Inflation Continues to Hinder Small Business Operations

NFIB’s Small Business Optimism Index rose by 1.2 points in April to 89.7, marking the first increase of this year but the 28^th consecutive month below the 50-year average of 98. Twenty-two percent of owners reported that inflation was their single most important problem in their business, down three points from March but still the number one problem for small business owners.

“Cost pressures remain the top issue for small business owners, including historically high levels of owners raising compensation to keep and attract employees,” said Bill Dunkelberg, NFIB Chief Economist. “Overall, small business owners remain historically very pessimistic as they continue to navigate these challenges. (…)”

Stubbornly High Rents Prevent Fed From Finishing Inflation Fight For more than a year, the central bank has expected slowing rent increases to show up in official housing measures. It’s still waiting.

This is from Nick Timiraos, possibly influenced by his FOMC/Fed contacts.

Stalled inflation this year hasn’t derailed the Federal Reserve’s plans to eventually cut interest rates. That’s because it expects a slowdown in housing costs to eventually drag inflation close to its 2% target.

The problem: It has been waiting for that slowdown for 1½ years now, and it still hasn’t arrived. The slowdown might simply be delayed. But some analysts worry it’s not going to happen because of changing dynamics in the housing market. If so, that would significantly weaken the case for lower rates. (…)

Because only a minority of leases turn over each year, changes in market rents are reflected in inflation with a lag. Accounting for that lag, Fed officials, Wall Street investors, and private-sector economists have expected housing inflation to slow since late 2022 based on what has already happened with market rents.

Housing inflation has indeed slowed from a peak of 8.2% one year ago—but only to 5.6% in March, “a much slower pace than pretty much anybody anticipated,” said Jay Parsons, head of residential strategy at Madera Residential, a Texas-based apartment owner. (…)

Housing “has not behaved the way we thought it would,” Chicago Fed President Austan Goolsbee said in an interview last month. “I still think it will, but if it doesn’t, we’re going to have a hard time” bringing inflation back to 2%.

To understand why, break core inflation into three different baskets: goods, housing and nonhousing services. To get all the way to 2% inflation, the Fed doesn’t need 2% for all those categories.

In the decade before the pandemic, core inflation was slightly below 2%, the result of inflation in goods running at about minus 1%, housing at 2.5% to 3.5%, and nonhousing services at slightly above 2%.

Much of last year’s slowdown in inflation was because goods prices returned to their prepandemic trend. For inflation to get back to 2%, nonhousing services inflation has to drop to less than 3% from 3.5% now, and housing to around 3.5% from 5.8%.

If inflation stays higher, Fed officials are likely to hold interest rates at their current levels, the highest in two decades, until they see more concrete evidence that the economy is slowing.

Many economists still think it’s only a matter of time before housing inflation reflects the slowdown in new leases that began two years ago. It might be taking longer than expected because more renters are renewing their leases instead of buying a home, deterred by high mortgage rates. That could lengthen the time it takes for lower rents from newly signed leases to show up in overall inflation. (…)

Some doubt whether housing will help as much as anticipated in bringing inflation down. Rents tend to be sensitive to wages and income, and as long as those expand solidly, rents might not slow as much.

A key reason market rents have moderated is that the industry is adding a record amount of new apartment supply. Some industry executives say, though, that that supply is being quickly absorbed because of increased immigration and solid job and wage growth.

“One of the surprises of the last six months, specific to multifamily, has been the reacceleration of demand,” Parsons said. (…)

“Most folks believed you would have had a massive falloff in rental growth throughout the Sunbelt,” said Ric Campo, chief executive of Camden. “But what’s happening is there’s been just a whole lot more demand than most people expected.”

Per the CPI, “nonhousing services inflation” is not 3.5% now, it was 4.8% YoY in March and 4.1% for Q1 as a whole, and rising.

Here’s a chart I found from our colleague Michael McDonough, the Chief Economist for Financial Products at Bloomberg. It shows so-called “super core” inflation — which strips out energy, core goods, and housing costs from CPI. It’s running at close to 4.8% year-on-year. (Joe Weisenthal)

Yesterday, the NY Fed released its Survey of Consumer Expectations: “Median one-year-ahead inflation expectations increased to 3.3 percent from 3.0 percent, according to the April Survey of Consumer Expectations. They also increased to 2.8 percent from 2.6 percent at the five-year-ahead horizon, while decreasing to 2.8 percent from 2.9 percent at the three-year horizon.”

This came right after the U. of Michigan released its own survey:

The university publishes both a mean and a median number, and the latter is more widely followed. Given that very few people ever expect prices to go down, outlying high inflation expectations will inevitably skew the mean upward. It’s also true that consumers have long been too negative, and the median has never dropped to the 2% target in the last three years.

All that said, it’s quite something that mean longer-term inflation expectations are now above 5% for the first time in three decades. (John Authers)

Euro Zone Wage Concerns Keep ECB Cautious on Rate Cuts Negotiated pay may not have slowed much — if at all — in 1Q

Data from the bloc’s largest economies suggest increases in negotiated pay failed to slow significantly in the first quarter. The danger is that companies pass rising costs on to consumers, keeping inflation above 2% for longer.

A key culprit is Germany, where past deals — some of which are embellished by one-off payments — have driven salaries sharply higher. Policymakers are unlikely to be sufficiently consoled by evidence of moderation elsewhere in the region. (…)

Pay gains probably slowed to 4.3% from a year ago in the first three months, compared with 4.5% for the final quarter of 2023, according to Bloomberg Economics. While not surpassing 3.5% in France, Italy and Spain, they reached 4.8% in Germany, it said.

For the ECB, part of the challenge is that negotiations work very differently across the continent. Whereas many contracts in Belgium are directly tied to inflation, German and Italian workers must often await new rounds of talks that determine compensation over multiple years.

In France, meanwhile, bargaining is more flexible and salaries in a host of sectors are agreed on once a year, Barclays economists said last week in a note.

Such complexities are reflected in the array of views on the first quarter. While ING’s Brzeski sees an acceleration to roughly 5%, Nomura analysts expect steady growth of 4.5% and the estimate over at Barclays is for a slowdown to about 4%. (…)

Macron Puts French Banks in Play With Plan to Transform Europe The French President signals he’d be open to cross-border bank M&A as he sets out the case for a transformative shift in the continent’s economic model

(…) “Dealing as Europeans means you need consolidation as Europeans,” Macron said in an interview with Bloomberg Editor-in-Chief John Micklethwait on the sidelines of the Choose France investment summit in Versailles near Paris. “We have now to open this box and to deliver a single-market approach which is much more efficient.”

As Europe comes to terms with Russia’s war in Ukraine and the steady deterioration of the global trading system, Macron has been trying to persuade his EU partners to embrace what he sees as a transformative program of reforms to turn the EU into a more united and powerful economic force. Only by getting smarter about protecting its interests, cutting back on regulation inside the single market and unlocking the bloc’s financial firepower, Macron argues, does the EU have a chance of going toe-to-toe with China and the US. (…)

But his proposals have run into stiff opposition nevertheless from Germany and its traditional allies, who are leery of pooling their financial liabilities with the rest of the EU and nervous about embracing the idea of capitalism à la française. (…)

“We do need a consolidation,” Macron said, so that BNP could buy smaller competitors. Asked if that could also include European rivals acquiring a French lender such as Societe Generale SA, he said, “Yes, for sure.” (…)

But the final piece of Europe’s so-called banking union — joint deposit insurance — is missing. Germany and like-minded countries have blocked efforts to move ahead, arguing that savers in their country shouldn’t be on the hook for losses at banks in other countries.

Bankers frequently say this hinders cross-border mergers in the bloc because funds in one country aren’t deemed to be as safe as those in another.

There’s also that fundamental European problem, that member states are reluctant to see their national champions bought up by bigger rivals, even if it helps to add muscle for the European economy as a whole. (…)

More Chinese Cities Move to Buy Up Housing Inventories The moves follow similar plans by a half dozen cities in recent weeks

Two more Chinese cities have unveiled plans to buy up unsold, unfinished or old housing, coming as Beijing shifts its focus to absorbing excess apartment supply as a way to resolve the country’s ongoing property crisis.

Nanjing, the capital of Jiangsu Province, on Saturday said it would help renovate or buy housing inventories and turn them into public housing.

Foshan, a midsize city in Guangdong Province, on Monday said it would encourage local state-owned enterprises to buy up and complete unfinished housing projects, and to participate in a trade-in program by buying old apartments and turning them into public housing. Foshan said it would make subsidies available for residents selling their apartments to move into new housing.

The moves, which follow similar plans by a half dozen cities in recent weeks, come after senior Chinese policymakers last month expressed concern about unsold and unfinished housing projects across the country, and flagged a desire to create more public housing.

Comments at the meeting raised speculation that central and local governments could allocate funding toward digesting a glut of unused and unfinished housing inventory across the country, the product of factors including tightened liquidity conditions for developers and lackluster consumption in the world’s second largest economy. (…)

We had the slow-moving accident, we are now having the slow-moving healing. First, stop prices from falling, deal with excess supply and builders’ debt, restore confidence, restart the cycle.

GameStop Shares Surge Again as Meme-Stock Phenomenon Returns Latest rally turbocharged by social media return of Keith Gill

Meme-stock traders again piled into GameStop Corp. and AMC Entertainment Holdings Inc., a day after shares of both firms soared in a revival of the retail frenzy.

The video-game retailer’s stock jumped 34% in premarket trading on Tuesday, while that of the beleaguered movie theater chain surged 41%.

The latest rally was turbocharged on Monday following the return to social media of Keith Gill, who drove the meme-stock mania of 2021 under the moniker “Roaring Kitty.” Gill, whose account had long been dormant, shot to fame that year by rallying day traders on Reddit in an effort to squeeze GameStop short sellers.

Both stocks — which remain far below their 2021 peaks — rallied more than 70% on Monday as option volume surged to the highest level since July 2022, with nearly 700,000 contracts traded. In contrast to the past few days, the surge was not solely driven by call trading, as put volume also surged. (…)

Monday’s rally also boosted other high-risk and heavily shorted names like included Rivian Automotive Inc., Lucid Group Inc., Nikola Corp., Vinfast Auto Ltd., Canoo Inc., EVgo Inc., ChargePoint Holdings Inc. and Blink Charging Co.

• AMC Set to Cash In on Meme-Stock Traders Driving Shares Higher Company’s fundraising deal could bring in another $125 million

Retail traders flocking to AMC Entertainment Holdings Inc. in hopes of burning short sellers may also be helping the company shore up its finances.

That’s because the beleaguered movie theater chain, which surged 78% on Monday amid the meme-stock frenzy, has a fundraising deal known as an at-the-market offering that lets it create new shares opportunistically to sell to buyers in the open market. The deal is part of AMC’s long-term effort to secure the capital needed to execute its turnaround, even if that means diluting investors seeking to cash in on short-term rallies. (…)

While the dilution would hit the very investors that have powered the shares higher, it’s nothing new for AMC or the meme-stock crowd. Over the past four years, the company has announced at least five equity offerings, data compiled by Bloomberg show, selling millions of shares in the process.

Navigating a massive debt load of $4.5 billion has been top of mind for AMC management, something the share sales are meant to address. The company had $624 million in cash and equivalents at the end of March, after losing nearly $165 million in the quarter, according to a filing last week. (…)

• “It is not so hard to see where GameStop goes from here. It has a $9.3 billion market cap and in the last year only reported $6.7 million in net income. With a price-to-earnings multiple of more than 1,000, the outlook for its share price is gloomy. And yet somehow, this isn’t a deterrent for retail traders. That’s unhealthy. It’s possible they’re still motivated more by anger than greed. But if there’s a single lesson from 2021, it’s that they’re dangerous to ignore. (John Authers)
• The Market’s Prion Disease Returns”

Prion diseases, of which “mad cow” is the best known, are thankfully quite rare in humans.  However, for better or worse, the market’s version – the meme stock trade — recurs periodically.

As I type this, GameStop (GME) is up about 70% today and several other speculative darlings are showing double-digit gains.  Why?  Because a popular meme account posted a cryptic message on X (fka Twitter) after three years of silence.  The crazy part is that within the cadre of traders who get involved in these names, this makes perfect sense. (…)

The stock was already up about 70% in the three weeks before today.  But that uptrend doesn’t fully explain why we saw such an explosion in open interest in options that would require another similar sized move during this week to pay off.

A suspicious person might wonder why “Roaring Kitty” chose to return to social media today. 

Given my past experience in analyzing the periodic bouts of meme stock activity, consider me suspicious.

In August 2022, there was a huge run-up in Bed, Bath & Beyond shares (the symbol was BBBY – it no longer exists).  The stock rallied sharply on a filing showing big purchases by then-insider Ryan Cohen – not coincidentally, the Chairman, President, and CEO of GME – and then fell sharply when it was revealed that he sold into the run-up.  We wrote two pieces explaining the activity, entitled “If You Can’t Spot the Sucker…” and “If You Can’t Spot the Sucker: Part 2”.  What occurred was legal, if unsavory.

I’m sorry, but I can’t shake the feeling that something similar is occurring today, except that a social media darling is under no obligation to file insider activity with the SEC – he is not an insider.  In both cases, nothing specific was said about the stocks.  The SEC filings in BBBY were boilerplate, and the social media post literally had no words.   So, it’s probably all legal, but someone played this beautifully.

Also in August 2022, we wrote the following:

“We noted during a previous meme stock bloom that the half-life of these flourishes seems to be shrinking.  If you participate in these period[ic] rallies and trade them profitably, congratulations.  If you notice the eruptions only after they are in full flourish, please be careful.”  This was a profitable play for many and treacherous for many more.  But it has returned once again, only with shorter opportunities for outsized profits.

Truthfully, I have no idea how long this flurry will last.  I’ll guess it will be in play longer than the two-day wonder in BBBY that we wrote about, since there will be no filings to tell us when those who catalyzed the move have sold.   If you caught the move early, congratulations.  If you’re jumping in now, when literally nothing has changed regarding the fundamentals of GME, AMC, KOSS and others, remember the adage, “if you can’t spot the sucker at the poker table, it’s probably you.”

How the ‘Harvard of Trading’ Ruined Thousands of Young People’s Lives IM Academy promises a Wall Street education. But instead of riches, many of its members have lost everything.

(…) During the pandemic, IM grew from a small New York operation into a global phenomenon by selling the promise that it could teach anyone, particularly teens and twentysomethings, how to become a savvy retail investor. For a one-time $275 fee and $250 a month, members had access to online courses and coaches providing trading strategies—the “Yale of forex, the Harvard of trading,” as a salesman described IM in a marketing video. When young people weren’t being invited by their friends to become budding stock market mavens, they might encounter Instagram videos showing how others had gotten rich with the IM method or hear about celebrity members, including fashion model Blac Chyna and professional boxer Floyd Mayweather Jr. (…)

The company, which had only 68,000 members in 2018, had grown to 225,000 by June 2021, with recruits spanning the globe, from the US to the Philippines. Membership exploded to half a million in 2022, and IM was bringing in at least a billion dollars in annual sales. (…)

IML students could learn foreign exchange trading or how to trade commodities or options. Lessons included a dozen or so prerecorded videos of Terry—at the time the company’s sole employee, along with freelance contractors—explaining market basics, like relying on price charts to predict pricing patterns. (…)

If students wanted to make money on trades but were less interested in mastering the contours of the markets, IML offered to automatically trade for people, mirroring moves from expert traders. In 2018, when officials at the US Commodity Futures Trading Commission found out that IML was trading directly for its customers and wasn’t a registered brokerage, they demanded the company to shut down and Terry to pay $150,000 in penalties. At the same time, the anti-MLM group Truth in Advertising published an exposé saying IML made false claims about how much members could make and promised returns that it never delivered. Terry pretended to adhere to the cease and desist by starting IM Academy as a new company—rebranding online and in his communications—while still filing most of his regulatory company documents under the original IML name.

Just as with IML, when a person joined IM, they would soon be encouraged to become an “independent business owner,” or IBO, a title that referred to customers who become salespeople. If a salesperson brought in two new members, they didn’t have to pay for their own subscription that month; if they brought in 12, they made $600 that month, and every month those new members remained active. Monthly commissions ranged from $150 to $750,000, but to reach the top level, a member needed 70,000 active recruits. While that was impossible for any individual to do, an IBO could exponentially increase their count by training recruits to also become IBOs and bring in new members—the hallmark of an MLM. [Multilevel marketing structure] (…)

Terry’s public persona took a religious turn. For years, he’d studied videos of megachurch leader Steven Furtick preaching to his congregants on how to channel God to be successful. Terry started peppering his speeches with references to the divine, crafting metaphors of himself as a Messiah and IM recruits as his God-given followers, who had a religious mission to sign people up. “I listen to messages that come from God. God’s trying to talk to you,” Terry often said in his thick Bronx accent during company rallies, which seemed like a cross between a rave and a revival. He also preached the “laws of attraction,” the new-age philosophy popularized in the 1980s by self-help author and friend Bob Proctor, in which people could attain wealth simply by visualizing it. (…)

Marco Moukhaiber, a former concert promoter turned YouTube vigilante, was in his condo in Edmonton, Alberta, in the summer of 2020 when he decided IM was his next target. He’d built a 93,000-person YouTube following with the release of video exposés of MLMs including health insurance company Primerica Inc. and telecom company ACN, and he’d already received cease-and-desist letters and threats of legal action from a few. Now his followers were directing him to IM. After weeks of research, Moukhaiber pretended to be interested in the platform and secretly recorded a recruiter telling him what IM had to offer.

Six months later, on Feb. 8, 2021, Moukhaiber released a 40-minute YouTube video, exposing Terry’s MLM history and the unsubstantiated claims IM consistently made about young adults getting rich from it. The video described the hundreds of thousands of young people who’d been left penniless and humiliated. Within a few days, it had clocked 590,000 views. (…)

Marco Moukhaiber, a former concert promoter turned YouTube vigilante, was in his condo in Edmonton, Alberta, in the summer of 2020 when he decided IM was his next target. He’d built a 93,000-person YouTube following with the release of video exposés of MLMs including health insurance company Primerica Inc. and telecom company ACN, and he’d already received cease-and-desist letters and threats of legal action from a few. Now his followers were directing him to IM. After weeks of research, Moukhaiber pretended to be interested in the platform and secretly recorded a recruiter telling him what IM had to offer.

Six months later, on Feb. 8, 2021, Moukhaiber released a 40-minute YouTube video, exposing Terry’s MLM history and the unsubstantiated claims IM consistently made about young adults getting rich from it. The video described the hundreds of thousands of young people who’d been left penniless and humiliated. Within a few days, it had clocked 590,000 views. (…)

Around the same time, the Federal Trade Commission began looking into IM. From the start of the pandemic, authorities around the world had received complaints that the company—along with other online trading MLMs, such as Kuvera, Melius and Pro Network Vision—was preying on young people. The Commodity Futures Trading Commission received 1,099 complaints about IM in 2020 alone, from people claiming that they’d lost their life savings and that the company had ruined their lives. According to IM’s own 2021 income disclosure, more than 94% of people who became IBOs made less in a year than what they spent on subscriptions. The top 0.05% of earners, including Rosa and Brown, averaged $1.4 million that year. (…)

Robert Fitzpatrick, founder of the website Pyramid Scheme Alert, says regulation in the US and globally is essentially nonexistent. “Bankrupt customers are in fact powerless to take on these giants,” he says. Financial education is one of the MLM industry’s fastest-growing categories, according to the Direct Selling Association, racking up close to $8 billion globally in sales in 2022. (…)

This February, at the Papp László Sportaréna on the outskirts of Budapest, some 3,500 people gathered for another IM rally. Attendance was less than a quarter of the Rotterdam event’s a year before, and Terry was nowhere to be seen. (…)

The company is promoting a three-day trip to Cancun at the end of May, along with a conference in Monterey, California, in November. But these days the young and hungry have been finding other day trading gurus on TikTok. Many people indoctrinated in IM’s ways have since moved on to build their own MLM offerings, despite Terry’s lawsuits. Morton, Rosa and Brown—none of whom have faced legal action for their work with IM—continue to broadcast their high-rolling lifestyles on Instagram and YouTube and promote IM, jetting between Dubai yachts and five-star hotels in Bali. Terry is still CEO but is keeping a lower profile, perhaps to avoid sanctions, perhaps to start other ventures. His personal website has been taken down, his last Instagram post is from August 2023 and his name isn’t mentioned on IM’s website.

At the Budapest arena, new recruits still saw nothing but possibility. Dino Mieviso, a 23-year-old assembly-line worker at a Volvo factory in Aals, Belgium, joined last October, persuaded by his brother, who’s part of a 170-member IM group in their hometown. While he says he initially just wanted to learn about the stock market to earn some extra income for his family, the rally made him see the value in bringing other young people along with him. “With the income I get from recruiting others, I’ll be able to trade using that residual income rather than my earnings from Volvo,” he says. “Soon we’ll be rich.”

US Consumer Sentiment Slumps as Inflation Expectations Rise

The sentiment index slid to 67.4 in May from 77.2, according to the preliminary reading from the University of Michigan. The figure was weaker than all forecasts in a Bloomberg survey of economists.

Consumers expect prices will climb at an annual rate of 3.5% over the next year, the highest in six months and up from the 3.2% expected in April, data Friday showed. They see costs rising 3.1% over the next five to 10 years, up slightly from a month earlier.

The decline in sentiment was broad across age, income and education groups, and also reflected growing concerns about high interest rates. While the labor market has driven economic growth over the last year, the downbeat assessment highlighted in the report adds to evidence of a slowdown.

The university’s measure of buying conditions for durable goods, some of which are financed, decreased to a one-year low.

“Worse yet, consumers expect the pain to continue, as expectations for interest rates deteriorated considerably this month,” Hsu said. “Only one quarter of consumers expect interest rates to fall in the year ahead, compared with 32% in April.” (…)

There is more as John Authers explains:

(…) Then there are the extraordinary results when Michigan asked for forecasts of average inflation over the next five to 10 years. The university publishes both a mean and a median number, and the latter is more widely followed. Given that very few people ever expect prices to go down, outlying high inflation expectations will inevitably skew the mean upward. It’s also true that consumers have long been too negative, and the median has never dropped to the 2% target in the last three years.

All that said, it’s quite something that mean longer-term inflation expectations are now above 5% for the first time in three decades.

The median consumer does not believe the Fed can achieve 2% inflation. Neither does the average consumer, well anchored at 3%.

Fixed income investors remain hopeful, even more so in the last month.

Which horse do you chose, people who buy bonds or people who buy stuff and services?

The CPI is out Wednesday:

+0.3% is the safe bet. Note that March was +0.359% on the core CPI:

The tougher bet is on services, particularly ex-rent, Powell’s supercore, which came at +0.71% in March, +1.84% QoQ , +7.6% annualized.

Zillow`s April rent data came out during the weekend: +0.3% in April after +0.4% in March. Not the deceleration everybody has been expecting for 2 years but deceleration nonetheless.

Zillow`s April rent is up 3.7% YoY, unchanged from March but up from 3.2% at last September’s low. The BLS rent YoY measure has been coming in 2% above Zillow’s this year.

China Consumer Inflation Rises, Factory Price Drop Continues

The consumer price index rose 0.3% from a year earlier, the National Bureau of Statistics said Saturday. That compares with an increase of 0.1% in March and a median forecast of 0.2% in a Bloomberg survey of economists.

Factory-gate prices remained stuck in deflation, as they’ve been since late 2022, with the producer price index sliding 2.5% in April from a year earlier. Economists surveyed by Bloomberg had expected a 2.3% drop after the index declined 2.8% in March.

The numbers suggest that deflationary pressure remains a threat to China’s economy, despite green shoots in the manufacturing sector and robust exports.

Falling producer prices are squeezing companies’ profits and making them reluctant to invest. A recent survey of more than 20,000 retailers by the China General Chamber of Commerce showed that average order values contracted by the most in nine months, even though total sales expanded as customer traffic grew during the Labor Day holiday. (…)

• Food inflation was unchanged at -2.7% YoY in April.
• Non-food price inflation inched up to +0.9% YoY in April from +0.7% in March. Fuel costs rose 6.9% YoY in April vs. 2.2% in March.
• Services inflation was flat at +0.8% YoY in April.
• Non-food goods prices inflation rose to 1.0% YoY in April vs. 0.6% in March.
• Core CPI inflation edged up to +0.7% YoY in April from +0.6% in March.

U.S. to Quadruple Tariffs on Chinese Electric Vehicles The administration is preparing to announce higher levies on a range of clean-energy goods made in China next week.

Higher tariffs, which Biden administration officials are preparing to announce on Tuesday, will also hit critical minerals, solar goods and batteries sourced from China, according to the people. The decision comes at the end of a yearslong review of tariffs imposed by former President Donald Trump on roughly $300 billion in goods from China.

(…) signs that China was ramping up exports of clean-energy goods prompted concern in Washington, where officials are trying to protect a nascent American clean-energy industry from China.

Officials are particularly focused on electric vehicles, and they are expected to raise the tariff rate to roughly 100% from 25%, according to the people. An additional 2.5% duty applies to all automobiles imported into the U.S. The existing 25% tariff on Chinese electric vehicles has so far effectively barred those models, often cheaper than Western-made cars, from the U.S. market. Biden administration officials, automakers and some lawmakers worry that wouldn’t be enough given the scale of Chinese manufacturing. (…)

What will Chinese manufacturers do? Export their cheaper cars to untapped markets such as Central and South America, Africa and South-East Asia, effectively creating, and occupying new markets for cheaper cars, trucks and buses.

In the chart below, the top 3 regions (vehicle penetration averages 657) have total population of 905 million. The next 18 (vehicle penetration averages 147): 4.5 billion people.

Data: Visual Capitalist

BTW:

Tech Giants Start to Treat Southeast Asia Like Next Big Thing Long-ignored region is attracting data center, AI investments

(…) For data centers alone, the world’s biggest companies are set to splurge up to $60 billion over the next few years as Southeast Asia’s young populations embrace video streaming, online shopping and generative AI. (…)

Silicon Valley is setting its sights on business-friendly regimes, fast-growing talent pool and rising incomes. The advent of AI is spurring tech leaders to pursue new sources of growth, laying the digital infrastructure of the region’s future. (…)

Southeast Asia has also become a sizeable market for gadgets and online services. About 65% of Southeast Asia will be middle class by 2030, with rising purchasing power, according to Singapore government estimates. That’ll help more than double the region’s market for internet-based services to $600 billion, according to estimates by Google, Temasek Holdings Pte and Bain & Co.

Apple, whose pricey gadgets for long remained out of reach for the vast majority in the region, is now adding stores. (…)

“These are markets where our market share is low,” Cook said on a conference call last week. “The populations are large and growing. And our products are really making a lot of progress.” (…)

Southeast Asia’s accelerating AI adoption has the potential to add about $1 trillion to the region’s economy by 2030, according to a report by consulting firm Kearney. (…)

BTW #2:

Ford Cuts Battery Orders as EV Losses Top $100,000 Per Car

(…) As EV prices have plunged and demand has slackened, Ford’s losses per EV exceeded $100,000 in the first quarter, more than double the deficit from last year, one of the people said. (…)

“We’ve seen prices coming down quite dramatically and that’s why we haven’t been able to keep up from a cost reduction standpoint,” John Lawler, Ford’s chief financial officer, told analysts April 24 on the company’s earnings call. “But we’re targeting to take out as much cost this year as we can on Model e and all in the spirit of driving toward that contribution margin positive.” (…)

Ford is fast-tracking the development of small EVs that will start at $25,000 and debut in late 2026, Bloomberg has reported. Farley has said those models will be profitable within their first year on the market. (…)

I suspect much accounting manipulations in the $100k loss per car but it is still a meaningful loss.

FYI, BYD sold 3.0 million EVs and hybrids in 2023 and reportedly averaged a $1,300 profit margin per car.

BTW #3:

China’s Super-Cheap EVs Offer Hope for Average American Buyers BYD’s sub-$10,000 Seagull electric car sets a new bar for global automakers, forcing Detroit to pivot toward cheaper rides.

(…) The primary threat comes from cars such as BYD Co.’s Seagull hatchback, which features angular styling, a two-tone dashboard shaped like a seagull’s wing and six airbags. There’s even a 10-inch rotating touchscreen for its infotainment system. BYD’s company slogan, “Build Your Dreams,” is embossed on the rear of the vehicle.

The car’s most extraordinary feature, though, is its $9,698 price tag. That undercuts the average price of an American EV by more than $50,000 (and is only a little more than a high-end Vespa scooter). Such aggressive pricing by BYD, which surpassed Tesla Inc. in late 2023 to become the world’s largest producer of electric vehicles, is indicative of how Chinese auto manufacturers will likely force US makers to pivot away from mainly producing expensive second cars for the affluent and toward more reasonably priced EVs for the Everyman. (…)

Ford Chief Executive Officer Jim Farley calls the Seagull “pretty damn good” and cautions that any automaker that can’t compete with the Chinese globally in the near future risks losing as much as 30% of its revenue. One of Farley’s top EV executives called Chinese EVs “a colossal strategic threat.”

BYD’s Atto 3, a curvaceous five-passenger SUV designed by a team led by former Audi and Lamborghini design chief Wolfgang Egger, could be even more imposing. It boasts a Tesla-like dashboard with a large center touchscreen that swivels to vertical or horizontal; quirks such as pseudo-guitar strings over the door pockets that passengers can play to make music; and a gear shifter in the center console that looks like the throttle lever in a jet cockpit. There’s also a complete suite of safety features, including front and rear collision warning sensors, blind spot monitoring, cross-traffic alerts and automatic emergency braking. And all that starts at $31,000, about half the average price of an American EV. (…)

BYD and Zhejiang Geely Holding Group Co. are winning over car buyers worldwide with distinctive vehicles that have plenty of creature comforts. Some are packed with advanced technology, such as the ability to park themselves. And many are priced well below the stickers on cars long sold in those export markets. (…)

Some auto industry officials are resigned to that inevitability. “If I was sitting in China right now running a Chinese OEM [original equipment manufacturer], I’d be looking for land in Mexico because you’ve got a supplier base, low cost of construction, low cost of labor and the USMCA that gives you access to the US,” Marin Gjaja, chief operating officer for Ford’s EV unit, Model e, said in an interview last month. “They’re going to come here, just as the Japanese ended up here.” (…)

BYD considers building EV plant in Mexico’s Jalisco state, report says

BYD sent a delegation to the Mexican state of Jalisco to consider building an electric vehicle (EV) plant there, Bloomberg said in a March 9 report.

BYD executives from China met with state officials last week, as well as Chinese suppliers already in Jalisco, such as Haitian, which makes machines for auto parts, said Roberto Arechederra, Jalisco’s economic development secretary., according to the report. (…)

BYD Americas CEO Stella Li told Reuters on February 28 that the company is looking for a location in Mexico to build a plant and expects to select a site for the plant by the end of the year. The plant will have a capacity of 150,000 vehicles per year, according to Li.

Li said BYD’s ambitions in Mexico were for local sales only. “Our plan is to build the facility for the Mexican market, not for the export market,” she said, according to Reuters.

BYD is looking for factory locations in the central and southern regions, rather than in northern Mexico near the United States — where transportation costs to reach consumers would be expensive, she said.

Earlier this month, BYD launched the Dolphin Mini, a micro EV, in Brazil and Mexico, bringing its least expensive model to South America.

The Dolphin Mini is known as the Seagull in China, and the Dolphin is BYD’s other slightly more expensive model.

BYD has previously introduced the Dolphin, Han, Tang and Yuan Plus to the Mexican market.

• BYD’s Mexico Plant Announcement Looms as Strategic Expansion Nears The company targets sales of over 100,000 units in Mexico by 2025, leveraging the new factory for potential exportation to the rest of Latin America in subsequent phases.

While in Hong Kong last March, I visited a BYD dealership: very nice looking cars:

  

Oups!! Sorry, this is a picture I took in Tokyo of the 1947 TAMA, an electric vehicle popular as a taxi in Japan until 1951. The outbreak of the Korean war in 1950 caused the price of lead to skyrocket while the control of gasoline was removed in 1952 and gasoline cars became dominant again. It is not widely known that EVs supported the postwar reconstruction of Japan.

Here are the BYD pics taken in HK:

  

  

Back to U.S. protectionism, David Fickling, a Bloomberg Opinion columnist, had this conclusion on Saturday:

The danger is that protectionism and corporate timidity are a lot easier to switch on than switch off, especially with the prospect of a Trump presidency looming.

Like birds on isolated islands, America’s carmakers are evolving to suit an oddly congenial environment — one where they can grow big and bloated in the absence of competition from hungry rivals. Gradually, they’ll lose the ability to fly.

Consumers who’d like to get their hands on affordable, clean and innovative cars will be the ones to lose out. “The American people won and special interest lost,” Biden declared as he announced the IRA. Increasingly, it looks like the reverse is happening.

Bloomberg informs us that

In 2023, only about 15% of Chinese exports went directly to the US, the lowest amount since China joined the World Trade Organization more than 20 years ago. Only about 7% of US goods exports went to China last year, down from almost 10% during the pandemic.

US Less Important as Export Destination for China

Much of that trade now goes via other countries, making the output of Beijing’s companies harder for the US government to tariff — especially if they are exporting Chinese components to be combined into finished products in Vietnam or Thailand.

If the US does try to block them it risks souring ties with nations it wants to bring closer. That shift shows how global supply chains have reorientated themselves to deal with the effects of the tariffs put in place during Trump’s administration. (…)

Here`s how Xinhua reported the April export data:

(…) In the first four months, China’s trade with countries participating in the Belt and Road Initiative surged 6.4 percent to 6.54 trillion yuan in the first four months, accounting for 47.4 percent of China’s total trade value.

Among them, the trade value with China’s largest trading partner ASEAN was 2.18 trillion yuan, up 8.5 percent year on year, accounting for 15.8 percent of China’s total trade.

Though trade with the European Union went down 1.8 percent, trade with the United States and the Republic of Korea climbed 1.1 percent and 5.5 percent, respectively, in the first four months.

Trade with Latin America climbed 11.7 percent year on year in the first four months, trade with Africa went up 7.7 percent, and trade with the five Central Asian countries soared 17.9 percent.

Structurally, China’s export portfolio has demonstrated strength in sectors of ships, electric vehicles and construction machinery, with growth rates of 108.4 percent, 28.3 percent and 16.2 percent, respectively. (…)

Clear message…

China to Start $138 Billion Bond Sale on Friday to Boost Economy It is fourth such sale in past 26 years, with the last in 2020

Canada: Deterioration of the labour market paused in April

Canadian employment recorded its strongest increase in 15 months in April, widely surpassing consensus expectations.

But the big surprise in this report was the demographic surge, as the population aged 15 and over rose by 112K, the second-highest increase on record. It is therefore important to adjust our labour market evaluation standards in this highly atypical context. At the current rate of population growth, the labour market needs to generate 60K jobs to maintain the employment rate. By this criterion, job creation in April was good, but no more. Moreover, despite this seemingly exceptional gain, the unemployment rate remained essentially unchanged, meaning that the labour market did not tighten in April after cooling off since the start of the monetary tightening cycle (unemployment rate is up 1.3 percentage points (pp) since July 2022).

For the time being, the easing of the labour market is characterized by the difficulty of individuals to enter the Canadian job market, as evidenced by the sharp rise in the unemployment rate for young people and recent immigrants. The deterioration is particularly acute in Toronto as shown by the unemployment rate reaching 7.9%, up 2.3 pp from recent trough. Back at the national level, the percentage of unemployed people finding work is currently at its lowest level in over a decade excluding the pandemic.

For the time being, layoffs are limited, as the separation rate remains very low on a historical basis (bottom chart). As for the private sector rebound, we remain skeptical about its sustainability. Goods-producing industries posted contractions in April, which is not surprising given the labour hoarding that occurred in 2023 in many of these sectors.

With more than 50% of SMEs indicating that they are concerned about their sales, we doubt that there will be a sustained upturn in corporate hiring in the months ahead.

  

Goldman Sachs:

Today’s report confirms that firming activity and labor demand are increasingly able to absorb the growing labor supply and supports our constructive GDP forecast. We think that the advanced labor market rebalancing achieved, the meaningful softening in inflation observed over the last few prints, and still subdued spending should be sufficient for the BoC to initiate its easing cycle at its June meeting. That said, the improving activity picture, the risks of a bumpy disinflation process, and the guidance offered in the latest BoC minutes reduce the likelihood of back-to-back cuts. Thus, we now expect a total of only three 25bp cuts in 2024 (vs. four before).

EARNINGS WATCH

From LSEG IBES

459 companies in the S&P 500 Index have reported earnings for Q1 2024. Of these companies, 77.3% reported earnings above analyst expectations and 16.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 8.3% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 7.0%.

Of these companies, 59.9% reported revenue above analyst expectations and 40.1% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 65% of companies beat the estimates and 35% missed estimates.

In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.5%.

The estimated earnings growth rate for the S&P 500 for 24Q1 is 7.4%. If the energy sector is excluded, the growth rate improves to 10.5%.

The estimated earnings growth rate for the S&P 500 for 24Q2 is 10.6%. If the energy sector is excluded, the growth rate declines to 10.2%.

The estimated revenue growth rate for the S&P 500 for 24Q1 is 3.7%. If the energy sector is excluded, the growth rate improves to 4.4%.

These tables and charts show the margins/profits boom large companies are enjoying.

Trailing EPS are now $226.20, up 2.8% YoY and 0.7% above forward EPS one year ago. Forward EPS are $252.99, up 12.6% YoY.

S&P 600 Index: Trailing EPS are now $81.67, down 8.3% YoY and 3.7% below forward EPS one year ago. Forward EPS are $88.55, up 4.3% YoY but still lower than the actual trailing EPS one year ago.

• S&P 600 companies are cheap:

• But smaller companies’ earnings are not keeping pace, actually declining amid a strong economy:

• Small has been tough revenue-wise since 2022 and not really improving yet:

SENTIMENT WATCH

Via Callum Thomas’ chart storm:

• Retail animal spirits have risen once again and the greed train has left the station.

Source:  @jessefelder

• Credit spreads are plumbing the lows. We can consider 2 thoughts; a. it’s a good thing because it means credit markets are running smoothly and there’s no default issues and the trend is down not up, or b. it’s a bad thing because there is no cushion for default risk, doesn’t factor in mixed macro signals, and credit spreads are expensive at these levels. And well, both of those thoughts are basically true (until they’re not).

Source:  Chart of the Week – The Calm

• Meanwhile, when it comes to the VIX, the Fed has started the timer. The VIX tends to rise when the Fed hikes rates (with a ~2-year lead time). Unless things are different this time, that means we are right about due to see the trend turn for volatility.

Source:  Off The Charts

• One area of the markets that is looking brighter though is Chinese stocks, and one of the key bullish points is how bearish everyone still is on China (yes some market technicians will be on board with the price action, but the consensus/crowd is still very skeptical and pessimistic on China). In particular, short covering could soon become a tailwind if the recent uptick in Chinese stocks continues.

Source:  Something Incredible is Happening in China MacroCharts

Ai,Ai, Ai!!

Source: Base Hit Investing