Finance

Editor’s note (September 14th 2022): This story has been update to include markets’ reaction. It had been hoped that America’s latest inflation report would bring good news. Headline annual inflation has been falling from the peak of 9.1% lodged in June, and economists expected that August would bring a second consecutive month of only modest increases—by recent standards—in core prices, which exclude food and energy. Those hopes have been dashed. The release on September 13th showed another fall in the headline annual rate, to 8.3% in August. But core prices rose 0.6% during the month, twice the 0.3% forecast. The news hit markets hard: the S&P 500 index of shares dropped by 4.4% as investors worried that the Federal Reserve would have to raise rates harder and faster to cool the economy.Investors are focused on core inflation because of big swings in energy prices. The price of crude oil is down a quarter from its peak in early June. Looking at a breakdown of the August price data, energy lowered the month-on-month inflation rate by nearly half a percentage point. But other components—food, goods and, especially, services such as rent—pushed up prices (see chart).Were August’s rate of core inflation sustained for a full year, it would mean a 7.4% annual rate—well above the Federal Reserve’s target of 2%. Investors believe the Fed will opt for its third consecutive three-quarter-point interest-rate increase when it meets later this month, making for the most aggressive pace of tightening in four decades. They may go further and raise rates by a full percentage point.One critical factor in explaining the persistence of high core inflation is tightness in the labour market. With roughly two jobs available per unemployed person in America, workers have strong bargaining power, which is reflected in hefty wage gains. A tracker published by the Fed’s Atlanta branch shows that in August wages rose at an annualised pace of nearly 7%. The grim conclusion for many economists is that America may require a marked increase in unemployment in order to temper wage pressures and, ultimately, inflation.The median projection of members of the Fed’s rate-setting committee is that the unemployment rate will only need to tick up slightly to 4.1% in 2024, from the current level of 3.7%. But a recent paper by Laurence Ball of Johns Hopkins University and Daniel Leigh and Prachi Mishra of the imf argues that a 4.1% level of unemployment would be consistent with core inflation of between 2.7% and 8.8% in 2024. In other words, only in the rosiest scenarios does it look like America can escape from the inflationary mire without many people losing their jobs.Nevertheless, the divergence between core and headline inflation poses an intriguing question. As far as consumers are concerned, there is no such distinction. All prices matter, and indeed prices at the petrol pump do more to capture the attention of Americans than prices anywhere else. Surveys of consumers show that their expectations for future inflation have come down sharply since June, undoubtedly thanks to the decline in oil prices.As Mr Ball and his co-authors argue, a failure to account for the pass-through from surging energy prices into core inflation was one reason why economists were wrong-footed about inflationary pressure over the past year. The hope now is that the plunge in energy prices can continue, and that the pass-through into weaker core inflation will again wrong-foot many economists. For now however, America’s inflation problem shows little sign of going away.■ More

Check out the companies making headlines before the bell:
Rent the Runway — Shares dropped 22% after the fashion rental company said it’s laying off 24% its corporate workforce. Additionally, Rent the Runway said it’s cutting $25 million to $27 million in fixed costs to deal with an uncertain macro backdrop.

Oatly — The stock declined 1.8% after Credit Suisse downgraded Oatly to neutral from outperform, saying rising inflation in Europe and Asia will hurt the Swedish dairy-alternative food company’s ability to compete.
Dow — Dow dipped 0.9% after Jefferies downgraded the chemicals company to hold from buy, citing excess supply and demand risks.
Nintendo — The gaming stock jumped 5% after Nintendo said its new title beat a domestic sales record. Sales of the action shooting game Splatoon 3 topped 3.45 million units in Japan.
Wolfspeed — The semiconductor stock advanced 1.6% in the premarket after Evercore ISI initiated coverage of the stock with an outperform rating, saying Wolfspeed “is one of the greatest ways to invest in the Electric Vehicle transition underway today.”
Oracle — The stock gained 1.6% in premarket trading after Oracle reported revenue that was in line with expectations. Revenue jumped 18% in its most recent quarter from the year-ago period, boosted by a recent acquisition in software maker Cerner.

Twilio — The stock added 1.1% after KeyBanc Capital Markets resumed coverage on the stock with an overweight rating, saying communications software company is “well positioned” to use its engagement strategy to raise gross margins.
Twitter — The social media stock nearly 1% as a Twitter whistleblower, previously an executive, is set to testify on his claims of security lapses at the company before a U.S. Senate committee on Tuesday. Twitter shareholders are also expected to vote on Elon Musk’s deal to buy the company.
Adobe — Shares fell 0.4% after BMO Capital Markets downgraded Adobe to market perform from outperform, saying there are concerns on the long-term durability of Adobe’s Creative Cloud.

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Goldman Sachs is planning on cutting several hundred jobs this month, making it the first major Wall Street firm to rein in expenses amid a collapse in deals volume.
The bank is reinstating a tradition of annual employee culls, which have historically targeted between 1% and 5% of lower performers, in positions across the firm, according to a person with direct knowledge of the situation.
At the lower end of that range, which is the size of the expected cull, that means several hundred job cuts at the New York-based investment bank with 47,000 employees at midyear.

Goldman Sachs is planning on cutting several hundred jobs this month, making it the first major Wall Street firm to take steps to rein in expenses amid a collapse in deals volume.
The bank is reinstating a tradition of annual employee culls, which have historically targeted between 1% and 5% of lower performers, in positions across the firm, according to a person with direct knowledge of the situation.

At the lower end of that range, which is the size of the expected cull, that means several hundred job cuts at the New York-based firm, which had 47,000 employees at midyear.

People enter the Goldman Sachs headquarters building in New York, U.S., on Monday, June 14, 2021.
Michael Nagle | Bloomberg | Getty Images

Goldman isn’t likely to be the only bank to cut workers. Before the pandemic, Wall Street firms typically laid off their bottom performers in the months after Labor Day and before bonuses are paid out. The practice was put on pause during the last few years amid a hiring boom.
Goldman declined to comment on the record about its plans. The timing of the cuts was reported earlier by the New York Times.
In July, CNBC was first to report that the bank was looking at a return to the annual tradition of year-end job cuts.
Steep declines in investment banking activities, especially IPOs and junk debt issuance, created the conditions for the first significant layoffs on Wall Street since the pandemic began in 2020, CNBC reported in June.

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Credit Suisse expects the Federal Reserve to pause interest rate hikes sooner than widely expected due to tumbling inflation.
According to the firm’s chief U.S. equity strategist, it will launch a powerful market breakout.

related investing news

Bank of America warns that investors are ignoring dangers of ‘synchronized’ policy tightening

5 hours ago

“This is actually what’s being priced into the market broadly,” Jonathan Golub told CNBC’s “Fast Money” on Monday. “Every one of us sees when we go to the gas station that the price of gasoline is down, and oil is down. We see it even with food. So, it really is showing up in the data already. And, that’s a really big potential positive.”
In a new note previewing this week’s August CPI and PPI data, Golub contends the inflation “collapse” will happen over the next 12 to 18 months.
“Futures indicate that Food and Energy prices should fall -5.7% and -11.8% by year end 2023, while Goods inflation has declined from 12.3% to 7.0% since February,” he wrote. “Over the past year, Services and Rents are up less than Headline CPI (5.5% and 5.8% vs. 8.5%).”

Arrows pointing outwards

Golub expects signs of an inflation breakdown will force the Fed to stop hiking rates. His time frame: Over the next four to six months.
“The market believes that come the first quarter, if we continue to go on this glide path where things renormalize, that they’re going to either pause or signal that they might pause,” he said. “If they do that the stock market wants to move ahead of it. The stock market is really going to take off.”

And, now may be a strategic time to look for opportunities. Golub particularly likes consumer goods, industrials, refiners and integrated oil producers.

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“Valuations on the market are somewhere between fair and inexpensive right now, meaning there’s more upside from p/e [price to earnings] multiples,” he added.
Golub’s S&P 500 year-end target is 4,300, which implies a roughly 5% gain from Monday’s close. The index is up almost 8% over the past two months. However, the S&P is still off about 15% from its record high.
Disclaimer

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Dado Ruvic | Reuters

Check out the companies making the biggest moves midday Monday:
Gilead Sciences — Shares of Gilead rose 3.8% after the biopharmaceutical company revealed it settled a patent case over its HIV therapies with five generic drugmakers.

related investing news

Newmont can jump 20% as gold miner’s new projects drive growth, Goldman Sachs says

11 hours ago

Twitter — Shares of Twitter slipped 2% after the company said in a regulatory filing that Elon Musk’s latest attempt to cancel the deal to buy the social media group is invalid. Most recently, Musk attempted to terminate the purchase citing Twitter’s treatment of a whistleblower.
Carvana — Carvana surged 7.8% after it was upgraded to overweight from neutral by Piper Sandler. Analyst Alexander Potter called the stock “grossly undervalued” and believes Carvana could double from current levels.
Newmont — The gold mining company gained 2.6% after Goldman Sachs initiated coverage of the stock with a buy rating. Analyst Emily Chieng said Newmont looks undervalued after falling 30% and pointed to the company’s new development projects in the pipeline that can boost growth.
Bristol-Myers Squibb — Shares of the biopharmaceutical company popped 5.4% after the U.S. Food and Drug Administration approved Bristol-Myers’ oral treatment for plaque psoriasis known as Sotyktu.
Amgen — Amgen shares fell 3.7% after the approval of Bristol-Myer Squibb’s psoriasis drug, which will compete with Amgen’s Otezla. Separately, the biotech company reported over the weekend that its Lumakras pill reduced the risk of lung cancer progression by 34% compared with chemotherapy in a clinical trial.

Alphatec — Shares jumped 7.7% after Morgan Stanley initiated coverage of the medical technology company with an overweight rating. According to the firm, Alphatec outpaces peers and has “significant runway” head for double-digit revenue growth in the spine surgery space.
Energy stocks — Rising oil prices helped push energy stocks higher. APA was the biggest winner of the day, jumping more than 5% after Citi upgraded the oil and gas company to buy from neutral. Hess and Marathon Oil were both up more than 3%, while Devon Energy rose nearly 4%. Exxon Mobil was up more than 1%.
Truckers and logistics companies — Transportation services company Yellow jumped nearly 6%, while trucking company Heartland Express rose more than 3%, and Old Dominion Freight Line and Saia saw almost 3% gains. The moves come as concerns about a possible railroad strike heat up.
— CNBC’s Sam Subin, Carmen Reinicke and Sarah Min contributed to this report.

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The 120km train ride between the cities of Luoyang and Zhengzhou is a showcase of economic malaise and broken dreams. From the window endless, half-built residential towers pass one after another for the duration of the hour-long journey. Many of the buildings appear near completion; some are finished and have become homes to families. But many more are empty skeletons where construction ceased long ago. Developers have run out of cash and can no longer pay workers and buy materials. Projects have stalled. Families will never get their homes.The train ride through China’s heartland helps to explain one of the country’s biggest crises in recent memory: the public’s loss of confidence in the government’s economic model. For decades the property industry has been symbolic of China’s unstoppable rise. Private entrepreneurs have made vast fortunes. Average people have witnessed their net worth soar as home values trebled. Local governments have filled their coffers by selling vast tracts of land to developers. An astonishing 70% of Chinese household wealth is now tied up in real estate. To undermine trust in this model is to shake the foundations of China’s growth miracle. With sweeping covid-19 lockdowns and a crackdown on private entrepreneurs, this is happening on many fronts. But nowhere is it clearer than in the property industry, which makes up an estimated 25% of gdp. New project starts fell by 45% in July compared with a year ago, home sales by 33% and property investment by 12%. The effects are rippling through the economy, hitting furniture-makers and steelworkers alike. The blow to confidence comes at a critical time for Xi Jinping, China’s leader, who will probably be granted a third term at a party congress in October. Reviving trust in the system is crucial for Mr Xi and the Communist Party. Yet the response from the government has been uncharacteristically disjointed and slow, with officials seemingly overawed by the complexity of the situation. To restore faith in the housing market, the public needs to see stalled projects completed and prices rise. Meanwhile, construction firms and their workers need to be reimbursed, and local and foreign investors to be paid back on their fixed-income products. And all this must be done without reinflating the unsustainable debt bubble that the property market has become.Lines in the sandThe housing crisis has two immediate causes. The first is a government crackdown on the excesses of the property industry. Since August 2020 officials have restricted developers’ ratios of liabilities to assets, net debt to equity and cash to short-term debt, in a policy known as the “three red lines”. This has forced many to stop unsustainable borrowing and sell down assets, severely limiting their ability to continue building and selling new projects. China’s zero-covid policy is a second blow. The central government has forced dozens of cities to lock residents in their homes for days, and sometimes weeks, on end when covid cases are discovered. At the time of writing, the megacities of Chengdu and Shenzhen are fully or partly locked down. The shutdowns have stopped people from viewing homes and making purchases. They have also had an impact on the consumer psyche. Entrepreneurs fear the sudden closure of their businesses. Employees worry about being laid off. This sort of trepidation does not encourage homebuying.The result is a crunch. China’s developers are highly reliant on selling homes long before they are built, so as to generate liquidity. Last year they pre-sold 90% of homes. But without access to bonds and loans, as banks reduce their exposure to the property sector, and with new sales now falling, the Ponzi-like nature of the property market has come into full view.Evergrande, the world’s most indebted developer, defaulted in December. An effort to restructure its offshore debts, intended as a model to follow, missed an end-of-July deadline. At least 28 other property companies have missed payments to investors or gone into restructuring. Trading in the shares of 30 Hong Kong-listed developers, constituting 10% of the market by sales, has been frozen, according to Gavekal, a research firm. In early August half of China’s listed developers traded at a price-to-earnings ratio of less than 0.5, the level that Evergrande traded at four months before it defaulted, notes Song Houze of MacroPolo, a think-tank in Chicago.Firms that just months ago were considered safe bets are now struggling. Take Country Garden, China’s biggest developer by sales. Earlier this year most analysts shrugged off concerns that it would come under pressure. Investors continued to buy its bonds. But on August 30th Country Garden revealed that profits for the first half of the year had fallen by almost 100%. The property market has “slid rapidly into severe depression”, it noted in its earnings. The strain on Country Garden indicates that problems are no longer specific to certain developers. The entire industry is at risk.Potential homebuyers have dropped out of the market. Far more worrying, though, are the millions of people waiting, often for years, for homes for which they have already paid. Just 60% of homes that were pre-sold between 2013 and 2020 have been delivered. Mr Liu, who has asked to be referred to by his family name, purchased a flat in Zhengzhou in 2014, making an initial 250,000 yuan ($40,000) down-payment. The home was scheduled for completion in 2017. But that day never came. Instead, he rented a flat, before eventually buying another one in an old building without an elevator. It is hardly the life he imagined for himself. Mr Liu never started paying his mortgage and has engaged in endless discussions with the property developer on getting back his down-payment. “There’s no use,” he says.Analysts have been aware of these problems for years, but had believed that the Chinese authorities would not allow aggrieved homebuyers to protest. A report published two years ago by pwc, an accounting firm, noted that even when construction on housing projects stalls, “the hundreds or thousands of uncoordinated households normally have little ability to influence things”.This calculation has been turned on its head. A small but influential movement to collect and publish data on the refusal to pay mortgages has taken the authorities by surprise. On July 12th anonymous volunteers began sharing data on mortgage boycotts on social media. So far about 350 have been identified; analysts believe this is probably a fraction of the true number. State censors have done their best to remove references to the explosive information, but knowledge of the protests appears to have spread nevertheless. As it does, others will be persuaded to delay purchases or halt mortgage payments.Investors and potential homebuyers are now watching with unease as the state pieces together its response, at both central and local levels. For more than a decade Chinese cities have wielded a long list of rules and incentives to fine-tune local real-estate markets, usually to reduce speculation and cool rapid price rises. These included control over access to mortgages, as well as limits on who can buy homes and how many they can buy.Cities are now loosening these rules. Between May and July municipal governments announced 304 individual measures to restore confidence, according to cicc, a Chinese investment bank. Zhengzhou, at the centre of the mortgage protests, was an early mover. In March it announced 18 actions in the hopes of stimulating demand. These included measures to make it easier to get mortgages, and to allow families with elderly members to buy flats if they move to the city. These signals to buyers have attracted lots of attention—not because they have revived demand but because they seem to contradict central-government policy. In a video widely circulated on Chinese social media in August, a local Communist Party chief in Hunan province was seen calling on people to buy as many homes as possible: “Did you buy a third one? Then buy a fourth.” The message clashes with the one from Mr Xi himself, who has warned that “homes are for living in” and certainly not for speculative investment.Local governments have also been encouraged by regulators and officials to create bail-out funds to invest in unfinished housing projects, and eventually to help deliver homes to frustrated buyers. Zhengzhou has allocated 80bn yuan ($12bn) to the cause. The thinking goes that local funds will be better suited to conditions on the ground.Zhengzhou is experimenting with perhaps the most aggressive local plan yet. The city government has issued a directive to developers that says all stalled construction must restart by October 6th. Insolvent companies that cannot do so must file for restructuring in order to bring in new investment, and also repay any down-payments made by homebuyers such as Mr Liu. Failure to do so could result in developers being investigated for embezzlement and other serious crimes.For their part, policymakers have repeatedly cut mortgage rates since mid-May. To guarantee the supply of homes, the central government has taken to fully guaranteeing new bond issuance by some private developers, effectively shifting the risk to the state. Longfor, a struggling property firm, priced a 1.5bn-yuan bond at a 3.3% coupon rate on August 26th, far below market pricing. This was possible solely because the bond was fully underwritten by China Bond Insurance, a state agency. More such issuance is planned in order to deliver liquidity to developers the government views as higher quality. It is the beginning of a programme to pick winners.Another prong of state support is coming in the form of direct liquidity. On August 22nd the central bank and finance ministry said that they will back special loans from state-directed policy banks that can be provided to complete pre-sold homes. The size of the programme has not been disclosed, but Bloomberg, a news service, reported that 200bn yuan would be made available.This sort of public spending is a double-edged sword. On the one hand, it will help deliver homes to rightful owners and restart mortgage payments, taking pressure off banks. But at the same time the cash is filling a hole created by bad local governance and dubious property developers. “That simply represents money that can’t be spent on stimulus elsewhere,” notes Alex Wolf of JPMorgan Chase, a bank.Back to the drawing boardZhengzhou’s efforts to encourage new buyers since March have fallen flat. Instead, conditions have continued to deteriorate, suggesting that tinkering with local policies is not enough. Local bail-out funds also look flimsy. On paper several cities have hefty pots to spend, but they rely on local government financing firms that are themselves strapped for cash. Analysts are closely watching Zhengzhou’s attempt to restart all construction within a month, but many question if the funds needed for such a quick fix are available. The measures could unleash a wave of collapses among smaller developers, causing panic and financial turmoil.Investors have put more hope in the central government, but so far its response has failed to match the scale of the crisis. The 200bn-yuan lending programme may account for just 10% of what is needed to complete all the country’s unfinished homes. About $5trn-worth of residential property has been pre-sold since 2020, reckons Mr Song of MacroPolo, making a bail-out of even a small portion of those homes incredibly costly.The central government still has more levers to pull. Larry Hu of Macquarie, an investment bank, says a number of measures can be snapped into place. These include temporarily easing the “three red lines”’ policy, or vowing to act as a lender of last resort for all stalled housing projects. The latter, while expensive, is fully within the central government’s financial wherewithal.The debate now focuses not on whether the central government can restore confidence, but on how far it is willing to go. The original crackdown on leverage was meant to punish companies that had taken on too much debt. A bigger bail-out will encourage more developers to ask for assistance in completing homes, pushing the government to subsidise yet more of the property sector, writes Allen Feng of Rhodium, a research firm: “quite the opposite of what was intended with the ‘three red lines’”.The campaign against leverage was also meant to bring the property sector more in line with demand over the next decade. Officials have long acknowledged that developers were selling far too many homes. About 70% of those sold since 2018 were purchased by people who already owned one, estimates JPMorgan. Restricting debt levels was supposed to force firms to adjust to actual demand. That demand is likely to fall as China’s population growth slows. Home sales reached 1.57bn square metres in 2021, more than twice as high as in 2007. But Chen Long of Plenum, another research firm, projects that real annual demand will fall to 0.88bn-1.36bn square metres over the next decade, as the demographic shift takes hold and urbanisation slows. Reinflating the market means propping up the bubble.The government’s balancing act is fraught with risk. In mid-October the party congress will take place as major cities lock down. Mortgage boycotts will rumble on, and possibly grow larger still. Overall confidence in China’s economic foundations could cross a threshold beyond which it becomes far more difficult to recover. All this means that Mr Xi’s third term will start in inauspicious circumstances. ■ More

The 120km train ride between the cities of Luoyang and Zhengzhou is a showcase of economic malaise and broken dreams. From the window endless, half-built residential towers pass one after another for the duration of the hour-long journey. Many of the buildings are near completion; some are finished and have become homes. But many more are skeletons where construction ceased long ago. Developers have run out of cash and can no longer pay workers. Projects have stalled. Families will never get their homes.The train ride through China’s heartland helps to explain one of the country’s biggest crises in recent memory: the public’s loss of confidence in the government’s economic model. For decades the property industry has been symbolic of China’s rise. Private entrepreneurs have made vast fortunes. Average people have witnessed their net worth soar as home values trebled. Local governments have filled their coffers by selling vast tracts of land to developers. An astonishing 70% of Chinese household wealth is now tied up in real estate. To undermine trust in this model is to shake the foundations of China’s growth miracle. With sweeping covid-19 lockdowns and a crackdown on private entrepreneurs, this is happening on many fronts. But nowhere is it clearer than in the property industry, which makes up around a fifth of gdp. New project starts fell by 45% in July compared with a year ago, the value of new home sales by 29% and property investment by 12%. The effects are rippling through the economy, hitting furniture-makers and steelworkers alike. The crisis comes at a critical time for Xi Jinping, China’s leader, who will probably be granted a third term at a party congress in October. Reviving trust in the system is crucial for Mr Xi and the Communist Party. Yet the government’s response has been disjointed and slow, with officials seemingly overwhelmed by the complexity of the situation. To regain faith in the housing market, the public needs to see stalled projects finished. Meanwhile, construction firms and workers need to be reimbursed, and investors paid back on their fixed-income products. All this must be done without reinflating the unsustainable debt bubble that the property market has become.The housing crisis has two immediate causes. The first is a crackdown on the property industry’s excesses. Since August 2020 officials have restricted developers’ ratios of liabilities to assets, net debt to equity and cash to short-term debt, in a policy known as the three red lines. This has forced many to stop unsustainable borrowing and sell down assets, severely limiting their ability to continue building. China’s zero-covid policy is a second blow. The central government has forced dozens of cities to lock residents in their homes for days, and sometimes weeks, on end when covid cases are discovered. At the time of writing, the megacities of Chengdu and Shenzhen are fully or partly locked down. The shutdowns have stopped people from viewing homes. They have also had an impact on the consumer psyche. Entrepreneurs fear the sudden closure of their businesses. Employees worry about being laid off. This sort of trepidation does not encourage homebuying.The result is a crunch. China’s developers need to sell homes long before they are built to generate liquidity. Last year they pre-sold 90% of homes. But without access to bonds and loans, as banks cut their exposure to the property sector, and with sales falling, the Ponzi-like nature of the property market has come into full view.Evergrande, the world’s most indebted developer, defaulted in December. An effort to restructure its offshore debts, intended as a model to follow, missed an end-of-July deadline. At least 28 other property firms have missed payments to investors or gone into restructuring. Trading in the shares of 30 Hong Kong-listed developers, constituting 10% of the market by sales, has been frozen, according to Gavekal, a research firm. In early August half of China’s listed developers traded at a price-to-earnings ratio of less than 0.5, the level that Evergrande traded at four months before it defaulted, notes Song Houze of MacroPolo, a think-tank.Firms that just months ago were considered safe bets are now struggling. Earlier this year analysts dismissed concerns that Country Garden, China’s biggest developer by sales, would come under pressure. But on August 30th the firm revealed that profits for the first half of the year had fallen by almost 100%. The property market has “slid rapidly into severe depression”, it noted. The firm’s difficulties indicate that problems are no longer specific to certain developers. The entire industry is at risk.Potential homebuyers have dropped out of the market. Far more worrying, though, are the millions waiting, often for years, for homes for which they have paid. Just 60% of homes that were pre-sold between 2013 and 2020 have been delivered. Mr Liu, who has asked to be referred to by his family name, bought a flat in Zhengzhou in 2014, with an initial 250,000 yuan ($40,000) down-payment. The home was scheduled to be finished in 2017. But it never was. Instead, he rented a flat, eventually buying another in an old building. It is hardly the life he imagined. Mr Liu never started paying his mortgage and has engaged in endless discussions with the property developer about getting back his down-payment. “There’s no use,” he says.Analysts have known of these problems for years, but had thought the authorities would not allow protests. Two years ago a report by pwc, an accounting firm, noted that when building stalls, the “unco-ordinated households normally have little ability to influence things”. This calculation has been turned on its head. A movement to collect data on the refusal to pay mortgages has taken officials by surprise. On July 12th volunteers began sharing data on social media. So far about 350 boycotts have been identified; analysts believe this is a fraction of the true number. State censors try to remove references to the information, but knowledge appears to spread nevertheless. As it does, others are persuaded to join in.Investors and potential homebuyers are now watching with unease as the state puts together its response. For more than a decade cities have wielded a long list of rules and incentives to fine-tune real-estate markets, usually to reduce speculation and cool prices. These included limits over access to mortgages, as well as on who can buy homes and how many they can buy.Cities are now loosening these rules. Between May and July municipal governments announced 304 individual measures to restore confidence, according to cicc, a Chinese investment bank. Zhengzhou, at the centre of the protests, was an early mover. In March it announced 18 actions to stimulate demand, including measures to make it easier to get mortgages and to allow families with elderly members to buy flats if they move to the city. These have attracted attention—not because they have revived demand but because they seem to contradict central-government policy. In a video circulated on social media in August, a local Communist Party chief in Hunan province was seen calling on people to buy as many homes as possible: “Did you buy a third one? Then buy a fourth.” The message clashes with the one from Mr Xi himself, who has warned that “homes are for living in” and certainly not for speculative investment.Local governments have also been encouraged by regulators and officials to create bail-out funds to invest in unfinished housing projects, and eventually to help deliver homes. Zhengzhou has allocated 80bn yuan ($12bn) to the cause. The thinking goes that local funds will be better suited to conditions on the ground.Zhengzhou is also trying perhaps the most aggressive plan yet. City officials have issued a directive to developers that says all stalled construction must restart by October 6th. Insolvent companies that cannot do so must file for restructuring to bring in new investment, and repay down-payments made by homebuyers such as Mr Liu. Failure to do so could result in developers being investigated for embezzlement and other serious crimes.For their part, policymakers have repeatedly cut mortgage rates since mid-May. To guarantee the supply of homes, the central government is fully guaranteeing bond issuance by private developers, shifting the risk to the state. Longfor, a struggling firm, priced a 1.5bn-yuan bond at a 3.3% coupon rate on August 26th, far below the market rate. This was possible solely because the bond was underwritten by China Bond Insurance, a state agency. More such issuance is planned to deliver liquidity to developers the government views as higher quality. It is the beginning of a programme to pick winners.Another prong of state support takes the form of direct liquidity. On August 22nd the central bank and finance ministry said that they would back special loans from state-directed policy banks to finish pre-sold homes. The size of the programme has not been disclosed, but Bloomberg, a news service, reported that 200bn yuan would be made available.This public spending is a double-edged sword. On the one hand, it will help deliver homes and restart mortgage payments, taking pressure off banks. But at the same time the cash is filling a hole created by bad local governance and dubious property developers. “That simply represents money that can’t be spent on stimulus elsewhere,” notes Alex Wolf of JPMorgan Chase, a bank.Zhengzhou’s efforts to encourage new buyers since March have fallen flat. Conditions have continued to deteriorate, suggesting that tinkering with city policies is not enough. Local bail-out funds also look flimsy. On paper several cities have hefty pots, but they rely on local-government financing firms that are strapped for cash. Analysts are watching Zhengzhou’s attempt to restart all construction within a month, but many question if the necessary funds are available. The measures could unleash collapses among smaller developers, causing panic and financial turmoil.Investors have more hope in the central government, but its response has so far failed to match the scale of the crisis. The 200bn-yuan lending programme may account for just 10% of what is needed to complete all unfinished homes. About $5trn-worth of residential property has been pre-sold since 2020, reckons Mr Song of MacroPolo, making a bail-out of even a fraction of these homes incredibly costly.The central government has more levers to pull. Larry Hu of Macquarie, an investment bank, says a number of measures can be snapped into place. These include temporarily easing the three red lines policy, or vowing to act as a lender of last resort for all stalled projects. The latter, while expensive, is fully within the central government’s financial wherewithal.The debate now focuses not on whether the central government can restore confidence, but on how far it is willing to go. The crackdown on leverage was meant to punish firms that had taken on too much debt. A bigger bail-out will encourage more developers to ask for assistance, pushing the government to subsidise more of the property sector, writes Allen Feng of Rhodium, a research firm: “quite the opposite of what was intended with the ‘three red lines’”.The campaign against leverage was meant to bring the sector in line with demand. Officials have long acknowledged that developers were building too much. About 70% of homes sold since 2018 were bought by people who already owned one, estimates JPMorgan. Restricting debt was supposed to force firms to adjust to reality. Demand is likely to fall as China’s population growth slows. Home sales reached 1.57bn square metres in 2021, more than twice as high as in 2007. But Chen Long of Plenum, another research firm, projects that real annual demand will fall to 0.88bn-1.36bn square metres over the next decade, as the demographic shift takes hold and urbanisation slows. Reinflating the market means propping up the bubble.The government’s balancing act is fraught with risk. In mid-October the party congress will happen as cities lock down. Mortgage boycotts will rumble on, and possibly grow. Confidence in China’s economic foundations could cross a threshold, beyond which it becomes far more difficult to recover. Mr Xi’s third term will start in inauspicious circumstances. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Ernie Garcia, CEO, Carvana
Scott Mlyn | CNBC

Check out the companies making headlines before the bell Monday.
Carvana — Shares of the online car seller rose more than 7% in the premarket after Piper Sandler upgraded Carvana to overweight from neutral. The firm said Carvana could double from current levels, noting that the stock is too cheap to ignore.

Roblox — Shares of Roblox slipped 1.8% in the premarket after Cowen initiated coverage of the online game platform with an underperform rating, citing uncertainty for Roblox ahead in the metaverse.
Newmont — Shares gained 2.7% after Goldman Sachs initiated coverage of Newmont with a buy rating, saying the stock looks undervalued and that the company has new development projects in the pipeline that can boost growth.
Bill.com — The payments software stock rose more than 2% in premarket trading after Morgan Stanley initiated coverage of the stock with an overweight rating. Analyst Keith Weiss said in a note that the stock was at an “attractive entry point” after underperforming the market this year and that Bill.com is a category leader with a solid moat.
Adobe — Adobe’s stock dipped 1.5% following a downgrade to neutral by Mizuho amid a murky macro environment.
Alphatec — The medical technology stock jumped 3.1% in the premarket after Morgan Stanley initiated coverage of the stock with an overweight rating, saying the company outpaces peers to gain share in the spine surgery market.

Bristol-Myers Squibb — The stock surged 6.7% after the U.S. Food and Drug Administration approved Sotyktu, an oral treatment for plaque psoriasis.
Walt Disney — Shares of the entertainment and media giant gained slightly on the heels of its 2022 D23 Expo over the weekend, where CEO Bob Chapek touted its rebounding theme park business and hinted in an interview that he has big plans for ESPN. Activist investor Dan Loeb also reversed his position on spinning off ESPN, tweeting Sunday he now understands the value of keeping the sports network under Disney.
Twitter — Twitter dipped about 1% in premarket trading after the social media company called Elon Musk’s third attempt to call off his acquisition invalid ahead of a shareholder vote. The social media company said it plans to enforce the agreement on the price and terms agreed upon with Musk.
KLA, Lam Research — Shares of the semiconductor companies declined following a Reuters report, citing people familiar with the matter, that said the Biden administration plans next month to publish new restrictions on U.S shipments to China of semiconductors. KLA and Lam Research each dipped 1%.
Union Pacific — Shares of railroad companies rose after two unions warned of cargo delays as they negotiate contracts for almost 60,000 workers, according to a Reuters report. Union Pacific is down 1.6% in premarket trading. CSX is 0.4% lower.
Coinbase — Crypto stocks popped on the back of the Ethereum merge. Coinbase is up 2.6%, Marathon Digital Holdings is 3.5% higher, and Riot Blockchain is up 2.8%.
— CNBC’s Christina Cheddar-Berk, Fred Imbert, Jesse Pound, Scott Schnipper, Samantha Subin and Michelle Fox Theobald contributed reporting.

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