Market Trends

2024-11-20

How Economic Changes Shape Wealth Distribution?

Since the dawn of human civilization, wealth inequality has been a central issue within societal structures. Despite technological advancements and sustained economic growth driving global prosperity, wealth remains concentrated in the hands of a few, creating a vast disparity compared to the resources held by the majority. Underlying this phenomenon, changes in the economic environment play a critical role. Factors such as asset price fluctuations, inflation, and central bank monetary policies significantly influence the distribution of wealth across households. To provide deeper insights into how macroeconomic factors impact wealth distribution, we examine findings from the European Central Bank’s "Distributional Wealth Accounts for euro area households" report, which highlights the critical role of economic conditions in shaping wealth inequality. Wealth Distribution and Composition in the Euro Area The report reveals stark disparities in wealth distribution across the euro area. According to the data, the wealthiest 10% of households own 56% of the region’s net wealth, while households with wealth below the median hold only 5% of the total. (Source: ECB) A closer examination of net wealth composition shows that as wealth increases, the share of deposits and real estate decreases. Instead, the wealthiest households derive a significant portion of their net wealth from business assets (non-financial business assets and unlisted equity) and financial assets (such as stocks, mutual funds, or insurance products). This composition suggests that wealthier households are generally better positioned to take on greater financial risks compared to less affluent households. (Source: ECB) The Role of Asset Price Fluctuations Differences in asset composition mean that price fluctuations significantly influence wealth distribution. The report indicates that households below the median are more sensitive to changes in housing prices. For these households, wealth is predominantly tied to real estate, which is highly sensitive to interest rate movements. Therefore, shifts in the market or changes in monetary policy—whether tightening or easing—directly affect their net wealth. For example, when housing prices increase by 10%, the net wealth of households below the median can rise by over 10%, while the wealthiest 10% see an increase of only around 5%, as real estate constitutes a smaller share of their overall wealth. (Source: ECB) In contrast, stock price fluctuations disproportionately benefit the wealthiest households. With a larger portion of their wealth held in financial assets, these households are better positioned to capitalize on stock market gains. Data shows that a 10% increase in stock prices leads to a 1.5% to 2% increase in the net wealth of the wealthiest households, while households below the median see almost no benefit. (Source: ECB) Inflation and Monetary Policy’s Indirect Effects on Wealth Distribution Beyond asset prices, inflation and monetary policy indirectly influence wealth distribution. During the pandemic in 2021, all household groups experienced a decline in net wealth, though the decline was smallest for households below the median. This period of rising inflation reduced the real value of liabilities for households below the median, with the reduction in liabilities outpacing the decline in real asset values. As a result, these households saw a net increase in wealth. However, as central banks raised policy rates to curb inflation, the subsequent decline in stock and real estate valuations reduced net wealth across all groups. The impact was more pronounced for lower-income households due to declining real estate prices, while the wealthiest households were more affected by falling financial asset values. (Source: ECB) In summary, wealth inequality primarily stems from differences in the composition of assets and liabilities across households. Net wealth fluctuations are often driven by changes in asset prices, particularly benefiting households with more financial assets. Inflation and monetary policy, rather than directly altering wealth distribution, primarily act as intermediaries by influencing asset price movements. Reference Introducing the Distributional Wealth Accounts for euro area households

By TrendForce

2024-11-19

US Credit Card Debt Delinquency Rate Hits Subprime Crisis Level!

The U.S. credit card debt reached a record high of $1.17 trillion in the third quarter of 2024, with the serious delinquency rate climbing further to 11.1%, according to data from the Federal Reserve Bank of New York. This level significantly surpasses the 9.98% peak witnessed during the pandemic and is approaching the figures recorded during the 2008 subprime mortgage crisis. Does this imply a weakening in U.S. consumer spending momentum or signal that economic deterioration may already be underway? (Source: Federal Reserve Bank of New York, TrendForce) Over the past few years, the post-pandemic reopening released a surge in global demand, which supply chains struggled to accommodate, resulting in soaring prices. The U.S. Consumer Price Index (CPI) experienced a historic peak not seen in over four decades. In response, the Federal Reserve began raising interest rates in March 2022 and initiated quantitative tightening a month and a half later to further restrict liquidity in financial markets and prevent economic overheating. As of today, while inflation growth in the U.S. has almost returned to the Federal Reserve's target range, the average price level remains 20-40% higher than pre-pandemic levels. This has led to worsening financial conditions, diminished consumer confidence, and greater financial strain on many American households in recent years. While credit card debt has reached a record high, it still represents a relatively small portion of total U.S. household debt. According to data from the Federal Reserve Bank of New York, credit card loans account for only 6-9% of total household liabilities, with the largest share coming from mortgage debt, which comprises approximately 68-73%. (Source: Federal Reserve Bank of New York, TrendForce) This implies that a significant economic slowdown or downturn is more likely to occur in scenarios where real estate prices experience a sharp decline or consumers are unable to service their mortgage debt, potentially triggering what is known as a "balance sheet recession." Historical data shows that during the U.S. subprime crisis, the serious delinquency rate for credit card debt rose to 13.7%, roughly two percentage points higher than the current 11.3% level. However, at that time, the bursting of the housing bubble caused widespread mortgage defaults, with the mortgage delinquency rate soaring to 8.9%. Currently, the serious delinquency rate for mortgages remains at a historically low 0.7%. This stability is largely attributable to the fact that nearly 90% of U.S. mortgages are on fixed rates, allowing many homeowners to lock in low rates from the pandemic period, shielding them from the recent rise in interest rates. (Source: Federal Reserve Bank of New York, TrendForce) Moreover, data on the credit scores of mortgage holders indicates that average scores exceed 750, reflecting significantly healthier financial and credit conditions than those observed before the financial crisis. (Source: Federal Reserve Bank of New York, TrendForce) In conclusion, we believe the risk of a broad economic downturn is limited. While credit card delinquency rates have reached historic highs, their impact on overall household debt is relatively minor. Rising credit card delinquencies more likely reflect the difficulties faced by lower-income or lower-credit-score populations in servicing debts amid elevated price levels. The Federal Reserve's recent research also points out that a significant portion of current retail sales growth is driven by higher-income groups. Looking ahead, as the Fed continues to cut rates, credit card interest rates (currently exceeding 20%) and delinquency rates are expected to decline, potentially boosting consumer demand.

By TrendForce

2024-11-18

Can China's 10 Trillion Yuan Fiscal Policy Revive the Economy?

China has yet to shake off the risk of deflation, according to data released by the National Bureau of Statistics on November 9. China's CPI Status China's Consumer Price Index (CPI) rose by 0.3% year-on-year in October, marking a 0.1 percentage point decline from the previous month. On a month-on-month basis, CPI decreased by 0.3%, reflecting a similar 0.3 percentage point drop. Read more at Datatrack Breaking down the components, food prices—a key driver of CPI growth—slowed to a 2.9% year-on-year increase, representing a 0.4 percentage point deceleration. Non-food prices, however, recorded a deeper year-on-year decline of 0.3%, mainly due to falling international crude oil prices. Service-related prices edged up by 0.2 percentage points to a 0.4% annual growth rate, driven by a temporary boost in travel costs during the National Day holiday, but still registered a 0.4% year-on-year decline. Excluding food and energy, China's core CPI rose by just 0.2%, a modest increase of 0.1 percentage points from the previous period. China's PPI Status On the China's Producer Price Index (PPI) side, China's PPI contracted by 2.9% year-on-year in October, with a marginal decline of 0.1 percentage points from the previous month. The month-on-month figure showed a decline of 0.1%, albeit an improvement of 0.5 percentage points. Read more at Datatrack The breakdown indicates that producer prices for means of production remained down 3.3% year-on-year, though month-on-month growth of 0.1% suggests short-term support from recent stimulus measures targeting construction-related industries. Conversely, prices for consumer goods saw a broader decline, with a year-on-year decrease widening by 0.3 percentage points to 1.6%. Among durable goods, the decline in automobile factory prices expanded to 3.1%, while prices for computers, communications, and electronic products contracted by 2.9%. Overall, the impact of China's September monetary easing policies appears limited, as consumer confidence remains weak and spending sluggish. This continued weakness has forced businesses to further lower prices, compressing margins and sustaining deflationary pressures in the economy. The Chinese Government Passes a 10 Trillion Yuan Fiscal Policy A day before the data release, China’s National People's Congress Standing Committee approved a fiscal package totaling approximately 10 trillion yuan. This package aims to raise the annual ceiling for special local government bonds by 2 trillion yuan over the next three years to replace implicit local government debts. Additionally, 800 billion yuan per year over the next five years will be allocated to addressing these hidden debts through special bond issuance. However, these measures primarily address debts accumulated through Local Government Financing Vehicles (LGFVs), which local governments have used to fund infrastructure projects and meet central GDP growth targets. By not appearing on local government balance sheets, these debts have enabled governments to bypass borrowing limits, leading to a massive buildup of hidden liabilities. LGFV bonds are frequently repackaged by banks as high-yield wealth management products sold to domestic investors. Despite the low or even negligible economic returns of many of these projects, investors continue to participate, believing that the central government will ultimately back these debts. This broad participation, often with disregard for moral hazard, has created a scenario likened to a "Ponzi scheme." The impact is clear, the continued downturn in China’s real estate market is pushing the country toward a balance sheet recession, with private consumption and investment constrained by the burden of significant private sector debt repayment. While the government is aware of these challenges, its approach has primarily involved "rolling over old debt with new debt," stalling any substantial economic recovery and hindering effective capital allocation.

By TrendForce

2024-11-18

3 Analysis of Why Trump’s Victory is a Nightmare for Europe?

As the U.S. presidential election comes to a close, it is all but confirmed that a wave of Republican dominance led by Trump is imminent, driving global capital to flow heavily into the U.S. capital markets to celebrate the election's outcome. However, Trump's victory appears to be a nightmare for Europe. Several ECB officials publicly stated before and after the U.S. presidential election that Trump's win could deliver further blows to both global and European economies. So, what impact could Trump's victory have on Europe? Tariffs First and foremost, the ECB is deeply concerned about Trump's trade policies. During the trade war, economic growth in the eurozone suffered a significant decline. Although Trump may not impose tariffs as high as 60% like those on China, Europe still faces the potential risk of a 10-20% tariff increase. Read more at Datatrack According to 2023 data from Eurostat, the United States is the EU's largest export partner, with exports totaling over €500 billion, accounting for roughly 20% of the EU's total exports. Among these, machinery and automotive exports are particularly vulnerable, with a combined value exceeding €200 billion, while automotive exports alone amount to approximately €40 billion. Over half of these exports come from Germany. (Source: Eurostat) For Germany, which continues to struggle with a manufacturing downturn, Trump's tariff policies could further restrict the development of its automotive sector and exacerbate economic weakness across the eurozone. According to Goldman Sachs, every 10% increase in tariffs could reduce the eurozone's GDP growth by 1%. Defense Spending Beyond trade policy, Trump's foreign policy stance may increase pressure on European countries to boost defense spending. In light of the ongoing Russia-Ukraine conflict, both the U.S. and Europe have been providing military aid to Ukraine. Trump has repeatedly criticized NATO member states for failing to meet the 2% GDP threshold for defense spending and has threatened to withdraw from NATO to pressure member states to increase their defense budgets. (Source: NATO) While increased defense spending may contribute to GDP growth in European countries, the economic multiplier effect of military expenditures is typically lower, limiting its impact on broader economic activity. Moreover, rising defense budgets could worsen fiscal deficits, elevate long-term bond yields, increase borrowing costs, and dampen economic growth. ECB Monetary Policy These factors add to the already fragile economic outlook in Europe, potentially prompting the ECB to adopt larger or faster rate cuts in 2025. This expectation has led to increased market bets on a weaker euro surrounding the presidential election. As of now, the EUR has depreciated from around 1.09 against the USD on November 5 to 1.06. Read more at Datatrack ▶ Read More Trump Policy Quick Guide: How Will It Impact the U.S. Economy? Why Trump Vows to Enact New Tariffs on China, Canada, and Mexico

By TrendForce

2024-11-18

3 Key Reasons Why US 10-Year Treasury Yield Continue to Surge

Since the Federal Reserve's two rate cuts and the release of its most recent Summary of Economic Projections (SEP) on September 18, the yield on the U.S. 10-year Treasury note has climbed sharply, increasing by 80 basis points over the past two months, moving from roughly 3.7% to around 4.5%. What factors are driving this significant rise in Treasury yields? We identify 3 key reasons behind this trend. 1. Market Overestimation of Rate Cuts Earlier, the market was more optimistic about rate cuts, generally expecting that a potential recession in the U.S. would prompt the Fed to lower rates by over 11 cuts in this cycle. As a result, the 10-year Treasury yield declined to around 3.65% between July and September. However, the SEP released on September 18 indicated that rate cuts may only total approximately 10 basis points in this cycle, with the Fed expressing confidence in managing inflation and stabilizing the labor market. This shift led the market to recalibrate expectations, pushing the 10-year Treasury yield up by 20 basis points to around 3.85%—a key initial factor behind the rise in yields. (Source: Fed - FOMC participants’ assessments of appropriate monetary policy) 2. Stronger-than-Expected Economic Data At the Fed’s meetings in July and September, the emphasis shifted from inflation to the labor market, with the market trading Treasuries based on the notion that "a deteriorating labor market could trigger a recession in the U.S." Employment Data Exceeds Expectations However, unexpectedly, the employment data released on October 4 significantly exceeded market expectations. Non-farm payrolls for September saw a substantial increase, and the unemployment rate declined once again. Although October’s non-farm payroll data showed a sharp drop, this was primarily due to temporary impacts from hurricanes and strikes. The ADP data indicates that the job market remains robust, which has led the market to raise its interest rate expectations again. As of November 1, the U.S. 10-year Treasury yield has risen to approximately 4.38%. (Source: CME - FedWatch, TrendForce) Consumer Confidence Rises Additionally, recent data on retail sales and GDP have highlighted robust consumer spending, with consumer confidence also climbing steadily. These indicators underscore the resilience of the U.S. economy, contributing to the recent rise in Treasury yields. 3. Potential Debt Expansion in Coming Years Although the U.S. Treasury announced on October 30 that the size of long-term debt auctions would remain unchanged, and the Treasury Secretary stated that there would be no increase in the coming quarters, concerns remain. Given that Donald Trump, the presumptive 47th President of the United States, has not addressed fiscal deficit reduction in his campaign policies, an increase in U.S. debt levels appears unavoidable. This has been a key factor driving the recent rise in Treasury yields. If economic data continue to demonstrate resilience, the Federal Reserve's capacity to lower rates could remain limited. Additionally, while the Treasury intends to maintain current issuance levels in the near term, the lack of deficit reduction emphasis among political candidates suggests persistent risks of fiscal expansion. Together, these elements are expected to place additional upward pressure on U.S. Treasury yields. Read more at Datatrack Reference Summary of Economic Projections (SEP) on September 18 Quarterly Refunding Statement of Assistant Secretary for Financial Markets Josh Frost

By TrendForce

2024-11-18

Trump Policy Quick Guide: How Will It Impact the U.S. Economy?

As the U.S. presidential election draws to a close, presidential candidate Donald Trump is virtually confirmed as the 47th President of the United States. Trump secured victory in all key swing states, winning 312 electoral votes and defeating Harris by a substantial margin. Additionally, the Republican Party has gained control of both chambers of Congress, with 53 seats in the Senate and 218 seats in the House of Representatives, signaling the onset of full Republican control in U.S. governance. Given this backdrop, what impact could full Republican control have? How might Trump's policies shape the economic outlook? Tariffs and Trade Trump’s tax agenda is anticipated to emphasize extending key provisions of the Tax Cuts and Jobs Act (TCJA), such as reducing the top individual income tax rate and lifetime personal exemption limits, with intentions to make these cuts permanent. Furthermore, he proposes reducing the corporate tax rate from 21% to 15% and exempting tips and overtime pay from income taxes. On trade policy, Trump intends to implement tariffs of 10% to 20% on all imports and as high as 60% on Chinese goods. Immigration Under Democratic administrations, a relatively permissive approach to illegal immigration has resulted in a record surge of undocumented immigrants, potentially endangering domestic security. Trump's policy seeks to comprehensively remove illegal immigrants from the U.S. He has vowed to restore several of his previous-term immigration measures, such as the "Remain in Mexico" program and the travel ban. Moreover, Trump plans to cease refugee admissions entirely and significantly limit the inflow of legal immigrants. Energy Trump supports traditional energy sources and has dismissed climate change as "a scam." He has pledged to "unlock" the potential of America's energy industry by rolling back restrictions on oil and natural gas extraction and promoting the construction of additional refineries. He also plans to revoke the Biden administration's Inflation Reduction Act (IRA), aiming to scale back subsidies for wind, solar energy, and electric vehicles, while accelerating approvals for coal and nuclear power projects. Financial Regulation Trump has historically maintained a more lenient approach to financial regulation. Last year, in July, the Fed introduced a draft of the Basel III Accord, initially mandating that banks with assets over $100 billion retain sufficient capital to mitigate potential losses. In September of this year, the Fed proposed increasing the Common Equity Tier 1 (CET-1) capital ratio for Global Systemically Important Banks (G-SIBs), often referred to as "too big to fail" institutions, to 9%. Trump's election could potentially result in the weakening or postponement of Basel III regulations. Impact on the Economy Based on the key policies outlined above, we have referred to the report by Oxford Economics to assess how Trump's policies may influence the economic trajectory. The report suggests that if Trump is elected with full Republican control, extending the Tax Cuts and Jobs Act (TCJA) alongside the exemption of tips and overtime pay from income taxes could provide a short-term boost to real GDP growth of 1%. Over the longer term, however, restrictive immigration and higher tariffs on imports could slow economic growth. (Source: Oxford Economics) On the inflation front, fiscal expansion and increased import tariffs are anticipated to push inflation higher by 0.8 percentage points. To counter potential inflationary pressures, the Federal Reserve is expected to pause interest rate cuts by 2026 and initiate rate hikes in 2027. (Source: Oxford Economics) In conclusion, under a fully Republican administration led by Trump, tariff policies are likely to be quickly enacted through executive orders, while the continuation of the TCJA is projected to further enhance individual asset growth. Concurrently, corporate tax cuts may attract capital inflows and stimulate potential fiscal spending, boosting short-term GDP growth. Nevertheless, potential labor shortages from stringent immigration measures and inflationary pressures from higher tariffs may pose challenges to long-term GDP growth. Reference Agenda47 | Donald J. Trump Upside risks have increased in toss-up US election -- (Photo Credit: Donald J. Trump Facebook) ▶ Read More 3 Analysis of Why Trump’s Victory is a Nightmare for Europe? Why Trump Vows to Enact New Tariffs on China, Canada, and Mexico

By TrendForce

2024-11-18

Fed’s Reverse Repo Shrinks Significantly: Is Market Liquidity at Risk?

The Fed Continues to Reduce its Balance Sheet Since June 2022, the Fed has been reducing its balance sheet to limit liquidity in financial markets in response to elevated inflation. Initially, the Fed reduced its monthly reinvestments by $60 billion in U.S. Treasuries and $35 billion in mortgage-backed securities (MBS), totaling a reduction of $95 billion per month. By June 2024, the Fed announced a slowdown in the pace of balance sheet reduction, lowering the amount of U.S. Treasuries not reinvested to $25 billion per month, bringing the overall reduction amount down to $60 billion. The Federal Reserve's balance sheet has gradually decreased from its peak of approximately $9 trillion in May 2022 to around $7 trillion currently. Read more at Datatrack Following the Fed's official announcement of a 50-basis-point rate cut in September 2024, market discussions have emerged around potentially halting balance sheet reductions. One key factor driving these conversations is the Fed’s overnight reverse repo operations, which have been hitting new lows. The Federal Reserve's Overnight Reverse Repurchase Agreement (ON RRP) Program The Federal Reserve's overnight reverse repurchase (repo) program serves as a key tool for absorbing excess liquidity from the market. It operates by selling securities to counterparties and repurchasing them the following day. The transaction volume peaked at $2 trillion during 2022 to 2023 but has now declined to below $200 billion. This decline indicates that excess liquidity is steadily exiting the financial system, sparking concerns that further reductions in transaction volume could lead to tighter market liquidity conditions. However, the Federal Reserve's balance sheet structure reveals that although the overnight reverse repo volume has fallen to $159 billion, bank reserves held at the Fed remain at a historically high level of approximately $3.2 trillion. As such, with expectations of continued rate cuts by the Fed in the future, overall market liquidity is still deemed sufficient. Read more at Datatrack The Federal Reserve Introduces Reserve Demand Elasticity (RDE) In October 2024, the Fed introduced a new liquidity monitoring tool — Reserve Demand Elasticity (RDE). A lower RDE value implies that changes in reserve demand have a more significant impact on interest rates, signaling tighter reserves. Current data shows that the RDE remains near zero, indicating stable liquidity conditions. Moving forward, attention will be focused on whether the Fed adjusts or halts balance sheet reductions before the depletion of RRP operations. (Source: Federal Reserve Bank of New York)

By TrendForce

2024-11-18

Why Haven’t Consumer Prices Dropped Despite Easing Inflation?

As global economic growth slows, many central banks around the world have begun to cut interest rates in an effort to reignite economic expansion. One of the main drivers behind this move is that inflation rates in most countries have gradually fallen back to levels within their central banks' target range. In theory, a gradual moderation in price increases should boost consumer optimism, as it indicates that inflation's erosion of wage gains is easing. However, why do media outlets continue to report on consumers being overwhelmed by high living costs? The obvious reason is that annual inflation rates only consider changes in prices relative to the previous year. Although current price growth has moderated compared to last year, it does not change the fact that prices have significantly risen from the pre-pandemic levels. (Source: BLS, EuroStat, Statistic Bureau of Japan, TrendForce) Take the United States as an example. The latest US - CPI and US - core CPI year-on-year growth rates were 2.6% and 3.3%, respectively, marking their slowest pace in nearly three years. Meanwhile, the Fed most preferred inflation gauge, US - core PCE, stood at 2.7%, down significantly from its peak of 5.6% in February 2022, reflecting a 2.9 percentage point decline. However, consumer perceptions often remain anchored to periods of lower prices, making it difficult to recognize the recent moderation in price growth. For consumers, goods prices are significantly higher than pre-pandemic levels, even if the pace of increase has slowed. According to data from the U.S. Bureau of Labor Statistics, the average prices of most goods have risen by approximately 20-40% over the past few years. The key point is that these prices are unlikely to return to previous levels unless deflation occurs—a scenario that the Federal Reserve is determined to prevent. (Source: BLS) Moreover, while consumer wage growth has surpassed the inflation rate since mid-2023, the overall increase in wage levels since the pandemic has still lagged behind inflation. This persistent gap has been a significant factor in eroding consumer confidence and fueling anger over high prices in recent years.

By TrendForce