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Breakfast Bites - China cuts 5-yr rate

China cuts 5-yer LPR; Home Depot discusses consumer slowdown; FT raises alarm on US CRE

Rise and shine everyone.

I hope you had a nice break away from the US Markets. We’re back on track for yet another interesting week ahead of us. We start off with Walmart and Home Depot reporting earnings today, the Fed minutes tomorrow at 2pm ET, followed by Nvdia’s earnings after the close.

We’re seeing some pullback in the premarket session in equities. Last week was a tough close for the US markets, down for the first week since the start of the year. Yields are marginally lower, with the longer end higher. The US Dollar is flat, with gold and bitcoin higher, while oil pulls back.

Big Stories

China cuts their 5-year Loan Prime Rate; Leaves 1-year unchanged

The five-year loan prime rate (LPR), which commercial banks use as a benchmark to adjust their mortgage rates, was lowered from 4.2 to 3.95%. This has been done in an attempt to jumpstart mortgages and the ailing property market. While this is a good sign, traders were probably also hoping for a cut to the 1-year rate, which is why the market traded lower after the announcement. Yesterday, the market closed higher by 1.6% but, didn’t get the spike everyone was expecting. Today, mainland equities closed +0.42%

In other news. the Lunar New Year spending levels have definitely improved, coming in higher than in 2023 and even compared to 2019, in some cases. There’s some encouragement there that the consumer is starting to spend again. However, Credit Agricole also points out some interesting facts:

  • the per person spend declined, so there’s been a consumption downgrade, even at a time when prices have deflated.

  • this spending could be contained to the holidays, obviously, and may not be sustainable.

  • holiday spending may be up but, retail sales data still disappoints.

Home Depot on the Consumer

Home Depot reported results for Q4, 2023 today. While they beat both revenue and EPS estimates, Same-store sales actual and guidance came in lower. Revenue was $34.8B vs $34.6B est and EPS was $2.82 vs $2.76 est. They also raised their quarterly divided 7.7% to $2.25 from $2.09.

But what they said about the consumer was more interesting:

“Our market is on its way back to normal demand conditions, pressures we saw in 2023 are receding; Demand for home improvement dipped throughout the year as consumers spent more of their dollars on experiences.”

"After three years of exceptional growth for our business, 2023 was a year of moderation”.

“Customers are still putting off bigger projects – especially the large-scale projects that may require a loan – because of higher borrowing costs”

While not always directly observable, we knew this day would come when the Fed’s hikes would start to have an impact. The demand for goods that these companies saw during the pandemic era, has now shifted to services (which we also see in the inflation numbers) and with Home Equity Loans (HELOCs) becoming more expensive and scarce, projects have been put on hold. Not to mention, people have gone back to work full-time, many to the office so home remodeling is no longer on the agenda.

FT shares some alarming concerns on US CRE

Financial Times highlights rising concerns over bad commercial real estate (CRE) loans exceeding loss reserves at major US banks, according to FDIC filings:

  • US banks face the lowest reserve ratios for CRE loan losses in over seven years, with significant declines at top banks like JPMorgan Chase and Bank of America.

  • Delinquent CRE debt at six major banks nearly tripled to $9.3 billion in the past year, with overall past-due loans in the sector doubling to $24.3 billion in 2023.

  • Reserves for delinquent CRE loans are at a seven-year low, with current coverage at $1.40 for every dollar of overdue loans, down from $2.20 year-over-year.

  • Bank of America CEO Brian Moynihan downplays the risk, citing only $5 billion in CRE debt exposure in declining markets against the bank's vast revenues and assets.

  • Banks could face up to $60 billion in losses from defaulted CRE loans over the next five years, nearly double the amount set aside for such losses.

  • Japan's Aozora Bank forecasts a full-year loss on overseas real estate loans, with a specific focus on the slow recovery of the US office market, especially in Chicago.

  • US financial institutions' loans to "shadow banks" surpassed $1 trillion in January 2024, a 12% increase from the previous year.

Chart of the Day

This time around we seem to have more companies beating sales estimates (blue) vs. EPS estimates (black). This seems to suggest that revenues are coming in higher than the bottom line, in other words, margins are decreasing.

  • UK banks, including Barclays, Lloyds, HSBC, and Standard Chartered, to announce earnings this week.

  • France's Finance Minister Le Maire reduces 2024 GDP growth projection from 1.4% to 1.0%.

  • UK's Rightmove house prices for February show a month-on-month increase of 0.9% and a year-on-year rise of 0.1%, marking the first annual gain since August 2023.

  • Capital One to buy Discover Financial in a deal valued at approximately $35.3 billion, expected to be over 15% accretive to adjusted non-GAAP EPS by 2027. Discover shareholders to get a 26.6% premium with a 100% stock deal, aiming for a late 2024 to early 2025 closure.

  • Xpeng's CEO forecasts severe competition in China's EV market could lead to significant challenges; plans to invest around $500 million in AI and recruit 4000 staff.

  • RBA's January minutes reveal consideration of a 25bps rate hike or maintaining current policy. The decision to hold rates was based on inflation progress and a quicker-than-anticipated

    easing in the labor market.


(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)

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