Jobs Watch

The percentage of small businesses with job openings increased to 40% in August. This series is highly correlated with the JOLTS job openings series and suggests they are normalizing rather than tanking. There was a significant jump to 56% of small business owners who can’t find qualified workers for their job openings. (Ed Yardeni)

The NFIB data supports the stabilization of Job Postings on Indeed through September 6:

OPEC Trims Oil Demand Outlook Further Amid Price Slump The report comes after oil prices tanked last week, erasing all gains made this year

The Vienna-based cartel expects demand to grow by 2.03 million barrels a day this year and 1.74 million barrels a day in 2025, from 2.11 million and 1.78 million barrels a day previously. Total demand is estimated to reach 104.2 million barrels a day in 2024 and 106 million the following year.

Demand is still seen at healthy levels—well above the historical average of 1.4 million barrels a day seen before the pandemic—bolstered by strong air travel and road mobility, as well as healthy industrial, construction and agricultural activities in non-OECD countries, OPEC said. (…)

In its latest report, the cartel raised its estimates for global economic growth to 3% this year from 2.9% previously, but left expectations for next year unchanged at 2.9%. (…)

Meanwhile, overall OPEC crude-oil production fell by 197,000 barrels a day to 26.59 million barrels a day in August, dragged down by Libya’s supply disruptions. Libyan production fell by 219,000 barrels a day to 956,000 barrels a day, while Saudi Arabia’s production fell by 25,000 barrels a day to 8.98 million barrels a day, the cartel said, citing secondary sources.

OPEC kept its estimates for supply growth from countries not participating in the Declaration of Cooperation—the formal name for OPEC+—at 1.2 million barrels a day for 2024, saying the main drivers of growth are expected to be the U.S., Canada and Brazil. Growth estimates for 2025 were also maintained at 1.1 million barrels a day. (…)

• Oil’s Fall Into $60s Widens the Runway for the Global Economy to Make a Soft Landing

With global benchmark Brent crude falling below $70 a barrel for the first time since late 2021 on Tuesday, a key component of the energy shock that drove the worst inflation crisis in a generation is already benign enough to give policymakers a green light for interest rate cuts.

But the prospect of a descent toward $60 a barrel in 2025, raised by forecasters from Citigroup Inc. to JPMorgan Chase & Co., and echoed on Monday by one of the world’s largest commodities traders, could further bolster the chances of the US and its peers weathering the effect of high borrowing costs without a damaging recession. (…)

The promise of $60 oil — at least for those who investors and policymakers who believe it — has the potential to further depress headline inflation rates and offer consumers a disposable-income boost. (…)

Adjusted for inflation, oil is now at levels seen two decades ago, when Beijing’s commodities boom was just beginning. Analysts at JPMorgan and Citigroup expect prices to fall further next year, as subdued demand growth is overwhelmed by a flood of new supply. (…)

Global oil production will swell by 1.5 million barrels a day this year and next — led by American shale fields — surpassing growth in world demand by roughly 50%, according to the International Energy Agency in Paris. This supply surge is one reason why prices have continued to wilt despite extended production cuts by Saudi Arabia and its allies in the OPEC+ cartel. (…)

The SHOK model devised by Bloomberg Economics suggests an immediate drop of that magnitude would remove 0.4 percentage point off inflation rates in the US and Europe in late 2024 and early 2025. For China, the decline would be half of that. (…)

• US Online Grocery Prices Plunge the Most on Record in August

Data by Adobe Inc. shows that online grocery prices fell 3.7% in August from a month earlier, the largest decline since the firm began tracking the numbers in 2014. (…)

Overall, online prices fell 4.4% in August from a year earlier, the 24th consecutive month that they’ve posted an annual decline, according to Adobe’s Digital Price Index.

The gauge is created by analyzing data from 1 trillion visits to retail sites and over 100 million product codes across 18 categories. The methodology behind the index was developed with guidance from Austan Goolsbee before he became president of the Federal Reserve Bank of Chicago.

Bond Market Sees Risk of Inflation Falling Below Fed Target

Two years into the Federal Reserve’s battle against inflation, bond investors are seeing a new risk: Consumer price growth is slowing too much.

A day ahead of the August inflation report, one gauge of expectations of consumer price index increases is showing that the inflation rate is in danger of falling below the Fed’s target. The central bank has long argued that persistently low inflation is as detrimental to the economy as elevated prices because it would force policymakers to keep borrowing costs too low for too long, reducing the Fed’s ability to fight off economic downturns.

“Market participants are sensing that the inflationary surge is now fully over, and there’s some chance here now, with the balance of risk being shifted to the employment mandate, that the Fed undershoots its inflation target,” said Tim Duy, chief US economist at SGH Macro Advisors. “You do have to take those risks fairly seriously.”

The so-called 10-year breakeven rate fell to 2.02% on Tuesday — the lowest closing level since 2021. That suggests investors see inflation averaging over the coming decade below the Fed’s 2% goal since historically CPI runs about 40 basis points above the preferred Fed target metric, the personal consumption expenditures price index.

The rate is calculated based on the difference between the yield on inflation-protected securities, or TIPS, and standard Treasuries. The falling measure is driven by the yields on the nominal bonds falling faster than the TIPS, which typically are less traded than regular bonds. (…)

In addition to the longer-term inflation outlook, Angelo Manolatos, a strategist at Wells Fargo Securities, said inflation swaps contracts are showing an even more dire outlook in shorter horizon.

The one-year swaps suggested traders are betting that consumer prices will only rise about 1.7% over the next 12 months. That would mark a sharp slowdown. (…)

China’s Unworkable Housing Rescue Math Is Prolonging Crisis

In May, China’s central government urged more than 200 cities to buy unsold homes to ease oversupply. More than three months later, only 29 have heeded the call.

The glacial pace of implementation — driven in large part by the unattractive economics of the plan for local governments — underscores the challenge President Xi Jinping faces as he tries to arrest a record property slump that’s threatening to undermine the country’s growth targets.

The plan has been a key part of the government’s attempt to shore up the real estate sector, while achieving Xi’s goal of creating more affordable housing. The disappointing progress raises the pressure for more forceful measures as China tries to deal with 382 million square meters of excess inventory, equivalent to the size of Detroit.

“Local governments have made slow headway,” Ding Zu Yu, chairman of real estate information platform Shanghai CRIC Info Tech Co., wrote in a late August report. Purchases stood at only 1.9% of unsold apartments nationwide as of July, Ding estimates. (…)

Buying apartments at this point makes little financial sense for those officials, as apartment prices are expected to drop at least another 30% in major cities before stabilizing, according to Jefferies Financial Group Inc. (…)

A few cities have proposed to resort to heavy bargaining to minimize their risks, raising doubts on whether distressed developers would be willing to sell their inventory. (…)

“We do not expect a wide rollout of the purchase program due to the lack of funding and the fact that banks and state-owned firms need to bear the full credit and investment risks,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.  (…)

• China Brings Heartbreak to US Families With Foreign Adoption Ban

(…) The ban applies to all pending applications, according to a US State Department spokesperson, who put the number of affected families at hundreds. (…)

“It truly fulfills a Chinese sense of assertiveness that ‘We can take care of our orphans well and we don’t need to send them to the West,’” said Guo Wu, associate professor of history at Allegheny College, noting how much wealthier China has become over the three decades since the adoptions formally began. (…)

Demographics is also a consideration for leaders in Beijing. Foreign parents in past decades helped underfunded Chinese orphanages find homes for babies — mostly girls — abandoned by parents complying with the now-scrapped one-child policy.

That saw China send some 150,000 children abroad, with about half going to America, said Zhou Yun, an assistant professor of sociology at the University of Michigan. With China’s birth rate hitting a record low last year, Beijing is now trying to encourage people to have more children. (…)

Demographic issues are a threat to China’s already slowing economy, as officials try to bolster the declining workforce. (…)

JPMorgan Leads Banks in Dimming Outlooks, Spoiling Win on Rules Tighter margins, struggling borrowers spark warnings by banks

Fears that a Goldilocks era of healthy borrowers and fattened loan margins is ending swept onto the market’s center stage Tuesday, as financial stocks tumbled. JPMorgan Chase & Co. dialed back expectations for next year’s net interest income, while major auto lender Ally Financial Inc. sounded a warning bell on consumer credit metrics. (…)

“We’re clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that’s worsened,” Ally Chief Financial Officer Russ Hutchinson told an industry conference. “As that pool of struggling borrowers in those later-stage delinquency buckets has grown, it gives us pause.” (…)

At JPMorgan, interest-rates trends were the theme, as President Daniel Pinto told analysts that they’re being too optimistic in projecting next year’s expenses and net interest income — the difference between what banks earn on their assets and what they pay on debts.

NII, as it’s known in the industry, surged to a record at the four largest lenders last year on the back of higher rates. But for months, JPMorgan leaders including Chief Executive Officer Jamie Dimon have been cautioning shareholders that the firm is “over-earning” amid tailwinds that wouldn’t last forever.

Now, they’re diminishing amid expectations for the Fed to lower rates in coming months, Pinto said, calling analysts’ current NII estimates “not very reasonable.”

Meanwhile, Fed Vice Chair for Supervision Michael Barr unveiled extensive changes to proposed bank-capital rules — slicing roughly in half the 19% capital hike that regulators had proposed in mid-2023 for the eight biggest US banks.

Those lenders, including JPMorgan, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. would now face a 9% increase in the capital they must hold as a cushion against financial shocks. (…)

CONSUMER WATCH

US Consumer Borrowing Rises $25.5 Billion, Most Since Late 2022 Credit outstanding in July topped all forecasts in survey

(…) Revolving debt outstanding, which includes credit cards, increased $10.6 billion, the most in five months. Non-revolving credit, such as loans for vehicle purchases and school tuition, surged $14.8 billion in more than a year. (…)

The increase in borrowing helped fuel the biggest jump in retail sales during the month since early 2023. That included a pickup in purchases in motor vehicles. (…)

A New York Fed report last month showed that while the share of overall consumer debt in delinquency held at 3.2% in the second quarter, the share of auto and credit-card loans that were newly delinquent continued to creep higher.

The share of auto loan balances that became at least 30 days delinquent was the largest since 2010. The share of credit card debt that was newly delinquent rose to 9.05%, the most in about 12 years.

• Net credit losses have climbed in Citi’s large cards business, and payment rates have started to “come down a bit,” he said, adding that it’s within ranges previously discussed by the firm. Meanwhile, more affluent customers are driving much of the spending growth. Mason said that, on a full-year basis, net credit losses look to be about 3.5% to 4% in the company’s branded cards business and 5.75% to 6.25% in retail services.

Delinquency rates are not back to their pre-financial crisis levels just yet:

Consumer loans have reached back to disposable income trends. Expenditures keep outpacing both traditional sources of funds.

The gap is filled by reduced savings owing to the huge wealth effect from equities and housing. Note how all lines are well above the pre-pandemic trend. See any bite from higher interest rates? Income, credit and spending are all well above trend and unwavering.

From Bank of America’s internal credit card data:

Looking at the underpinnings of the US consumer, the picture remains fairly healthy. While data from the Bureau of Labor Statistics (BLS) shows that jobs growth is cooling, with nonfarm payrolls growth of 142K in August 2024 compared to the 2023 average of 251K, our Bank of America internal data on after-tax wages and salaries growth is not showing signs of a slowdown, and, in fact, accelerated in August for all income groups. After-tax wage growth remains highest for lower-income households in August 2024, though there has been some notable acceleration in higher-income wage growth since last year.

Meanwhile, Bank of America internal data on households’ savings and checking balances continues to show that median balances, while well off their highs, remained up at least 10% in inflation-adjusted terms, with nominal growth up over 33%. And while some headlines have speculated that uncertainty around the upcoming US election will stifle consumers in the coming months, a study from the University of Chicago finds that while the election may affect consumer sentiment, spending plans typically aren’t impacted.

  

BTW: Bank of America announced today that it’s raising the minimum wage it pays employees to $24, up from $23. The bank’s increase goes into effect next month and will apply to workers across its consumer business: bank tellers, call center workers, and more. Bank of America previously said it would raise its minimum wage to at least $25 by 2025. “The payback is lower turnover.” In 2019, the bank said it would pay $20 per hour, at minimum. The following year it hiked pay by $3 per hour to meet that goal. That helped set off a minimum pay-hiking frenzy, with some big bank rivals following suit. (Axios)

The NY Fed’s August Survey of Consumer Expectations shows little, if any, consumer angst:

  

• The latest Atlanta Fed GDPNow (Sept. 9) is at +2.5%. “The nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 3.2 percent and 0.0 percent, respectively, to 3.5 percent and 1.2 percent.”

• The NY Fed Nowcast is at +2.6% (Sept. 6), up from +1.8% on Aug. 16. Real GDP was up 3.0% in Q2.

The fixed income market anticipates big cuts:

Small Business Optimism Dips in August

The NFIB Small Business Optimism Index fell by 2.5 points in August to 91.2, erasing all of July’s gain. (…) The Uncertainty Index rose to 92, its highest level since October 2020. Inflation remains the top issue among small business owners, with 24% of owners reporting it as their top small business operating issue, down one point from July. (…)

Chinese Exports Rose in August Despite Growing Trade Barriers Outbound shipments rose 8.7% from a year earlier in August

Outbound shipments in August rose 8.7% compared with the same period a year earlier, picking up from July’s 7.0% increase, the General Administration of Customs said Tuesday. That beat the 6.6% growth tipped by a Wall Street Journal poll of economists.

The rise in shipments sent the value of exports to their fastest on-year increase in 17 months, as export volumes reached a record high, according to Zichun Huang, an economist at Capital Economics. “Outbound shipments are likely to remain strong in the coming months,” added Huang, in a note to clients. (…)

The growth of China’s exports to the U.S., its second-largest trade partner, accelerated to 13.4% on year in August, up from July’s 8.0%. Shipments in August to the Association of Southeast Asian Nations and EU, its No. 1 and No. 3 trade partners, slowed but still grew at 9.0% and 5.0% respectively, according to calculations made by The Wall Street Journal based on official data. (…)

The lackluster domestic demand was also indicated in Tuesday’s import data. August import growth cooled to 0.5% in August, after surging 7.2% in July, official data showed. Economists had projected August imports would rise 2.5%. That widened the August trade surplus to $91.02 billion, compared with $84.65 billion in July and the $80.0 billion tipped by a WSJ poll of economists.

Bloomberg adds:

Chinese companies are having to cut prices to secure sales, with the volume of shipments rising faster than the value in recent months. Data out Monday showed that producer prices continued to fall, with prices of manufactured goods dropping 2.7% in August from a year earlier. (…)

Vehicle exports soared to a record. The breakdown of where those cars went isn’t available yet, but it may show Chinese companies trying to get more EVs into Europe before definitive tariffs kick in.

Overall exports to almost every market grew, with double digit expansions to the EU, India and Brazil. Shipments to the US grew 5.1% to the most since September 2022, while exports to Russia also picked up to the highest this year.

Among EU nations, shipments to Germany exceeded $10 billion for the first time since August 2022 and those to France hit the highest in more than two years.

• China urged to spend up to $1.4tn to battle deflation

Global Trade Dims as Chips Boom Faces Risks: Bloomberg Tracker

Appetite for chips in August emerged as one bright spot in an otherwise increasingly gloomy outlook for world commerce — but even that sector faces headwinds.

Bloomberg’s Trade Tracker showed two out of 10 key measures of global commerce in “below normal” territory, while eight were in “normal” and “above normal” territory.

Exports from South Korea, a bellwether for global demand of semiconductors to batteries, surged in early August at the fastest pace since May 2022. Shipments of semiconductors, in particular, soared by about 42% from the prior year.

The solid print is rare these days in the world of trade, where slowing economic growth, hefty tariffs and shifting supply chains weigh on demand — with no indication of abating. (…)

While robust retail sales quelled immediate investor fears about increasing recession risk in the US, manufacturing activity shrank at the fastest pace this year, as new orders declined. It was a similar story in the Eurozone, where manufacturing output went deeper into contraction. (…)

From S&P Global’s August Global Manufacturing PMI:

August saw global manufacturing production decrease, albeit only slightly, for the first time in 2024 so far. Output contracted in both the intermediate and investment goods industries. Although the upturn at consumer goods producers continued, the rate of growth was only mild and the weakest during the current 13-month sequence of expansion.

July and August have seen back-to-back contractions in the level of new work received by global manufacturers. The rate of growth was also identical to the prior survey month.

All three of the sub-industries covered by the survey (consumer, intermediate and investment goods) saw new order intakes decrease. The trend in global trade flows was especially subdued, as the volume of new export business fell for the third straight month and at the quickest pace since last December. China, the US, Japan, Germany and the UK were among the larger exporting nations to register reduced new export order intakes.

All this while Americans keep splurging on goods. Maybe the recent manufacturing weakness was due to inventory management, which may be over…

China’s $6.5 Trillion Stock Rout Worsens Economic Peril for Xi

(…) The risk for Xi Jinping’s government is that the market slump further erodes confidence among consumers and businesses, spurring a deflationary feedback loop for the economy. That’s one reason why state-backed funds have spent billions of dollars trying to prop up stock prices, to little avail. (…)

Just this year, state funds are estimated to have purchased around $66 billion worth of exchange-traded funds to prop up stocks through mid-August. Restrictions have been tightened over quant trading and short selling in a bid to reduce volatility, while companies are urged to boost buybacks and dividend payouts. In February, China replaced the head of its securities regulator in a surprise move. (…)

In all, about $6.5 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021. (…)

Earnings per share for the MSCI China Index fell 4.5% from a year earlier in the second quarter, the worst performance in five quarters, according to data from Bloomberg Intelligence. (…)

Goldman Sachs CEO says trading revenue is heading for a 10% slide in 3Q

Goldman Sachs’ trading revenue will probably slip 10% in the third quarter because of sluggish conditions last month, CEO David Solomon said on Monday.

Given “a more challenging macro environment, particularly in the month of August, that business is trending down close to 10%,” Solomon told investors at a financial conference in New York.

The slide will follow a very strong quarter for trading in the third quarter of 2023, when equities revenue jumped 8%. (…)

Investment banking continues to improve, even though activity from financial sponsors has not rebounded as much as expected, said Solomon, who was hopeful that private equity-led deals will bounce back at the end of this year and in 2025. (…)

Citigroup’s Chief Financial Officer Mark Mason told the same conference earlier Monday that investment banking fees are expected to jump 20% in the third quarter from a year earlier. (…)

“The combination of those things this quarter will likely have an approximately $400 million pre-tax impact, largely showing up in revenues,” Solomon said. (…)

Meanwhile, the U.S. economy has been in “reasonable shape,” suggesting credit conditions will remain relatively steady, he said.

• Biggest US Banks’ Capital Hike Chopped in Half in Latest Plan by Regulators Top banks face 9% increase in revised plan from 19% earlier

(…) The capital overhaul first announced in July 2023 is tied to Basel III, an international accord that started more than a decade ago in response to the global financial crisis of 2008. (…)

APPLE DAY YESTERDAY?

Hmmm…

• Apple Loses EU Top Court Case Over €13 Billion Tax Bill

• Google Loses EU Court Fight Over €2.4 Billion Antitrust Fine