Morning Report: Country Garden Announces Lehman-type losses.

Vital Statistics:

Stocks are higher after key inflation data came in as expected. Bonds and MBS are flat.

Personal Incomes rose 0.2% in July, while spending rose 0.8%. The PCE Price Index (the Fed’s preferred measure of inflation) rose 0.2% month-over-month and 3.3% year-over-year. Excluding food an energy, the index rose 0.2% MOM and 4.2% YOY. The YOY numbers are an uptick from June, however that month was unusually low. Bonds are positive despite the increase.

Country Garden, China’s biggest property developer, reported a loss of $7 billion for the first half of the year and warned of an imminent default. Country Garden has already missed payments on several bond issues and is in the grace period.

Like the subprime crisis in 2008, the conventional wisdom is that this will be contained and there won’t be any systemic risk to the financial system. Country Garden’s losses are comparable to Lehman’s in 2008, so this isn’t a small event. Granted, China’s economy is more closed than most, however it is naive to me to think that there won’t be any pain in the West when the world’s second largest economy experiences a burst real estate bubble.

Real Estate is about 30% of China’s GDP. In the US, it is about 16%. Japan in about 12%. If China’s real estate percentage falls to normal worldwide levels, it will cause a mid-teens contraction in GDP. To put that into perspective, US GDP dropped by 15% between 1929 and 1932.

Announced job cuts soared 267% year-over-year, according to outplacement firm Challenger, Gray and Christmas. A big portion of this was due to the bankruptcy of Yellow, the trucking company.

“Job openings are falling, and American workers are more reluctant to leave their positions right now. The job market is resetting after the pandemic and post-pandemic hiring frenzy,” said Andrew Challenger, labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc. “The increase in job cuts is not surprising as technological disruption and companies taking a cost savings approach on the economy claim positions,” he added.

Hiring plans are the lowest since 2016. Year-to-date, companies have announced plans to hire 135,980 workers, which is a 83% drop compared to 2022.

Home prices set a new high, according to the Black Knight Home Price Index. Prices rose 2.3% on an annual basis, according to the index. Some of this is due to seasonal factors, and prices should start showing bigger YOY increases. That said, affordability issues will probably cap growth rates.

Atlanta Fed Chairman Ralph Bostic said that the Fed should probably hold tight and not continue rate hikes in a speech overnight in South Africa: “You no doubt saw that the Committee voted last month to raise the federal funds rate another 25 basis points, to a level of 5 1/4 to 5 1/2 percent. Based on current dynamics in the macroeconomy, I feel policy is appropriately restrictive. I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”