Jump in July Durable Goods Orders Clouds Sluggish Underlying Demand
New orders of durable goods surged 9.9% in July, coming on the heels of a 6.9% contraction the prior month. The month-to-month volatility has been driven primarily by aircraft. Separately released data from Boeing showed aircraft orders picking up in July after some weakness in May and June, which corroborates the recent swings in headline durable good orders. Excluding transportation goods, orders slipped 0.2% in July.
Softness was broad-based. Orders of motor vehicles & parts (-2.6%) posted the largest monthly decline, followed by communication equipment (-1.1%) and primary metals (-0.9%). The decrease in new orders of autos and parts reflects the ongoing normalization in the sector that has been faced with numerous supply challenges since the pandemic. On the flip side, computers and related products continue to be a bright spot in the otherwise dreary landscape—new orders of computers rose 3.2% in July and are up nearly 13% over the year.
Over the past year, new orders of durable goods (excluding transportation) are up a meager 0.65%, which is the softest annual growth rate since January. The stalling is illustrative of restrictive monetary policy and political uncertainty. These dynamics have underpinned a deferment mindset among businesses who are reluctant to take on major projects today.
The composition of orders points to a sluggish environment for capital expenditures. Yet, it is shipments, not new orders, that are used for the calculation of business fixed investment in the U.S. GDP accounts. Nondefense capital goods shipments rose 4.7% in July, coming on top of an upwardly revised 6.1% pop in June. While that suggests business equipment spending is tracking for a decent outturn in the third quarter, most of the strength is tied to aircraft. Excluding aircraft and defense goods, core capital goods shipments fell 0.4% in July after a flat reading to end Q2, pointing to a recent loss of momentum. (…)
PDD’s $55 Billion Stock Crash Sends Warning on Chinese Economy PDD’s stock plunges 29% after a disappointing sales outlook
One of the last remaining bright spots for Chinese consumption is rapidly fading, as the nation’s economic malaise takes a toll on demand for even the most accessible of goods.
In the latest warning to global markets on the health of the Chinese economy, Temu-owner PDD Holdings Inc. on Monday surprised investors with an unusually gloomy outlook. The e-commerce firm, which became a market darling with low-priced goods that helped propel sales and profits during China’s economic downturn, also reported revenue that missed estimates. During a post-earnings briefing, CEO Chen Lei mentioned at least eight times that revenue and profits must “inevitably” decline as economic growth slows. (…)
The CEO and his lieutenants were careful to stress they remained confident in Chinese consumption over the longer term — a big priority for Beijing in rebalancing the world’s No. 2 economy. But the damage was done. PDD’s shares plunged 29% in their biggest fall on record, wiping out $55 billion of market value. Its closest rivals Alibaba Group Holding Ltd. and JD.com Inc. followed suit, sliding about 5% in Hong Kong.
PDD’s warning stunned investors because the company was long viewed as the main beneficiary of a Chinese “consumer downgrade” — its low-pricing strategy on Pinduoduo domestically and Temu abroad was intended to appeal to cost-conscious shoppers at a time of unprecedented economic volatility.
The disappointing results were the latest in a series of red flags about the Chinese economy. This week, popular fast food chain Din Tai Fung — long one of the most popular restaurant brands across the country — revealed it was shutting more than a dozen outlets. Last month, Starbucks Corp. disclosed a 14% plummet in Chinese revenue in the June quarter. (…)
Consumption, a main driver of the economy, weakened this year after a rebound in post-Covid reopening spending last year. Against the backdrop of widespread job and salary cuts as well as plunging property prices, Chinese consumers have turned more cautious with their spending, leading to intense price wars in sectors such as cars.
Retail sales expanded just a little over 3% in the first seven months of 2024, far worse than the 8%-plus growth recorded in pre-pandemic times. Residents’ confidence in future income plunged to the worst level since the end of 2022, one of the most intense periods of Covid lockdowns, according to a central bank survey conducted in the second quarter.
Almost half of the residents polled said employment is “grim and difficult,” the highest proportion since the end of 2022. Nearly two thirds of those surveyed said they’re willing to save more, hovering near an all-time high recorded last year. (…)
Canada to Hit China With Tariffs on Electric Vehicles, Steel Plans 100% levy on electric cars, 25% on steel and aluminum
(…) The surtax on electric vehicles will take effect Oct. 1 and will also include certain hybrid passenger automobiles, trucks, buses and delivery vans. It will be added to an existing 6.1% tariff that applies to Chinese EVs.
The levies on aluminum and steel will come into place Oct. 15. The government released an initial list of goods on Monday and the public will have a chance to comment before it is finalized on Oct. 1.
Trudeau’s government is also launching a new 30-day consultation on other sectors, including batteries and battery parts, semiconductors, solar products and critical minerals. (…)
Canada’s auto sector is highly integrated with that of its closest neighbor: The vast majority of its light vehicle production — which was 1.5 million units last year — is exported to the US. (…)
The European Union has also announced proposed new tariffs on electric vehicles important from China, though at lower levels than the US and now Canada are proposing. (…)
The value of Chinese electric vehicles imported by Canada surged to C$2.2 billion ($1.6 billion) last year, from less than C$100 million in 2022, according to data from Statistics Canada. The number of cars arriving from China at the port of Vancouver jumped after Tesla Inc. started shipping Model Y vehicles there from its Shanghai factory.
However, the Canadian government’s main concern isn’t Tesla, but the prospect of cheap cars made by Chinese automakers eventually becoming available. BYD informed the Canadian government in July that it intends to lobby lawmakers and officials about its plans to enter the country. (…)
US industry seeks easing of steep Biden-Harris China tariff hikes
The Biden-Harris administration this week is expected to announce final implementation plans for steep tariff increases on certain Chinese imports, and if U.S. industry gets its way, many of the planned duties would be softened.
Manufacturers from electric vehicles to electric utility equipment have asked for the higher tariff rates to be reduced, delayed or abandoned, and for potential exclusions to be greatly expanded. (…)
The White House had said initially the new tariffs would take effect on Aug. 1 but that was delayed until some time in September as the U.S. Trade Representative’s office studied more than 1,100 public comments. A final determination is due by the end of August. (…)
The Biden-Harris tariffs include a new 25% levy on Chinese-made ship-to-shore cranes, a China-dominated sector with no U.S. producers. The Port of New York and New Jersey said it has eight cranes on order from China’s state-owned ZPMC at $18 million apiece, and a 25% tariff would boost the cost of each by $4.5 million, “causing a significant strain on the Port’s critical and limited resources.” (…)
Ford Motor asked USTR to reduce proposed tariffs on artificial graphite, a key material used in the production of anodes for electric vehicle batteries. Ford said it still “almost exclusively” uses Chinese secondary-particle graphite,
Autos Drive America, a group representing foreign-brand automakers, called for tariff rates on batteries, modules, cells, and critical minerals to be kept stable through at least 2027 to allow automakers to “fulfill investments in U.S. production and to bolster consumer adoption” of EVs. (…)
High-tech manufacturing spurs China’s July industrial profit growth
China’s industrial profits grew faster in July buoyed by high-tech manufacturing, even as sluggish domestic demand weighed on the recovery in the world’s second-largest economy.
Profits in July jumped 4.1% from a year earlier following a 3.6% rise in June, National Bureau of Statistics (NBS) data showed on Tuesday.
For the January-July period, profits expanded slightly faster at 3.6% compared with 3.5% in the first half, offering some hope of improving momentum amid dreary factory output, export, prices and banking lending numbers earlier in August. (…)
The high-tech manufacturing sector, including the making of lithium-ion batteries and semiconductors and related equipment, led the earnings growth with a 12.8% rise in the January-July period, the data showed.
Still, “domestic consumption demand remains weak while the external environment is complex and volatile,” said NBS statistician Wei Ning, suggesting more efforts were needed to boost domestic demand.
Tamer shipments last month raised a red flag over the country’s export-driven recovery and heightened concerns about frail domestic demand.
China’s July bank loans recorded the first contraction in 19 years, central bank data showed earlier. (…)
China’s export curbs on semiconductor materials stoke chip output fears Western customers say restrictions on supply could hit production of advanced microprocessors and optical products
The FT reports on “Beijing’s curbs on shipments of germanium and gallium, which are used for semiconductor applications and military and communications equipment components, have led to an almost twofold increase in the minerals’ prices in Europe over the past year. (…) The country produces 98 per cent of the world’s supply of gallium and 60 per cent of germanium, according to the US Geological Survey. (…) Beijing also announced export restrictions this month on antimony, a mineral used in armour-piercing ammunition, night-vision goggles and precision optics. The measure followed China’s imposition of controls on exports of graphite and technologies used in rare earth extraction and separation.” (…)
China’s Budget Spending Drops as Land Sales See Record Fall Broad budget spending is down 2% in first seven months of 2024
(…) Behind the decline was a 8.9% decrease in land-related expenditure that includes payments for primary land development and compensation for existing rural infrastructure in preparation for a potential sale. Local governments have been cutting spending as their budgets come under strain from a severe housing downturn that’s made developers reluctant to purchase land.
The property fallout on public finances is becoming increasingly evident on the balance sheets of indebted local governments. Their revenue from land sales in July shrank just over 40% on year to 250 billion yuan, according to Bloomberg calculations, the sharpest fall since comparative data became available in 2016.
Total revenue under the two budgets came in at 15.9 trillion yuan in the first seven months, down 5.3% on year. That translated into an augmented deficit — a broad measure of the fiscal gap — of 3.8 trillion yuan. (…)
At a regular meeting on July 31, China’s cabinet vowed to study additional steps that would be strong enough to reach companies and households.
The Goldman economists estimate fiscal expenditure growth rebounded in July, citing a broad deficit metric of their own that combines major on- and off-budget channels. They also expect government bond net issuance to increase “notably” in coming months to support fiscal spending and government-led investment.
Calls are meanwhile intensifying for the Chinese authorities to ramp up fiscal stimulus. Domestic demand has struggled to pick up as the persistent real estate crisis, price competition between companies and a gloomy job market weigh on business and consumer confidence. (…)
Libyan Rival Government to Stop Oil Output Over Bank Row Dueling governments fight over leadership of central bank
Brent crude jumped as much as 3.2% to above $81 a barrel, after the eastern authorities said Monday in a statement on Facebook that a “force majeure” applies to all fields, terminals and oil facilities.
Waha Oil Co., which supplies Es Sider — the country’s largest export terminal — said it will start cutting shipments gradually. Sirte Oil Co. also said it will start reducing output. (…)
A row over who leads the central bank, the manager of billions of dollars of energy revenues, has been brewing for over a week, deepening political divisions and threatening a UN-brokered peace deal. The internationally acknowledged government in the country’s west has been seeking to replace Governor Sadiq Al-Kabir, who has refused to step down. A government delegation entered the regulator’s offices today to take over, according to local media. (…)
The country produced a total of about 1.15 million barrels a day of oil last month, according to data compiled by Bloomberg. (…)
FYI: Corporate cash as a share of total assets has been trending lower, indicating that we could see a pullback in share buybacks.
Source: BofA Global Research