global head of data center energy at Alphabet Inc.’s Google. (…)

For Google, having round-the-clock energy that isn’t intermittent is “critically important as we think about long-term growth,” Corio said.

If you missed that: Power Play

This could also prove nuclear for GOOG:

Antitrust Officials Weigh Splitting Google, Others Antitrust enforcers search for tough remedies to counteract alleged monopoly abuses

U.S. antitrust enforcers haven’t broken up a company in 40 years. Several high-stakes cases, including two involving Google, could determine whether that dormant period comes to an end.

The Justice Department submitted a filing Tuesday that presented a federal court with a range of potential options—from conduct restrictions to a breakup—aimed at ending what a judge said was Google’s unlawful monopoly in search.

The filing said the government is considering a “full range of tools” to restore competition, including “structural” changes to Google’s business that would prevent it from using products such as its Chrome browser or Android operating system to advantage Google’s engine search.

Google responded in a blog post that the Justice Department’s initial proposal for reforming the search engine market is “radical and sweeping” and could have “negative unintended consequences for American innovation and America’s consumers.”

U.S. District Judge Amit Mehta in August found that Google ingrained its monopoly by paying billions of dollars to operators of web browsers and phone manufacturers to be their default search engine. Mehta will now spend the better part of a year deciding what to do about it.

Google also faces the threat of breakup in a separate government lawsuit targeting its online-advertising business. And Ticketmaster-owner Live Nation and Meta Platforms are defendants in antitrust cases that could lead the Justice Department and Federal Trade Commission to ask courts to unwind the megamergers that helped forge their corporate empires.

The agencies alone can’t order a breakup; that power lies with courts. But there is little modern precedent to guide judges on when such a forceful remedy is appropriate. The last major ruling came in 2001, when a federal appeals court in Washington, D.C., found a trial judge overstepped in ordering the breakup of Microsoft. (…)

The last major one came with the 1984 breakup of AT&T, which then controlled long-distance and local phone service and had the telephone equipment market locked up. The telecommunications company negotiated the split with the Justice Department instead of waiting for a judge’s ruling on whether it had violated antitrust laws. (…)

Judges view breakups as an extreme remedy that could have unintended consequences, such as creating a new stand-alone company that later fails, said Cornell University law professor Erik Hovenkamp.

“Breakups are surprisingly hard from a practical standpoint,” Hovenkamp said, citing the challenge of divining how precisely to split a company apart. (…)

The Justice Department has until Nov. 20 to decide the specific fix it will propose in the Google search case. Mehta’s August ruling found that Google “has no true competitor” in mobile search. While its search engine is the best, he wrote, Google foreclosed competition by cutting off rivals from accessing the mobile devices where competing search engines could develop and grow. (…)