⏬ Biggest engine sputters

Plus: Winter is coming | Tuesday, August 16, 2022

Open in app View in browser     Axios Markets By Matt Phillips and Emily Peck · Aug 16, 2022 Hallo Marketeers! Matt is back. Emily is still out there lounging somewhere. Here's your newsletter, at 988 words, 4 minutes, and edited by Kate Marino.     1 big thing: The world's economic engine is sputtering Illustration: Annelise Capossela/Axios   China is slowing fast, and the government is taking only modest steps to try to keep the earth's second-largest economy from outright contraction, Matt writes. Why it matters: While it lags behind the U.S. in size, China's economy has been the largest source of growth for global GDP for much of the last two-plus decades — meaning it's a global engine of corporate profitability, investment activity, and demand for commodities. Driving the news: A raft of disappointing economic updates this week showed Chinese growth still sputtering on multiple fronts. Its industrial sector slowed again. Industrial production rose just 3.8% in July compared to the previous year — and well short of expectations for 4.5%. The crisis in China's housing sector continues to hurt. Fixed investment — of which housing is an important component — was up just 5.7% in the first seven months of the year, compared to the same period in 2021. (In 2021, that figure was 10.3% higher year over year as of July.) Consumers aren't picking up the slack either. Retail sales in July were up a scant 2.7% year over year, far short of the 5% expectation. Context: In the recent past, when faced with a slowdown, Chinese policymakers quickly turned to tried-and-true tools to attempt to give growth a kick in the pants. They included... Pouring money into public infrastructure investment. Engineering a borrowing boom to fuel domestic spending. Delivering sharp interest rate cuts. The intrigue: Despite China's current economic blahs, there's little indication that the government is decisively trying to prop growth up. In past slowdowns, China's broadest measure of all types of credit to the economy — known as "total social financing" — has surged, a sign the government was keen to boost debt to offset slumps. A report on Friday showed total social financing far lower than expected, as the government seems disinclined to use a debt-driven boom as a source of growth. Yes, but: The People's Bank of China did cut interest rates by a tiny one-tenth of a percentage point on Monday — a move most analysts think is modest, and unlikely to reinvigorate economic activity. The bottom line: The ruling Chinese Communist Party knows that the breakneck pace of Chinese economic growth that prevailed in past decades is unlikely to be matched. But unlike in past decades, they don't seem particularly worried about it. For the rest of the world, that may mean China will be less of a reliable engine of growth in the coming years.     2. Catch up quick 💻 Chip makers are bracing for downturn after pandemic boom. (Bloomberg) 🚨Oracle begins auditing TikTok's algorithms to test for manipulation by Chinese authorities. (Axios) 🔨 Home Depot beats expectations for Q2 earnings. (CNBC) 🛒 Walmart beats earnings expectations as sales grow, but profits tighten. (CNBC)     3. What the high-yield market's telling us Data: FRED; Chart: Axios Visuals Investors are pouring back into the U.S. high-yield market, a signal that they're dialing back recession jitters — for now, Axios' Kate Marino writes. Why it matters: For a minute, things got dicey: Borrowing costs for U.S. companies with lower credit ratings shot up to levels suggesting possible recession concerns or that a sharp rise in defaults could be in the offing. But over the last month, high-yield bond spreads over Treasuries — a measure of how much more high yield-rated companies pay to borrow compared to the U.S. government — have tightened massively. They're now actually a little tighter than the median stretching back to 2011. That came after spreads had surged to 6 percentage points. (The 5-point mark, which high-yield spreads breached in June, is something of a red line between a market that's healthy, and one seeing a worrisome level of flight.) Some of the same stuff that propelled the equity market higher in July also gave tailwinds to high yield, dragging spreads back down to earth. Among them: Earnings season came in better than many had expected, the Fed started providing wiggle room about potentially slowing down its pace of rate hikes — and inflation data started to cool, says Will Smith, AllianceBernstein's director of U.S. high yield credit. So investors reshuffled. For one, hedge funds with super bearish positioning ultimately had to cover shorts — that pushed up bond prices and was a sort of "lighter fluid" on the price movement, Smith says. High-yield mutual fund and ETF investors returned: Those flows turned positive after a negative first half, according to Refinitiv Lipper. And even companies got in on the action: With loads of bonds trading in the 75 to 85 cents on the dollar range, companies have been quietly buying back debt in the open market, says David Norris, head of U.S. credit at TwentyFour Asset Management. The macro signal: High-yield spreads moving closer to risk-free Treasury rates "is generally a positive," says Norris. "It's credit markets expecting a softer landing, or a shallow recession, or not even entering into recession." What to watch: Spreads may yet widen back out as new earnings and data points trickle out. "It's been a pretty vicious move [tighter]. If you had told me three months ago some of those data points, like CPI, earnings and Fed commentary, I would have said high-yield would probably rally — but not this hard," says Smith. "And the question that we're all grappling with is: Is it too much in a short amount of time?"     A message from Axios For you, your team or your company     Contact our dedicated account team and learn how Axios Pro Corporate Subscriptions can help you achieve your business goals. Get in touch, and we'll build you the best plan for your organization. Contact us.     4. Charted: Winter is coming Data: FactSet; Chart: Axios Visuals European natural gas prices continue to hit ludicrous heights, as expectations of a winter fuel crisis grow, Matt writes. Driving the news: Benchmark European natural gas prices jumped above €230 per megawatt hour, a level that would have been considered laughably high a couple of years ago. Backstory: Russia, the largest supplier of gas to Europe, has been cutting back on shipments, in response to European sanctions levied on Russia after its invasion of Ukraine. Shipments are now down to 20% of pre-invasion levels, with expectations for a winter shutoff growing. Ominous indicator: Google searches for "firewood" have soared in Germany.     A message from Axios For you, your team or your company     Contact our dedicated account team and learn how Axios Pro Corporate Subscriptions can help you achieve your business goals. Get in touch, and we'll build you the best plan for your organization. Contact us.   🚨 Big thank you to Mickey Meece for copy editing Markets today, and every day. Why stop here? Let's go Pro. Join the thousands of professionals using Axios Pro to keep up with the companies, deals and trends changing their industries.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. 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