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‘Supercore’ inflation measure shows Fed may have a real problem

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US Federal Reserve Chair Jerome Powell attends a “Fed Listens” event in Washington, DC, on October 4, 2019.

Eric Baradat | AFP | Getty Images

A hotter-than-expected consumer price index reading rattled markets Wednesday, but markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading.

Along with the overall inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore gauge, which also excludes shelter and rent costs from its services reading, takes it even a step further. Fed officials say it is useful in the current climate as they see elevated housing inflation as a temporary problem and not as good a gauge of underlying prices.

Supercore accelerated to a 4.8% pace year over year in March, the highest in 11 months.

Tom Fitzpatrick, managing director of global market insights at R.J. O’Brien & Associates, said if you take the readings of the last three months and annualize them, you’re looking at a supercore inflation rate of more than 8%, far from the Federal Reserve’s 2% goal.

“As we sit here today, I think they’re probably pulling their hair out,” Fitzpatrick said.

An ongoing problem

CPI increased 3.5% year over year last month, above the Dow Jones estimate that called for 3.4%. The data pressured equities and sent Treasury yields higher on Wednesday, and pushed futures market traders to extend out expectations for the central bank’s first rate cut to September from June, according to the CME Group’s FedWatch tool.

“At the end of the day, they don’t really care as long as they get to 2%, but the reality is you’re not going to get to a sustained 2% if you don’t get a key cooling in services prices, [and] at this point we’re not seeing it,” said Stephen Stanley, chief economist at Santander U.S.

Wall Street has been keenly aware of the trend coming from supercore inflation from the beginning of the year. A move higher in the metric from January’s CPI print was enough to hinder the market’s “perception the Fed was winning the battle with inflation [and] this will remain an open question for months to come,” according to BMO Capital Markets head of U.S. rates strategy Ian Lyngen.

Another problem for the Fed, Fitzpatrick says, lies in the differing macroeconomic backdrop of demand-driven inflation and robust stimulus payments that equipped consumers to beef up discretionary spending in 2021 and 2022 while also stoking record inflation levels.

Today, he added, the picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes.

“They are so scared by what happened in 2021 and 2022 that we’re not starting from the same point as we have on other occasions,” Fitzpatrick added. “The problem is, if you look at all of this [together] these are not discretionary spending items, [and] it puts them between a rock and a hard place.”

Sticky inflation problem

Further complicating the backdrop is a dwindling consumer savings rate and higher borrowing costs which make the central bank more likely to keep monetary policy restrictive “until something breaks,” Fitzpatrick said.

The Fed will have a hard time bringing down inflation with more rate hikes because the current drivers are stickier and not as sensitive to tighter monetary policy, he cautioned. Fitzpatrick said the recent upward moves in inflation are more closely analogous to tax increases.

While Stanley opines that the Fed is still far removed from hiking interest rates further, doing so will remain a possibility so long as inflation remains elevated above the 2% target.

“I think by and large inflation will come down and they’ll cut rates later than we thought,” Stanley said. “The question becomes are we looking at something that’s become entrenched here? At some point, I imagine the possibility of rate hikes comes back into focus.”

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Mainland Chinese investors snap up a record amount of Hong Kong stocks

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Hong Kong’s stock exchange reported its highest quarterly profit in nearly four years after China’s stimulus measures boosted trading and listing volume.

Bloomberg | Bloomberg | Getty Images

BEIJING — Mainland Chinese investors are piling into the Hong Kong stock market at record volumes as its tech-heavy Hang Seng Index trades around three-year highs.

Net mainland Chinese purchases of Hong Kong stocks hit a record 29.62 billion Hong Kong dollars ($3.81 billion) on Monday, according to the Wind Information database.

That was the most since the Hong Kong stock market launched its “connect” program with the mainland, allowing local investors easier access to a select number of stocks traded offshore. The Shanghai Connect launched in November 2014, while the Shenzhen Connect opened in December 2016.

The Hang Seng Index traded around 0.7% lower Tuesday morning following a sharp sell-off in U.S. stocks overnight on worries about the impact of tariffs on global growth.

Net buys via the Shanghai Connect reached nearly 18 billion HKD on Monday, while those from the Shenzhen Connect reached 11.63 billion HKD, the data showed.

Hong Kong-traded shares of Alibaba and Tencent, both of which are not traded in mainland China, saw the largest net purchases, according to Wind data.

China last week affirmed its pro-growth stance by emphasizing plans to support private sector tech innovation, and increasing its fiscal deficit to a rare 4% of gross domestic product including an expanded consumer subsidies program.

There could be a significant reordering of investment flows out of the U.S. and into Europe and Asia

Citi’s global macro strategy team on Monday upgraded its view on Chinese stocks — namely the Hang Seng China Enterprises Index — to overweight, while downgrading the U.S. to neutral.

“One key reason why we have not been focused on Chinese equities is tariff risk,” the analysts said.

“Abstracting from this issue, we believe the case for China tech was clear. A) DeepSeek proved that China tech is at the Western technological frontier (or beyond), despite the export controls. This was followed by the release of Tencent’s Hunyuan (an AI video generator) and Alibaba’s QwQ-32B,” they added.

‘Cheap and under-owned’ stocks

Chinese and foreign institutional investors started piling back into Chinese stocks after Beijing started announcing more forceful stimulus plans in late September. Chinese equities got another boost after the emergence of DeepSeek’s latest model in late January prompted a global tech sell-off. More major tech companies are traded in Hong Kong than in mainland China.

Manishi Raychaudhuri, CEO of Emmer Capital Partners, said investors could soon pour money back into emerging markets, particularly Asian emerging markets, once global stocks emerge from the current rut.

“I would say largely it would still be Greater China, which means largely Hong Kong, China. The stocks are cheap and under-owned,” Raychaudhuri told CNBC’s “Street Signs Asia” on Tuesday.

“We have seen some degree of consumption boost in the form of what the policymakers have been doing since January. It is not yet to the full extent that the market would like to have but at least it is a departure from the trend of many years,” he continued.

“So, right on top of my list, it would still be Hong Kong, China, the internet stocks, the large internet platforms and also some of the consumption-related names, mostly in athleisure, the restaurant stocks and other travel and tourism-related names,” Raychaudhuri said.

— CNBC’s Sam Meredith and Anniek Bao contributed to this report.

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China’s $41 billion plan to boost consumption is just a start

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QINGDAO, CHINA – JANUARY 08: Customers browse at an electronics shop amid an ongoing nationwide trade-in subsidy program on January 8, 2025 in Qingdao, Shandong Province of China.  

Zhang Ying | Visual China Group | Getty Images

BEIJING — China’s latest move to boost consumption isn’t meant to jolt all kinds of spending.

Policymakers last week doubled subsidies for a consumer trade-in program to 300 billion yuan ($41.47 billion) this year, matching market expectations — and again steering clear of cash handouts. The subsidies will go toward around 15% to 20% of the purchase price for select products, including mid-range smartphones and home appliances.

That’s an expansion from last year’s 150 billion yuan program, announced in the summer, for a narrower range of products.

The new round of subsidies are “pretty substantial” and will likely support retail sales, similar to how e-commerce companies saw a sales boost in certain products late last year, Jacob Cooke, co-founder and CEO of WPIC Marketing + Technologies, told CNBC on Monday.

While there’s skepticism that the impact of a one-time subsidy won’t last long, Cooke said more subsidy programs will likely follow. He added that China’s “aggressive” 5% GDP growth target and prioritization of consumption indicate that Beijing will do more to support growth — without relying as much on the old playbook of infrastructure spending.

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Chinese Premier Li Qiang last week delivered an annual report on government work that named boosting consumption as the top task for the year ahead.

That’s the first time in a decade that Beijing has given consumption such high priority, said Laura Wang, chief China equity strategist at Morgan Stanley. She added that the government work report cited “consumption” 27 times — the most mentions in a decade.

While Beijing has not followed the U.S. or other countries in handing out cash to consumers, Chinese policymakers have increasingly acknowledged the need to counter deflationary pressure at home.

China must focus more on domestic demand given the possibility of “new shocks” to overseas demand, Shen Danyang, head of the drafting group of the Government Work Report and director of the State Council Research Office, told reporters Wednesday in Mandarin, translated by CNBC.

China’s retail sales grew by 3.5% last year, a sharp slowdown from 7.2% growth the prior year. In a sign of a persistent drop in demand, China’s consumer price inflation in February fell below zero for the first time in over a year, according to official data released Sunday.

If prices are too low, it becomes difficult to incentivize businesses to invest and increase consumers’ income, Chen Changsheng, member of the drafting group of the Government Work Report and deputy director of the State Council Research Office, said at the same press conference on Wednesday.

He noted that the work report called for four tasks to address the depressed prices: expanding fiscal support, working to lift consumption, using regulation to prevent price wars and making a greater effort to stabilize real estate prices.

Real estate accounts for the majority of household wealth in China. A crackdown on property market leverage in 2020 spurred a slump that only started to turn around late last year — after a high-level policy call in September to halt the real estate sector’s decline.

Stabilizing real estate can have a significant effect on boosting consumption, similar to wealth effects from a rise in the stock market, said Meng Lei, China equity strategy analyst at UBS Securities, noting expectations that the mainland China A share market has become more strategically important.

Stocks have rallied after China’s stimulus announcements in recent months.

The 300 billion yuan for the subsidies comes from an increase in ultra-long special government bonds for 2025. China said last week it is raising its deficit to 4% as it pursues “proactive fiscal policy.”

NEW YORK, NY – SEPTEMBER 19: The Chinese flag flies outside the New York Stock Exchange during the initial price offering (IPO) for Alibaba Group on September 19, 2014 in New York City. The New York Times reported yesterday that Alibaba had raised $21.8 Billion in their initial public offering so far. 

Andrew Burton | Getty Images News 

Also helping sentiment are signs that Beijing appears to be turning more business friendly. Chinese President Xi Jinping held a rare meeting with entrepreneurs last month.

Once businesses are more confident, they can hire more and increase wages. The Chinese premier at the high-level meeting last week vowed more efforts to promote residents’ income growth and ease financial burdens for low-to-middle income groups.

The officials pledged more support for the care of the elderly, children and the broader healthcare system, steps seen critical to bolster the country’s safety net, allowing residents to feel comfortable spending more.

To a certain extent, these measures can help to reduce living costs and release potential consumption, said Pan Xiang, a macro foreign exchange analyst at Nanhua Futures.

Incremental pivot

Economists have long called for a structural re-calibration of the income distribution system and policies seen necessary to stimulating domestic consumption in a meaningful way.

The recent pledges signal that “the door [is] cracking open” yet still “very gradual movement of the leadership toward being comfortable with doing more direct support for consumption,” said Michael Hirson, a fellow at Asia Society Policy Institute’s Center for China Analysis.

“We’re not really there yet in terms of a very forceful push,” he added.

Before more support comes, an underdeveloped social safety net, a gloomy job market and low wages have spurred households to save rather than spend, Hirson said.

Household spending accounts for less than 40% of China’s GDP, significantly lower than the international average of roughly 60%, according to the Organization for Economic Co-operation and Development.

EVs, films, tourism

A look at an implementation plan, released Wednesday, from the National Development and Reform Commission reveals how China is thinking about boosting consumption.

The portion describing tasks for 2025 starts with an entire section on boosting consumption and investment. The report calls for efforts to “increase spending power” and encourage the development of products and scenarios that would encourage consumers to spend.

But it’s not a call to support all kinds of shopping.

Top of mind for policymakers is retail sales of “big-ticket items,” according to the report. China also said it would reduce restrictions on real estate transactions and automobile purchases.

Part of the plan includes developing the experience economy — immersive scenarios that combine film, video games, tourism and traditional Chinese culture — similar to the surge in tourists to historical sites associated with last year’s hit video game “Black Myth: Wukong.”

BEIJING, CHINA – JANUARY 15: People queue up in outside a Miniso store to buy co-branded goods featuring characters from the game ‘Black Myth: WuKong’ on January 15, 2025 in Beijing, China. Miniso and ‘Black Myth: WuKong’ launch co-branded products on January 15. 

Yi Haifei | China News Service | Getty Images

Chinese authorities also said they would improve “mechanisms for regular pay increases” along with the system for paid vacation days. Employees in China typically get fewer than 10 paid days off and several public holidays include days that must be made up by working for part of a weekend.

The report also discussed the continued plan for subsidizing consumer good trade-ins and upgrading equipment.

But two parts of the sub-section focused more on investment — developing talent, infrastructure and ecological projects — as well as building up “security capacity” in basic research for tech innovation and domestic food supplies.

China will soon release a more detailed plan for boosting consumption, Zheng Shanjie, head of the National Development and Reform Commission, told reporters Thursday.

Preliminary data indicates a sales boost from China’s initial 81 billion yuan in consumption subsidies announced in January, ahead of the this month’s parliamentary meeting.

Retail sales of new energy vehicles, for which buyers enjoy trade-in subsidies of up to 15,000 yuan, surged almost 80% to 686,000 units in February from a year earlier, data from China’s auto industry body showed on Monday.

Smartphone sales for the week of Jan. 20 to Jan. 26 surged by nearly 65% from the year-ago period to more than 9.5 million units, “and maintained a high level in the following weeks,” Counterpoint Research said in a late February report.

The analysis said subsidies are likely encouraging Chinese consumers to replace their smartphones earlier than planned, especially when artificial intelligence features are gaining prominence. The firm estimates the first-quarter subsidy to generate at least two to three points of additional growth this year in China’s smartphone sales.

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Stocks making the biggest moves after hours: DAL, ORCL

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