Daily Comment (December 9, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EST] | PDF

Good morning!  After several days of risk-on, today is shaping up as a risk-off session.  Our coverage begins with economics and policy, where we discuss yesterday’s JOLTS data and inflation.  Tomorrow we get CPI, and there are worries we will see a yearly rate in excess of 7%.  International news is next.  The Summit for Democracy begins today, and the situation in Ukraine continues to evolve.  China news follows; the real estate sector situation is moving toward restructuring. We close with pandemic coverage.

Economics and policy:  Job openings continue to exceed the level of unemployment, and inflation data comes out tomorrow.

The JOLTS series only has about 23 years of data.  To get a feel for the longer-term pattern, we used a model to graft the JOLTS data to the older help wanted/unemployed ratio.  That data suggests the current labor market is as tight as it was in the late 1990s.

As this chart shows, the recovery has been remarkably strong and may prompt the Fed to conclude that the labor market has mostly recovered (see below).

International roundup:  The Summit for Democracy kicks off today, and negotiations around Ukraine continue.

China news:  More nations join the diplomatic boycott, and the real estate sector glides toward restructuring.

  • After the U.S. decided to engage in a diplomatic boycott of the Winter Olympics, Australia, Canada, and the U.K. decided to follow suit. There may be others.  China will not be pleased with these actions, but retaliation will likely wait until the 2024 Summer games.
  • The House has passed a bill to ban all imports from Xinjiang unless it can be proven with clear and convincing evidence the products were not made with forced labor. The Senate passed a similar measure in November, but it appears the House bill is more restrictive than the Senate version, meaning a conference committee will create the final version.
  • Although the PBOC has never been as independent as western central banks, the bank has been a given rather wide latitude relative to other financial entities in China. Anticorruption officials are said to be investigating the bank, which is likely a move to increase party control over the bank.  It is possible the Xi government is concerned that regulators were corrupted by the real estate sector and is looking for evidence of such activity.
    • In the past, China has tended to lose its nerve when acting to delever. Authorities know China’s debt levels are dangerously elevated, but when they move to discourage lending, the economy often weakens.  We note that credit growth rose in November for the first time since January.  The PBOC and finance officials want to provide some credit but avoid a rapid recovery.  That will be difficult to manage.
    • In this vein, China has eased restrictions on asset-backed high yield lending often used by property firms, further evidence that regulators are trying to provide some credit support but avoid a rapid expansion. This lending is a form of factoring, where firms supplying products to builders sell their accounts receivables to firms who package the obligations for investors.  Obviously, the payments depend on the builders making payments on these goods received.
    • Although variable interest entities (VIE) have not been completely eliminated, China appears to be cutting off these instruments to tech startups. It appears that China is grandfathering those firms that used VIEs for funding but is denying the use in the future, at least for technology firms.
  • China’s economic situation has always been difficult to decipher. For example, it is well known that China’s GDP numbers in the first decade of the century were partly fabricated.  However, as General Secretary Xi increases control over the economy, data is being treated as a state secret, and economic reporting is getting become harder to acquire.
    • China’s CPI rose 2.3% in November, almost entirely due to higher food prices. Core CPI rose 1.2%.  PPI rose 12.9% from last year but was unchanged on a monthly basis.
  • Private international primary and secondary schools are facing curbs from the CPC on curriculum. Some schools are closing rather than submitting to oversight.
  • Recently we have reported that China may have seen its growth peak already. Reports that marriages have hit a 13-year low would support that idea.
  • Evergrande (EGRNF, USD, 0.23) has been sliding toward bankruptcy and will need to restructure its debt. After failing to make debt payments, Fitch has placed the company on “restricted default.”  According to reports, the government has added several officials to the company’s risk committee, perhaps signaling that the Xi administration has decided to intervene directly in the troubled company.  Expect a long, drawn-out process to manage the wind-down of the company.
  • The U.S. and Taiwan have announced measures to increase investment in important technology sectors.  As we have previously discussed, Taiwan is a critical bottleneck for semiconductors, and the U.S. has been encouraging Taiwanese firms to build capacity outside of the island.
  • China has been cracking down on social media companies. According to reports, some of these companies have started layoffs.
  • When the scandal surrounding Peng Shuai erupted, Chinese regulators were able to quickly remove references to her in Chinese social media. However, controlling the narrative abroad was more challenging, requiring bots and fake Twitter (TWTR, USD, 45.72) accounts.
  • New Caledonia will vote on Sunday to decide if it will remain a French dependency or declare independence. China is said to be encouraging independence, likely to extend Beijing’s influence in the area.

COVID-19:  The number of reported cases is 268,035,994, with 5,283,305 fatalities.  In the U.S., there are 49,538,960 confirmed cases with 793,228 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors.  The CDC reports that 586,471,075 doses of the vaccine have been distributed with 475,728,399 doses injected.  The number receiving at least one dose is 237,087,380, while the number receiving second doses, which would grant the highest level of immunity, is 200,400,533.  For the population older than 18, 71.8% of the population has been fully vaccinated, with 60.4% of the entire population fully vaccinated.  The FT has a page on global vaccine distribution.  The Axios map shows a widespread rise in infections.

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