HOT AIR BALLOON FLIGHT

By Julia Horowitz • Thursday, September 23

Good morning. In today's newsletter: How the fallout from Evergrande could hurt the global economy. Plus, the Federal Reserve may hike interest rates next year, and a sign the US housing market is cooling off.

 

US stock futures are up after all three main indexes closed 1% higher on Wednesday. Markets in Europe mostly gained in early trading, following stocks in China.

 

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MARKET FLASH

Evergrande's fiasco could damage the global economy

 

All eyes are on China's Evergrande, the heavily-indebted real estate conglomerate that's become a market obsession after global investors tuned in to its mounting problems this week.

 

What's happening: The company faces a crucial test on Thursday, when it has a deadline to pay nearly $84 million worth of interest on a bond. My CNN Business colleague Laura He, who's tracking the story closely, reports that it's not clear yet whether Evergrande will make that payment. It had not commented by the close of trading in Hong Kong.

 

Global markets have been rattled by the risk that one of China's biggest developers could collapse. But the concern may be less about financial contagion, and more about the broader effects on the world's second biggest economy, which was already slowing.

 

"China has the means to contain the fallout from the Evergrande situation," Berenberg chief economist Holger Schmieding wrote in a note to clients Thursday. "However, China is storing up trouble for the future as trend growth slows and as its leaders impose an increasingly authoritarian and controlling regime."

 

Remember: Worries about the pace of China's economic growth have been building in recent months. An official survey of manufacturing activity fell to 50.1 in August from 50.4 in July. That was just above the 50-point mark indicating expansion rather than contraction, but still the slowest rate of growth since the start of the pandemic. Retail sales have also struggled, increasing just 2.5% last month compared to a year earlier.

 

Chinese authorities have partially attributed slower growth to Covid-19 outbreaks and flooding, which stopped people from traveling and caused them to hold off on summer spending. Economists, however, are increasingly convinced the loss of momentum could persist.

 

One big reason is China's property sector. New housing projects, as measured by floor space, fell 3.2% during the first eight months of the year.

 

On the radar: A tightening of credit conditions as the government tries to ease debt loads has played a major role in the sector's recent downturn, according to Deutsche Bank analyst Lucia Kwong. Now, there are fears that fallout from Evergrande could make matters worse.

 

"While funding channels have remained open until now, developers may face additional liquidity pressure due to [repercussions] of Evergrande's potential default," she wrote in a research note this week.

 

As of June, Evergrande itself also had about 200,000 housing units that had been sold but not delivered to buyers, according to an analysis by Bank of America.

 

Why it matters: China's property sector is a vital engine of job creation and accounts for an estimated 29% of the country's economy, which for years has powered global growth. That means a slowdown could have deep economic ramifications — not just for China, but for the world.

 

The property pullback also comes as Beijing cracks down on private businesses, which Capital Economics said Thursday adds to the research group's "broad pessimism" about China.

 

In an event for clients, its economists predicted that the country's trend growth will slow down to 2% by 2030 from the current level of 4% to 5%.

 

Japan, South Korea and other economies throughout Asia would suffer from a slowdown in China, according to Berenberg. European countries that export lots of goods to China — Germany, for example — would also be hit.

VOICES

Former Treasury secretaries issue warning on debt limit

"Even a short-lived default could threaten economic growth."

 

IN A LETTER TO HOUSE SPEAKER NANCY PELOSI

 

Read more from CNN Business.

CENTRAL BANK MONITOR

The Federal Reserve could hike interest rates next year

The Federal Reserve isn't ready to take its foot off the stimulus gas pedal. That might change soon.

 

The latest: If the economic recovery continues to progress as expected, the Fed "judges that a moderation in the pace of asset purchases may soon be warranted," according to its policy update published Wednesday.

 

The announcement raises the prospects of a November announcement that it will ease $120 billion in monthly bond buys, my CNN Business colleague Anneken Tappe reports.

 

Investors have been gearing up for this possibility. More surprising was the indication that the Fed could lift interest rates as early as next year, according to updated projections. Previous forecasts had called for a hike in 2023. 

 

That could depend on the trajectory of the economic recovery, however. The Fed, incorporating the effects of the Delta variant into its projections, now expects weaker economic growth for 2021, with output rising 5.9%, compared to the 7% it predicted in June. The growth rate for 2022, however, was revised upwards to 3.8% from 3.3%.

 

Watch this space: Other policymakers aren't waiting for the Fed to make a move. On Thursday, Norway's central bank hiked its benchmark interest rate from 0% to 0.25%.

 

"A normalizing economy now suggests that it is appropriate to begin a gradual normalization of the policy rate," Governor Oystein Olsen said in a statement.

 

The Bank of England, for its part, is sitting tight for now. The central bank on Thursday held its main rate at 0.1%, though two members voted to halt bond purchases.

UP NEXT

Darden Restaurants and Rite Aid report results before US markets open. Costco and Nike follow after the close.

Also today: Initial US jobless claims for last week post at 8:30 a.m. ET.

 

Coming tomorrow: Data on new US home sales for August.

WHAT WE'RE READING AND WATCHING

▸ What's at an Amazon store? High-tech dressing rooms (WSJ)
▸ Apple denies Fortnite a return to the App Store (CNN Business)
▸ The gender pay gap for MBA grads starts immediately (Bloomberg)
▸ Restaurant tech firm Toast surges in market debut (CNBC)
▸ US default would wipe out nearly 6 million jobs (CNN Business)
▸ The climate can't wait for sustainable planes (CNN Business)

FINAL WORD

Is the housing market starting to look more normal?

Outside of China, the housing market has been on fire, with soaring prices cutting out many first-time buyers. Finally, it may be cooling off.

 

Details, details: US home sales dropped in August, both from July and from a year ago, breaking two straight months of increases, according to the National Association of Realtors.

 

Surging home prices have been powered by pent-up demand among potential buyers that built up during shutdowns and lifestyle changes people made during the pandemic, all while interest rates remained very low, my CNN Business colleague Anna Bahney reports.

 

But now the effects of those trends are easing up.

 

"The housing sector is clearly settling down," said Lawrence Yun, chief economist for NAR. "Home sales are trying to return to a normal equilibrium after that big surge we saw last year."

 

Sales of existing homes, including single-family homes, townhomes, condominiums and co-ops, fell 2% in August from July, and were down 1.5% from a year ago, according to the report.

 

And yet: Sales for 2021 year-to-date are 16% higher than in 2020 and up 12% from 2019. And prices continue to rise thanks to low inventory. The median home price in August was $356,700, up 14.9% from a year ago, marking 114 straight months of year-over-year gains in home prices.