Risk sentiment was mixed Tuesday as traders looked to the latest US CPI data for fresh insight into the likely trajectory of Fed policy.
Count yourself among the fortunate if the only thing you have to fear from higher inflation is Fed tightening. For the average person, higher inflation means… well, it just means higher inflation. So, higher prices for stuff, some of which people need. Food is a good example.
Consumer expectations (as measured by The New York Fed survey) are coming unglued, if not yet totally unanchored on a longer horizon. At 4%, medium-term expectations are very elevated. As Rabobank’s Michael Every put it Tuesday, “the public the New York Fed, the home of Wall Street, speaks to, still expects inflation twice the Fed’s target in late 2024.”
Markets didn’t seem overly concerned about the specifics of Democrats’ tax hike proposals. And why should they fret? After all, the details pretty clearly suggest the original proposals will be watered-down to appease moderates and “business-friendly” Democrats, whose votes are critical considering razor-thin majorities.
“The proposal, while substantial in scope, stopped well short of changes needed to dent the vast fortunes of tycoons like Jeff Bezos and Elon Musk, or to thoroughly close the most egregious loopholes exploited by high-flying captains of finance,” The New York Times wrote, summing it up. “It aimed to go after the merely rich more than the fabulously rich.”
Go figure. What higher rates mean for stocks going forward is debatable, but for right now the answer seems to be “nothing.”
Meanwhile, there are protests in China. And if there’s anything Xi Jinping doesn’t want to see as he works to bring about “common prosperity” via a “profound revolution,” it’s protests.
The problem is Evergrande, and everyone’s furious, apparently. Employees at an office near the North Korea border worked from home following weekend protests by staff who (silly them) bought wealth management products from the company. Last week, angry homebuyers encircled a Guangzhou housing bureau in an effort to compel Evergrande to get moving on idled construction. And on Sunday and Monday, dozens of irritable folks showed up at Evergrande’s Shenzhen headquarters, where they hoped to make a point about past due payments on WMPs.
As usual, the translated version of domestic coverage is amusing. “Some products of Evergrande Financial Wealth Management were overdue, and investors took offline actions,” Caixin said. “Participants include Evergrande Fortune’s own employees.”
I’m not sure I’ve ever heard a better euphemism for in-person protests than “offline actions.”
Caixin continued. “On the evening of September 12, hundreds of investors from many places went to Shenzhen Excellence Houhai Center, the headquarters of China Evergrande Group, to have a dialogue with Du Liang, executive director and general manager of Evergrande Fortune.” Again, you have to love it: A “dialogue.”
The WMP problem isn’t new. The products are notorious, and there have been protests before. But cleaning them up is like untangling a giant box of Christmas lights.
“The latest uproar follows Evergrande’s proposal late last week to impose lengthy repayment delays on holders of WMPs,” Bloomberg wrote Tuesday, summing up the last several episodes of this never-ending soap opera. “While Evergrande tweaked its plan on Monday in an attempt to mitigate the backlash, retail and institutional investors will still face delays unless they accept repayment in the form of Evergrande-developed properties,” the same linked article added.
Evergrande is essentially trying to impose a restructuring of sorts on WMP holders, who are being asked to choose from a list of repayment options. The company initially planned to prioritize small investors, but larger investors didn’t like that idea. The situation is fluid. Some of the terms associated with the payment options are laughably self-referential. For example, if you hold an overdue WMP, you can elect to buy an Evergrande residential unit or office at a discount.
The developer has $300 billion in liabilities. A debt restructuring is a foregone conclusion. Beijing will almost surely have to step in to guarantee construction projects are completed and suppliers made whole.
It’s impossible to imagine Beijing countenancing the kind of melee that would surely ensue absent state intervention. Last week, the government green-lighted a company plan to renegotiate payment schedules with creditors, which essentially just means they’re buying time, figuratively and literally.
“The month of September is typically when real estate companies in China record higher contract sales of properties,” the company said Tuesday, adding that,
However, the ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group. The Company expects significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cashflow and liquidity.
How’s that sound? The same release said the company has hired advisers to “assess the Group’s capital structure, evaluate the liquidity of the Group and explore all feasible solutions to ease the current liquidity issue and reach an optimal solution for all stakeholders as soon as possible.”
Beijing is also grappling with another COVID outbreak, this time in Fujian province. Xiamen, population 4.3 million, is under lockdown. “The decision to place all residential areas of the city under ‘closed-loop’ management – which bans people from leaving their local area – and shut all entertainment venues was made after 32 infections were identified on Monday, most of them traced back to Putian where the latest outbreak originated,” SCMP said.
This is yet another test of China’s “zero COVID” policy, which Western media continues to insist isn’t viable, especially to the extent it impedes international trade.
Last month, authorities temporarily shut down the world’s third-busiest container port over one asymptomatic case. The country’s August trade data was robust nevertheless.
Officials described the situation in Putian as “tough and complicated.” Much like the Evergrande debacle. And forecasting inflation in advanced economies. And rewriting the tax code in the US.
