Month: September 2024

After a significant decline in July, US Industrial Production rebounded dramatically in August, rising 0.8% MoM (as July was revised down from -0.6% to -0.9% MoM). That lifted Industrial Production back up to unchanged on a YoY basis…

Source: Bloomberg

Manufacturing also soared 0.9% MoM, lifting the YoY print to +0.2%…

Source: Bloomberg

Most major market groups posted gains in August, with the jump in the output of motor vehicles and parts contributing to the strength recorded across a variety of categories.

The index for consumer goods rose 0.7 percent, as a 10.5 percent increase in the index for automotive products more than offset a small decline in the index for nondurable consumer goods.

Similarly, the index for business equipment stepped up 1.4 percent in August, supported by a 6.6 percent gain in the index for transit equipment.

The index for materials grew 0.9 percent in August, with gains in all its subcomponents, including the index for durable goods materials, which rose 1.6 percent and was bolstered by the output of motor vehicle parts.

Beyond the influence of motor vehicles and parts, defense and space equipment posted a gain of 0.5 percent and was 3.2 percent above its year-earlier level.

Business supplies recorded the sole decline among major market groups, edging down 0.2 percent in August after decreasing 0.7 percent in July.

Capacity Utilization ticked modestly higher in August…

Source: Bloomberg

Is US manufacturing really swinging from its biggest drop since January to its biggest jump since Feb?

And one more thing – are we really going to cut rates by 50bps after a big surge in manufacturing?

Meta, the owner of Facebook and Instagram, has responded to the US government’s directive urging entities and nations abroad to ban all activities by Russian state broadcaster RT and other Moscow-funded networks.

Meta on Tuesday announced it is booting RT from its apps globally, agreeing with the Biden administration on its charge of deceptive influence operations. “After careful consideration, we expanded our ongoing enforcement against Russian state media outlets. Rossiya Segodnya, RT and other related entities are now banned from our apps globally for foreign interference activity,” a Meta spokesman said.

At this point no RT page or channel will be present on Facebook, Instagram, WhatsApp and Threads. RT’s Facebook page with 7.2 million followers has disappeared as has its Instagram page with one million followers.

The Kremlin has responded on Tuesday blasting the move, saying: “With these actions, Meta is discrediting itself… This complicates the prospects for normalizing our relations with Meta.” And RT stated that “US Big Tech cannot stop RT from making its voice heard” while further pointing out “META/Facebook already blocked RT in Europe two years ago, now they’re censoring information flow to the rest of the world.”

Washington starting last Friday took its war against the state-funded English language broadcaster to a global level, urging all nations to block its broadcasts and close down offices.

Already back in 2022 after being officially branded a foreign agent by the US government which resulted in major platforms dropping its programing, RT America’s offices in the US were shuttered and it was effectively booted from the country. But on Friday the Biden administration unveiled a new effort which seeks to expose RT as part of “malign global intelligence and influence operations”.

So now Meta appears to be dutifully and rather quickly falling in line behind Washington’s directives.

Secretary of State Antony Blinken said last week that “we know that RT possessed cyber capabilities and engaged in covert information and influence operations and military procurement.”

US officials are further alleging that Russian intelligence efforts utilized RT to the point of crowdfunding for military gear. “Under the cover of RT, information produced through this unit flows to Russian intelligence services, Russian media outlets, Russian mercenary groups, and other state and proxy arms of the Russian government.”

RT issued a response Tuesday on its international broadcast, which it subsequently released on X. So far, Elon Musk has shown no willingness to ban RT from the platform he owns…

⚡️ Meta has banned several Russian news networks, including RT, for alleged ‘foreign interference activity.’ Before the ban, RT had over 7 million followers on Facebook.

On behalf of our team: Silence us all you want, but there’s no way to silence the truth.

QUESTION MORE! pic.twitter.com/DX4NC1AgL9

— RT (@RT_com) September 17, 2024

Blinken further told reporters Friday, “Our most powerful antidote to Russia’s lies is the truth” and that the administration is “shining a bright light on what the Kremlin is trying to do under the cover of darkness.”

The timing of the public rollout of this major anti-RT initiative is interesting and curious to say the least, given the US is getting closer to the November election, and admin officials and the Democratic party are busy resurrecting the old ‘Russiagate’ talking points against Trump. There are also the usual same election ‘foreign interference’ warnings being loudly sounded from US officials. This has also included talk of China and Iran as supposedly meddling in significant ways. But ultimately this is all part of the ongoing infowar related to the Ukraine conflict.

After August’s upside surprise (+1.0% MoM, thanks to some shenanigans in the used car sales segment of the economy), US Retail Sales was expected to decline MoM (-0.2% MoM) in August (with BofA suggesting a 0.3% MoM decline).

But…. just like in July, the headline retail sales print for August beat expectations, rising 0.1% MoM (with July revised up to +1.1% MoM) thanks to non-store retailers…

This slowed the YoY retail sales print to +2.1%…

Source: Bloomberg

However, core retail sales (ex-Autos) rose just 0.1% MoM (less than the +0.2% expected), but the core YoY print rose to +3.9%…

Source: Bloomberg

Under the hood, Motor Vehicle sales contracted while non-store retailers (internet) surged…

After last month’s surge, vehicle sales were flat MoM at the highs ignoring the slide in CPI Used car prices which suggest sales are anything but robust…

Source: Bloomberg

Non-Store Retailers hit a new record high…

Source: Bloomberg

Does anyone else think that line is just a little too linear for the real world?

Will any of this stop Powell and his pals from cutting rates by 50bps tomorrow? Of course not…

Authored by Mike Shedlock via MishTalk.com,

Claudia Sahm claims to have invented a recession indicator created by Ed McKelvey. Now she says the indicator is wrong. Let’s investigate.

Data from the BLS, chart by Mish

What is the McKelvey Recession Indicator?

Take the current value of the 3-month unemployment rate average, subtract the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started.

Edward McKelvey, a senior economist at Goldman Sachs, created the indicator.

Claudia Sahm, a former Federal Reserve and White House Economist, modified the indicator from 0.3 to 0.5.

The rule triggered in August but Sahm is in denial.

Sahm Denial

Marketplace discusses Sahm’s Recession Denial.

When the monthly jobs report from the Labor Department was released in August at 8:30 a.m., it packed a punch. Something called the Sahm Rule had been triggered — it was like an economic fire alarm was going off.

“I was live on the radio, and they read the numbers out loud. I said, ‘OK, so the Sahm Rule says we would be in a recession, but Sahm says we’re not,’” said Claudia Sahm.

Sahm discovered the rule when she was studying previous recessions as part of a project to help policymakers prepare for the next one. 

So why is Sahm, the economist, discounting Sahm, the rule, now?

The unemployment rate, Sahm explained, has an Achilles’ heel: It doesn’t only go up when people lose their jobs, it can also go up when the number of people looking for jobs goes up.

“When you have people enter the workforce, it can take longer to find a job, even in the best of times,” she said. “That will push up the unemployment rate.” 

Sahm certainly did not discover the rule. She modified Ed McKelvey’s rule with no credit given to McKelvey.

And it might behoove Sahm to actually investigate her explanation.

In 7 of 10 recessions, the labor force was higher in the third month of recession than the start of it.

In isolation, that would tend to raise the unemployment rate as Sahm says. But it is also normal behavior.

The Covid recession only lasted 2 months and was so unusual in many other ways that it’s best to remove it for comparison purposes. But if you insist, then call the score 7 of 11.

Recessions Tend to Start Slowly

In two recessions, 1970 and 1973, employment was higher in the third month of recession than the first, by 83,000 and 353,000 respectively.

Nonfarm payrolls were up by 275,000 and 223,000 respectively.

And that is after revisions!

So, don’t claim the labor market is too strong for a recession to have started.

The McKelvey Recession Indicator Triggered, But What Are the Odds?

On September 10, I commented The McKelvey Recession Indicator Triggered, But What Are the Odds?

Many eyes are on the McKelvey recession indicator. Too many?

That would probably be the case if everyone believed it. [But heck, not even Sahm believes it!]

I calculate the odds based on past history of recessions at well over 50 percent. Click on the link for how I arrived at the percentage.

Recession Supporting Factors

September 3: Construction Spending Growth Slows in May, Stops in June, Negative in July

September 6: Payroll Report: Manufacturing Sheds 24,000 Jobs, Government Adds 24,000, Big Negative Revisions

September 7: BLS Negative Job Revisions 15 of Last 21 Months

September 9: Fed Beige Book Conditions Are Worse Now Than the Start of the Great Recession

US equity futures gain, and trade just shy of all time highs, led by Tech (especially Mag7 and Semis) as global markets trade higher ahead of the FOMC tomorrow as traders continue to increase probability of 50bps cut (~70% chance now) prompted by another Nick Timiraos WSJ article saying the decision between at 25 vs 50bps rate cut is complicated but withholding a larger cut could raise awkward questions. As of 8:00am ET, S&P futures are up 0.4%, rising for a 7th consecutive day, while Nasdaq 100 futs gain 0.5%, with INTC (+6.9%) the standout and MSFT +1.9% on a new $60 billion buyback. European stocks are also broadly higher as Asian markets are mixed and Japan stocks tumbled 2% after reopening from holiday and getting dragged lower by the surging yen.  Bond yields are lower across the curve as the 10Y TSY yields drop to 3.60%, a new 2024 low ahead of tomorrow’s Fed rate decision where odds are now 70% of a 50bps rate cut. The USD remains under pressure, dropping for a fifth consecutive session, falling 0.1% to the lowest since January. Commodities are mixed: crude down, natgas up, precious down, base up, and Ags higher. For the US session, focus is on retail sales this morning, with the market looking to firm up expectations for tomorrow’s FOMC meeting (currently ~-40bps priced). The latest BofA card spending data suggests retail sales will miss estimates (est are for headline retail sales at -0.2%, control group +0.3%) reflecting mixed card spending and a moderation from the 7.7% annualized pace of retail control growth over the prior two months, but a potential boost from back-to-school shopping. Also this morning we have IP, NAHB housing market data and pre-recorded remarks from FOMC non-voter Logan (note, her remarks will not address monetary policy or the economy, reflecting the FOMC’s blackout period).

In premarket trading, Microsoft  gains +2% after after it raised its quarterly dividend 10% and announced a new $60 billion stock repurchase program. Intel is up +6.5% after it announced it will make custom AI chips for Amazon AWS. Here are some other notable premarket movers:

• AppLovin climbs 2.4% following an upgrade of the software maker to buy at UBS on improving revenue growth visibility.
• HP Enterprise rises 3.5% as BofA upgrades to buy from neutral, citing numerous upcoming catalysts for the computer hardware and storage company.
• Shopify advances 2.1% following an upgrade to buy at Redburn Atlantic, which sees the company as a prime beneficiary of expected accelerated growth in US social e-commerce.
• SolarEdge Technologies shares fall 7.1% as Jefferies cuts to underperform from hold, citing significant headwinds in Europe.
• Torrid Holdings shares gain 3.5% after William Blair raised the apparel retailer to outperform from market perform, seeing potential for the stock to “effectively” double over the next six to 12 months.
• Viasat shares fall 3.7% as JPMorgan cut the recommendation on the communication company to neutral from overweight, after United Airlines chose to partner with Elon Musk’s Starlink instead of the broadband satellite provider to power its inflight Wi-Fi.

On the eve of the Fed’s first rate cut in more than four years, investor attention will home in on US retail figures due later (our preview is here). The numbers will feed into a debate raging across markets over whether the Fed will ease by 25 basis points, or by double that amount.

“August’s US retail sales report is, arguably, the most important of today’s releases, given that a soft print would likely see participants go ‘all-in’ on the idea of a jumbo 50 basis point Fed cut tomorrow,” wrote Michael Brown, a strategist at Pepperstone Group Ltd., in a note. “Though it’s tough to imagine an equally aggressive paring of dovish bets were the data to beat expectations.”

Former NY Fed President Bill Dudley was among those expecting a 50 basis-point move. “Monetary policy is tight, when it should be neutral or even easy,” he wrote in a Bloomberg column. “And a bigger move now makes it easier for the Fed to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook.”

But for Jacques Henry, head of cross-asset research at Silex in Geneva, such a large reduction is “a double-edged sword,” as it could suggest the Fed is worried the US economy is slowing faster than expected. The quarter-point cut he expects brings the risk of some short-term disappointment for equity markets. “There could be some drawback on sectors such as real estate and tech,” Henry said.

Meanwhile, optimism around Fed rate cuts has boosted investor sentiment for the first time since June, according to a global survey by Bank of America, Fund managers see a 79% chance of a soft landing as rate cuts support the economy. Still, investors are “nervous bulls,” with risk appetite tumbling to an 11-month low, said BofA strategist Michael Hartnett. The poll also showed a big rotation into bond-sensitive sectors such as utilities from those that typically benefit from a robust economy. 

European stocks climb to their highest in two-weeks with all 20 sectors in the green. The Stoxx 600 was up 0.7%, led by retail and banking stocks while healthcare and telecommunications stocks lagged. Gains were also boosted by the latest German ZEW Investor Confidence print which was weaker than expected (expectations 3.6 vs cons 17; current situation -84.5 vs -80 cons, lowest since May 2020/expectations lowest since Oct ‘23) boosting hopes for even more rate cuts by the ECB. Here are the biggest European movers Tuesday:

• Hermes advances as much as 1.4% after the luxury fashion house was upgraded to outperform from neutral at BNP Paribas Exane, which said the company will be stronger than peers for longer
• Flutter shares rise as much as 1.3% in London trading after the group agreed to acquire Playtech’s Italian gambling operation Snaitech for a total enterprise value of €2.3 billion in cash
• Kingfisher gains as much as 8.4%, the most in about four years, after the UK home-improvement retailer lifted the bottom-end of its guidance ranges for annual earnings and cash flow
• Barry Callebaut shares rise as much as 7.8% after getting a double upgrade to overweight at Barclays, while Lindt & Spruengli shares also gain after being raised by one notch at the broker
• SUSS MicroTec rises as much as 13% as Jefferies starts coverage with a buy rating, describing the process equipment provider as a “hidden gem” within the European semiconductor sector
• Pure Biologics surge as much as 30% after the Polish biotechnology company signed a term sheet on a possible partnership with an undisclosed US company to develop two drug projects
• Auction Technology Group shares rise as much as 5.1% after the online marketplace platform operator was upgraded by analysts at JPMorgan, who said the shares are now “overly discounting” the risk to earnings in 2025
• Dometic falls as much as 14%, the most since March 2020, after the Swedish recreational vehicle and camping equipment maker issued a profit warning, saying that macroeconomic challenges were weighing on sales
• THG shares drop as much as 5.2% after the online retailer reported weaker-than-expected first-half results and said it expected earnings for the year at the lower end of consensus estimates
• Essentra shares sink 25%, their steepest drop since 2016, after the component maker cut its guidance for full-year adjusted operating profit by about 17% at the midpoint
• JTC drops as much as 7.4% on Tuesday after releasing its first-half results, with the financial firm retreating from yesterday’s record high close 

Earlier in the session, Asian stocks were mixed as gains in Hong Kong were negated by losses in Japanese stocks as a stronger yen weighed on exporters. The MSCI Asia Pacific Index rose less than 0.1%, recovering from early declines, as Tencent and Alibaba climbed in Hong Kong. The nation’s benchmark index rose nearly the most in three weeks. Meanwhile, Japan’s Topix plunged nearly 2% as the market reopened following a holiday on Monday as stocks caught down to the recent plunge in the USDJPY. Markets in mainland China, Taiwan and South Korea were closed for holidays, while Australian shares climbed for a fourth day, and Indian stocks rose. Benchmarks also traded higher in Southeast Asia, led by the Philippines, Singapore and Malaysia.

All eyes are on policy decisions and commentary this week by the Federal Reserve and Bank of Japan. The yen strengthened through the psychological level of 140 per dollar Monday amid expectations the gap between US and Japanese interest rates will narrow further. “We continue to think the earnings picture of Japan’s exporters and multinationals will likely get murkier, as much of the forex gains that have greatly flattered corporate earnings in the past two years disappear,” Asymmetric Advisors said in a note.

In FX, the Bloomberg Dollar Spot Index drops for a fifth consecutive session, falling 0.1% to the lowest since January ahead of Wednesday’s Federal Reserve policy decision.  “The US retail sales numbers out later today will likely be significant,” Michael Wan, a senior currency analyst at MUFG Bank in Singapore, wrote in a research note. They “may perhaps help to settle the ongoing debate about whether the Fed may do a 25 or 50 basis point cut later this week.” The yen erased an earlier loss against the dollar as a slide in Japanese shares boosted demand for the currency as a haven.

In rates, treasuries inch higher, with US 10-year yields falling 1 bp to 3.61%. Treasuries are narrowly mixed in early US trading with the curve flatter as front-end yields rise about 1bp on the day with 7Y-30Y sectors little changed. 2s10s, 5s30s spreads extend Monday’s flattening move and remain near session lows. Bunds outperform Treasuries in the wake of weaker-than-expected September ZEW survey data. Focal points of US include August retail sales data and 20-year bond auction. Treasury coupon auctions resume with $13b 20-year bond reopening at 1pm New York time; WI 20-year yield near 3.995% is ~17bp richer than last month’s, which drew good demand.

In commodities, oil prices are little changed, with WTI trading near $70.10 a barrel. Spot gold falls $7 to around $2,576/oz. Bitcoin rises 2%.

Looking to the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for August, Canada’s CPI for August, and the German ZEW survey for September. From central banks, the FOMC will begin their two-day meeting today.

Market Snapshot

• S&P 500 futures up 0.2% to 5,650.50
• STOXX Europe 600 up 0.5% to 517.71
• MXAP little changed at 183.82
• MXAPJ up 0.6% to 574.41
• Nikkei down 1.0% to 36,203.22
• Topix down 0.6% to 2,555.76
• Hang Seng Index up 1.4% to 17,660.02
• Shanghai Composite down 0.5% to 2,704.09
• Sensex up 0.2% to 83,115.80
• Australia S&P/ASX 200 up 0.2% to 8,140.90
• Kospi up 0.1% to 2,575.41
• German 10Y yield little changed at 2.11%
• Euro little changed at $1.1135
• Brent Futures down 0.1% to $72.67/bbl
• Gold spot down 0.0% to $2,582.31
• US Dollar Index down 0.14% to 100.63

Top Overnight News

• Fed watcher Nick Timiraos wrote “Fed Prepares to Lower Rates, With Size of First Cut in Doubt: The central bank usually prefers to move in increments of a quarter point. This time, it’s complicated” which noted the decision whether to cut by 25bps or 50bps will come down to how Powell leads his colleagues through a finely balanced set of considerations, while he added that data over the past months showed inflation resumed a steady decline to the 2% goal but the labor market has cooled: WSJ
• US officials are traveling to China with a warning to Beijing about the flood of exports being sent by Chinese companies around the world as the country’s domestic growth cools. WSJ  
• Washington and Tokyo are nearing a deal that would impose fresh restrictions on the ability of non-US chip firms to export products to China. FT
• Shigeru Ishiba has taken the lead in the latest Nikkei opinion poll asking who the best person is to lead the LDP (and therefore become the country’s next PM). Nikkei
• There’s little chance that the European Central Bank will lower interest rates again next month, according to Governing Council member Gediminas Simkus. BBG
• UniCredit is set to ask the ECB within days for regulatory permission to build a stake of as much as 30% in Commerzbank, a person familiar said. BBG
• Justin Trudeau suffered a big political setback as his Liberal Party lost a special election in Montreal. It’s the second major defeat at the ballot box for the Canadian PM after his party lost a seat in the Toronto area in June, raising the pressure on him to step aside before the next election. BBG
• Blinken is headed back to the Middle East, but a Gaza ceasefire breakthrough isn’t imminent. WSJ
• Israel updated its war goals, adding the safe return of its citizens to their homes near the border with Lebanon. RTRS
• A panel of federal judges sounded skeptical about TikTok’s legal arguments as the company combats a recent bill that would force the platform to be sold or face a US ban. NYT
• BofA September Global Fund Manager Survey: Sentiment improves for first time since June on “Fed cuts = soft landing” optimism; cash level dips to 4.2%; Big rotation to bond sensitives from cyclicals, overweight utilities since 2008; Tactically survey says the bigger the Fed cut, the better for cyclicals.
• Microsoft announced a quarterly dividend increase of 10% to USD 0.83/shr and a new USD 60bln share repurchase program.
• Intel said it and AWS are expanding their strategic collaboration by co-investing in custom chip designs, including an AI fabric chip and a custom Xeon 6 chip; the partnership supports US semiconductor manufacturing and AWS’s data centre expansion in Ohio. Separately, it said it plans to establish Intel Foundry as an independent subsidiary to provide clearer separation for external customers and suppliers. Will be pausing manufacturing buildout projects in Poland and Germany.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly positive but with gains capped as participants continued to second-guess the magnitude of the looming Fed rate cut, while markets in Mainland China, Taiwan and South Korea remained closed for holidays. ASX 200 marginally edged higher and printed a fresh intraday record high with early advances led by real estate and tech. Nikkei 225 suffered on return from the long weekend and fell beneath 36,000 amid headwinds from the recent currency strength. Hang Seng shrugged off early cautiousness and gradually climbed higher ahead of the Mid-Autum Festival in Hong Kong, while Midea Group’s H shares surged over 8% on its Hong Kong debut following Hong Kong’s largest IPO in three years.

Top Asian News

• US and Japan are nearing a deal to curb chip technology exports to China, according to FT.
• Japanese Finance Minister Suzuki said FX fluctuations have both merits and demerits on Japan’s economy, while they will respond appropriately after analysing the impact of FX moves. Furthermore, he reiterated that rapid FX moves are undesirable and it is important for currencies to move in a stable manner reflecting fundamentals.
• German KfW executive says looking to grow investments in India to USD 1bln from current USD 400mln over the next few years.

European bourses, Stoxx 600 (+0.5%) opened on a firmer footing, and have traded at session highs throughout the European morning, not deviating much from the levels seen at the cash open. European sectors hold a strong positive bias; Retail is the clear outperformer, propped up by post-earnings strength in Kingfisher (+7.2%). Healthcare is found at the foot of the pile, alongside Telecoms. US Equity Futures (ES +0.2%, NQ +0.5%, RTY +0.3%) are modestly firmer across the board, with very slight outperformance in the tech-heavy NQ, attempting to pare back some of the losses seen in the prior session.

Top European News

• ECB’s Simkus says the economy is developing in line with forecasts; the likelihood of an October rate cut is very small; will not have many new data points in October.
• EU Commission President von der Leyen proposes France’s Sejourne as Commissioner for Industrial Strategy and Ribera for Competition Commissioner; proposes Sefcovic as the Trade Commissioner and Dombrovskis as the Economy Commissioner. Serafin as the Budget Commissioner. Kubilius as Defence Commissioner

FX

• USD is a touch softer vs. peers as the dovish Fed repricing continues. Markets now assign a near 70% chance of a 50bps cut by the Fed this week vs. circa. 15% in the wake of last week’s CPI data. Today’s US Retail Sales at 13:30 BST / 08:30 EDT is due.
• EUR is steady vs. the USD after another batch of soft data from Germany saw the pair pullback from its session high at 1.1146. If upside in the pair resumes, the 6th September high resides at 1.1155.
• GBP is flat vs. the USD with UK-specifics light in the run up to UK CPI tomorrow and the BoE policy announcement on Thursday with the former unlikely to have much impact on the latter. The 1.3218 high for today’s matches that of Monday’s.
• JPY is steady vs. the USD after the pair failed to hold below 140 yesterday (printed a trough at 139.57). Focus this week will no doubt be on the FOMC on Wednesday ahead of the BoJ on Friday.
• Antipodeans are both broadly steady vs. the USD. AUD/USD has just about eclipsed yesterday’s best of 0.6753 and is at its highest level since 6th September; 0.6767 was the high that day.
• CAD is steady vs. the USD in the run up to today’s CPI metrics. Today’s release comes in the context of comments over the weekend from BoC Governor Macklem that the Bank could begin cutting rates in 50bps increments.
• Canada’s ruling party has lost a key Quebec seat in the Montreal special election, framed as a blow to PM Trudeau, via CBC.

Fixed Income

• USTs are essentially flat; overnight focus was on the latest WSJ Timiraos piece which highlighted that when the Fed has doubts around the size of its first cut it generally favours 25bps; however, “this time, it’s complicated”. This could potentially be the reason USTs caught a slight bid to a 115-21 high, where it currently resides.
• Bunds are firmer; a modest bounce was seen across fixed income as European players rejoined the session. Specific developments were slim but the move was potentially a function of participants reacting to an overnight Timiraos piece. A move which took Bunds to a 135.39 peak, stopping 10 ticks shy of last week’s 135.49 best.
• Gilts are firmer, in tandem with the broader strength seen across peers; Gilts hit a new contract peak at 101.52, but unable to matierally hold above 101.50 ahead of the 2054 Gilt auction. The tap was strong but not as stellar as the last outing, but Gilts themselves were unreactive to the auction.
• UK sell GBP 2.75bln 4.375% 2054 Gilt: b/c 2.89x (prev. 3.35x), average yield 4.329% (prev. 4.636%), tail 0.2bps (prev. 0.2bps)

Commodities

• Crude futures began the European morning on a firmer footing, but has since slipped off best levels and currently trades towards the bottom end of today’s ranges; Brent’Nov currently within a 72.35-73.21/bbl range.
• Mixed trade overall in the precious metals complex, with spot silver flat and gold dips lower but spot palladium outperforms with gains of some 1% at the time of writing. XAU sits in a narrow USD 2,574.63-2,587.02/oz range.
• Mixed trade across base metals futures with traders not committing to a particular direction ahead of the upcoming risk events. APAC trade was also tentative amidst the lack of Chinese participants amid the Mid-Autumn festival break.
• PBF’s 166k BPD Torrance California refinery reports flaring due to malfunction

Geopolitics: Middle East

• US Secretary of State Blinken will travel to Egypt today for US-Egypt strategic dialogue.
• “Houthi leader: ready to send hundreds of thousands of trained fighters to Hezbollah”, via Sky News Arabia.

Geopolitics: Other

• North Korea’s Foreign Minister travelled to Russia, according to KCNA.
• Two Chinese Coast Guard ships arrived in Russia’s Port of Vladivostok for joint drills, according to RIA.

US Event Calendar

• 08:30: Aug. Retail Sales Advance MoM, est. -0.2%, prior 1.0%
  • Aug. Retail Sales Ex Auto MoM, est. 0.2%, prior 0.4%
  • Aug. Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.4%
  • Aug. Retail Sales Control Group, est. 0.3%, prior 0.3%
• 08:30: Sept. New York Fed Services Business, prior 1.8
• 09:15: Aug. Industrial Production MoM, est. 0.2%, prior -0.6%
  • Aug. Manufacturing (SIC) Production, est. 0.2%, prior -0.3%
  • Aug. Capacity Utilization, est. 77.9%, prior 77.8%
• 10:00: July Business Inventories, est. 0.3%, prior 0.3%
• 10:00: Sept. NAHB Housing Market Index, est. 41, prior 39

DB’s Jim Reid concludes the overnight wrap

If you’ve been following DB’s macro research over the last few days, you’ll be aware of the view that if there was no informed Fed sources massaging the market back down to 25bps by the close of play last night, then the consensus here is that this would imply the Fed is leaning towards 50bps tomorrow night. For most of yesterday the market was pricing in around 40bps of cuts which as Matt Raskin pointed out in a great chart we highlighted yesterday, left this meetings’ pricing the furthest from both a 25 and 50bps move two days out from the meeting since for over 15 years. So a very rare level of uncertainty. As we type this morning, the pricing has ticked up further to 43.5bps, or in other words a 74% chance of a 50bp move. Overnight, we’ve had another WSJ article from Nick Timiraos, although it didn’t steer things in either direction and the headline indicates the ongoing uncertainty, saying “Fed Prepares to Lower Rates, With Size of First Cut in Doubt”.

In recent times, the closest parallel to this uncertainty is the decision in March 2023, amidst the regional bank turmoil. Before SVB’s collapse on March 10 last year, it was widely expected that the Fed would proceed with a rate hike on March 22. But as the turmoil grew worse, there were serious doubts about whether the Fed would still go ahead, and there were similar debates happening about whether a dovish decision might signal that things were worse than markets thought. Ultimately, the Fed did proceed with the hike, but on the Monday before the decision, futures were still only pricing it as a 73% chance, and right before the announcement it had only drifted up to 80%. So there was a little bit of doubt as to what they’d do, although not to the extent that we’re seeing today.

Of course, there are quite a few residual nerves today about going for 50bps. Indeed, on all the recent occasions when the Fed have accelerated up to 50bp cuts, bad things have then happened. That was the case when they opened in 2001 and 2007 with 50bp cuts, whilst the first Covid cut in March 2020 was also an initial 50bp move (followed up by a 100bp cut less than two weeks later). But although the precedents aren’t good, it’s worth bearing in mind that correlation isn’t causation, and it’s hardly like the GFC only happened because the Fed opened with 50bps. So it’ll be fascinating what history has to say about this time.

With growing anticipation for a 50bp cut, that helped pushed US Treasury yields down to fresh lows. For instance, the 2yr yield (-3.1bps) closed at a fresh two-year low yesterday of 3.55%, and the 10yr yield (-3.4bps) closed at a 15-month low of 3.62%. It was a similar story for real yields, and the 10yr real yield (-4.2bps) fell back to 1.53%, which hasn’t been seen since July 2023. Already that’s been filtering through into lower mortgage rates, and last week’s data from the MBA showed that the average 30yr mortgage rate in the US was down to 6.29% in early September, the lowest in over 18 months. However there wasn’t much negative impact from rates going up aggressively as most homeowners have a 30yr fixed (low) rate. So it’s unlikely that lower mortgage rates will have a big impact on housing unless it goes a lot lower and prompts refinancing and more voluntary home moves.

We will get a final batch of data today before tomorrow’s big decision, as US retail sales and industrial production numbers for August are out later. So it’ll be interesting to see how they affect estimates for Q3 growth. Currently, the Atlanta Fed’s GDPNow tracker stands at an annualised rate of +2.5% for this quarter, and we’ll get another update today after that data is out, so one to keep an eye on. We didn’t get much data yesterday, although there was the Empire State manufacturing survey for September, which posted its strongest reading since April 2022, at 11.5 (vs. -4.0 expected).

For equities, the main theme yesterday was the rotation trade, as the Magnificent 7 (-0.70%) fell back again even as the small-cap Russell 2000 (+0.31%) advanced. That continued the theme from Friday, and it means that over the last two sessions, the Russell 2000 is now up +2.81%, whereas the Mag 7 is down -0.39%. That weakness among the Mag 7 was led by Apple (-2.78%) as the first weekend of new iPhone pre-order sales appeared to have come in at the weaker side of expectations. But the broader mood was positive, with the S&P 500 (+0.13%) advancing for a sixth session in a row, closing just -0.60% beneath its all-time high from mid-July. Indeed, three quarters of the index constituents were higher on the day, led by financials (+1.22%) and energy (+1.20%) stocks, which helped the equal-weighted S&P 500 (+0.66%) to reach a new all-time high.

Over in Europe, that rotation theme was also evident. The STOXX 600 (-0.16%) posted a modest decline, mostly as the STOXX Technology Index (-1.25%) saw a decent pullback. Sovereign bonds also echoed the US rally, with yields on 10yr bunds (-2.6bps), OATs (-0.7bps) and BTPs (-3.3bps) all moving lower. Moreover, for BTPs that left them at 3.48%, their lowest closing level so far this year.

Overnight in Asia it’s been a fairly quiet morning, with markets in mainland China and South Korea closed for public holidays. But in Japan, equities have slumped amidst the continued appreciation of the Japanese Yen, with the Nikkei (-1.81%) and the TOPIX (-1.76%) both seeing sharp declines. Indeed, the prospect of a 50bp Fed rate cut saw the Japanese Yen strengthen past 140 per dollar at one point yesterday, which is its strongest since July 2023, although this morning it’s weakened again to 140.71 though. Nevertheless, there has bene some more positivity elsewhere, and in Hong Kong, the Hang Seng is up +1.44% this morning. Looking forward, US equity futures are pointing a bit lower, with those on the S&P 500 down -0.11% as we await the Fed’s decision tomorrow.

To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for August, Canada’s CPI for August, and the German ZEW survey for September. From central banks, the FOMC will begin their two-day meeting today.

A new report from the Financial Times details how US and Japanese officials are nearing a deal to curb tech exports to China’s chip industry. This comes two weeks after Beijing threatened severe economic retaliation against Tokyo if it proceeded with new chip export curbs.

FT spoke with insiders who said US and Japanese officials are nearing a ‘breakthrough’ in talks to coordinate new export controls against China’s chip industry. The curbs would target non-US companies, forcing them to obtain licenses to sell products directly to Chinese companies that directly or indirectly connect to the nation’s chip industry. 

The new trade restrictions would close loopholes in existing rules and add additional restrictions at a time when Huawei and other Chinese firms have managed to circumnavigate Western chip trade restrictions in recent years.

One of Washington’s primary objectives is to make it much more challenging for Chinese firms to acquire critical chipmaking tools, such as those from ASML in the Netherlands and Tokyo Electron in Japan. 

Here’s more from FT:

The US also wants them to restrict servicing, including software updates, and maintenance of the tools, in a move that would significantly hurt China. The controls would have a similar impact to those already on US companies and citizens.

Negotiations have centered on aligning the three countries’ export control rules so Japanese and Dutch companies will not be subject to the FDPR, which one person in the Netherlands described as a “diplomatic bomb.”

One of the top concerns, while the Biden administration shines the beacon of democracy that continues to bully its allies, is the real possibility that Beijing unleashes severe economic retaliation against Tokyo.

In a recent but separate Bloomberg report, Toyota Motor told Tokyo officials that new chip export curbs could be devastating because they would halt access to critical minerals from the world’s second-largest economy. 

The question becomes whether Tokyo should fall in line with the Biden administration’s crusade against China’s tech industry.

“Japan shouldn’t tighten its export control just because the US is making such a request,” Akira Minamikawa, an analyst with the research firm Omdia, recently said, adding, “Japan should have its own philosophy, decide what’s best for the country and stand firm.”

Meanwhile…

FT noted that Biden plans to unveil the new export controls before November’s presidential election. 

China’s high-tech advancements, such as domestic 5G smartphones and AI chips, are further evidence that Western sanctions have yet to slow Beijing’s accession to become a global superpower.

Authored by Jeffrey Tucker via The Brownstone Institute,

There is a lack of public comment and debate about Kamala Harris’s call for price controls on groceries and rents, the most stunning and frightening policy proposal made in my lifetime. 

Immediately, of course, people will reply that she is not for price controls as such. It is only a limit on “gouging” (which she variously calls “gauging”) on grocery prices. As for rents, it’s only for larger-scale corporations with many units. 

This is nonsense. If there really are national price-gouging police running around, every single seller of groceries, from small convenience stores to farmers’ markets to chain stores, will be vulnerable. No one wants the investigation so they will comply with de facto controls. No one knows for sure what gouging is. 

Don Boudreaux is correct:

“A government that threatens to punish merchants for selling at nominal prices higher than deemed appropriate by government clearly intends to control prices. It’s no surprise, therefore, that economists routinely analyze prohibitions against so-called ‘price gouging’ using exactly the same tools they use to analyze other forms of price controls.”

As for rental units, the only result will be fewer amenities, new charges, new fees for what used to be free, less service, and a dramatically reduced incentive to build new units. That will only lead to a pretext for more subsidies, more public housing, and more government provision generally. We have experience with that and it is not good. 

The next step is nationalizing housing and rationing of groceries because there will be ever fewer available. 

The more the betting odds favor Kamala, the stronger the incentive to raise prices as high as possible now in anticipation of price controls come next year. That will provide even more seeming evidence for the need for more controls and a genuine crackdown. 

Price controls lead to shortages of anything they touch, especially in inflationary times. With the Federal Reserve seemingly on the verge of cutting rates for no good reason – rates are very low in real terms by any historical standard – we might see wave two of inflation later next year. 

Here are real interest rates historically considered as they stand. Do you see a case here for lowering them?

Next time, however, merchants will not be in a position to respond rationally. Instead, they will confront federal price investigators and prosecutors. 

Kamala is wrong that this will be the “first-ever” ban on price gouging. We had that in World War II, along with rationing tickets on meat, animal fats, foil, sugar, flour, foil, coffee, and more. It was a time of extreme austerity, and people put up with it because they believed it was saving resources for the war effort. It was enforced the same as we saw with covid lockdowns: a huge network enlisting state and local institutions, media, and private zealots ready to rat out the rebels.

Franklin Roosevelt issued Executive Order 8875 on August 28, 1941. It claimed broad powers to manage all production and consumption in the US. On January 30, 1942, the Emergency Price Control Act granted the Office of Price Administration (OPA) the authority to set price limits and ration food and other commodities. Products were added as shortages intensified.

And yes, all of this was heavily enforced.

In case you are doing the math, that’s a $200,000 fine today for noncompliance. In other words, this was very serious and highly coercive. 

Technology limited enforcement, however, and black markets sprung up everywhere. The so-called Meatleggers were the most famous and most demonized by government propaganda. 

What happens when the government restricts meat consumption?

During World War II, food rationing led to significant changes in consumption habits in the United States.

Adults and children over 12 were limited to 2 lbs of meat per week, which was monitored through rationing… pic.twitter.com/goCU1FGMnD

— Meat Head (@markeatsmeat) February 20, 2024

In a nation with more agriculture in demographic proximity, people relied on local farmers and various methods of bartering goods and services. 

Years went by and somehow people got through it but production for civilian purposes came to a near standstill. The GDP for the period looked like growth but the reality was a continuation and intensification of the Great Depression that began more than a decade earlier. 

There are fewer people alive now that recall these days but I’ve known some. They adopted habits of extreme conservation. I once had a neighbor who simply could not bear to throw away tin-foil pie pans because she had lived through rationing. After she died, her kids discovered her vast collection and it shocked them. She was not crazy, just traumatized. 

How would such a thing transpire today?

Look at the program SNAP, the new name for food stamps. For those who qualify, the money goes into a special account managed by the federal government. The recipient is sent an EBT (Electronic Benefits Transfer) card, which is used like a credit card in stores. It costs taxpayers some $114 billion a year, and works out as a huge subsidy to Big Agriculture, which is why the program is administered by the Department of Agriculture. 

Transitioning that program to the general population would not be difficult. It would be a simple matter of expansion of eligibility. As shortages grow, so too could the program until the entire population would be on it and it would be mandatory. It could also be converted into a mobile app instead of a piece of plastic as a fraud-prevention measure. With everyone carrying cell phones, this would be an easy step. 

And where could people spend the money? Only at participating institutions. Would non-participation institutions be entitled to sell food, for example, at local farmers’ co-ops? Maybe at first but that’s before the media demonization campaigns come along to decry the rich who are eating more than their fair share and the sellers who are exploiting the national emergency. 

You can see how this all unfolds, and none of it is implausible. Only a few years ago, governments around the country canceled gatherings for religious holidays, limited the numbers of people who could gather in homes, and banned public weddings and funerals. If they can do that, they can do anything, including the rationing of all food. 

The program that Harris has proposed is not like other matters that she has flip-flopped on. She is serious and repeats it. She spoke about it even during the debate with Trump but there was no followup or critique of the scheme offered. Nor does such a crazy plan require some legislation and a vote by Congress. It could come in the form of an executive order. Yes, it would be tested by the Supreme Court but, if recent history holds, the program would be long in effect before the Court weighed in. Nor is it clear how it would rule. 

The Supreme Court in 1942 heard the case of Albert Yakus, a Boston-based meat seller who was criminally prosecuted for violating the wholesale beef price ceiling. In Yakus vs. United States, the Supreme Court ruled for the government and against the meat-selling criminal. That’s the existing precedent. 

Nor does all this have to unfold immediately following the inauguration. It can happen as matters become ever worse following anti-gouging edicts and when inflation worsens. After all, a presidency that believes in central planning and forced economic austerity would last a full four years, and the coercion could grow month after month until we have comprehensively enforced deprivation by the end, and no one remembers what it was like to buy groceries at market prices with their own money. 

I wish I could say that this is an outlandish and fear-mongering warning. It is not. It is a very realistic scenario based on repeated statements and promises plus the recent history of government management of the population. There is likely another wave of inflation coming. This time it will meet with a promise to use every coercive power of government to prevent increases in prices on groceries and rents. 

What if voters actually understood this? What then? 

Keep in mind the main legacy of the Covid years: governments learned the fullness of what they could do under the right circumstances. That’s the worst possible lesson but that is what has stuck. The implications for the future are grim. 

Fed chair Jerome Powell has signaled that interest rate cuts are on the horizon, amid a cooling labor market marked by fewer job additions and rising unemployment.

Today, the benchmark interest rate stands at 5.25- 5.50%, up from near-zero levels in 2022. Historically, equities have performed better after gradual rate cuts compared to swift reductions typically seen during economic crises. Sectors of the economy are also impacted in different ways, due to shifting consumer demand and interest rate sensitivity.

This graphic, via Visual Capitalist’s Dorothy Neufeld, breaks down sector performance after the first interest rate cut, based on data from PinPoint Macro Analytics.

Ranked: Sector Performance During Rate Cut Cycles

Below, we show the average performance of each sector relative to the broad equity market 12 months after the first rate cut between 1973 and 2024:

Average historical data of rate cycles from 1973 to present day.

Consumer non-cyclicals see the strongest returns after the first rate cut, particularly during recessions, thanks to steady demand for staple goods.

This traditionally defensive sector includes companies such as Procter & Gamble, Walmart, and Coca-Cola. Notably, consumer staples are the only S&P 500 sector that have produced positive returns on average, during the recession stage of the business cycle since 1960. During the slowdown phase, it also outperformed the vast majority of sectors, averaging 15% returns over these periods.

Meanwhile, the tech sector underperforms the market six months after the first rate cut, but performance bounces back over a 12 month period since lower interest rates generally benefit growth stocks by reducing borrowing costs. However, some of today’s largest tech companies have been more resilient to higher rates due to large cash reserves and heightened investor interest in AI-related stocks.

On the other hand, financials historically experience the weakest performance. This is due to the fact that interest rate cuts often signal that the economy is slowing, putting pressure on loan growth, credit losses, and default risk.

To learn more about this topic from a sector-composition perspective, check out this graphic on the largest company in each S&P 500 sector in 2024.

Authored by Jeff Carlson & Hans Mahncke via Truth Over News,

One of the more important policy issues for markets in the US election may be corporate tax rates. Kamala Harris has said she wants to raise corporate taxes from the current rate of 21% up to a lofty 28%. During her 2020 primary campaign Kamala said she wanted to raise corporate taxes all the way to 35% – and this may still be her real target. By contrast, President Trump has said he wants to cut the corporate tax rate to at least 20% but would prefer to drop the corporate tax rate to 15% if possible.

How much revenue is generated from corporate taxes?

The answer to this question may surprise some people. In 2023 the federal government collected just under $420 billion in corporate taxes. This compares to the approximately $2.18 trillion in individual taxes and $1.6 trillion in payroll taxes. The amount paid in corporate taxes is not as large as many intuitively expect – a little more than double the total amount of aid that we’ve allocated to the Ukraine war. 

Corporate tax revenue has actually been declining on a percentage basis for decades. The reasons for the decline have everything to do with incentives and competition – incentives for businesses to invest, locate and produce in the United States and competitiveness of American companies in a global environment. And it’s all intrinsically tied into economic activity, productivity, wages and employment. We as a nation have stymied business activity through a combination of high taxes and excessive regulations.

Who actually pays corporate taxes? Hint: it isn’t the corporations.

Corporations are actually just tax collectors – legal entities that serve to collect taxes on behalf of the corporation’s owners. The true taxpayers are primarily the company’s shareholders – and to some degree, labor and customers – not the corporations that Kamala tries to vilify. When Kamala says she’s going to raise taxes on corporations, what she’s really saying is she’s going to raise taxes on you and me.

As our system stands now, shareholders’ dividends and capital gains are reduced by taxes collected by the corporation. Dividends are profits that a corporation distributes amongst its shareholders. Capital gains come from an increase in the value of a corporation’s assets. If the corporation did not pay corporate taxes on “behalf” of the shareholder these extra dollars would flow through to shareholders in the form of increased profits and dividends, reinvestment in the business (which generates additional profits) and share repurchases. These increased cash flows to shareholders would then be taxed at the shareholder level.

If this argument is not sitting well, consider this example. A corporation could, in theory, give year-end bonuses to its workers such that the amount exactly equaled the corporation’s taxable income. After the payment to workers, the corporation would have zero taxable income. Because the corporation would record no profits in this case, shareholders would pay no tax as they too would receive no profits. But workers would now have a significantly increased tax bill – and in all likelihood be taxed at a higher overall rate than the corporation would have been. The corporation merely serves as the vehicle or conduit – the legal structure – for tax payments.

What about customers and labor – don’t they shoulder much of the corporate tax bill through higher prices for goods or lower wages? 

As it turns out, there is some material debate about these two groups. In a normalized market environment, customers probably don’t pay much in corporate tax as it is very hard to pass this cost through. The ultimate price of the corporation’s end product or service is determined by market forces – not tax rates. And corporations have many differing competitors – including sole proprietorships and foreign corporations with differing tax structures. Market competition determines the final selling price – not taxes.

The amount of corporate taxation that labor bears is less clear – the arguments center around the availability and flexibility of capital – the ability to shift production to lower cost areas, etc. The Tax Policy Center has concluded – fairly close to Treasury estimates – that labor bears about 25% of the corporate tax burden. Some estimates have labor bearing as much as 70% of the cost.

In our opinion, the amount of corporate taxes that are borne by labor is probably north of the 25% figure – but likely well shy of the 70% estimates. The reason for this lies primarily in the mobility of capital. Money is far more fungible and easily moved than labor. If returns are higher abroad due to lower foreign tax rates, investors will quickly move capital to those places. Labor has a more difficult time taking advantage of higher wages elsewhere.

When corporations are burdened with a higher tax rate, their return on capital falls, making them less attractive for investment. In order to attract capital, companies are forced to reduce costs in an attempt to boost returns. And, in general, labor is the largest cost component for most corporations, making it a prime target for cost cutting. The accelerating shift towards the use of AI may lead to an even greater amount of the tax burden being shouldered by labor.

Think of it in simple terms. If corporations were hit with a tax hike tomorrow, which group could more quickly adjust. Investors who could quickly sell and redeploy their capital overseas – or labor with their families and homes? The matter becomes a bit more complicated in real terms because if such a tax was enacted, share prices would be impacted immediately, but hopefully you get our point.

So the answer to who really pays corporate taxes appears to be primarily shareholders with labor sharing in some material percentage of the cost. What should be clear is that corporations do not truly pay taxes – they merely collect them on behalf of third parties for payment.

Why are tax rates different at the corporate level versus the shareholder level?

At the heart of the matter, the tax rate is lower for capital gains and dividends paid to shareholders to reduce the impact of double-taxation – profits used to pay dividends have already been taxed at the corporate tax rate. The capital gains and dividend tax rates are arbitrary but the intent has been to pick a number that was not so high as to completely discourage investment into companies by investors.

Why do we have differing corporate and individual taxation systems in the first place?

Our nation’s tax system evolved in fits and starts with various taxes being implemented and then repealed – some ruled unconstitutional. Our modern tax era began in 1909 – in response to rising political pressure to tax the rich – when Congress enacted an excise tax on corporations at the urging of President William Howard Taft. In a concurrent move, President Taft proposed the 16th Amendment to establish a personal income tax.

The excise tax on corporations did not require a constitutional amendment and was originally intended to be a temporary measure until the passage of the 16th Amendment which occurred in 1913. Like all things government, legislation once enacted does not die and so the two concurrent tax systems – corporate and individual were born. And they have been creating inefficiencies and needless complexities for our nation ever since.

We should consider abolishing the Corporate Tax – not raising it.

Reducing or eliminating the corporate tax rate would go a long way towards drawing businesses and business activity back to the United States. Our corporate tax structure creates countless unnecessary complexities and conflicts with our individual tax code. Do away with that structure – even if shareholder taxes are adjusted in a manner that is revenue neutral to the Treasury – and you have gained significant economic efficiencies.

Some other reasons to abolish the corporate tax:

Removal of political gamesmanship – An entire lobbying force working to get tax breaks for corporations is gone overnight. Gone too are the incentives for politicians to grant their corporate constituencies favors via the tax code. Kill the corporate tax code and you immediately remove a big motivation for corporate money being involved in the political arena – along with special interests.

Legal & Tax Departments – Tax compliance and tax strategy related departments would be rendered obsolete and would result in the saving of literally billions of dollars and countless man-hours. Tax lawyers and consultants would need to find another avenue for work. And smaller businesses would be placed on a more equal footing.

Tax status – There would be no need for non-profit distinction – and the associated games being engaged in by both companies and the IRS.

The entire tax system would be vastly simpler. Any corporate tax burden borne by labor would be removed. The increased level of investment by corporations – along with higher dividends – would re-invigorate our entire economy. Corporations would run their companies based on underlying economics without the distorting influence of tax strategy behavior.

Corporate CEOs would focus on what are now pre-tax profits. Foreign investment would flood back into the United States. International tax problems and distortions would disappear. U.S. corporate cash held overseas could be repatriated for use domestically.

Lowering (or removing) the corporate tax does not mean that taxation of corporate income is avoided. Instead, taxes would now be paid at the individual versus corporate level. Corporations could stop focusing on tax strategies and could instead place their full focus on generating profits. And Labor would see their corporate tax burden lifted.

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The short-cover rally Goldman analysts forecasted early last week in Chinese iron ore prices has completely reversed. After all, analysts from the bank said the rally should be sold. Now, analysts have revised their Q4 2024 iron ore price forecast to $85/t, down from $100, based on strong global supply and soft demand in the world’s second largest economy. They add that the buildup in Chinese port stocks suggests prices will be pressured lower unless lower-cost producers cut production. 

Last week, ahead of Goldman’s iron ore note telling clients, “desk expect short cover rally,” prices in Singapore sank to the $90/t level, the lowest level since 2022, on concern that global supply is running ahead of demand. Prices jumped shortly to the $95/t level, where Goldman told clients: “Be ready to sell at the $95-100” level, noting that iron ore’s “fundamental outlook remains bleak.” 

One week later, on Monday, Goldman analysts Aurelia Waltham, Daan Struyven, and Samantha Dart pointed out that iron ore prices recently hit a nearly two-year low of $90/t, driven by strong global supply despite stabilizing Chinese demand. 

They said prices of the industrial metal have plunged by around 20% since July, but shipments remain 2% higher than last year, with similar arrivals into China. They added that India has reduced exports, but without a significant demand recovery, further production cuts from lower-cost producers are needed to rebalance the market and shore up prices.

Due to the supply imbalance, the analysts revised their Q4 2024 price forecast down to $85/t, noting that restocking before China’s Golden Week could provide short-term support. However, they said prices are expected to drop further in October on rising stocks. 

The most important chart from the analyst’s chart pack is that elevated iron ore stocks in China due to a faltering economy have driven down prices. In other words, stocks must come down to experience a meaningful price recovery. 

Here’s more color on the depressing iron ore market from the analysts: 

Following soft China macro data in July, activity came in broadly below market expectations, and our China economists have downgraded their 2024 GDP growth forecast to 4.7% from 4.9% previously. Year-on-year industrial production growth fell, fixed asset investment growth improved less than expected, although export growth was stronger. After two months of decline, the volume of steel exports increased by 21% MoM to 9.5Mt in August, bringing YTD YoY growth to +19%. This likely helped to limit the extent of the drop in flat steel production last month (-4.6% MoM in August) and iron ore consumption as Mysteel data showed sluggish domestic demand.

Looking ahead, we maintain the view that the potential for falling exports is a key risk to steel production in China over the coming year and could result in a further decline in Chinese iron ore demand, given that we see increased support from domestic demand as unlikely.

Following a substantial fall in the iron ore price over the past three months, China’s approaching Golden Week holiday (beginning October 1st) could bring some price stabilisation over the next two weeks as mills restock raw materials, creating a demand pull on port stocks. Indeed, last week’s data showed a 2.6% WoW increase in mills’ in-plant stocks, marking the largest jump since the pre-Lunar New Year restock. There is also a near-term risk of a short covering rally due to substantial short positioning in both iron ore and Chinese steel markets.

However, while the build in port stocks came to a halt last week, they remain ~30Mt above the 2016-2023 September average. Meanwhile, total Chinese iron ore stocks (including tonnes held at mills) continue to rise, counter-seasonally, and despite Indian iron ore shipments having declined in response to lower prices. Furthermore, even with India’s decline, high frequency vessel tracking data shows that global iron ore seaborne shipments in the first two weeks of September were 3% higher than the same period in 2023, and Vale has raised guidance for this year to 323-330Mt.

As a result, we believe that another leg lower in prices towards the 95th percentile (~$80/t on a grade adjusted basis) would be needed to (1) completely remove new Indian tonnes from the seaborne market and (2) pressure supply further down the cost curve in order to rebalance fundamentals. We therefore revise down our 2024Q4 price forecast to $85/t (previously $100/t).

In a separate note, a team of Goldman analysts led by Aurelia Waltham and Daan Struyven said that iron ore’s “fundamental outlook remains bleak” as prices traded at a two-year low. 

This was the most stunning chart from the analysts’ report: Only 1% of steel mills are profitable in the world’s second-largest economy. As profitability collapses, hot metal output declines.

Earlier this month, Goldman’s Rich Privorotsky told clients, “Iron ore is dropping to 90, China will continue to struggle, and commodities as a whole, I think, are reflecting the downgrade to growth expectations in the geography.” 

China’s steel industry has been under pressure amid a severe property market downturn and weak economic recovery.

Last month, Baowu Steel Group Chairman Hu Wangming warned that economic conditions in the world’s second-largest economy felt like a “harsh winter.”

As the world’s largest steel producer, Baowu Steel’s chairman said the steel industry’s downturn could be “longer, colder, and more difficult to endure than expected,” potentially mirroring the severe downturns of 2008 and 2015.

Another team of Goldman analysts, led by Yuting Yang and Lisheng Wang, recently published high-frequency economic indicators, including consumption and mobility; production and investment; other macro activity, and markets and policy, that revealed there was no imminent recovery in China.

Meanwhile, JPM Global Manufacturing PMI has slid (<50) into a contraction. 

Besides cutting iron ore price targets, Goldman Daan Struyven recently slashed his expected range for Brent oil prices by $5 to $70-$85 per barrel, citing weaker Chinese oil demand, high inventories, and rising US shale production.  

None of this is new to the market, where sentiment is downright apocalyptic. As noted several weeks ago, bullish positioning in oil just hit an all-time low.

China’s rapid deceleration and signs of a US slowdown have capped further upside for commodity prices. Whether US interest rate cuts that begin this week will boost economic growth remains uncertain. At the same time, more clarity on Chinese economic policies is expected to emerge after the US elections in November.