Daily Commentary

MarketMinder’s View: This article highlights some interesting research supporting our skepticism that the government’s efforts to stimulate manufacturing and boost growth may be overstated. Essentially, it details how a good chunk of industrial loans aren’t going to industry. Instead, “[research group] Rhodium found much of the increase in industrial loans were driven by banks’ refinancing to local government financing vehicles — companies that borrow on behalf of provinces and cities to fund infrastructure — as well as extended loan repayment for small firms during the pandemic. Many companies also took cheap bank loans and channeled them into long-term time deposits and investment products to gain a profit.” Rolling over questionable debts or parking loan money back in banks may not be the most efficient use of funds, but it also suggests how credit flows enable China’s protracted debt restructuring. That can help avert long-awaited (and feared) crises in problem areas like property development and local government debt.

MarketMinder’s View: Please note MarketMinder doesn’t make individual security recommendations. Specific companies mentioned here are examples of a broader theme we wish to highlight: “Buy Now, Pay Later” (BNPL) platforms’ impact on consumer debt and spending. BNPL options at checkout allow buyers to split a purchase into installments (typically four). While BNPL may enable consumers to spend more than they can currently afford—buoying spending, at least initially—the article argues its increasing usage creates hidden risks, especially since the BNPL market is pretty opaque (for reasons discussed within). The article walks through some anecdotes of consumers who have racked up debts they couldn’t pay right away, creating the specter of a big, unseen consumer debt pile. But for investors to gauge the supposed problem’s overall market impact, it helps to scale the amounts properly. According to one report the article cites, there will be an estimated $334 billion in BNPL transactions this year. Assuming that is true—it may be on the high end considering actual Q1 amounts were closer to $19.2 billion, per Adobe Analytics—that figure isn’t so big when compared to the $17.5 trillion in total US household debt (as of Q4, the most recent numbers). Tacking on another few hundred billion in BNPL debt would still be a rounding error. Or consider BNPL platforms’ average outstanding balances—$641 at the high end—whereas the average credit card balance was $6,501 (and average household debt is around $60,000, per the New York Fed). BNPL may add to (historically low) consumer delinquency rates, but the impact at this point would be marginal. Another way to see this, per the Fed: Households are paying 9.8% of their disposable personal income to service that $17.5 trillion in debt, which remains below any point prepandemic. BNPL payments may loom large for some households—and we don’t dismiss the troubles some face—but the vast majority don’t have any issues with it. Oh, and as a friendly reminder: There is no free lunch, so while BNPL may offer quick credit approvals, providers may levy steep penalties for missed payments—always make sure you read the fine print before using any financial service.

MarketMinder’s View: Sweden’s central bank, the Riksbank, cut rates a quarter point to 3.75% today, after recent Swiss, Czech and Hungarian central bank cuts. This has added to speculation of an ECB rate cut next month—and how that may affect the Fed’s rate path, as well as how any prospective divergence will drive currency moves. These expectations get pre-priced in real time, though, blunting much of the surprise power they might have had—which is what moves markets most. Consider, the Swedish krona moved negligibly in response to the Riksbank’s cut today, having already fallen against the dollar and euro this year. This is a big reason why rate (and currency) moves are overrated. Because they are widely watched and anticipated, they don’t have a predetermined impact when policymakers eventually decide. And because of monetary policy’s long and variable lag, investors have time to evaluate a move’s likely effects, if any. Central bank speculation is needless as it is fruitless. As for the fear a weaker currency invites higher prices, yes, it can make imports more expensive (see Japan for more), but inflation itself is ultimately a monetary phenomenon. The big driver is money supply and how fast that is turning over against the supply of goods and services. With money supply slowing globally—and goods and services volumes expanding worldwide—we see inflation continuing to trend down, short-term wiggles notwithstanding. To us, the most notable takeaway here is that central banks don’t predict one another—the Fed doesn’t automatically preview what its peers will do.