Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

US Labor Costs Rise Less Than Forecast as Inflation Eases Employment cost index increased 0.9% in second quarter

The employment cost index, which measures wages and benefits, increased 0.9% in the April-to-June period, after rising by the most in a year at the start of 2024, according to Bureau of Labor Statistics figures out Wednesday. The median estimate in a Bloomberg survey of economists called for a 1% rise. (…)

The second-quarter slowdown in employment cost growth was broad across private industries and included declines in construction, wholesale trade and information, according to Wednesday’s report. Compared with a year earlier, the ECI climbed 4.1%, the smallest annual advance since 2021.

Though there are a number of other earnings metrics published more frequently — including average hourly earnings figures from the monthly jobs report — economists tend to favor the ECI because it’s not distorted by shifts in the composition of employment among occupations or industries. It’s also the Fed’s preferred wage measure.

Wages and salaries for civilian workers increased 0.9%, the smallest advance in three years. They were up 4.2% from a year ago, also the least since 2021.

Adjusted for inflation, private-industry compensation grew 0.9%, while wages increased 1.1% — both accelerations from the start of the year. The strength of the jobs market, including positive real earnings growth, has been key to sustaining household demand. (…)

Wages for service workers in the private sector rose 1% from the prior quarter, unadjusted for inflation. Since compensation is a major cost for employers in this sector, Fed officials monitor it closely through a subset of inflation known as core services excluding housing.

Worker pay in goods-producing industries climbed 0.2%, the smallest advance since 2009. That included construction, where wages declined by the most on record.

Wells Fargo:

(…) With the ECI the Fed’s preferred barometer of labor costs growth, today’s data mark an important step toward the FOMC gaining “greater confidence” that inflation is cooling sufficiently to begin reducing the fed funds rate.

While still noticeably above last cycle’s peak of 2.9%, employment cost growth slowed to 4.1% year-over-year in Q2, the smallest gain in two and a half years. Moreover, having increased at an annualized rate of 3.7% in the three months ending in June, the second quarter’s figures show employment cost growth closely approaching a pace consistent with the FOMC’s 2% inflation objective once accounting for productivity growth (productivity gains allow businesses to raise compensation faster than prices). (…)

But importantly, the Employment Cost Index is considered the gold standard among Fed officials as it controls for compositional shifts in the economy’s jobs and is a more encompassing measure than average hourly earnings. The ECI accounts for the cost of employer provided benefits—which are just over 30% of total compensation costs—in addition to wage & salaries. It also includes labor cost growth for public sector workers in addition to private sector workers. As a result, the ECI’s moderation in Q2 marks an important step for the FOMC obtaining “greater confidence” that inflation is subsiding back toward 2%. (…)

  

Private sector compensation cost growth advanced 0.9% over the quarter after a 1.1% rise in Q1, with wages & salaries and benefit cost growth moderating. The slowdown came despite another hefty increase to private sector union workers (+1.6%) to help catch up to the compensation gains with non-union workers since the start of 2020. Public sector employment costs also eased over the quarter but are still running ahead of private industry gains over the past year after having initially lagged this cycle. (…)

As demonstrated in yesterday’s JOLTS report, employee retention has greatly improved, while waning demand for workers and growing pool of unemployed workers are lessening the extent to which employers need to raise compensation to retain existing or attract new workers. (…)

Ed Yardeni:

(…) [yesterday’s] employment indicators suggest that the labor market is in good shape. To some economists, it seems to be weakening. To us, it seems to have normalized. In July’s Consumer Confidence Index survey, the percentage of respondents agreeing that “jobs are plentiful” did fall to 34.1% from 42.8% in February, while the percentage saying “jobs are hard to get” edged up to 16.0% (chart). That means that 49.9% believe that jobs are available, which is slightly above the historical norm of 48.1%.

The jobs plentiful series closely tracks the JOLTS series on job openings and quits, both of which came out today but through June. Again, some economists look at these series and see weakening, while we see normalizing (chart). Take your pick.

China Home Sales Slump Drags On Despite Latest Rescue Effort New-home sales value slid 19.7% in July, faster than in June

The value of new-home sales from the 100 biggest real estate companies slumped 19.7% from a year earlier to 279.07 billion yuan ($38.6 billion), faster than the 17% decline in June, according to preliminary data from China Real Estate Information Corp. Transactions dropped 36.4% from June, after showing a notable increase in April and May. (…)

Bloomberg Economics estimates that the central bank’s $42 billion relending program can only help local governments purchase 0.8% of China’s 60 billion unsold homes.

S&P Global Ratings expects residential sales to drop 15% this year, more than the 5% decline it projected earlier. Fitch Ratings cut its annual sales estimate to a decrease of 15%-20%, worse than an earlier estimate of a 5%-10% drop. (…)

China PMIs Signal Continued Softness in Manufacturing, Slowdown in Services The manufacturing purchasing managers index dropped slightly to 49.4 in July, from 49.5 in June

Declines were seen in some key subindexes. The production subindex fell to 50.1 in July from 50.6 in June, while that for total new orders dropped to 49.3, compared with June’s 49.5. New export orders improved somewhat, rising to 48.5 in July from 48.3 in June.

China’s nonmanufacturing PMI, which covers both service and construction activity, also fell last month but remained in growth territory. The headline reading declined to 50.2 in July from 50.5 in June, the statistics bureau said.

The subindex that tracks service activity fell to 50.0 in July from 50.2 in June, while the construction subindex fell to 51.2 from 52.3.

Service activity in retail, capital market services and the property market all contracted in July, the data showed, reflecting subdued domestic consumption amid a protracted real-estate downturn. (…)

Canada Economy on Track to Grow 2.2% in Second Quarter

Gross domestic product is on track to grow at an annualized pace of 2.2%, according to Statistics Canada’s estimate Wednesday. That’s stronger than the Bank of Canada’s and economists’ forecasts of 1.5%, and is an acceleration from 1.7% between January and March.

The data point to Canada’s economy expanding 1.3% in the first half of the year, the fastest six-month period of growth since August 2022. Still, preliminary data suggest June output grew 0.1%, suggesting weakening momentum following a 0.2% expansion in May and 0.3% in April. (…)

Taken together with Canada’s rapid population growth due to strong immigration, Wednesday’s report shows an economy that’s still in excess supply and growing below its potential, which will continue to help cool price pressures as the Bank of Canada further reduces the restrictiveness of monetary policy.

While quarterly growth has picked up, data showed weakness in household spending as high interest rates weigh on consumers.

Retail trade was the largest detractor to growth in May, contracting 0.9% and more than offsetting the increase in the previous month. Wholesale trade also fell.

Manufacturing led the growth in May, with over half of the increase stemming from petroleum and coal products. That subsector rose 7.3%, its largest increase since June 2021.

The crude oil and other pipeline transportation industry rose 1.5%, reflecting in part the opening of the expanded Trans Mountain pipeline carrying Alberta crude to the British Columbia coast for shipment. (…)

In June, factories along with wholesalers saw declines in output, according to Statistics Canada’s early estimate. (…)

Three Big Differences Between the AI and Dot-Com Bubbles It’s looking a bit like summer 2000.

(…) Deluard draws a parallel between the present AI bubble (might as well call it what it is) and the bursting of the late 1990s dot-com bubble. He notes that the same thing happened in the summer of 2000. The US economy slowed, and money rotated from the similarly expensive tech leaders that were leading the market back then, and into the value laggards.

As some of you will recall, the 2000s cycle saw a shallow but eye-catching recession to accompany the bear market, plus big interest-rate cuts from the Federal Reserve.

However, Deluard argues, there are three major differences between now and then — ones that mean we may not see the recession, the cuts or even the same scale of bear market.

His first point is that the recession and rate cuts were largely driven by the September 11th, 2001, terrorist attacks on New York, “which we all hope were a one-time catastrophe”, as Deluard puts it. Without the terrorist attacks, there would probably have been a soft landing, and the rate cuts from the Federal Reserve would never have been as deep.

His second point is that fiscal policy is far more stimulative today than during the tech bubble. The idea of a developed economy government ever running a surplus seems unthinkable today, but that’s exactly what the US was doing back then. Today’s government spending forms another cushion against the potential impact of any bursting AI bubble.

His final point is probably the most intriguing, and one that perhaps points to deeper structural issues with our markets. This is about the rise of passive investing and how that might stifle the scale of any correction.

Passive investing has lots of advantages and I am by no means opposed to it. It’s cheap, it’s low maintenance, and it’s a very accessible way for “normal” people to invest their money without having to get deep into the weeds of financial admin. If anything has made investment more accessible — “democratised” it, if you must — it’s the rise of passive.

But you can have too much of a good thing. To put it simply, passive investing means a big dollop of money gets directed into stocks every month, without any discernment beyond “what’s biggest?” That’s a world in which active money — which is making judgements about value — has less power.

The exact levels and precise mechanisms are heavily disputed here, mainly because these days everyone has skin in the game on one side or the other. But it strikes me as common sense that if the majority of capital flows are being allocated on a passive, market-cap-weighted basis, that’s going to favour momentum investing — the big get bigger.

The risk, argues Deluard, is not so much that the great rotation stops altogether, but that “shorting” the momentum-driven side — i.e. betting that the Big Tech stocks will continue to fall — is just very dangerous.

The good news is that we’re all retail investors here (or at least hanging out in that camp for the purposes of this newsletter) and so actively shorting stuff or “pairs trading” indices is not the sort of thing most of us do.

From that point of view, investing in the boring value stocks that haven’t gone up is a reasonable way to bet on a rotation continuing, and one that’s nowhere near as likely to leave you nursing painful actual losses (as opposed to relative underperformance) as a short bet might. (…)

FYI:

Source: @TheTerminal, Bloomberg Finance L.P.

Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

US Job Openings Come in Above Forecast After Upward Revision

Available positions decreased to 8.18 million from a upwardly revised 8.23 million reading in the prior month, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as JOLTS, showed Tuesday.

The median estimate in a Bloomberg survey of economists called for 8 million openings.

The report still shows there’s solid demand for workers even though employers have pulled back on hiring and wage growth has slowed.

Indeed Job Postings show the labor market has recently stabilized.

Small cars are hot again

Americans are snapping up small cars again, not because they want to, but because it’s what they can afford.

Small car sales are outpacing the rest of the market this year, according to Cox Automotive data.

• While overall vehicle sales were up about 2% nationwide in the first half of 2024, subcompact crossover utilities grew more than 20%.
• Compact cars and SUVs also increased 18% and 12% respectively, per Cox.
• Full-size pickup truck sales, meanwhile, were down 4% for the first half of the year.

(…) Consumers on average are paying $11,000 more for a new car than they were five years ago,” she tells Axios.

The Chevrolet Trax, with a starting price of $21,495, is perhaps the best example of the trend.

• General Motors redesigned the small SUV for the 2024 model year, making it larger and less expensive but with more technology than the previous version.
• Even the base model comes with standard safety features like automatic emergency braking and lane-keeping assist, while higher-trim versions include Apple CarPlay, a Wi-Fi hotspot and adaptive cruise control — all for well below $30,000.
• Consumers love the Trax, with sales up 230% compared to the first six months of 2023.
• Other subcompact SUVs, like Mazda’s CX-50 (starting at $30,300) and Honda’s HRV (starting at $25,100), are also selling fast.

Compact cars are also booming, led by strong sales of the Nissan Sentra (+55%), Honda Civic (+38%) and Toyota Corolla (+26%).

• U.S. automakers pretty much gave up on small sedans in recent years, although the popularity of small SUVs like the Trax is keeping them in the entry-level game.

The threat of inexpensive electric cars from China will also drive automakers to shift to smaller, more affordable vehicles.

• That’s the best way for automakers to compete with cheap Chinese EVs, Ford CEO Jim Farley said recently.
• “We have to start to get back in love with smaller vehicles. It’s super important for our society and for EV adoption,” Farley told The Guardian. “We are just in love with these monster vehicles, and I love them, too, but it’s a major issue with weight.”
• “These huge, enormous EVs are never going to make money: The battery is $50,000, even with low-nickel, LFP chemistry. They will never be affordable.”

Not necessarily good news for American car manufacturers…

China Pledges Steps to Shore Up Flagging Economy Chinese leaders said they would take more aggressive steps to boost consumer spending and head off a worsening set of economic challenges.

The Communist Party’s top policymaking body, the 24-member Politburo, pledged more measures to boost household income and reduce funding costs for companies, though the report from the state-run Xinhua News Agency offered few specifics on what it is planning. (…)

The Politburo’s assessment of China’s economy is “grimmer” in tone when compared with that of senior officials two weeks ago when they released second-quarter economic growth figures, said Bruce Pang, a China economist at Jones Lang LaSalle. The Politburo’s downbeat tone indicates that more policy support and stimulus could be in the offing.

At Tuesday’s Politburo meeting, Communist Party leaders stressed the importance of expanding domestic demand with a focus on boosting consumption, Xinhua said. Leaders also pledged to support consumption in industries including culture and tourism, elderly care and housekeeping, without offering further details.

They also signaled more regulatory efforts to address inefficient production and excessive competition in industries as China grapples with overcapacity issues that have sparked trade tensions abroad. (…)

Chinese EVs Nab Record 11% Share in Europe Ahead of Tariffs

Chinese brands captured 11% of the European electric-car market in June, notching record registrations as manufacturers raced to beat stiff European Union tariffs that took effect early this month.

SAIC Motor Corp. led the charge, shipping its MG4 hatchback to dealers in volume, according to analysts at researcher Dataforce, which compiled the figures. Cars registered before July 5 could be sold on to customers without the added duties on imported EVs.

Chinese brands registered more than 23,000 battery-electric vehicles across the region during the month, the most ever, Dataforce figures show. Their 72% sequential jump from May was twice the gain in overall European EV registrations for June. Chinese-made imports from Western manufacturers including Volvo Car AB, BMW AG and Tesla Inc. are also subject to the new levies. (…)

The EU’s provisional charges subject SAIC to an additional 38% fee, while BYD will pay an extra 17% on the existing 10% customs duty. (…)

Conversely, there were signs of durable progress for BYD Co., the world’s largest plug-in vehicle maker. A marketing push centered on the Euro 2024 football tournament held in Germany gained real traction with consumers, said Julian Litzinger, a Dataforce analyst.

Another driver of the European EV market in June was the introduction of incentives in Italy, which helped to spur a doubling of battery-electric sales in the country from a year ago. About €200 million in new-EV subsidies ran out in less than nine hours, the government said in a statement. About 60% was tapped by families and the rest by companies.

The rise vaulted Italy, which has been lagging in EV sales, into the top six of a regional market that includes EU states, countries like Norway and Switzerland that participate in its single market, and the UK.

European policymakers are trying to strike a balance between easing access to less-expensive Chinese-made EVs that would aid progress toward sustainability goals, and protecting the legacy automaking industry in a tough economy. (…)

Overall, June was the third-highest month ever for EV volumes with 208,872 registrations across the region, according to the European Automobile Manufacturers’ Association, behind December 2022 and March 2023, and just ahead of June 2023.

The U.S. Wanted to Knock Down Huawei. It’s Only Getting Stronger. The Chinese telecom giant struggled at first under U.S. sanctions—then Beijing stepped in

Bolstered by billions of dollars in state support, Huawei has expanded into new businesses, boosted its profitability and found fresh ways to curb its dependence on U.S. suppliers. It has held on to its leading position in the global telecom-equipment market, despite American efforts to squeeze Huawei out of its allies’ networks. And it’s making a big comeback in high-end smartphones, using sophisticated new chips developed in-house to take buyers from Apple.

Along the way, a company that portrayed itself as independent from Beijing has morphed into something more like a national champion, helping China wean itself off foreign suppliers—part of a broader campaign to eliminate U.S. technology in China, dubbed “Delete A,” for Delete America. Its resurgence shows why it’s so hard for America to contain China’s technological ambitions.

State money was critical. While China’s government has backed Huawei since its earliest days, government support ramped up in recent years. Huawei’s profit more than doubled last year, the largest jump in at least two decades. Roughly two-thirds of its revenue comes from domestic clients.

Government contracts and company registration records, as well as interviews with former and current employees, reveal that billions of dollars flowed from the Chinese government to Huawei through preferential buying contracts and subsidies. State-owned enterprises, government agencies and Communist Party bodies sought Huawei chips, smartphones, cloud services and software, with some procurement contracts calling for Huawei gear by name.

Local governments have bought Huawei businesses, providing cash injections. Once reliant on Google’s Android for its consumer devices, Huawei built its own operating system. It has even made a foray into electric vehicles, a task that Apple gave up on, and developed its own version of Bluetooth.

Huawei still faces challenges. Its most advanced semiconductors remain a step behind industry leaders such as Nvidia, and some sector experts believe it will be hard for Huawei to keep innovating without access to more advanced Western technologies.

“We’ve been through a lot over the past few years. But through one challenge after another, we’ve managed to grow,” Huawei said in a written statement, adding that the company owed its survival and development to the trust and support of global customers, partners and “all sectors of society.” Sustaining R&D investment will be crucial going forward, the company said. (…)

“The goal wasn’t to drive Huawei out of business,” said Matt Pottinger, who was deputy national security adviser in the Trump administration and now chairs the China program at the Foundation for Defense of Democracies think tank. “It was to protect our alliances and protect our data, and if it made life harder for Huawei, all the better.”

Washington is watching Huawei’s progress warily. One current U.S. official said Washington is closely tracking Huawei’s efforts to make its own semiconductors, in case more actions are needed to block China from manufacturing artificial-intelligence-focused chips that can give Beijing a military edge. (…)

Huawei denied that its products would ever be used to spy on Western nations, and played down any ties with the Chinese state. In the company’s early years, according to state media, Ren turned down help from China’s then-premier in getting a loan so that Huawei could maintain distance from authorities.

After the U.S. imposed restrictions, Huawei and China’s government grew closer. Soon, Huawei leaders declared that every product they made going forward should be able to rely entirely on components developed by Chinese companies.

In a public speech last year, Ren recalled that a Huawei executive told him: “America doesn’t understand that with this blow, they are turning the biggest supporter of the U.S. into its largest detractor.” (…)

Huawei received over $1 billion in government grants in 2023, more than quadruple the amount it received in 2019, according to Huawei’s financial reports. In all, Huawei received nearly $3 billion in the past five years, accounting for 3% of its total R&D expenses. (…)

The Wall Street Journal found more than 300 government procurement contracts worth around $5 billion specifically calling for the purchase of servers and other tech infrastructure powered by Huawei’s Kunpeng central processing units, or CPUs, in 2023. Other contracts listed Huawei CPUs among a handful of preferred local vendors.

All of this was a sharp contrast to five years ago, when government agencies specifically requested products from U.S. chip makers Intel or AMD.

China’s buy-local policy is even more pronounced in the telecom-equipment space, Huawei’s largest revenue source. State-owned Chinese wireless carriers have largely stopped buying equipment from Huawei’s foreign rivals, Sweden’s Ericsson and Finland’s Nokia, even when one of them priced their contracts more cheaply than Chinese companies. The shift came while Sweden and other European countries indicated that they would cut Huawei and another Chinese equipment maker, ZTE, from their networks.

Ericsson and Nokia held about 15% of China’s cellular equipment market before 5G began rolling out in 2019. Now, in the 5G cellular-equipment market, they hold about 4% to 5%, according to research firm Dell’Oro. (…)

Huawei boosted R&D spending to almost 165 billion yuan, or $23 billion, last year, up from 102 billion yuan in 2018. More than half of Huawei’s 207,000 employees are in R&D.

Huawei is now at the vanguard of China’s push to develop cutting-edge chips to wean reliance on Nvidia and Intel, as the Biden administration seeks to curb China’s ability to develop advanced chips and technology that could aid its warfare and surveillance. U.S. chip juggernaut Nvidia singled out Huawei as a top competitor in February.

Huawei is leading a government-funded project to develop memory units for advanced AI chips, people familiar with the matter said, with at least 11 national AI data centers now using Huawei chips. (…)

Through various state-backed funds, the Chinese government has invested in more than two dozen chip-related startups alongside Huawei over the past five years, according to corporate database Tianyancha.

Last August, Huawei launched its Mate 60 Pro, a smartphone with 5G-like capability powered by a chip developed in-house. Many Chinese consumers have cited national pride as a reason for buying Huawei smartphones, whose success led to a sharp drop in Apple iPhone sales so far this year. (…)

Apple Intelligence: Here’s When the New AI Features Come to the iPhone and iPad The new Siri and other tools won’t be available until iOS 18.1 is released later this fall. This is the timeline.

The first wave of Apple Intelligence tools won’t be in the initial iOS 18 release this fall. Instead, they’ll be a part of iOS 18.1, which is expected a few weeks later. In the past, Apple has released the new iOS in mid-September, followed by the first big update in October. Microsoft, Google, Samsung and Meta have already released generative-AI tools to users.

On Monday the company released a developer-only beta version of iOS and iPadOS 18.1 and MacOS Sequoia 15.1, which include some of those Apple Intelligence tools. Keyword: some. Text-summarization tools and some Siri enhancements are there but the promised visual tools and ChatGPT integration aren’t coming until later in the year. (…)

Only those with an iPhone 15 Pro, 15 Pro Max, and iPads and Macs with M chips will be able to get Apple’s AI. Apple says the features require the latest and fastest chips.

If you’ve got one of those devices and iOS/iPadOS 18.1, you’ll get access to the following:

• New Siri: With the redesigned assistant, you can move between talking and texting. It will also have a more natural voice, and it can better understand you if you flub or change your ask midsentence. (Example: “Set an alarm for 3 a.m., oh wait, I mean 3:10 a.m.”) Siri can also answer questions about your Apple products and their settings.

• Writing tools: Available wherever you’re able to copy and paste text, these can proofread and rewrite your words. The AI can also take a big chunk of text and summarize it, and even distill it into a list or a table.

• Photos: The Photos app supports natural language search and can create a video based on a written prompt. (Example: “A movie about my trip to the New Jersey Shore.”)

This specific release will also include transcriptions and summaries of phone calls and recordings in Notes. And there are AI-generated summaries of Messages, emails and notifications.

Before the New Year’s Eve ball drops, Siri will get ChatGPT integration and the ability to tap in to your personal context. (Example: “When should I leave to get mom from the airport?”) Siri’s ability to perform actions within third-party apps is coming next year. 

What Apple won’t commit to is when the rest of the following promised features will arrive. The company will only say they’ll arrive in software updates this year and over the course of next year:

• Image creation/editing: Missing from iOS 18.1 are a number of the photo tools Apple previewed. These include Photos Clean Up (removes objects in a photo, similar to Android’s Magic Eraser), Image Playground (generates images in different styles) and Genmoji (generates new emojis).

• More Siri: Plus, there’s also Apple’s promise that Siri will have an understanding of what appears on your screen. (Example: “Add this address to his contact card.”)

• Additional languages + countries: Initially, Apple Intelligence will only support American English.

Like I said, these things could come this year or next. Maybe we can ask the new Siri about this, too. Oh, wait…