Morgan Stanley Turns Bullish on Chinese Banks as Risks Subside

Economic

Summary:

Policy moves will boost mortgages, margins, analyst says. Industrial upgrades paying off, aiding shift from property.

Morgan Stanley is turning more bullish on China’s banking sector, saying global investors are too pessimistic about the impact of the nation’s property downturn and weak economy on profits.

Measures by policymakers in recent months have put a floor under the real estate market and will cushion the risk exposure of lenders, preventing any worst-case scenarios, according to Richard Xu, the US bank’s chief China financial analyst. Reduced risks in the property sector and for local government financing vehicles suggests the costs of supporting the nation’s ongoing industrial upgrades are also manageable, underpinning growth, he said.

Morgan Stanley joins UBS Group AG and Goldman Sachs Group Inc. in voicing more optimism on China stocks as the government steps up support to the ailing property sector, even as investors expecting an earnings recovery are losing patience.

Morgan Stanley raised price targets for Chinese lenders this month by as much as 36%, partly on expectations that property sales at current levels are enough to support a rebound in mortgage loans, which would lead to higher profit margins and lower capital burdens, Xu said.

“Bank shares have yet to reflect such expectations,” he said in an interview in Beijing.

UBS earlier raised its recommendations on a key Chinese stock index to overweight in April as the market recovered from a meltdown earlier in the year. Morgan Stanley Investment Management has also been increasing exposure to Chinese stocks on cautious optimism that share buybacks will help boost prices.

Bank shares have rallied this year from rock-bottom valuations. Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, is up 19% this year in Shanghai. The lender’s price-to-book ratio has improved to 0.58.

Morgan Stanley Turns Bullish on Chinese Banks as Risks Subside_1

China’s government announced its most forceful attempt yet to rescue the property market in May, relaxing mortgage rules and urging local governments to buy unsold apartments. Yet home prices still fell at a faster pace that month. The nation’s biggest banks reported a rare drop in profits in the first quarter, as a combination of weak loan growth, margin contraction and lower fee income weighed on earnings.

Even if the pace of property destocking remains flat, Xu said, lower mortgage rates and down payments can help boost demand for the more profitable residential loans, which will improve bank margins. The program for local governments to purchase apartments could amount to providing a floor to home prices, preventing steep declines, he said.

Xu and colleagues maintained their “attractive” industry rating for China banks in a June 4 report and raised their price targets, saying that “the seasonal share price pullback before and after dividend payments should create a good buying opportunity.”

China’s policy shift since 2021 to prioritize risk containment, particularly in property and local government financing vehicles, while pushing industrial upgrades is paying off earlier than expected, Xu said.

In a report in May, Xu and colleagues estimated that banks will need to digest an estimated average of 2.2 trillion yuan ($303 billion) in non-performing loans from manufacturing in the next three years, which would be “a manageable level of costs for the level of industrial upgrades achieved.”

Investors have been skeptical that China can break away from the reliance on property for growth and shift to manufacturing “because they think the ditch is too deep to cross, and therefore they have no confidence,” Xu said. “But we believe China has made it.”

Source:Bloomberg

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Samantha Luan

Economic

The IMF has urged the US to “urgently” address its mounting fiscal burden, as it took aim at the tax plans of both presidential candidates just hours before their first electoral debate.

The fund said projects from its annual Article IV health check of the US economy showed the debt-to-GDP ratio hitting 140 per cent by 2032 — much higher than its current level of 120.7 per cent.

The surge, off the back of successive projected fiscal deficits in the coming years, would leave the debt burden in excess of previous highs in the aftermath of the second world war.

“Such high deficits and debt create a growing risk to the US and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations,” the fund said in its Article IV consultation. “These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed.”

The IMF’s warnings come after the Congressional Budget Office, the US’s official fiscal watchdog, predicted earlier this month that the deficit was likely to hit $1.9tn this year, or about 7 per cent of GDP, up from a February estimate of $1.5tn.

Economists and investors have grown increasingly concerned that neither US President Joe Biden nor his Republican rival Donald Trump are prepared to do enough to bring rampant spending under control. The two are set to meet in Atlanta on Thursday evening for the first debate of the current election cycle.

The fund said both candidates needed to “carefully consider” a range of tax rises — including on incomes for those earning under $400,000 a year, who Biden has pledged will not pay more tax should he secure a second term in the White House.

Trump’s tax plans, which include making permanent a series of cuts he introduced in 2017, are expected to add between $4tn and $5tn to US deficits over the coming decade.

IMF managing director Kristalina Georgieva said that strong growth in the US meant that the country had the space to address its fiscal burden.

“There is a temptation to postpone decisions related to debt and deficits for the future, rather than pay them when the sun is shining and conditions are good,” she said at a press conference on Thursday, adding that it was the role of the fund to be the “voice of reason” on the topic.

While Georgieva said on Thursday the fund did not support the Biden administration’s tariffs on Chinese green tech products, or Trump’s plans to impose a blanket 10 per cent levy on all imports, she acknowledged that there was a political case for such actions.

“Decades of globalisation has led to overall positive outcomes,” Georgieva told journalists. “But there have been negative consequences for some communities, including here in the United States, with jobs disappearing as a result of cheap imports from other countries.”

She added that the pushback to free trade from people in the US, and in Europe, indicated a “genuine concern” that “has to be taken seriously”.

Source:Financial Times

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Warren Takunda

Economic

Central Bank

According to new statistics, UK Gross Domestic Product (GDP) expanded 0.7% quarter-on-quarter in Q1, exceeding the first ONS estimate for 0.6%. On a year-on-year basis, the economy expanded 0.3%, which was more than the previous estimate of 0.2%

"As the fall in inflation has outstripped that in wage growth, real household disposable incomes (RHDI) have been rising, supporting the economy," says Ellie Henderson, an economist at Investec.

The ONS said RHDI growth at 0.7% quarter-on-quarter, matching the pace of expansion of Q4 – "a robust pace of income growth," says Henderson.

"The economy rebounded strongly from last year's recession," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics, warning that the Bank of England might forgo an interest rate cut in August owing to strong economic growth.

Pound Sterling has been through a soft patch over recent days, but these data are helping the currency firm against both the Euro and Dollar ahead of a risk-filled week that will include French and UK elections.

Wood says the UK economy will continue to deliver robust growth, which will potentially delay a Bank of England interest rate cut. "Growth even further above potential in H1 2024 may give the MPC some pause for thought, and supports our call that rate-setters will wait until September before cutting Bank Rate for the first time," says Wood.

Pound Sterling Firms: Rising Incomes and Falling Inflation Boost UK Economic Growth_1

The Bank of England's June meeting minutes indicated enough members of the MPC were wavering on a decision to keep interest rates on hold to suggest they are close to cutting. The odds of an August cut are deemed to be around 50/50, according to market pricing.

However, a strong economy with rising real incomes will mean demand will stay strong enough to frustrate further declines in inflation.

"Looking ahead, our story for 2024 is all about the consumer. We expect real household disposable income to rise 2.2% in 2024 as inflation slows and wage growth remains strong. Cuts to National Insurance Contributions and the government uprating benefits in line with last year’s inflation also add 0.8pp to real disposable income growth in 2024. That income growth should flow through one-for-one to consumer spending," says Wood.

Source: Poundsterlinglive

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Alex

Economic

China, the world’s biggest investor in and generator of wind and solar power has been stocking up on coal in anticipation of peak demand during the summer.

Now, the move is about to start paying off as temperatures rise and so does demand for cooling. After several years of coal shortages during peak demand season, this year may be the first year that China avoids one.

Bloomberg reported this week that China had accumulated inventories of 162 million tons of coal over the first five months of the year, equal to about 8.5% of consumption during those five months, per data from cqcoal.com.

The increase came from both domestic production and imports. The former actually fell in the first quarter of the year after a series of fatal incidents prompted shutdowns and investigations in China’s coal country—the Shanxi province. Output ramp-up only began this month, but demand for coal has offset the effect of the temporary shutdowns thanks to a surge in hydropower generation following abundant rainfall.

Imports, meanwhile, rose quite substantially over the first four months of the year thanks to lower prices that boosted demand. Over the period, China’s imports of the commodity rose by 13%, as prices almost halved from a year ago.

China continues to lead the world in both wind and solar capacity, as well as coal capacity. Last year, global operating coal capacity increased by 2% as the world added a total of 69.5 gigawatts of coal power, with China representing two-thirds of new additions. The country is still going strong on coal capacity, in line with its all-of-the-above energy policy.

As for the immediate future, chances are there will be enough coal to secure supply for the hottest months of the year, especially as hydropower remains strong for the time being. Over the first five months of the year, hydro output rose by a respectable 15%, which led to a much more modest increase in cola-powered generation and, as a result, higher inventories.

According to Bloomberg, China’s economy is “sluggish,” which contributes to more moderate electricity demand growth, and while a GDP growth rate of 5.3% for the first quarter can hardly be called sluggish with any seriousness, the pace of industrial power demand growth has moderated, leading to a decline in coal demand.

As it happens, China’s comfortable coal supply position was also helped by none other than the weather. In addition to heavy rains earlier in the year to fuel higher hydropower output, moderate temperatures going into the summer are helping keep demand equally moderate.

Of course, this could change as summer advances, but it seems this year will not see a shortage of coal that threatens the security of electricity supply in China. The situation, however, begs the question of what happened with forecasts that wind and solar could replace hydrocarbons entirely. If China is any indication, this is not really true—and China is the biggest case study on transition technology because of the sheer scale at which it is installing that technology.

By the end of this year, China will have some 1,400 GW of wind and solar capacity. This would represent a substantial 40% of the energy mix, while the share of coal would fall to 37% from a little under 40% last year.

Yet China is still building new coal power plants instead of simply waiting for when it is time to retire existing ones and double down on wind and solar. However, China is aware that wind and solar cannot compare on reliability of supply with coal—and on price, incidentally—so it is keeping coal in its energy mix for the observable future, despite the ambitious net-zero targets.

Source:Oilprice

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Warren Takunda

Stocks

Economic

U.S. inflation may be slowing again after first-quarter surge

The Federal Reserve has been waiting for good news on inflation all year - and now it looks like it's going to get it on Friday.

Here are the key numbers to watch in the May PCE inflation report.

Prices not going up as fast

The PCE index, the Fed's preferred U.S. inflation gauge, is forecast to show no change in May. If so, it would be the first time in six months that inflation didn't go up.

A benign PCE report was foreshadowed earlier this month by a pair of inflation reports on consumer and wholesale prices. The consumer price index was flat in May and the producer price index fell.

Both of these reports feed into the PCE.

Core inflation

Another measure that strips out food and energy, known as the core rate of inflation, is expected to rise a tepid 0.1% in May. The core rate is viewed a better predictor of future inflation.

That would be the smallest increase since last November. The last time the core rate declined was in April 2020 at the height of the pandemic.

Longer run inflation

If the report goes according to plan, the rate of inflation would edge closer to the Fed's goal of 2%.

The yearly increase in headline PCE could slow to 2.6% from 2.7%.

The 12-month increase in the core rate, meanwhile, could dip to 2.6% from 2.8% and touch the lowest level since the spring of 2021.

Short-run inflation

Top Fed officials are also paying close attention to the three- and six-month annualized rates of inflation to get a sense of the most recent trend in prices.

These annualized rates tell us what inflation would look like if it rose for the full year at the same rate as it did in the last three months or the last six months.

The three-month annualized rate of core PCE inflation fell to as low as 1.6% in December before spiking to 4.4% in March.

The three-month rate has since dropped back to 3.5%.

Six-month trend

The six-month annualized rate of core inflation has been more steady, but it was still rising at a 3.2% clip in April.

Fed Gov. Lisa Cook, in a speech on Tuesday, predicted the 12-month rate of PCE inflation would get stuck near current levels for the rest of the year because of some high readings in 2023.

Yet she also said she expects the three- and six-month annualized rates to move closer to the Fed's 2% goal.

"My forecast is that three- and six-month inflation rates will continue to move lower on a bumpy path, as consumers' resistance to price increases is reflected in the inflation data," she said.

Under the current scenario, the Fed is likely to cut interest rates at least once and perhaps twice this year.

Source: MarketWatch

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Warren Takunda

Cryptocurrency

Bitcoin miner withdrawals have decreased by nearly 90% since the time of the block subsidy halving, data shows.

In a Quicktake post on June 28, on-chain analytics platform CryptoQuant suggested miner sell pressure is “weakening.”

CryptoQuant: Bitcoin miner withdrawals "rapidly decreasing"

Bitcoin miners have spent several months adjusting to a new economic reality after April’s halving, which cut their subsidy per mined block by 50%.

Network fundamentals have reflected a reshuffling taking place since, with both hash rate and mining difficulty dropping from all-time highs.

“After the Bitcoin halving, mining rewards were cut in half, so older model mining machines were no longer used as they were no longer cost-effective,” CryptoQuant contributor Crypto Dan explained.

“As a result, mining activity decreased, and miners began selling Bitcoin in OTC transactions to cover mining operation costs.”

Hash rate in fact reflects a state of “capitulation” among miners, per the popular Hash Ribbons metric — the 30-day moving average hash rate is below its 60-day equivalent.

While that in itself is traditionally treated as a buy signal by Bitcoin traders, Crypto Dan already sees the process winding down.

“The current market can be seen as being in the process of digesting this sell-off, and fortunately, the quantity and number of bitcoins miners are sending out of their wallets has been rapidly decreasing recently,” he continued.

“In other words, the selling pressure of miners is weakening, and if all of their selling volume is absorbed, a situation may be created where the upward rally can continue again.” Bitcoin Miner Sell Pressure 'Weakening' as BTC Withdrawals Drop 85%_1

Bitcoin Miner Sell Pressure 'Weakening' as BTC Withdrawals Drop 85%_1

Bitcoin miner withdrawals. Source: CryptoQuant

Accompanying CryptoQuant data puts the peak number of withdrawals from known miner wallets at more than 53,000 on April 10 — nine days before the halving.

Since then, that figure has been slashed to around 8,000 as of June 27 — an 85% decrease.

“Positive movements in the cryptocurrency market can be expected in the third quarter of 2024,” the post concluded.

Hash price raises concerns over small BTC miners

As Cointelegraph reported, a declining hash price has led to reduced profit margins for smaller-scale miners.

Between June 8 and June 24 alone, hash price, which reflects expected revenue per exahash, dropped by 50%.

Data from monitoring resource Hashrate Index puts hash price at $0.048 as of June 28.

“The decline in Bitcoin hash price has recently put less efficient miners under pressure,” Bitcoin-focused economist and mining specialist Jan Wuestenfeld responded on X (formerly Twitter).

“Since the halving, the hashrate has started declining (partially stopped following a price increase), but the current price correction further reduces miners' revenues.”

Bitcoin hash price (screenshot). Source: Hashrate Index

Source: Cointelegraph

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Cohen

Economic

Forecasts for a mild slowdown in India's fast-growing economy held steady in the first Reuters poll of economists since the ruling Bharatiya Janata Party (BJP) lost its parliamentary majority in phased national elections that ended in early June.

Asia's third-largest economy grew 8.2% in the last fiscal year, the fastest among major economies. But growth is set to slow to 7.0% and then 6.7% in the current and next fiscal years, according to a June 19-27 Reuters poll of over 50 economists.

The forecasts are broadly unchanged from those made before the outcome of an election Prime Minister Narendra Modi was widely expected to win easily. Instead, the BJP lost its sizeable parliamentary majority for its historic third term.

Forming a government with the support of regional parties, the BJP retained most ministers, suggesting no imminent shift in policy, which for years has aimed to boost gross domestic product (GDP) growth through government capital spending.

But without a follow-through in private expenditure, many Indians - particularly young people - have been left out of work or in low-paying jobs. With no major change to policy expected yet, economists left their forecasts steady.

"With a reduced majority now, I don't expect any major growth-enhancing reforms whatsoever over the next five years," said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

"The reality is (that) consumption is weak. It's just going to surface more in the GDP numbers because the lift from statistical discrepancies is fading."

India's economic growth in the three months through December was much higher than most estimates due to a sharp fall in key subsidies which provided a boost to GDP - a situation economists in the poll say is unlikely to recur.

The median 7.0% growth rate expected this fiscal year in the latest poll is slightly below the Reserve Bank of India's (RBI) own forecast of 7.2%, which Governor Shaktikanta Das recently said could improve further in coming months.

"Growth is switching to a lower gear but will remain close to potential. I have baked in a modest private capex cycle pickup, not perhaps as strong as the RBI is factoring. And consumption (will) perform better but I don't think it will become a growth driver," said Dhiraj Nim, economist at ANZ.

Most economists expect the government to maintain a broad path of fiscal consolidation, but use a bumper dividend transfer from the RBI last month for higher spending in a budget likely to be presented in late July.

"The government has for years focused on infrastructure..., and that has slightly come at the cost of consumption. So I believe the budget can sort of provide some support, especially at the lower end of the economic spectrum," Nim said.

The government is considering lowering personal tax rates to boost consumption, two government sources told Reuters.

Nearly two-thirds of respondents in the poll - 25 of 39 - said the government will not significantly alter its planned spending in its first full budget compared to the interim one. The rest said it will increase.

"The government is unlikely to reverse its policies despite receiving a lower-than-anticipated mandate. It (will) increase funding for employment guarantee schemes and create more jobs through a manufacturing push," said Sanya Suri, senior Asia economist at Continuum Economics.

"However, the substantial surplus provided by the RBI and ongoing growth in tax receipts will fund these initiatives."

Inflation is not expected to fall below the RBI's medium-term target of 4% anytime soon - averaging 4.6% and 4.5% this fiscal year and next. But the RBI is expected to cut interest rates once this year, most likely in October-December.