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Breakfast Bites - China's Deflation Continues

Breakfast Bites - China's Deflation Continues

S&P 500 closing in on 5000; US Consumer Credit Lower; CBO projects highest interest cost since 1940

Ayesha Tariq
February 08, 2024

Rise and shine everyone!

Breakfast Bites has a new look. After a year and a half of the same format, we thought it was time to change things up.

The big news yesterday was the S&P 500 almost crossing the 5000 mark, before settling at 4995. The push came later in the afternoon following a strong $42B 10Y bond auction that pushed yields down and caused the market to rally.

Earlier in the day, US markets opened lower, weighed down by the downgrade of NYCB. Further news of Morgan Stanley advising clients in Europe to sell their bonds with exposure to US Commercial Real Estate (CRE), didn’t inspire much confidence. While the regional bank ETF, KRE made a new low for the year, under the surface, worries seemed to be focused on banks with exposure to CRE while there wasn’t much concern about consumer lending.

US Equity Futures are trading lower this morning, pulling back after yesterday’s late surge. Yields, Bitcoin, and the US Dollar are all higher. Oil also continues to run higher, crossing the 20-day moving average in pre-market trading. Gold is pulling back.

Headline Stories

China’s Deflation weighs on the Economy

China continues to see deflation, with YoY numbers coming in at -0.8% YoY, marking the fourth straight month of decline which was the longest streak of drop since October 2009. The MoM number was slightly higher at 0.3% vs. 0.1% in Dec, likely driven by higher holiday spending.

Prices fell for all components but food prices fell at a record pace (-5.9% vs. 3.7% in Dec). This continues to reinforce the theme that local consumption is not picking and economic growth will continue to remain weak. While China suffers, the rest of the world is probably happy given that this alleviates inflation pressures in other countries to a certain extent.

China President Xi gave pre-Luna New Year comments which noted that the government will further comprehensively deepen reforms. He added the country should enhance positive economic recovery.

Consumer Credit Change came in much lower

US December Consumer Credit numbers came in far below expected at $1.6B vs $16.0B estimated. This is following a gain of $23.7 in November. This is quite a drastic change lower and perhaps represents some prudent spending patterns.

Revolving credit, like credit cards, went up by $1.04 billion (up 1 percent on an annual basis).
Non Revolving credit, typically auto and student loans, rose by $0.5 billion (up 0.2 percent on an annual basis) from the prior month.
On a quarterly basis, consumer credit increased at a seasonally adjusted annual rate of 2.6 percent.

CBO says: Highest US interest cost since 1940

The Congressional Budget Office projects FY2024 net interest costs will represent the highest percentage of GDP since at least 1940, at 3.1% vs. 2.4% YoY, rising to 3.9% in FY 2034.

Their release had some good news - the new forecast indicates a $0.1 trillion reduction in the deficit for the fiscal year 2024 compared to the May 2023 estimates, with the total deficit for the years 2024-2033 expected to be $1.4 trillion (or 7%) less. The primary reason for these lower deficit projections, according to the CBO, is a decrease in discretionary spending resulting from the passage of the Fiscal Responsibility Act.

The deficit for FY24, as a share of the Gross Domestic Product (GDP), is estimated at 5.6%, predicted to rise to 6.1% in FY25, before decreasing to 5.2% in both FY27 and FY28.

Quote of the Day

Hard to imagine a path of continuous rate hikes; the market is expecting a very smooth rate path trajectory.

Bank of Japan (BOJ) Dep Gov Uchida

Chart of the Day

GS is seeing extremely bullish options activity in the big tech names - namely Meta, Apple, Amazon, Google, Nvidia, and Microsoft. This has only happened 5 other times in the post-covid era (over the last 3 years). According to the team, the forward returns following this activity in 2 to 4 week forward window skews towards negative returns. So remain vigilant for a pullback in these names.