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.
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S&P 600 companies are cheap:
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But smaller companies’ earnings are not keeping pace, actually declining amid a strong economy:
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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