"Mortgage Boycotts Hit China"

MONETARY

• Pursuant to the most recent FOMC meeting, the Federal Reserve opts to raise its Federal Funds Target Rate by .75% to a new range of 2.25-2.50%⁴
  • FOMC statement noted that spending and production softened in the period since the prior meeting, but that overall unemployment remained very low⁴
  • Statement noted that inflationary pressures remain elevated as a result of supply and demand imbalances⁴
    • FOMC statement also reiterated the effect that the Russia-Ukraine conflict is having on putting upward pressure on global inflationary effects⁴
  • Regarding Chairman Powell’s opinion on whether the United States is currently in a genuine recession⁴
    • (Powell) “So, I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well. And of course, I would point to the labor market in particular. As I mentioned, it’s true that growth is slowing.”⁴
    • (Powell) “if you think about what a recession really is, it’s a broad-based decline across many industries that sustain for more than a couple of months and there are a bunch of specific tests in it. And this just doesn’t seem like that.”⁴
  • On the current state of the Consumer and Labor Markets⁴
    • (Powell) “…there is a great deal of money on people’s balance sheets that they can spend. The unemployment rate is very low. The labor market’s very hot. There are many, many job openings. Wages are high. So it’s the kind of thing where you think that the economy should actually be doing pretty well in the second half of the year. But we’ll have to see.”⁴
• San Francisco Fed President Mary Daly comments on the potential for future interest rate hikes to come in at a lower level than prior hikes. Additionally, Minneapolis Fed President Neel Kashkari attempted to quell expectations that the Fed will undergo a policy shift to a more accommodative stance in 2023 ⁶
  • (Mary Daly) “I start from the idea that 50 (basis points) would be a reasonable thing to do in September because I believe I’m seeing evidence in my contact conversations, and in the observations of the world I see, that there are some bright spots for me”⁶
  • (Neel Kashkari) “I don’t want to say it’s impossible, but it seems like that’s a very unlikely scenario right now given what I know about the underlying inflation dynamics. The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2%”⁶

 

FISCAL

• Democrat lawmakers introduce new legislation known as the Inflation Reduction Act, which is going to be attempted to be passed via the Budget Reconciliation method, thereby requiring no Republican support¹
  • Included in the proposal are the following Tax provisions to raise revenue:¹
    • 15% minimum tax rate for companies with over 1B in annual revenue¹
    • Prescription drug pricing reform & Medicare drug price negotiation¹
    • Heightened tax enforcement¹
    • Closing the carried interest loophole¹
  • The aforementioned revenue sources would be spent on the following:¹
    • Continuation of ACA subsidies put forth in the American Rescue Plan¹
    • Investments in domestic energy security and climate change¹
    • General deficit reduction¹
  • Despite its name, the proposed legislation is not currently seen as having any statistically significant effect on Inflation¹

 

GEOPOLITICS

• Russia and Ukraine reach a safe passage agreement to allow for the safe passage of grain shipments through Ukraine to the rest of the world²
  • Combined, Russia and Ukraine account for roughly a third of all global wheat exports. Prior to the safe passage agreement, grain exports were blocked from the area²
  • Wheat prices, which had soared during the initial stages of the Russia-Ukraine conflict, have retreated closer to more historically normal levels²
    • Higher wheat prices were a significant factor in elevated food costs in the United States and across the world²
    • It is likely that lower wheat costs will take some time to be reflected in consumer facing prices²
  • Halted exports of wheat from the region have also materially contributed to food shortages in various underdeveloped areas of the world²
• Tensions between China and Taiwan moderately escalate as China prepares to run military exercises around the areas surrounding Taiwan, as well as the Taiwan Straight⁵
  • Chinese military is preparing to run naval drills from Thursday (Aug 4) through Sunday (Aug 7)⁵
  • Shipping officials are operating under the expectation that logistics disruptions will not extend beyond Sunday, thereby limiting the effect that military exercises will have on global supply chains⁵

 

MISCELLANEOUS

• Chinese homebuyers have increasingly started to boycott the payment of mortgages of newly purchased homes under development, as many private-sector home developers face long delays in construction times³
  • State-owned property developers have taken over numerous projects from private-sector developers in an effort to mitigate the construction delays and stop the mortgage boycotts³
  • Estimates currently tie about $222 billion worth of mortgages to projects that remain unfinished³
    • Additionally, there is a degree of variance around what percentage of projects are unfinished, ranging from 5-20%³
  • Earlier in the year, major property developer China Evergrande Group became insolvent and failed to repay debt payments on some of its obligations³

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. Bloomberg. “‘Inflation Reduction Act’ Has Little Inflation Help, UPenn Study Says”. July 29, 2022
2. Reuters. “”Relief for the world” as Ukraine grain ship leaves Odesa”. August 1, 2022.
3. Reuters. “Analysis: China’s mortgage boycott spurs shakeout among strapped developers”. July 20, 2022
4. The Federal Reserve. “Federal Reserve issues FOMC statement”. July 27, 2022.
5. The Wall Street Journal. “China’s Military Exercises Around Taiwan Put Major Shipping Lanes at Risk”. August 3, 2022
6. Reuters. “Fed officials beat inflation drum; 50-basis-point rate hike ‘reasonable’ next month”. August 3, 2022