Considering the extraordinary amount of economic pain and human suffering to China’s Covid policy, it’s not surprising to see a robust response to the possibility that China is exploring steps to fully reopen and that a committee was being formed, according to rumors on social media. China’s foreign ministry spokesman however said “I’m not aware of the situation you mentioned.” Maybe not yet but at some point he hopefully will and the global economy would also be a huge beneficiary. On the other hand, the demand for commodities would remain firm and the inflation story would continue to be. In response to the chatter, the Shanghai comp was up 2.6%, the H share index in Hong Kong spiked by 5.5% and the Hang Seng rallied by 5.2%. Travel and leisure stocks led the way with Trip.com up by 12% and Sands Macao by 11.5% to name a few. The yuan is higher too as is copper by 2.6%, iron ore by 1.7% and brent crude by 1.7%.
With respect to energy specifically, we know that the Biden windfall profits tax proposal is just political noise that has zero chance of passing but just the talk of it and reality of it in Europe is more reason to be bullish on energy stocks as these companies will be even less incentivized to drill more and provide us with more needed supply.
The Reserve Bank of Australia hiked rates by another 25 bps to 2.85% as expected. This is the 2nd time at this new lower pace and “The Board expects to increase interest rates further over the period ahead” and “The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labor market” said Governor Philip Lowe. Lowe is trying to balance the need for higher rates but also in the face of a high percentage of Australian home mortgages that are floating rate and also the Australian people have a high level of debt relative to income. That ratio stood at 188% as of Q2, a record high. Helped by the rally in Chinese stocks, the ASX was up by 1.7% and the Aussie$ is higher as is everything against the dollar today.
Australia Debt to Income Ratio
With respect to gold, the World Gold Council released its Q3 2022 report today and while the price languishes, they said “Healthy Q3, driven by stronger consumer and central bank buying, helped year to date demand recover to pre-covid norms. Gold demand (excluding over the counter) in Q3 was 28% higher y/o/y at 1,181 tons. Year to date demand increased 18% vs the same period in 2021, returning to pre-pandemic levels.” Central bank buying reached a record high in the quarter at “nearly 400 tons.” Jewlery demand also was up, increasing by 10% y/o/y but investment demand was weaker by 47% y/o/y “reflecting weak sentiment among some investor segments.” The investment demand for physical gold was pretty strong, rising 36% for bars and coins but was offset by outflows from ETFs. Bottom line, the demand for physical gold, whether via central bank demand, jewelry and coins/bars, is solid but paper demand, via ETF’s and futures remains weak. As for the supply of gold, it rose just 1% y/o/y. Get the physical while you can because at some point it will cost more and I remain a wounded bull.
Ahead of vehicle sales data today for October, last week JD Power said “new vehicle prices remain at record levels, with the average transaction price expected to reach $45,599 – a record for October and a 2.7% increase from a year ago.” The record high was just above at $46,173 seen in July. They also said, “Even with a modest increase in inventory, strong demand continues to allow manufacturers to maintain a low level of discounting. The average incentive spend per vehicle is tracking toward $882, a decrease of 44.7% from a year ago. This will mark the 6th consecutive month under $1,000. Incentive spending per vehicle expressed as a percentage of the average vehicle MSRP is trending at 1.9%, down 1.6% percentage points from October 2021.”
In all the earnings calls I’ve heard in the industrial/manufacturing world, the auto sector is the one that continues to hang in there but I wonder for how much longer as used car prices continue to fall and stress is growing in subprime auto credit.
With regards to the global PMI’s out today, they were pretty weak across the board with m/o/m declines seen in Taiwan (down to just 41.5, the lowest since 2009), Thailand, Malaysia, Vietnam and Indonesia. While China’s Caixin index and the PMI in South Korea both rose from September, they were still below 50.
On China’s private sector PMI, not surprisingly it was below 50 at 49.2 “As Covid containment measures weighed on both output and demand” but “business confidence edged slightly higher during October.” On Taiwan, “Weak domestic and international demand conditions were the main drag…production levels were cut for the 7th month in a row, while firms grew increasingly pessimistic over their outlook for output, which was the 2nd weakest in the series history.” The South Korean PMI release explained its weakness, “as global economic conditions and ongoing cost pressures, often linked to exchange rate weakness, reportedly dampened demand conditions.”
Also out of South Korea was the 5.7% y/o/y drop in exports in October led by a drop of almost 16% to China and a 13.1% fall to Japan. Exports to the US and EU rose. Product wise, semi shipments declined by 17.4% y/o/y.
The UK October manufacturing PMI was revised to a slightly better 46.2 vs the initial print of 45.8 but still down from 48.4 in September. The softness was driven by “weak demand, high inflation, supply chain constraints and heightened political and economic uncertainties,” not surprisingly at this point.
The Bank of England will hike rates either 50-75 bps on Thursday and today they will start selling gilts as previously announced. They will auction off 750mm pounds of short term gilts and we’ll hear the results at 10am est time. Gilts are trading well ahead of it with the 2 yr yield lower by 11 bps and the 10 yr down by 7 bps.
Finally, here is an updated chart of S&P 500 eps estimates and I expect this downward trend to continue.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.