US producer prices unexpectedly fall; goods deflation seen persisting
(…) The producer price index for final demand dipped 0.1% last month, the Labor Department’s Bureau of Labor Statistics said. Data for November was revised to show the PPI falling 0.1% instead of being unchanged as previously reported. The PPI has now declined for three consecutive months. (…)
Goods prices dropped 0.4%, with a 12.4% decline in the cost of diesel fuel accounting for half of the decrease.
Goods prices fell 0.3% in November. They have dropped for three straight months. Excluding food and energy, goods prices were unchanged after edging up 0.1% in November.
The weakness also suggested that goods deflation remained in force despite an uptick in consumer goods prices in December following two straight monthly decreases. (…)
In the 12 months through December, the PPI increased 1.0% after advancing 0.8% in November. (…)
The narrower measure of PPI, which strips out food, energy and trade services components, rose 0.2% in December after gaining 0.1% in the prior month. The so-called core PPI rose 2.5% on a year-on-year basis after increasing 2.4% in November. (…)
Based on the CPI and PPI data, economists estimated the PCE price index excluding food and energy rose 0.2% in December after gaining 0.1% in November and October. In the 12 months through December, the so-called core PCE price was forecast increasing 3.0%. That would be the smallest year-on-year gain since March 2021 and follow a 3.2% rise in November.
The overall PCE price index is also seen climbing 0.2% in December, with the annual increase forecast to come in at about 2.6%, unchanged from November’s advance. (…)
- Atlanta Fed boss warns US progress on inflation is likely to slow Raphael Bostic believes rates need to stay on hold until at least summer to prevent prices from rising again
- @RBAdvisors: Both today’s #PPI and yesterday’s #CPI troughed 6-7 months ago. Yet the #Fed is apparently signaling “Mission Accomplished.”
Bank of Canada surveys show weak business environment, lower inflation expectations
The central bank’s Business Outlook Survey for the fourth quarter of 2023 found Canadian companies are experiencing slowdowns in sales and increased competition. As a result, fewer businesses are planning larger-than-normal price increases in the coming year.
A separate survey of consumers found that Canadians are growing more pessimistic about the economy and pulling back on spending. (…)
The survey of about 100 companies, conducted in the second half of November, shows a weakening business environment. Nearly 40 per cent of the survey respondents saw outright declines in sales over the past year. And indicators of future sales – including order books, advance bookings and sales inquiries – remained subdued.
The dour outlook for demand is feeding into weaker investment intentions and hiring plans.
“Most firms do not feel the need to add new staff and are experiencing less-intense labour shortages than 12 months ago,” the Bank of Canada said.
Companies still expect to raise wages faster than normal over the next year as a result of cost-of-living adjustments. However, three-quarters of the survey respondents expect wage growth will be back to pre-COVID-19 norms by 2025.
Over all, business expectations of future inflation continued to ease in the fourth quarter, albeit very slightly. About one-quarter of the companies surveyed said inflation won’t return to the Bank of Canada’s 2-per-cent target in the next four years. (…)
“Consumers continued to report feeling the negative impacts of high inflation and high interest rates, and more than last quarter are cutting their spending in response. Further spending adjustments are expected, with many mortgages coming up for renewal in the near term,” the Bank of Canada said.
Survey respondents reported feeling worse about their personal finances and more wary about the job market. People saw a higher likelihood of losing their jobs and a lower chance of switching jobs voluntarily. (…)
Consumer beliefs about near-term inflation have barely budged in recent quarters, with people consistently expecting inflation to be around 5 per cent in a year’s time. However, expectations for inflation five years out have now fallen below prepandemic levels.
Consumers increasingly expect inflation to moderate for key goods such as food and gas. But they think service prices, especially rents, will continue to rise quickly, and that “may be slowing progress in returning overall inflation expectations to where they were before the COVID‑19 pandemic,” the bank said. (…)
China’s Ping An Bank Names 41 Developers in Funding Support List
Major Chinese lender Ping An Bank Co. has put 41 developers on a list of builders eligible for its funding support, a shift toward more lending to a property sector in crisis following government steps to stanch the pain.
The bank decided to adjust criteria related to extending credit lines to meet builders’ reasonable funding demands, people familiar with the matter said, requesting anonymity discussing private matters. That mirrors a task that authorities set out in a major annual government economic conference last month, and comes after regulators drafted their own list of builders to guide financial institutions as they weigh more lending. (…)
“It’s hard to say how much benefit companies on that list will receive from the bank’s lending, but companies not on that list will be regarded by investors as abandoned by the bank,” said Shujin Chen, analyst at Jefferies Financial Group. “Ping An Bank’s exposure to property sector is not small, so its list can also be seen as a signal for the sector.” (…)
More than half of the builders on the current list are state-backed companies including Poly Property Group Co. and Beijing Urban Construction Group Co. The rest cover private-sector peers such as Longfor Group Holdings Ltd., China Vanke Co. and Gemdale Corp. (…)
Ping An Insurance (Group) Co., parent of Ping An Bank, had previously said it’s trying to reduce exposure to the sector, and regulators have been encouraging insurers to focus on their core business. The latest list marks a shift in strategy and may see other banks follow suit.
The bank told its departments and branches that they should extend full lending support to developers on the list operating normally, and refrain from cutting or suspending credit lines, said the people. The lender also urged them to use maturity extensions and rescheduling payment arrangements to alleviate builders’ liquidity pressure, the people added. (…)
Ping An Bank ranked as the country’s 13th-biggest bank by assets last year, according to local media citing a league table from the China Banking Association. (…)
- Latest Stress Testing on Chinese Banks Highlights Rising Capital Pressure The latest stress test on Chinese banks shows persisting capital pressure across the sector, including some of the domestic systemically important banks (D-SIBs), although individual banks’ capability to withstand an external shock varies significantly.
(…) The stress test shows that, in a mild economic downturn, the 19 D-SIBs’ average capital-adequacy ratio (CAR) would drop to 14.5% by end-2025 from the reported CAR of 16.3% at end-2022. This is a more severe capital deterioration than in last year’s macro-stress testing results, where the average CAR would decline to 14.8% by end-2024 from 16.1% at end-2021. The latest testing assumes more pessimistic economic forecasts than in previous years, likely indicating the rising risks faced by the Chinese economy. (…)
A more severe scenario, with GDP growth assumptions at 1.1%, 2.9% and 3.2% in 2023, 2024 and 2025, respectively, which are higher than our hypothetical stress scenario of growth slowing to 1.5% and 2.0% in 2024 and 2025, respectively, found that the 19 D-SIBs’ average CAR would drop to 12.7% by end-2025 and remain above the minimum requirement. However, we believe if such a severe stress scenario were to materialise, it would trigger rising downside risks to banks’ operating environment and their standalone Viability Ratings. (…)
The vulnerability revealed by the latest stress tests reinforces our base case that a reversal of financial reforms or sharp, broad-scale credit growth is unlikely as such outcomes could further undermine loss absorption capacity at banks and increase risks to financial stability. Instead, we expect the authorities to continue a targeted credit allocation approach, with regulators guiding selected banks in channelling credit to strategic sectors, especially given the government’s focus on maintaining systemic stability and pushing forward risk resolutions at small and medium-sized banks.
As I reported last week (China: Here We Go!) China is using the Fed’s QE playbook (Chinese Cities Buy Housing With PBOC-Tied Loans, Report Says).
As Dallas Cowboys quarterback Dak Prescott says just before the snap: “Here we go!”. Finally a concrete measure to begin to really address China’s real estate problem. A Chinese version of the Fed’s Quantitative Easing program: the central bank provides low cost funds to cities to purchase vacant apartment buildings from troubled developers or, even better, from troubled LGFVs, thereby transferring bad debt up to the PBOC.
The PBOC should provide an update on the use of its tools later this month, potentially confirming that banks have tapped the funds for the rental program. Look for the $14B program to repeatedly be extended.
EARNINGS WATCH
We have 29 reports in: the beat rate is 93% and the surprise factor is +2.4%.
- All 12 consumer-centric companies beat with surprise factors of +5.8% (staples) and +13.5% (discretionary)
- 6 of 7 Financials beat but the surprise factor was only +0.1%
Trailing EPS are now $220.06 and full year 2024 $243.51.
