Taking the data out of China with a big grain of salt, they reported that Q2 GDP rose .4% y/o/y, below the estimate of up 1.2% and activity declined by 2.6% q/o/q with distress in residential real estate and the stop-start fight against covid. With the reopenings again in June, retail sales that month did lift by 3.1% y/o/y but assume part of that was stocking up on things in case there is another set of lockdowns. Industrial production rose 3.9% y/o/y about as expected and fixed asset investment was up by 6.1% ytd y/o/y but we also know the manufacturing side of their economy as well has spending on infrastructure AGAIN has been mostly spared in terms of output and government largesse. The services side of the Chinese economy is what is suffering the most from the strict covid restrictions. On the data miss, the Shanghai comp was down by 1.6% and the H share index was lower by 2.4%. Copper is down 1.1% and iron ore is falling by 4% to under $100 a ton for the first time since December 2021.
With the stories this week about Chinese home buyers balking on paying their mortgages on unfinished properties until they are done, it’s almost the equivalent of a bank run and why it’s likely that the Chinese government continues to nationalize these builders or at least will fund the completion of these projects themselves. I read a stat from Nomura that apartment builders only finished 60% of the homes they presold between 2013 and 2020. Either way, the use of residential real estate to dictate so much economic activity (about 30%) is likely over.
Redfin said yesterday that nationwide home supply in June was up 2% and that was the first increase since July 2019. Their advice to sellers from their chief economist, “I advise sellers to commit: If you decide to sell, do it quickly before demand falls further. And price carefully – this is not the time to test the waters. You’ll do more harm than good if you overprice and have to do a price reduction or take the home off the market.” Buyers are of course facing higher mortgage rates and still expensive homes but the competition has been drastically reduced.
The yen is bouncing a touch off its 24 yr high after the Japanese Finance Minister at around 6am est said that he’s “watching FX developments with greater urgency…and will act appropriately on currencies if needed.” As FX intervention never works, I’m not sure what he’s got in mind if it’s not connected to a change in stance by Kuroda and the BoJ. We did see a drop for a 3rd day in the 40 yr JGB yield and by 5.3 bps to 1.38% which is near a 2 week low. That coincides with the drop in yields elsewhere, including in Europe and the US, and also with the drop in energy prices.
Reflecting a central bank is just not serious about taming inflation and is more worried about the finances of its member states, ECB Governing Council member Olli Rehn said they will most “likely” raise rates by 25 bps next week and by 50 bps in September. As a reminder, their deposit rate is currently at .-50% and inflation is running north of 8%. Rehn said “In Europe, it’s still possible to get inflation under control by gradually normalizing monetary policy, without such policy leading to an economic recession.” The euro is holding above parity today after dipping below yesterday. Italian bonds again are the outlier with the political career of Mario Draghi uncertain but this is really just par for the course for Italian politics as they’ve had about 60 different governments since WWII.
I mentioned this week that not only should we be watching to see the impact of FX moves on earnings but also who has too much floating rate debt. This all as part of the new mosaic of falling corporate profit margins. I highlight floating rate exposure again because it’s a major possible risk in the world of CLO’s and bank loans as the interest rate shock is bound to matter for countless companies that aren’t hedged against this at the same time cash flows are shrinking with falling margins and slowing growth. Here is a chart of the LSTA Leveraged Loan Index.