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Week Ahead: More US (Headline) Inflation and Consumption, and 75 bp Hike by Bank of Canada

Last month, when the Federal Reserve hiked 75 bp instead of the 50 it had signaled, Chair Powell cited the unexpectedly strong CPI and elevated University…

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Last month, when the Federal Reserve hiked 75 bp instead of the 50 it had signaled, Chair Powell cited the unexpectedly strong CPI and elevated University of Michigan consumer inflation expectations. The June CPI will be reported on July 13, and the preliminary July University of Michigan consumer inflation expectations will be reported two days later.  

This may have been a tactical error, though only one Fed official seemed to think so. Kansas City Fed President George, a hawk, favored 50 bp as the Fed had signaled. While inflation did accelerate, the core rate fell. Moreover, the Fed targets the PCE deflator, which is less sensitive to shelter and energy prices. The problem with citing a preliminary report is that the final report may be different, and indeed, it was. Instead of surging to a new high of 3.3% from 3.0% as the preliminary estimate of 5-10 year consumer inflation expectations had it, the final reading stood at 3.1%, matching the January high.  

It may never be known whether a Fed official helped prompt the press story the next day, suggesting a 75 bp hike was likely. Some bank economists had nearly immediately moved in that direction. The implied yield of the June Fed funds futures contract had a 52 bp of tightening priced the day before the CPI data. It firmed to 57 bp by the end of June 10, when the CPI and University of Michigan's surveys were published. After a good weekend think and the press reports, the market moved to price in 72 bp of tightening.  

The "expeditious" effort to bring the Fed funds rate to neutral and beyond means that the central bank will use any opportunity it gets or creates. St. Louis Fed President Bullard was candid about it. The Fed must ratify what the market does based on the central bank's guidance. Even though some pundits will cringe at the notion of any similarity between Powell and Volcker, it may be recalled that Volcker cited money supply growth to justify what he thought the Fed needed to do in any event.  

The Fed funds futures suggest the market is giving the Fed another option to hike by 75 bp when it meets next on July 27, the day before the first estimate of Q2 GDP is released. The market went into the weekend pricing around 95% confidence in a 75 bp hike. While there are clear signs that the economy is slowing, this is what the Fed is trying is achieve. So rather than deter it, the slowing confirms that the Fed is on the right course.  

Still, the fact that Powell cited the CPI gives the report added importance. The monthly increase will be 1% or higher for the third time in four months. The median forecast of a 1.1% month-over-month gain would lift the year-over-year rate to 8.8% from 8.6%. That would bolster confidence that the Fed will take another three-quarter step. It could also boost the perceived chances of a 75 bp hike in September.   The market has about a 1-in-5 chance instead of  75 instead of 50 bp currently discounted.  

Nevertheless, a change is afoot. Despite the talk of a broadening of price increases, the CPI core rate is likely to slow for the third consecutive month. The core rate is important, not because it excludes volatile food and energy prices as some pundits have it, but because, as Powell noted, it is a better predictor of future inflation. That is to say that over time, the headline converges with the core rate, not the other way around. Market-based inflation expectations, measured by the 10-year breakeven, fell to new lows for the year in late June, near 2.3%, and have been consolidating below 2.4% recently. The two-year break even, which had approached 4.5% the day before the FOMC meeting concluded, tumbled to almost 3.05% in early July and finished a little above 3.20% last week. 

A one or two-tenths rise in the 5-10-year inflation forecast in the University of Michigan's survey does not seem as important as the general trend, and it has been flat though elevated 2.9%-3.1% for nearly a year. Instead, what appears more notable is that the reading of consumer sentiment, which was revised in the final June reading to 50, is associated with past recessions. Sentiment is not just a mental state, but that mental state is shaped by what one experiences directly or indirectly.  

The US also reports retail sales, industrial production, and business inventories. Outside of the headline impact, the data points are essential as economists fine-tune estimates for Q2 GDP. This is particularly important because there is a divergence between two historically reasonably good estimates. The first is the Atlanta Fed's GDP tracker, which sees the economy contracting by 1.2%. The other is the median forecast in the Bloomberg survey. This appears slightly closer to the actual first official estimate than the Atlanta Fed's tracker. The median in the Bloomberg survey is 3.0%, but this may overstate the case. What Bloomberg calls a weighted average is at 1.8%, and the mean is 2.8%. The eight forecasts that have been updated this month have an average forecast of 1.55%. Notably, only one of the 60 forecasts projects an economic contraction in Q2. 

On July 15, China will report monthly June data (retail sales, investment, surveyed jobless rate) and Q2 GDP. Bloomberg apparently conducts two surveys. The monthly poll had 24 forecasts, and the median forecast was for a contraction of 1.5% quarter-over-quarter after a 1.3% expansion in Q1. The other survey, whose results are posted on the economic calendar page, has 10 responses has a median forecast of -2.3%. Perhaps the exact print does not matter.  

The takeaway is that the zero-Covid policy means that the official target of around 5.5% growth this year will not be met. The multilaterals (IMF, World Bank, and the OECD) estimate Chinese growth at 4.3%-4.4% this year. The market is less sanguine. That said, the stimulative efforts and the easing of the lockdowns suggest the possibility of a robust recovery in H2. Of course, with a relatively less effective vaccine and less fully vaccinated people (especially 60 and older), there is the risk of further economic disruptions.

China could reduce interest rates or cut reserve requirements, but its revealed preferences show a cut in the medium-term lending facility (set on July 15) is unlikely. It trimmed the rate by 10 bp in January, which was the first cut since the pandemic moves in early 2020 when it cut the rate by 30 bp. No change in the medium-term lending facility means that the loan prime rates, set on July 20, will also be kept steady.  

The UK reports May GDP on July 13. The monthly GDP unexpectedly contracted in March and April (-0.1% and -0.3%, respectively) and was stagnant in February. The economy has not grown since January, and that was after a 0.2% contraction in December. While we have noted that economists do not expect the US economy to have contracted in Q2, they are less sanguine about the UK. The median forecast (Bloomberg) is for a 0.1% contraction. A quarter of 36 projections have not been updated since mid-May. The average of the last five updates (June 30-July 8wir) estimates that the UK economy shrank by 0.4% in Q2.  

Just as the Fed hiked rates while the GDP was falling in Q1, the market is convinced that the Bank of England will also look through the possible contraction. A quarter-point hike at the August 4 meeting is a foregone conclusion, and the swaps market leans heavily toward a 50 bp move instead (~83%). UK politics may make for good theater but have not been much of a market factor. In the foreign exchange market, sterling saw its recent slide against the dollar extended and two-year lows were recorded (~$1.1875). However, as the cabinet resignations mounted in the first half of last week, sterling rose against the euro and reached its best level in nearly three weeks. It regained some footing in the second half of the week against the dollar.  The $1.2100 area may offer the first hurdle. 

Australia reports June employment figures early on July 14. The Australian labor market is robust: record-low unemployment and record-high participation. It has created an average of almost 61.5k full-time jobs a month through May this year. In the same period last year, the average was 45.5k, and in 2019 it was less than 19k.   After the 50 bp hike on July 5, the market leans slightly (~55%) toward another half-point move at the next meeting on August 2.  

While the RBA and the BOE do not meet until next month, the Bank of Canada meets next week. The swaps market has a fully discounted 75 bp hike on July 13. It would lift the target rate to 2.25%. The market favors a 50 bp hike at the following meeting but has about a 1-in-4 chance of another 75 bp move instead. The year-end rate is seen around  3.50%. The treatment of the Canadian dollar as a risk asset (high and reasonably stable correlation in recent months with the S&P 500, ~0.70) remains dominant. However, we note that the two other factors in our informal model, namely commodity (oil as a proxy) and rate differentials (two-year spreads as a proxy), have also increased correlations. The correlation between changes in the exchange rate and the two-year differential is the highest in five months (~0.38). The changes in the exchange rate and WTI prices increased in May and stabilized in June and into July (~0.43).

The Reserve Bank of New Zealand is widely expected to hike its cash target rate by 50 bp on July 13. It will then stand at 2.50%. With three more meetings after it this year, the swaps market has another 140 bp of tightening priced into the curve. According to current pricing, that could prove to be the peak, even though CPI is running near 7%. This year, the New Zealand dollar's 9.4% decline makes it the worst-performing in the dollar bloc. The Australian dollar has fallen almost 5.7%, and the Canadian dollar is off slightly less than 2.5%.  


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BRV China Holds Singapore Explorer Day at SMU

BRV China Holds Singapore Explorer Day at SMU
PR Newswire
SINGAPORE, Sept. 29, 2022

Brings Together Leading Entrepreneurial Minds Across China, Southeast Asia, North America
SINGAPORE, Sept. 29, 2022 /PRNewswire/ — BlueRun Ventures China (BRV Chin…

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BRV China Holds Singapore Explorer Day at SMU

PR Newswire

Brings Together Leading Entrepreneurial Minds Across China, Southeast Asia, North America

SINGAPORE, Sept. 29, 2022 /PRNewswire/ -- BlueRun Ventures China (BRV China), a leading early-stage technology-focused venture firm, yesterday hosted Explorer Day in Singapore in collaboration with the Institute of Innovation & Entrepreneurship of Singapore Management University and SGInnovate, a government-owned innovation platform in Singapore to support deep technology entrepreneurship. The event brought together more than 80 founders and pioneers – local entrepreneurs, government associations, academics and venture capitalists – who discussed the company's global investment strategy and emerging trends in the fields of artificial intelligence (AI), enterprise services, Web3, robotics and the global expansion plans of start-ups.

BRV China sees significant opportunity for technology investment globally and shared the following insights during the event:

  • Despite market volatility, BRV China remains confident in the fundamental value of many portfolio companies as high-quality start-ups capable of developing disruptive innovations have continued to demonstrate an ability to secure third-party capital.
  • BRV China remains bullish on the long-term prospects of key frontier areas such as AI, robotics, new energy solutions and biotechnology (powered by innovative algorithms).
  • Unlike internet services like mobile apps and e-commerce services that are specifically designed for a geographical region, deep technologies possess substantial business development potential with increasing demand in the global market that will lead to an expected rise in demand for deep technology talent.
  • BRV China believes there's significant long-term potential in the global market with investment flows into the region expected to bounce back following global economic recovery in the coming years.
  • With great changes unseen in a generation will come greater opportunities. Venture capitalists, entrepreneurs and startups were called on to re-evaluate the economic cycle and establish long-term plans so they are ready to "surf the wave" upon eventual recovery in the near-term.

Having first-mover advantages in deep technology and a strong track record across market cycles, BRV China shared its experiences on the opportunities and challenges faced by early-stage startups in areas such as accessing financing solutions and commercialization of technologies ultimately helping promising companies be fully prepared for the many hurdles they face on their growth journey.

"We continue to witness a rapid transition towards a digitalized economy that was accelerated by the pandemic leading to a gamut of opportunities for start-ups that continues to contribute to the growth of the technology sector," said Jui Tan, Managing Partner of BRV China. "To help Chinese start-ups survive a crisis of such unprecedented magnitude, BRV China has been providing continuous support helping many companies adapt and reconfigure their business models while speeding up their R&D and commercialization processes."

The event also featured guest speakers from startups such as Gaussian Robotics and HPC-AI, two fast growing portfolio companies, who shared their journey to success.

"China has leading competitive advantages in deep technologies such as robotics, new energy, AI infrastructure and applications, consumer technology and semiconductors which are in hot demand across the world," said Terry Zhu, Managing Partner at BRV China. "To go global, it is necessary for startups and entrepreneurs to leverage the country's competitive edge and weigh between political influence from different markets while formulating their plan of development. BRV China will help China start-ups to achieve their goal, seizing development opportunities as they arise due to the digital transformation of supply chains, growth in market size and globally distributed Chinese talents."

"Singapore has a flourishing ecosystem as it has a fertile ground for start-ups which are supported by a forward-looking government, a strong research base and a skilled talent pool. BRV China will leverage its experience and help connect researchers, entrepreneurs and investors in order to build a robust ecosystem for innovation," said Jui Tan.

About BRV China

BlueRun Ventures China (BRV China) is a leading early-stage venture firm in China with offices in Beijing and Shanghai. Having its heritage in Silicon Valley since 1998 and entered China in 2005, BRV China has managed over $2 billion through multiple USD and RMB funds, with over $1 billion cash distributions. BRV China focuses on investing in entrepreneurs who create a sustainable impact through technological innovations across enterprise services, transportation and smart machine, digital healthcare, and consumer technology sectors in China. The firm has invested in more than 150 portfolio companies, including Li Auto (NASDAQ: LI), QingCloud (688316.SH), WaterDrop (NYSE: WDH), Energy Monster (NASDAQ: EM), Mogujie/Meilishuo (NYSE: MOGU), Qudian (NYSE: QD), Ganji/58.com, PPTV, Guazi, Meishubao, Nanyan, Shanzhen, Gaussian Robotics, Yi Auto, Pinecone, etc. The firm has been recognized as the "No.1 Early-Stage Investment Firm" in China by Zero2IPO and ChinaVenture, and "Consistent Performing Venture Capital Fund Manager" by Preqin. For further information, please visit https://www.brv.com.cn/en/.

View original content to download multimedia:https://www.prnewswire.com/news-releases/brv-china-holds-singapore-explorer-day-at-smu-301636758.html

SOURCE BRV China

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Butter, garage doors and SUVs: Why shortages remain common 2½ years into the pandemic

The bullwhip effect describes small changes in demand that become amplified as they move down the supply chain, resulting in shortages. The pandemic put…

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Consumers have been seeing empty shelves throughout the pandemic. Diana Haronis/Moment

Shortages of basic goods still plague the U.S. economy – 2½ years after the pandemic’s onset turned global supply chains upside down.

Want a new car? You may have to wait as long as six months, depending on the model you order. Looking for a spicy condiment? Supplies of Sriracha hot sauce have been running dangerously low. And if you feed your cat or dog dry pet food, expect empty shelves or elevated prices.

These aren’t isolated products. Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal and many more items have also been facing shortages in the U.S. during 2022 – and popcorn and tomatoes are expected to be in short supply soon.

In fact, global supply chains have been under the most strain in at least a quarter-century, and have been pretty much ever since the COVID-19 pandemic began.

I have been immersed in supply chain management for over 35 years, both as a manager and consultant in the private sector and as an adjunct professor at Colorado State University - Global Campus.

While each product experiencing a shortage has its own story as to what went wrong, at the root of most is a concept people in my field call the “bullwhip effect.”

What is the ‘bullwhip effect’?

The term bullwhip effect was coined in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics.” It describes what happens when fluctuations in demand reverberate and amplify throughout the supply chain, leading to worsening problems and shortages.

Imagine the physics of cracking a whip. It starts with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to the tip, a snap – and a sharp pain for anyone on the receiving end.

The same thing can happen in supply chains when orders for a product from a retailer, say, go up or down by some amount and that gets amplified by wholesalers, distributors and raw material suppliers.

The onset of the COVID-19 pandemic, which led to lengthy lockdowns, massive unemployment and a whole host of other effects that messed up global supply chains, essentially supercharged the bullwhip’s snap.

How the bullwhip effect works.

Cars and chips

The supply of autos is one such example.

New as well as used vehicles have been in short supply throughout the pandemic, at times forcing consumers to wait as long as a year for the most popular models.

In early 2020, when the pandemic put most Americans in lockdown, carmakers began to anticipate a fall in demand, so they significantly scaled back production. This sent a signal to suppliers, especially of computer chips, that they would need to find different buyers for their products.

Computer chips aren’t one size fits all; they are designed differently depending on their end use. So chipmakers began making fewer chips intended for use in cars and trucks and more for computers and smart refrigerators.

So when demand for vehicles suddenly returned in early 2021, carmakers were unable to secure enough chips to ramp up production. Production last year was down about 13% from 2019 levels. Since then, chipmakers have began to produce more car-specific chips, and Congress even passed a law to beef up U.S. manufacturing of semiconductors. Some carmakers, such as Ford and General Motors, have decided to sell incomplete cars, without chips and the special features they power like touchscreens, to relieve delays.

But shortages remain. You could chalk this up to poor planning, but it’s also the bullwhip effect in action.

The bullwhip is everywhere

And this is a problem for a heck of a lot of goods and parts, especially if they, like semiconductors, come from Asia.

In fact, pretty much everything Americans get from Asia – about 40% of all U.S. imports – could be affected by the bullwhip effect.

Most of this stuff travels to the U.S. by container ships, the cheapest means of transportation. That means goods must typically spend a week or longer traversing the Pacific Ocean.

The bullwhip effect comes in when a disruption in the information flow from customer to supplier happens.

For example, let’s say a customer sees that an order of lawn chairs has not been delivered by the expected date, perhaps because of a minor transportation delay. So the customer complains to the retailer, which in turn orders more from the manufacturer. Manufacturers see orders increase and pass the orders on to the suppliers with a little added, just in case.

What started out as a delay in transportation now has become a major increase in orders all down the supply chain. Now the retailer gets delivery of all the products it overordered and reduces the next order to the factory, which reduces its order to suppliers, and so on.

Now try to visualize the bullwhip of orders going up and down at the suppliers’ end.

The pandemic caused all kinds of transportation disruptions – whether due to a lack of workers, problems at a port or something else – most of which triggered the bullwhip effect.

The end isn’t nigh

When will these problems end? The answer will likely disappoint you.

As the world continues to become more interconnected, a minor problem can become larger if information is not available. Even with the right information at the right time, life happens. A storm might cause a ship carrying new cars from Europe to be lost at sea. Having only a few sources of baby formula causes a shortage when a safety issue shuts down the largest producer. Russia invades Ukraine, and 10% of the world’s grain is held hostage.

The early effects of the pandemic in 2020 led to a sharp drop in demand, which rippled through supply chains and decreased production. A strong U.S. economy and consumers flush with coronavirus cash led to a surge in demand in 2021, and the system had a hard time catching up. Now the impact of soaring inflation and a looming recession will reverse that effect, leading to a glut of stuff and a drop in orders. And the cycle will repeat.

As best as I can tell, these disruptions will take many years to recover from. And as recent inflation reduces demand for goods, and consumers begin cutting back, the bullwhip will again work its way through the supply chain – and you’ll see more shortages as it does.

Michael Okrent does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Searches For “Real Estate Market Crash” Highest In Internet History

Searches For "Real Estate Market Crash" Highest In Internet History

Another milestone for the extremely confused elderly citizen in the White…

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Searches For "Real Estate Market Crash" Highest In Internet History

Another milestone for the extremely confused elderly citizen in the White House basement.

Analysis of Google Trends data reveals that searches for ‘real estate market crash’ exploded 284% in the United States as of September 2022 – the highest level in Google Trends history.

The analysis by the Malibu real estate experts at RubyHome reveals that search interest for ‘real estate market crash’ exploded within the past month, an unprecedented increase in Americans looking for information and prognostication about the real estate market, according to Google search data.

This comes at a time when the US housing market sees mortgage rates rising at the fastest pace in history, surging above 7% after touching 6% just two weeks ago!

Pointing out the obvious, RubyHome CEO Tony Mariotti said that “we know home sales are down. Tuesday’s report from Case-Shiller confirmed the broad price reductions, which also showed U.S. home prices continued their deceleration in July at their fastest rate in the history of the index. We're keeping an eye on this because market activity is seasonally low - we'll know a heck of a lot more about how soft the market is come next spring.”

“Mortgage rates continue to rise beyond the Federal Reserve’s reported 6.29% on September 22. However, we’ve seen this accelerate; mortgage approvals on 30-year fixed loans this week reached 7% for some of our buyers. Going forward, if this trend holds, buyers will afford smaller homes unless they are cash buyers.”

"Sellers who've been holding out for pandemic-inflated prices are going to have to eventually lower their prices. This is just a psychological shift taking place - one that takes a few months to play out."

Tyler Durden Thu, 09/29/2022 - 05:45

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