““As we look ahead, we currently do not anticipate any relief from inflationary cost pressures in the third quarter. We expect aggregate global economic growth to remain positive with end-use market activity comparable to the second quarter, adjusted for traditionally lower seasonal demand. However, uncertainties exist regarding global trade policies, which may create uneven demand by region and in certain industries. Specific to PPG, we expect that the previously announced architectural customer assortment change will lower our third quarter year-over-year sales volume growth rate by between 120 and 150 basis points. We remain confident that our leading-edge technologies and products, which are bringing value to our customers, will facilitate our growth going forward….

Currently the new tariffs are starting to add some modest cost to our raw materials. Based on the strength in the US dollar in the second quarter, we expect foreign currency exchange rates to have an unfavorable impact to our sales in the third quarter”

This was the essence of the guidance industrial paint company PPG Industries (PPG) provided in its 2nd quarter earnings report. I added the emphases because the warnings on inflation and international demand were clear precursors to the company’s pre-earnings warning tonight. The stock traded down about 10% in after market trading in response to significant cuts in revenue and earnings guidance. I was most interested in the explanation which made the second quarter’s caution come to life (emphases mine)…

““In the third quarter, we continued to experience significant raw material and elevating logistics cost inflation, including the effects from higher epoxy resin and increasing oil prices…These inflationary impacts increased during the quarter and, as a result, we experienced the highest level of cost inflation since the cycle began two years ago.

“Also, during the quarter, we saw overall demand in China soften, and we experienced weaker automotive refinish sales as several of our U.S. and European customers are carrying high inventory levels due to lower end-use market demand…Finally, the impact from weakening foreign currencies, primarily in emerging regions, has resulted in a year-over-year decrease in income of about $15 million. This lower demand, coupled with the currency effects, was impactful to our year-over-year earnings and is expected to continue for the balance of the year.”

Instead of moderating, inflationary pressures are mounting on PPG. The weakness in China is telling in the context of the trade war with the U.S. The lower “end-use market demand” points to the trickle-down impact of “peak auto.” These warnings are each important given PPG has a market cap of $26.5B and trailing 12-month revenue of $15.4B. I fully expect other industrial companies to deliver similar news this earnings season.

Interestingly, Credit Suisse downgraded the stock in late September and the market responded by taking PPG down 2.8% on relatively high trading volume. The gap down confirmed the end of PPG’s post-earnings run and breakout above 200-day moving average (DMA) resistance. Until the downgrade the stock finally looked ready to challenge its 2018 high.

Source: FreeStockCharts.comThe market is supposed to be a forward-looking mechanism, so it is natural to wonder why PPG was rallying so well in the first place. I do not put all the blame on investors. I assume the company itself was partially responsible through its sizable share repurchase program. For the first half of 2018, PPG spent $1.1B on its own shares: 4.1% of the company’s current market capitalization. With this kind of aggressiveness, PPG should quickly move in on the new 52-week low to add to take out even more shares.

As earnings season unfolds, I will be paying close attention to company commentary on trade woes and inflation. The stock market has spent most of the past several months ignoring risks, so there are a good group of over-priced stocks out there waiting their turn for a douse of realty. Collectively, these warnings could be the catalyst that delivers the oversold market conditions I am anticipating.

Full disclosure: no positions

The post PPG Industries Warns of Intensifying Inflation Pressures and Weakening Demand appeared first on Inflation Watch.

“Inflationary pressure eased further, as the underlying inflation rate tapered to a year-on-year 3.8% in October from 4.5% in June. The sequential pressure moderated slightly to an annualised 3.1% on a three-month-on-three-month comparison. This reflected waning food price inflation and moderation in price increases for other major CPI components.”

The slowly growing economy is expected to continue to keep inflation at bay. However, this calm surface masks a still roiling property market. Indeed, the HKMA believes the property market is well ahead of the economy given meager gains in income:

“In the property market, the disconnect between housing prices and economic fundamentals appeared to have become more acute. In contrast to tepid income growth, housing prices surged by a cumulative 23.2% in the year to October. Housing affordability deteriorated as a result, with both the price-to-income ratio and the mortgage payment-to-income ratio rising to their post-1997 highs.”

This is likely a matter of cheap money finding a home somewhere. In this case it is the property market. The government has responded to the growing problem with a series of taxes that seem to be moderating demand.

The HKMA places partial blame for inflationary pressures in the property market on the the Federal Reserve’s recent rounds of quantitative easing:

“Risks to inflation have also increased with additional quantitative easing in the US, through its potential impact on global commodity prices and local property prices.”

Note that the HKMA recognizes that QE in the U.S. will drive commodity prices higher. This dynamic is something Ben Bernanke has refused to acknowledge. With the Federal Reserve adding a “stealth” QE4 in the December statement, I will look to commodity prices to catch bids in 2013…and for central banks to work to try to counter-act the moves of the Federal Reserve.

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The current and projected jumps in labor costs are dramatic:

“…wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China’s National Bureau of Statistics. A labor ministry survey of 91 cities in the first quarter showed demand for workers outstripping supply by a record amount, pointing to low unemployment…

…At current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China’s early growth.”

These wage hikes are coming off low levels. For example, as of February of this year, Hon Hai Precision Industry Co, the company that manufactures Apple (AAPL) iPads, reported a 10% increase in base salary for its factory workers to 2,200 yuan ($345) per month.

Moreover, the supply of new, young workers will decrease thanks to China’s one-child policy:

“In 2005, there were 120.7 million Chinese people aged 15-19, according to United Nations estimates. By 2010, that had fallen to 105.3 million, and by 2015 it is expected to dip to 94.9 million.”

Finally the government is forcing the minimum wage and benefits higher:

“China is committed to sharply raising minimum wages, which puts pressure on employers to raise salaries for higher skilled workers. Beijing also has increased requirements for severance payments, which discourages layoffs unless business drops severely.”

It will be interesting to watch what happens to China’s economy as its manufacturing competitiveness declines slowly but surely with the increase in wages.

The post Wages on the rise in China appeared first on Inflation Watch.

“Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.”

This is a sobering statistic that has potentially dire implications for the economy in general. Compare this situation to that in China where an on-going study in the New York Times concludes that China’s government has propped up its banks and large corporations at the expense of Chinese workers (see “As Its Economy Sprints Ahead, China’s People Are Left Behind.”):

“Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.

This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.”

Neither system, in the U.S. or China, appear stable to me. With China dependent on the income (or rising debt) of U.S. workers to keep its exports alive, these systems of increasing inequity actually start to look increasingly unstable. I will be monitoring these processes even more closely going forward. They are certainly deflationary, not inflationary.

The post U.S. workers missing out on the “reflation celebration” appeared first on Inflation Watch.

China’s efforts to consolidate its rare earths industry and to move it more effectively under the government’s watchful eyes promise to increase international pressures for manufacturers to relocate to China to get cheaper prices.

See the article reference above for more details.

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The post Diamond prices up 17% in the first quarter appeared first on Inflation Watch.

“Sales of detached homes, townhouses and condominiums in metropolitan Vancouver jumped 70 percent in February from January, to 3,097 units from 1,819, and were up 25 percent from a year earlier, according to the Real Estate Board of Greater Vancouver. In March, sales climbed 32 percent from February, to just shy of a record for the month of 4,371 transactions set in 2004. Sales increased by 80 percent from two years ago.”

“In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide, according to Canada’s Frontier Centre for Public Policy. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive. Vancouver’s median home price of C$602,000 ($618,000) was 9.5 times the annual median household income of C$63,100, the group said in a study released Jan. 24. Canada had a 4.6 national multiple, making it ‘seriously unaffordable,’ while the U.S. at 3.3 was ‘moderately unaffordable,’ the study showed. To be affordable, the multiple must be 3 or less.”

The rest of the article explains how buyers from China are helping to drive prices in Vancouver as they escape property restrictions back home. Given three waves of Chinese buyers have descended upon Vancouver since 1990, market participants must feel like everything is normal. As an outsider, this market seems to have all the classic markers of a bubble. As long as the money keeps flowing, the market will remain inflated…

The post Vancouver Housing Keeps On Soaring appeared first on Inflation Watch.

“‘For a while, hedging had become unfashionable. This has changed,’ said François Combes, head of commodities trading at Société Générale. ‘You have to go back at least five years to find the last time there was genuine hedging of this scale.'”

Currently, this seems to equate to a hedge of about 25% of production. This reported bearishness has not yet shown up in lower copper prices. An analyst in the article claims that copper prices have so far remained firm because producers are buying options instead of selling futures.

The robust recovery in copper prices has been led by Chinese demand. With other major economies experiencing sluggish growth, there is no likely buyer to fill any gap in Chinese purchases anytime soon. These dynamics imply that the volatility in copper prices could significantly increase in the near future without clear signs that Chinese demand will remain firm.

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The post Price of soap and detergent going up in China appeared first on Inflation Watch.

“The U.S. Federal Reserve’s expansion of stimulus will add to the risk of a housing bubble in Hong Kong and may force extra measures to cool prices…”

“The Hong Kong Monetary Authority will take measures that are specific to the housing market if necessary…The risk of an asset bubble in Hong Kong’s property market is rising.”

It must seem odd to monetary authorities on this side of the Pacific that a central bank is trying to get ahead of a property bubble and not just plan for clean-up duty after it bursts. Since August, Hong Kong’s authorities have “…raised down-payment ratios, stopped offering residency to foreigners who buy property in the city, and increased land auctions to boost supply.” Despite these measures, sales of news homes still doubled in October.

The post Hong Kong braces itself for Fed-induced money flows appeared first on Inflation Watch.