New feature: EDGE AND ODDS’ DaiLY CHAT.
Most days, I will provide a link to an AI generated chat on the day’s post courtesy of Google’s NotebookLM. Not totally satisfying but worth offering to readers on the go. No support charts however and some AI generated conclusions not really mine….
And there is much more on the blog itself.
And if you sense hallucinations, editorializing and patronizing, I will totally fault AI 
.
CONSUMER WATCH
US households have experienced significant gains in stock prices and home prices over the past 15 years, and Fed hikes have generated significant cash flows to owners of fixed income.
As a result, the debt-to-income ratio looks much better for US households compared with other countries, including Canada and Australia, see the first chart below.
At the same time, credit card debt for US households is at very low levels and declining.
U.S. consumers remain resilient with solid spending in the third quarter, two of the country’s biggest lenders said on Friday, although there are signs higher inflation has stretched some Americans on lower incomes.
Strong earnings from JPMorgan Chase JPM.N and Wells Fargo WFC.N and upbeat comments from their top executives should further ease investor worries that elevated borrowing costs were weighing on consumers and pushing the economy to the cusp of a downturn, even as JPMorgan hiked provisions for soured loans.
“Overall, we see the spending patterns as being sort of solid,” said Jeremy Barnum, chief financial officer of JPMorgan, the country’s largest lender and a bellwether for the U.S. economy, adding spending had normalized from a post-pandemic bounce when Americans splurged on travel and eating out.
Barnum said spending patterns were “consistent with the narrative that consumers are on solid footing and consistent with a strong labor market and the current central case of a kind of ‘no-landing’ scenario economically.”
Wells Fargo Chief Financial Officer Michael Santomassimo told reporters that spending on credit and debit cards, while down a little from earlier this year, was still “quite solid.”
The bank reported debit card purchase volumes and transactions were up nearly 2% year-on-year, while credit card point-of-sale volumes were up 10%. At JPMorgan, year-on-year debit and credit card sales volumes were up 6%. (…)
Where it’s not so strong:
Another Huge Federal Deficit in Fiscal Year 2024 Despite Surging Corporate and Other Tax Collections
The federal government’s budget deficit was $1.8 trillion in fiscal year 2024 (which ended in September), according to preliminary analysis by the Congressional Budget Office (CBO)— lower than the $1.9 trillion deficit CBO forecast in June as tax revenue came in slightly higher and spending slightly lower than expected.
Nonetheless, this marks the third largest deficit ever recorded in nominal terms, after the pandemic deficits of 2020 and 2021, which were $3.1 trillion and $2.8 trillion respectively.
The deficit in FY24 was about 6.4 percent of GDP after accounting for recent revisions and expected economic growth, larger than any deficit in records going back to 1930 except the years around World War II, the 2008 financial crisis, and the pandemic.
A major source of the growing deficit is net interest on the public debt, which grew 34 percent to $950 billion in FY24. Interest on the debt is now the second largest federal expenditure after Social Security, which costs $1.5 trillion, surpassing defense spending of $826 billion and Medicare spending of $869 billion.
As currently measured, interest paid on the debt in FY24 was about 3.3 percent of GDP, which (after adjustments for comparability) would be the highest since 1992 and nearly the highest in records going back to 1940. Interest on the debt as a share of GDP is set to enter unchartered territory in the new fiscal year, surpassing the high-water mark set in the early 1990s. (…)
Overall, CBO estimates spending grew 10 percent in FY24 to $6.8 trillion. At about 23.4 percent of GDP, federal spending in FY24 was above the prior 20-year average of 22.0 percent of GDP.
Federal tax collections grew 11 percent to $4.9 trillion, topping the previous all-time high in 2022. As a share of the economy, federal tax collections reached about 17.1 percent of GDP—higher than the prior 20-year average of 16.6 percent and roughly matching the average over the 20 years prior to the 2017 Tax Cuts and Jobs Act (TCJA). Federal tax collections since the TCJA have averaged about 17 percent of GDP.
The largest source of revenue, individual income taxes, grew 11 percent to $2.4 trillion in FY24, while payroll taxes grew 6 percent to $1.7 trillion. By far the fastest-growing source of revenue was corporate income taxes, which grew 26 percent to $529 billion—$109 billion higher than the prior year and higher than any other year on record. Other receipts grew 12 percent to $255 billion.
As CBO notes, part of the reason both corporate and individual income taxes grew so much in fiscal year 2024 is because tax deadlines were postponed from fiscal year 2023 due to federally declared disaster areas. However, the growth in corporate tax revenues stands out, even after adjusting for the shift. Average corporate tax collections over the last two years reached $474 billion, $49 billion higher than the previous record high of $425 billion in 2022. (…)
How can it be that corporate tax collections now meet or exceed the average levels seen before TCJA, when a major part of that law reduced the corporate tax rate from 35 percent to 21 percent?
The main reason is that TCJA not only reduced the corporate tax rate but also substantially broadened the corporate tax base. TCJA limited deductions for net interest expense, net operating losses, and fringe benefits, required R&D expenses to be amortized over 5 or 15 years, repealed the domestic production activities deduction, and reformed international taxes. In total, these offsets were estimated by the Joint Committee on Taxation (JCT) to raise more than $1 trillion over a decade, offsetting more than three-quarters of the $1.3 trillion cost of reducing the corporate tax rate. (…)
Another reason corporate tax collections have grown so much is that TCJA reforms boosted economic growth and profits while encouraging companies to report more profits for tax purposes. (…)
Nonetheless, growth in spending, particularly interest on the debt, has swamped much of these gains, producing another year with an alarmingly high deficit.
U.S. Producers’ Selling Prices Held Flat in September
The producer-price index was unchanged last month compared with August, versus the 0.1% increase economists polled by The Wall Street Journal had expected. Over the past 12 months, producer prices have risen by 1.8%.
In September, a 0.2% increase in producers’ services prices offset a 0.2% decline in goods prices. (…)
China’s Deflation Problem Worsens on Weak Consumer Prices Producer prices have declined for 24 straight months
The consumer price index inched up 0.4% from last year, although that was boosted above zero only by a jump in fresh vegetable prices. Core CPI rose 0.1% in September, the lowest since February 2021, while producer inflation fell for a 24th straight month, according to data from the National Bureau of Statistics on Sunday. Producer inflation fell 2.8%, year-over-year, slightly more than the 2.6% drop economists had predicted.
Overall food inflation climbed 3.3% in September from a year ago, while the cost of fresh vegetables surged 22.9% after gaining 21.8% in August, boosting inflation by 0.48 percentage point. Adverse weather and seasonal demand ahead of a weeklong holiday in China likely pushed up prices for fruits and vegetables. (…)
China is facing the longest period of deflation since the 1990s, with a broad measure of economy-wide prices falling for five straight quarters through June — a stretch that likely continued through September. (…)
Weak consumption and a rapid rise in output have led to intense price wars in sectors including electric vehicles and solar. Prices of so-called transportation facilities including cars dropped 5.3%, while automobile manufacturers saw their sale prices decline 2.3%.
Falling prices are a bad sign for the economy. Deflation could lead to a vicious circle by driving down spending and investment, which in turn lead to weaker economic growth and higher unemployment.
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On a MoM basis, non-food CPI fell 0.2% in September after +0.2% in August.
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Core CPI was +0.1% YoY in September after +0.3% in August.
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On a monthly basis, China’s PPI dropped 0.6% in September, compared with a 0.7% month-on-month decline in August. Goldman Sachs’ calculations put the annualized decline at 9.0% after –5.6% in August.
- Nonfood prices in China fell 0.2% on year last month, reversing a 0.2% rise in August due to a bigger fall in energy prices.
- PPI-Consumer Goods was down 1.3% in September vs –1.1% in August.
Beijing, we have a big demand problem!
Local governments will be allowed to use special bonds to buy unsold homes, Finance Minister Lan Fo’an and his deputies announced at a briefing Saturday, without giving an amount. Lan hinted at room for issuing more sovereign bonds and vowed to relieve the debt burden of local governments, signaling a possible rare revision to the budget that could come in the next few weeks.
“The central government still has quite large room to borrow and increase the deficit,” Lan said, without providing a time frame. (…)
Officials said China will also issue special sovereign notes to boost capital at its largest state-owned banks, a move expected to spur lending to lift the economy. (…)
Pang and some other economists expect more details of fiscal stimulus to be published after a meeting of top lawmakers in the coming weeks, including the sale of more treasury debt and a mid-year revision of the budget. (…)
“The tone is positive — the MOF will likely add new quota of treasury and local bonds,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “We expect 1 trillion yuan of ultra-long treasury and 1 trillion yuan of local bonds to be announced.”
Ahead of the event, investors and economists surveyed by Bloomberg expected the government to commit as much as 2 trillion yuan in new fiscal stimulus. (…)
Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc., said allowing the use of the bonds for more purposes is “significant” because it could lead to as much as 1 trillion yuan of cash currently idling to trickle through the economy. (…)
And while he didn’t give an amount, Lan said the size of the one-off effort to raise the local government limit to swap off-balance sheet debt will be the “largest in recent years.”
Goldman Sachs Group Inc. economists led by Lisheng Wang expect policymakers to enlarge the local government debt swap plan to around 5 trillion yuan for multiple years. This compared to about 1.5 trillion yuan for a similar initiative last year, according to an earlier estimate by UBS AG economist Wang Tao.
Fiscal support has been the biggest missing piece in a stimulus package Beijing started to deploy in late September, in an unprecedented push led by the central bank that ranged from interest-rate cuts to aid for the property and stock markets.
More expansionary public spending is deemed crucial to reviving the world’s second-largest economy, which is in deflation and risks missing the government’s 2024 growth target of around 5%.
Still, the MOF offered only limited direct boost for consumption at the briefing and no indication of cash handouts to families on a large scale — something Beijing has long resisted due to concerns over what it calls “welfarism.”
“There’s still a long way to go to see the government shifting its stimulus focus to consumption,” said ANZ’s Xing. “Between boosting growth and preventing risks, the government looks to be picking the latter at this stage.”
The Chinese government is now serious: it recognizes the size and scope of the problems and has adopted its own “whatever it takes” policies.
But so far, it has only thrown cash to the problems: more loans or loan guarantees to local governments, capital boosts to banks and large purchases of equities.
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Local governments are expected to use the cash to buy the huge housing overhang from developers. This has been tried earlier this year on a smaller scale, only to find few actual transactions because the bids are deemed too low. Then there is the problem of what to do with those unfinished homes. Local governments are not housing developers.
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Banks may be willing to lend but they need willing borrowers. Business and consumer confidence is at a historical low, not only on the economy but on the government itself. The healing will be slow.
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China has but a flimsy social safety net. Chinese were saving some 29% of their income pre-Covid. It’s now 33%.
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Artificially boosting equity markets may help confidence and create the beginning of a wealth effect but only for a very tiny slice of the population. For most Chinese, the 15-25% decline in their real estate investment has deflated their long-term dreams. The latest data offer no hope of a stabilization, let alone a recovery.
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Deflation is a real risk as shown above, complicating the necessary consumption revival. How many cash vouchers will be needed to restart demand?
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The PBOC keeps cutting interest rates but inflation keeps declining, leaving real rates around 2.0%, the same as in 2021.
China Exports Growth Slows in Blow to Economy’s Bright Spot Shipments to many markets fall, US and EU demand slows
Exports climbed just 2.4% in dollar terms from a year earlier to almost $304 billion, the lowest level since May, the customs administration said Monday. Shipments to key markets including Japan, South Korea and Taiwan all fell, while exports to the European Union and the US marked their slowest rise in at least four months as politicians ramped up tariffs.
Russian purchases of Chinese goods soared to a record $11 billion, as Beijing continues to shield Moscow from economic isolation after Western companies producing everything from cars to phones quit President Vladimir Putin’s nation due to sanctions to punish his military aggression. (…)
Chinese exports have powered the economy this year with shipments through September soaring to the second highest value on record. Weak consumer spending at home, however, has dampened the appetite for foreign products spurring a record trade surplus, and prompting US President Joe Biden and others to impose trade curbs.
Exemplifying that problem, imports inched up just 0.3%, leaving a trade surplus of almost $82 billion for September and $690 billion for the first nine months of this year. (…)
BTW, Goldman calculates that exports sequential growth (seasonally adjusted by GS) was -3.5% non-annualized in September vs 1.6% in August. Imports sequential growth (seasonally adjusted by GS): 0.2% non-annualized in September vs. -1.9% in August.
Boeing to Cut Workforce by 10% as Strike Eats Into Reserves
The cuts translate to roughly 17,000 positions and will include executives, managers and employees, Chief Executive Officer Kelly Ortberg told employees in a memo on Friday. The company also plans to delay the introduction of its first 777X jetliner, and separately announced that it expects third-quarter sales to come in well below Wall Street estimates. (…)
“The workforce reductions are what we have seen across smaller suppliers earlier this week, signaling more to come across” in the industry, she said. (…)
Boeing has made two offers for higher wages, both of which have been rebuffed by the union representing hourly factory workers across the west coast. About 33,000 employees have been on strike for a month now, devastating production and draining Boeing’s reserves. (…)
Businesses Anticipate Slower Price, Wage Growth, Bank of Canada Survey Says Nearly three-quarters of companies now anticipate inflation will hover around 1% to 3% over the next two years, up sharply from the previous quarter
Nearly three-quarters of Canadian businesses believe inflation over the next two years will hover between the Bank of Canada’s target range of 1% to 3%, according to a quarterly central bank survey, marking a sharp turnaround in price expectations from the previous three-month period.
The Bank of Canada’s business-outlook survey, published Friday, indicated that nearly half of companies anticipate a deceleration in worker pay raises over the next 12 months and a further softening in price increases for their goods and services due to weak consumer demand. The central bank said that for some businesses, “discounts are becoming necessary to attract an increasingly budget-constrained consumer.” (…)
Overall, the quarterly survey results suggest that “demand is weak, firms have excess capacity, and price growth continues to slow,” the Bank of Canada said. A gauge of business sentiment remains in negative territory, despite a slight improvement, as managers fret about elevated interest rates, soft demand, and the high costs for goods and services. Investment and hiring intentions remain weak, the survey said.
“The survey points to an economy clearly in need of rate relief, and leans towards the Bank of Canada needing to take a larger step,” like a half-point cut, said Ali Jaffery, an economist at CIBC Capital Markets. Traders in the overnight-index swap market are placing a 54% likelihood of a half-point cut later this month, said Karl Schamotta, chief market strategist at Corpay, a foreign-exchange and global payments company.
Jobs data for September, also released Friday, indicated net employment grew by a stronger-than-expected 46,700, and the unemployment rate dropped to 6.5% from 6.6%. On a year-over-year basis, the ranks of the unemployed grew 19.5% in September versus a 1.5% gain in net new jobs. (…)
The share of firms expecting inflation to be 3% or higher over the medium term declined sharply in the third quarter, to 15% from the previous 41% print. (…)
Inflation slowed to 2% in August, Statistics Canada reported, and some economists expect September’s data, scheduled for release next week, to show prices rose less than 2% from a year ago.
EARNINGS WATCH
From LSEG IBES:
29 companies in the S&P 500 Index have reported revenue for Q3 2024. Of these companies, 65.5% reported revenue above analyst expectations and 34.5% 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, 62% of companies beat the estimates and 39% missed estimates.
In aggregate, companies are reporting revenues that are 0.4% 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 1.1%.
The estimated earnings growth rate for the S&P 500 for 24Q3 is 4.9%. If the energy sector is excluded, the growth rate improves to 7.3%.
The estimated revenue growth rate for the S&P 500 for 24Q3 is 4.0%. If the energy sector is excluded, the growth rate improves to 4.8%.
The estimated earnings growth rate for the S&P 500 for 24Q4 is 12.2%. If the energy sector is excluded, the growth rate improves to 14.6%.
CEOs and Analysts Are at Odds About S&P 500’s Earnings Outlook Company guidance is optimistic while analysts are bearish
Data compiled by Bloomberg Intelligence show analysts expect S&P 500 firms to report a 4.2% increase in third-quarter earnings versus a year earlier, down from a 7% forecast in mid-July. Guidance by the firms, on the other hand, implies a jump of about 16%.
Gina Martin Adams, chief equity strategist at BI, said the dichotomy was “unusually large,” and the significantly stronger outlook suggests “companies should easily beat expectations.” (…)
Momentum on earnings-per-share guidance has also turned positive, with a BI model showing a score of 0.14 for the three months through September, compared with a post-Covid average of 0.03.
Meanwhile, a Citigroup Inc. index of earnings revisions showed strong negative momentum in September, dipping to its lowest level since December 2022. Despite analysts’ fears, the S&P 500 hit another record high on Friday and is up 22% in 2024, its best start to a year since 1997. (…)
Investor focus will eventually turn to the Magnificent Seven group of stocks that largely fueled the rally this year, including Apple Inc. and Nvidia Corp. Consensus expects their profits to rise about 18% from a year ago, a slowdown in the pace of growth — at 36% — seen in the second quarter. The group has underperformed since the second-quarter reporting season and has been trading sideways more recently as the S&P 500 rally broadened.
“The fundamental reason for the underperformance of Mag 7 could simply be the deceleration in EPS growth from the very strong pace last year,” said Morgan Stanley’s Wilson. “If earnings revisions show relative strength for the Mag 7, these stocks will likely outperform once again and market leadership may narrow — like it did during the second quarter and all of 2023.”
