Today in Finacial History
1931: The day after the Bank of England abandons the gold standard, U.S. stocks tumble. The Dow Jones Industrial Average plunges 6.2% to an intraday low of 104.79, and the New York Stock Exchange authorities debate closing the market. But NYSE President Richard Whitney insists that the market should remain open, and the executives compromise by instituting a temporary ban on short-selling. By day’s end, stocks have recovered almost all their lost ground, with the Dow closing at 110.83, down less than 1%.
John Brooks, Once in Golconda: A True Drama of Wall Street, 1920-1938 (Harper & Row, New York, 1969), p. 132; Peter L. Bernstein, The Power of Gold: The History of an Obsession (John Wiley & Sons, New York, 2000), p. 315; Barrie A. Wigmore, The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929-1933 (Greenwood Press, Westport, Ct., 1985), p. 301; Phyllis S. Pierce, ed., The Dow Jones Averages 1885-1980 (DowJones Irwin, Homewood, IL, 1982), not paginated.
NEWS FLOW RIGOR
S. Korean Producer Prices Rise 3% Y/y in August
*S. KOREA’S KIM: JOB MARKET HAS HIT BOTTOM, WON’T IMPROVE SOON
*S. KOREA’S KIM: FX, BOND EQUITY, MARKETS RELATIVELY STABLE
Brazil’s Bolsonaro Had Slight Temperature Increase: Hospital
*DUJOVNE: ARGENTINA WILL NOT RESTRUCTURE ITS DEBT
*JAPAN PM ABE PLANS TO KEEP KONO, MOTEGI, SEKO IN CABINET:SANKEI
*JAPAN PM ABE PLANS TO KEEP KONO, MOTEGI, SEKO IN CABINET:SANKEI
*JAPAN AUG. CORE CONSUMER PRICES RISE 0.9% Y/Y; EST. 0.9%
*JAPAN AUG. OVERALL CONSUMER PRICES RISE 1.3% Y/Y
*JAPAN AUG. CPI EX-FRESH FOOD, ENERGY RISES 0.4% Y/Y; EST 0.4%
*JAPAN’S TOPIX INDEX RISES 0.5% TO 1,797.09 AT MORNING CLOSE
*JAPAN’S TOPIX INDEX RISES 0.62% TO 1,798.77 AT MARKET OPEN
*JAPAN 40-YR BOND YIELD CLIMBS TO 1.015%, HIGHEST SINCE JANUARY
*BOJ OFFERS TO BUY 300.0 BLN YEN: JGB 1YR-3YR OUTRIGHT FUT DLVR
*BOJ OFFERS TO BUY 350.0 BLN YEN: JGB 3YR-5YR OUTRIGHT FUT DLVR
*BOJ OFFERS TO BUY 180.0 BLN YEN: JGB 10YR-25YR OUTRIGHT FUT
*BOJ OFFERS TO BUY 50.0 BLN YEN:JGB MATURITY OF OVER 25YR
*BOJ CUTS >25 YR JGB BUYS TO 50B YEN; WAS 60B YEN IN LAST OP.
*JAPAN, US TO HOLD BILATERAL TRADE TALKS SEPT 24: YOMIURI
*JAPAN 10-YR BOND YIELD CLIMBS TO 0.125%, HIGHEST SINCE AUGUST
*JAPAN 40-YR BOND YIELD CLIMBS TO 1.025%, HIGHEST SINCE NOVEMBER
*MOON TO PROPOSE TRUMP SUMMIT WITH KIM IN OCTOBER, MUNHWA SAYS
*PBOC SKIPS REVERSE REPO
*PBOC DRAINS NET 110B YUAN IN OPEN MARKET OPERATION
*CHINA SETS YUAN REFERENCE RATE AT 6.8357 AGAINST U.S. DOLLAR
*CHINA SHANGHAI COMPOSITE SET TO OPEN UP 0.2% TO 2,733.87
*AUSTRALIA 3-MONTH BANK BILL FIXED AT 1.9250% VS 1.9200%
*AUSTRALIA TO SELL A$800M OF NOV. 2029 BONDS ON SEPT. 24
*AUSTRALIA TO SELL A$1.5B OF MAY 2030 BONDS ON SEPT. 26
*S&P: AUSTRALIA TO AAA/STABLE FROM AAA/NEGATIVE – FOREIGN CURREN
*AUD ERASES DROP AS S&P LIFTS AUSTRALIA RATING OUTLOOK TO STABLE
*NEW ZEALAND AUG. CREDIT CARD SPENDING RISES 7.7% VS YEAR AGO
*NEW ZEALAND AUG. CREDIT CARD SPENDING RISES 2.6% VS MONTH AGO
*HKMA SEES H.K. BANKS MULL RATE RISE IF U.S. LIFTS RATE: RTHK
*HKD 3-MONTH HIBOR RISES TO HIGHEST SINCE DEC. 2008
*HONG KONG’S HANG SENG INDEX EXTENDS GAIN TO 1%
*HONG KONG DOLLAR STRENGTHENS AS MUCH AS 0.23%, MOST IN A YEAR
*CNH OVERNIGHT HIBOR SPIKES 161BPS, MOST SINCE MAY
*HKMA SAYS TO INCLUDE YUAN BILLS ISSUED IN HONG KONG BY PBOC
*HKMA: EXPAND YUAN LIQUIDITY FACILITY ELIGIBLE COLLATERAL LIST
*INDIAN RUPEE SURGES; GAINS O.7% TO 71.8525/USD
(consumption fares better than the retail sales headline story)
Retail sales growth decelerated in 2Q and weakened further in the summer, along with lackluster earnings reports from consumer names in autos and home electronic appliances. Some argued that private consumption has weakened materially in China and will worsen further due to households’ investment losses (eg, the stock market correction and ongoing P2P defaults) and the crowd-out effect of high property prices.
The analysis shows much of retail sales weakness is due to slower sales in autos, home appliances, and construction materials and other housing-related goods. Since the government tightened property policies to slow both demands and supply further in 2H17, it is perhaps unsurprising to see housing-related consumer good sales taking a breather along with home sales after two strong years.
On the other hand, consumer staples and services consumption growth still remains resilient. Recall that retail sales do not cover any consumer services beyond dining out, missing an important and fast-growing component in private consumption. That is one of the key reasons some have cautioned using retail sales as the only indicator of private consumption.
Little evidence of a negative wealth effect was found from investment losses on consumption.
*** [But the risk is slower income growth becoming a headwind for future consumption.]
H. Qiao, X. & W. Yang
Weaker auto, housing-related good sales a key drag…
Weaker retail sales growth since mid-2017 was mainly driven by a fast decline in auto sales growth as well as slower sales growth in housing-related goods (especially home appliances). Auto sales represent nearly 14% of China’s total retail sales and 29% of retail sales at large retailers, while housing-related goods could be about 5% and 10% respectively. Their growth slowdown had weighed on headline retail sales growth quite significantly, even though sales growth in some other major items (such as food, daily good and jewelry) stayed relatively firm in recent months.
…largely driven by policy and property cycle
Rising home sales growth has been a reliable boost to auto demand in the past, given that new homes tend to be further away from city centers. On the other hand, auto sales growth decelerated rapidly in 2018 on the back of (1) the exit of the auto purchase tax cut in 2018: (2) scaled-backed monetary compensation for shantytown development in tier 3-4 cities; and (3) slower new property sales growth under tighter restrictions on home purchases and mortgages.
In particular, households who chose to buy autos do not seem to be settling for cheaper cars. The gradual decline in the share of low-end passenger cars in auto sales suggests the opposite of consumption downgrades. In 1H17, sales growth of SUVs grew 9.7% YoY (perceived to be the more high end), 4.2ppt higher than normal cars, according to the Ministry of Commerce.
As for home appliance sales, the property cycle has been an important driver in the past years. Both air conditioner and refrigerator sales growth have slowed since 4Q17, after home completion growth started weakening in 2Q17, with a 2-3 quarters lag.
Retail sales statistics systemically understates consumption strength
Retail sales growth tend to show a more pronounced slowdown than the underlying consumption trend during an investment downturn like the present. This is because retail sales growth tracks the purchase of goods by all entities (including households, corporate and government) at retail outlets above certain sizes. In other words, sales related to corporate capes and government expenses are also captured in retail sales, which is outside of household consumption. Note fixed asset investment growth weakened quite noticeably so far in 2018 (to 5.3% in 8M18 from 7.2% in 2017).
Additionally, retail sales data are showing more limits when used to track China’s consumption growth, due to the lack of coverage on most service and rural consumption. The retail sales series leaves out most services consumption ( except for dining out, 10% of services), and rural sectors/e-commerce is most likely under-covered.
However, these missing components are increasingly more important to the China consumption story, given they are growing faster than the rest as a structural trend. Note services account for half of the household consumption and rural consumption is 27% of household consumption.
Consumption growth in services holds up relatively well
The quarterly consumption expenditure per capita data from the household survey showed private consumption growth was still quite resilient. Services consumption growth has been the major driver, while goods consumption growth slowed. BofAML believes this set of data offers a more reliable framework to track consumption strength.
At the sector level, there is evidence on service sector as well.
+ Various tourism-related indicators stayed quite resilient. Domestic tourist growth was still firm with double-digit growth, measured in both volumes and revenues, albeit slowing from the peak in mid to late 2017. Hotel revenue growth from both luxury and affordable hotel chains (Billy Ng__) China overseas tourism growth actually picked up in 1H18 from 2016 and 2017, with a pretty strong print at 15.9% YoY in 2Q18.
+ Another leisure spending also grew relatively quickly in 1H18. For instance, household expenditure in sports rose 39% YoY, and the number of visits to cinemas increased by 17.8% YoY in 1H18, according to the Ministry of Commerce.
The relative resilience in consumption growth is underpinned by still-firm disposable income growth, especially for rural households. But the risk is that slower income growth could become a headwind on future consumption, as downside risks to the economic outlook rise.
Linkages to negative wealth effect or higher property prices are weak
There are popular views that China’s consumption demand is being hit by a negative wealth effect due to financial losses in A-share markets and P2P credit defaults or crowded out by rising property prices.
Regarding the high property prices, it is hard to prove whether it stimulates or discourages consumption. On one hand, households that bought homes in the recent past could be paying higher mortgages and feel more constrained with discretionary spending. On the other hand, homeowners could feel richer and be more willing to spend, given that property prices are still on a moderate rise.
Meanwhile, the direct impact on Chinese consumers from A-share market corrections and rising P2P credit defaults could be quite limited (BofAML). This is due to (1) low participation and high concentration in the wealthy group and (2) a small allocation of household wealth in those financial investments at 6.7% in 2017.
1. Stock market correction may only affect a small group of wealthy individuals
There were 142mn individual stock market accounts as of July 2018 (10% of the total population) and only less than a half of those investors or 4-5% of the population would have positions (latest statistics is 42% as of February 2017 and typically the share would decline during stock-market downturns).
Moreover, nearly 90% of total value of stock investment was in the hands of 28% of active individual investors (14mn, who invested at least RMB100K), according to BofAML’s own calculation.
2. The magnitude of distressed P2P loans/affected investors is quite small
According to WDZJ, distressed P2P loans amounted to RMB78bn as of July 2018, accounting for 7.7% of total P2P loans outstanding or 0.06% of outstanding banking loans. The total number of investors affected by P2P investment losses is around 1.1mn cumulatively, accounting for 6,2% of total P2P investors or 0.08% of the total population.
The fact some debtors who borrowed money from distressed P2P platforms may not pay it back could also help reduce the net losses within the household sector.
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