NEW$ & VIEW$ (21 MAY 2013)

Posted on May 21, 2013 by Denis Ouellet

Chicago Fed: Economic Activity Was Slower in April

According to the Chicago Fed’s National Activity Index, April economic activity slowed from March, now at -0.53, down from March’s -0.23. This index has been negative (meaning below-trend growth) for eleven of the past fourteen months. (Doug Short)

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The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

Click to View

Developed Economies See Slight Growth

Developed economies returned to growth in the first three months of the year, although the euro zone continued to lag behind the U.S. and Japan, according to figures released by the Organization for Economic Cooperation and Development.

In the United States, the CLI continues to point to economic growth firming. In Japan, it indicates that growth should remain above trend.
In the Euro Area as a whole, the CLIs continue to indicate a gain in momentum. In Germany, the CLI shows that growth is returning to trend. In France, the CLI points to growth close to trend rate. As in April, the CLI points to a positive change in momentum in Italy.

The CLIs for the United Kingdom, Canada, Brazil and Russia point to growth close to trend rates. In China, the CLI indicates that growth is returning to trend while for India, it continues to indicate growth below trend.

German Central Bank Sounds Upbeat Note

The German economy is due to recover at a stronger clip in the current quarter than in the first three months of the year, but the euro-zone debt crisis remains a significant risk, Germany’s central bank wrote Tuesday.

Both an expected recovery in construction after weather delays in the winter and encouraging signs from the industrial sector support the outlook, the Bundesbank said. (…)

The bank said that not only would a “catch-up effect” in the construction sector following a rough winter contribute to growth, but the “noticeable increase in industrial new orders after the weak beginning of the year generates hope that exports and equipment investment,” two traditional growth drivers of the German economy, will increase. (…)

Markit’s latest PMIs were not that upbeat:

Germany’s manufacturing sector started the second quarter of 2013 with declines in output, new orders and employment. As a result, the final seasonally adjusted Markit/BME Germany Purchasing Managers’ Index® posted below the neutral 50.0 mark in April. At 48.1, down from 49.0 in March, the latest reading indicated a moderate worsening of overall business conditions, and the rate of deterioration was the most marked since December 2012.

The final seasonally adjusted Markit Germany Composite Output Index – which measures the combined output of the manufacturing and service
sectors – dropped to 49.2 in April, from 50.6 in March. This was below the 50.0 no-change value for the first time in five months and signalled a marginal reduction of overall private sector output in Germany.

Chile’s Economy Slows Sharply, As Hit From Copper Price Fall Dazes The decline of copper prices this year has started to undermine the economy of Chile, the world’s leading source of the red metal.

The Andean nation Monday reported annual gross domestic product growth of 4.1% in the first quarter, less than the 4.5% expected. Even adjusted for the Easter holiday, which fell in March this year and April last year, growth was still 4.7%, pretty good relative to most other parts of the world. But it was a full percentage point below Chile’s 5.7% expansion in the last quarter of 2012.
Moreover, its seasonally adjusted quarterly growth was just 0.5%, making for an annualized rise of about 2%.
No one expects Chile’s economy to downshift to that extent this year after growing 5.6% in 2012. But it’s now highly likely to grow closer to the bottom end of the central bank’s 4.5% to 5.5% forecast range.

LONG TIME CLOSE FRIENDS PARTING WAYS

Highly unusual divergence.

U.K. Inflation Rate Falls More Than Forecast to 2.4% U.K. inflation slowed more than economists forecast in April to a seven-month low and producer prices rose the least since 2009 as fuel costs fell.

EARNINGS WATCH

S&P’s just updated earnings tally to May 17:

Of the 465 (93%) companies having reported, 66% beat and 26% missed. The miss rate rose to 58% last week, up from 48%, 28% and 21% in each of the previous weeks respectively.
Q1 EPS are now estimated at $25.74, down 0.8% from last week but up 1% from the estimate on March 28. Q2’13 estimate is $26.69, up $0.06 from last week but down 3% from March 28. The full 2013 estimate, at $109.69 is down $0.20 from last week and 1.3% from March 28.
Trailing 12-month EPS should total $98.32, down $0.22 from last week and up only 1.5% QoQ and +0.2% YoY.

Earnings preannouncements for Q2 as of May 16 (from Factset):

MARKET HISTORY

Here is an interesting statistic to think about for a moment.

The current rise in the stock market has gone uninterrupted for 181
days which is the longest period in the history of the stock market.
Think about that for a moment.

Over the last 113 years of stock market history we are now witnessing the longest rise – ever. Every single time in history, when the markets have gone on extended runs, they have NEVER, not once, lasted as long as the current artificially fueled advance. What do you think is likely to happen next? (Lance Roberts)

FEELING GROOVY!

Posted on May 20, 2013 by Denis Ouellet

Slow down, you move too fast.
You got to make the morning last.

The media and most talking heads have abandoned their negative bias, struggling to explain any which way they can the mysteries of rising equity markets reaching new milestones just about every day.

Even though most recent economic stats are worse than expected and point to further economic weakness, there seems to be a constant positive spin to make them acceptable to the investing crowd. If markets keep rising on so-so news, it probably means that the news is not that so-so after all.

The latest case is U.S. consumer sentiment, one of the most useless data.

US consumer sentiment nears six-year high

US consumer sentiment rebounded at the start of May to the highest level in almost six years as more Americans, led by those on the highest incomes, felt better about their economic situation.
The Thomson Reuters/University of Michigan’s preliminary reading on the overall index on consumer sentiment rose to 83.7 from 76.4 in April – the highest level since July 2007. Economists surveyed by Bloomberg had expected a level of 78.

Why the economists surveyed missed so badly on that particular data is itself a surprise since they obviously belong to the “highest incomes” segment. Introspection is likely not their forte.

“ Consumer confidence rose to a fresh post-crisis high in May, with sharply higher home, auto, and durable goods purchase expectations likely to have positive implications for the expected economic growth rebound later this year,” said Gennadiy Goldberg, US strategist at TD Securities.

Never mind that consumer sentiment indices have demonstrated little, if any, predictive qualities (see Doug Short’s chart).

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Never mind also that these surveys have no bearing on the actual, objective reality of the average American as these charts reveal:

Median-Income-051713

Food-Stamps-Yearly

Obviously, the average Joe and Jane were too busy to answer the U. of M. survey. They seem to have taken the Conference Board call however as this one shows confidence still way below average historical grooviness levels.

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Small biz people, the main job creators in the U.S. also missed the U. of M. call:

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So, before you jump to place a buy order on the basis of better consumer sentiment, think of this following ISI chart:

Nothing makes SUV owners happier than low gas prices.

Happiness is in the little things!

Hello lamp-post, what’s cha knowing, I’ve come to watch your flowers growin’
Ain’t cha got no rhymes for me, do-it-do-do, feelin’ groovy
Feeling groovy

There are better explanations for the momentum in equity markets. Two sharp minds interviewed by Barron’s:

Steve Einhorn: The Fed’s policy has protected the equity market from bad economic and earnings news. Bad economic news encourages investors to think that QE will last longer; good economic news is good because it underpins better earnings growth but also because near-term economic strength is not deemed sufficient to deter the Fed. So, bad news is good news for stocks, and good news is good news for stocks. This, along with the lack of return in fixed income, is a reason to think the bull market can persist after a period of consolidation. So the market’s downside risk is limited.
Leon Cooperman: Everyone is in the process of moving up the risk curve. We have an investor who put all of his money in T-bills when he retired, because he didn’t want duration risk or credit risk. So for the guy who bought T-bills, he can’t get any return anymore, so he migrated to T-bonds. The guy who bought T-bonds has migrated into industrial credits. The buyers of industrial credits have migrated into high yield. The high-yield buyers have migrated into structured credit, where we are now in our credit exposure at Omega, and the structured-credit people are increasingly looking at equities. So everybody is moving up the risk curve.
That helps equities, no doubt?
Einhorn: There is no effective alternative to common stocks and people are getting fatigued sitting on cash earning zero and bonds, which have such unattractive returns.

Buying the least unattractive asset. Hmmm…

Einhorn: So, for a whole host of reasons, I would expect the market to enter a prolonged consolidation, at around current levels. The basis for that consolidation is, first, the market is up 12% in the first four months of this year. That’s 3% a month. The average monthly gain for the S&P is about seven-tenths of 1%. So, just on the surface, the year-to-date advance has been rather extreme.

Second, if you look at the sectors that have led the market for most of this year, they are defensive: health care, utilities, telecom, and consumer staples. Rarely, if ever, does the U.S. equity market march to new highs on the back of defensive, noncyclical industries. Third, earnings are challenged. Excluding financials, for the S&P 500 in the first quarter, year-over-year earnings growth was about 1% to 2%. Revenue growth was essentially flat. So there is not much earnings growth, and what earnings growth there is isn’t sourced in revenue. It is sourced in cost-cutting, with margins at a record that can only go so far.
Cooperman: He is not saying the bull market is over; he’s saying it’s ahead of schedule.

What schedule? There is no schedule. Just the reality that Bernanke and the world central banks have succeeded: the liquidity flood with interest rates through the floor without any apparent inflationary effect are pushing investors into risk assets, bringing stock valuations near fair value even though earnings have flattened out due to pretty sluggish top line growth. Slow and slower is bullish, for now.

NEW$ & VIEW$ (20 MAY 2013)

Posted on May 20, 2013 by Denis Ouellet

U.S. ECONOMY HANGING IN…

Leading Indicators Index in U.S. Rises More Than Forecast

The Conference Board’s gauge of the outlook for the next three to six months climbed 0.6 percent in April after falling a revised 0.2 percent in March that was steeper than previously reported, the New York-based group said today.
Seven of the 10 indicators in the leading index contributed to the increase, including a jump in building permits, a drop in the number of jobless claims and the widening interest-rate spread between the federal funds rate and 10-year Treasury notes.

The LEI, to me the best economic indicator, refuses to signal a major economic contraction for the U.S. Here are Doug Short’s excellent charts:

Here is a look at the rate of change, which gives a closer look at behavior of the index in relation to recessions.

…WHILE THE ROW IS STRUGGLING…

Global economy lacking demand growth For every nation reporting good news, there are weaker data elsewhere

Falling commodity prices and a rising dollar show the broad picture: the global outlook is weakening a little and becoming more dependent on the US.

Friday’s report of better car sales in Europe might have cheered investors. But…

Sadly, anyone hoping to conclude that Europe’s deeply depressed automobile market has finally revved up, also needs to consider the bad news. There were, on average, two extra working days in April this year compared with 2012. In itself, this would account for the increase, according to the automakers’ trade association. Also, in absolute terms, only 1.04m new car registrations occurred last month, the third lowest level for any April on record. That leaves EU car registrations for the first four months down 7 per cent. So not exactly a sign of new spark plugs, more one of an engine struggling to splutter into life.

Even so, the data does complement anecdotal evidence that a sector trough has been reached. This can be put down to stabilising economic conditions which, in turn, may be encouraging some owners to replace older clunkers. Deutsche Bank puts the region’s usual replacement demand at about 14m units annually. Sales have been below that since 2008 and barely topped 12m units in 2012. Also reinforcing the sense of a trough is the fact that April’s uptick was well-spread. Germany, Spain and the UK all saw year-on-year growth last month. Even in France, falls were much diminished. Of Europe’s five big markets, only Italy stayed stubbornly stalled. (…)

Italy Outlines New Economic Steps

Prime Minister Enrico Letta, who was sworn in last month as head of a coalition cabinet, said an unpopular tax on primary residences would be suspended and an extra €1 billion would be pumped into a wage-supplement program.

Mr. Letta, however, emphasized that only the summer installment of the tax on primary residences is being suspended. That is because the government intends this summer to overhaul the way Italy’s tax code impacts real estate overall. Rome draws €44 billion in revenue from taxes, tariffs and other levies related to private property. About half of that is linked to ownership and the rest to service charges. (…)

The decision to lower a tax on property is popular, because of Italy’s high home-ownership rates. But it also reduces the government’s room to maneuver on another important issue: lowering income and business taxes.
Italian income taxes are unusually high even by European standards and hobble competitiveness and output, said Timo del Carpio, an economist at RBC Capital Markets in London.
The property tax was an efficient tool to spread out Italy’s painful fiscal adjustment amid the euro-zone debt crisis, said Mr. Carpio.
The decision to undo it shows that Mr. Letta’s “fragile coalition is already proving to be an obstacle” toward that goal, he said. (…)

Mexico’s First Quarter GDP Down, But Far From Out Mexico’s first quarter economic data suggest the rug has been yanked out from under Latin America’s second-largest economy. Although it clearly stumbled in the opening months of 2013, it’s poised to quickly recover its footing, if not to run as fast this year as originally expected.

Mexico economy’s expanded just 0.8% on the year in the first three months of 2013, far less than the 3.2% growth in the preceding quarter or the 1.2% consensus increase economists had expected. It was the weakest performance since the last quarter of 2009.

In seasonally adjusted terms, it advanced just 0.5% in January through March from the last three months of 2012, making for annualized growth of just 1.8%.
Friday’s data disappointed, prompting Mexico’s government to cut its 2013 growth forecast to 3.1%, down from 3.5% previously.
But a good part of what drove last quarter’s downturn was transitory. The Easter holiday was in March this year, so there were fewer working days this time around, as Holy Week fell in April last year. Also, public spending dipped 10% after PresidentEnrique Peña Nieto’s administration took over in December, needing a few months to get a handle on disbursements. (Chart from FT)

Russia grows at slowest rate since 2009 Economy hurt by falls in investment and commodity prices

Russia’s economy grew at 1.6 per cent in the first quarter compared with a year earlier, its slowest growth rate since 2009, on the back of a fall in investment and lower commodity prices.
Friday’s data, from Russia’s State Statistics Service, is significantly better than the 1.1 per cent growth figure estimated earlier this year by the Russian economy ministry and beat market expectations. However, Russia is still looking at significantly reduced economic growth for 2013, with most economists slashing full-year forecasts.
The economy ministry estimates growth will reach just 2.4 per cent for 2013, while last week the European Bank for Reconstruction and Development halved its own forecast to 1.8 per cent. Economists polled by Reuters gave a more optimistic consensus forecast of 2.9 per cent.

China April housing inflation quickens to two year high

China’s housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.
Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.
The rise was the sharpest since April 2011. (…)
New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai’s prices were up 8.5 percent in April from a year ago. Both marked the fastest year-on-year gains since January 2011 when NBS changed the way it calculated data.
However, on a monthly basis, new home prices rose 1 percent in April, easing from March’s gain of 1.2 percent, the NBS data showed, providing tentative signs that recent government moves to ward off property bubbles are biting.
Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March. (…)

Fresh rate cut call on poor Thai GDP data Despite annualised growth Q1 contraction raises fears over economy

The economy contracted 2.2 per cent in the January to March period from the previous quarter – largely due to sluggish domestic demand and exports – although it grew 5.3 per cent on an annualised basis.
At the same time the National Economic and Social Development Board trimmed its forecast for full-year economic expansion to 4.2-5.2 per cent from the 4.5-5.5 per cent range. It also cut its projection of 2013 export growth to 7.6 per cent from 11.0 per cent. (…)
This year Thai authorities and industry have been concerned about the strength of the baht, emerging Asia’s strongest currency in 2013. (…)

Vietnam Says Economy at Great Risk of Macroeconomic Instability

Vietnam still faces “great risk” of macroeconomic instability, a deputy premier said, as credit growth trails behind targets while banks work to reduce elevated bad debt that has hampered growth.

Philippines Further Limits Access to Special Deposit Accounts

The Philippines, which won its first investment-grade ranking from Fitch Ratings and Standard & Poor’s this year, is seeking to slow surging capital inflows that boosted the peso and sent stocks to a record-high this month. Bangko Sentral cut the rate on SDAs three times this year to 2 percent, after banning foreign funds from the facility in 2012.

…EXCEPT JAPAN

Japan Upgrades Economic Outlook

The Japanese government upgraded its assessment of the domestic economy for the first time in two months in its May report, as a pickup in exports fueled by the weak yen helped improve confidence in Japan’s still-nascent economic recovery.

Winking smile (Looks like devaluation is more effective than austerity)

EARNINGS WATCH

Earnings Are a Margin Story but for How Long

(…) Net margins in the first-quarter were running at their second highest level in the past 20 years, according to data from S&P Dow Jones Indices. The final numbers might come down a bit as the rest of the retailers (which typically have thin margins) report, but right now net margins are coming in at 8.92%; they were 8.95% in the third-quarter of 2006. Operating margins are running at 9.58%.
Margins are higher now than at any point in the recovery, when some observers were already pointing to the higher margins as an unsustainable trend. Eventually, they argued, the margins would have to revert to the mean and put pressure on earnings, in the absence of strong sales growth.
It hasn’t happened yet, which is at least one reason why valuations still look reasonable. (…)

U.S. COMMERCIAL REAL ESTATE MARKET FIRMS UP SLOWLY

March 2013 CCRSI National Results Highlights

PRICING RECOVERY SLUGGISH IN THE FIRST QUARTER: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—were slightly negative in March 2013, a continuation of a seasonal pattern witnessed in the last several years which contributed to modest declines in the first quarter. Despite the uneven first quarter performance, commercial real estate prices are still up appreciably from year ago levels. The equal-weighted index, which reflects more numerous smaller transactions, increased 5.7% from March 2012, while the value-weighted index, which is influenced by larger transactions, expanded by 8.1% during the same period.
SEASONALITY CONTINUES TO BE EVIDENT IN THE COMMERCIAL REAL ESTATE MARKET: In each of the past four years, a pricing decline in the first quarter has been preceded by a similar pricing increase in the last quarter of the previous year. These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity. This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. Despite the recent decline, the two components of the Equal-Weighted Index—the Investment Grade Index and General Commercial Index—remained 11.0% and 4.9% above year-ago levels, respectively.
TRANSACTION VOLUME ACCELERATES IN MARCH: Composite pair volume of $5.5 billion in March 2013 marked an increase from a $3.3 billion monthly average during January and February 2013. Yet the first quarter’s total of $12.1 billion was well below the record-setting volume reached in the final quarter of 2012, as expected. Transaction volume for the first quarter of 2013 was in line with the first quarter of 2012’s total and well above the first quarter totals of 2011 and 2010. Transaction volume appears to be responding to acceleration in lending volume across debt capital sources including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity.
DISTRESS SALES DECLINE: The percentage of commercial property selling at distressed prices dropped to 16.4% in March 2013 from 25.5% in March 2012.

/uploadedImages/About_Costar/CCRSI/images/CCRSI_may2013_image_02.jpg

THE U.S. ENERGY GAME CHANGER

U.S. Approves More Gas Exports

The Obama administration cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.

The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillips plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations.
The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. (…)
Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise. (…)
The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

US energy revolution gathers pace

Obama approves wider LNG exports as door opens to Japan and EU

NEW$ & VIEW$ (17 MAY 2013)

Posted on May 17, 2013 by Denis Ouellet

PHILLY FED SURVEY: ANOTHER WEAK REGIONAL PMI

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings. The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

The demand for manufactured goods remained weak, with the current new orders index declining from -1.0 to -7.9. The shipments index also indicated weakness, decreasing more sharply from 9.1 to -8.5. Firms reported a notable increase in inventories this month: The current inventories index increased from -22.2 to 4.1.

Labor market conditions showed continued weakness, with indexes suggesting lower employment overall. The employment index decreased 2 points to -8.7, its second consecutive negative reading. The percentage
of firms reporting employment decreases (22 percent) exceeded the percentage reporting increases (14 percent). The workweek index declined 10 points to -12.4, remaining negative for the fifth consecutive
month.

Jobless Claims Spike by 32,000

The number of U.S. workers seeking new unemployment benefits jumped last week after trending down much of the spring, showing the uneven nature of the job market’s recovery.

It was the largest one-week gain in new benefit requests since November 2012. The prior week’s level was revised up by 5,000.
The four-week moving average of claims, which smooths week-to-week volatility, increased by 1,250 to 339,250. The prior week’s average, which was revised up slightly, was the lowest level since January 2008, just after the most recent recession started.

(Bespoke Investment)

Executives upbeat on world economy

Positive trend continues from start of year

Of the more than 1,600 business people polled, 27 per cent expected conditions to improve, against 21 per cent who expected the outlook to worsen. The rest thought conditions would stay the same.
The figures continue the positive trend that began earlier this year, when executives were more upbeat on the global outlook than gloomy for the first time since mid-2011. In February, 29 per cent thought conditions would improve and 22 per cent thought they would deteriorate.

Strangely, I don’t read the story with quite the same “upbeat” suggested by the title. Given that current world conditions are nowhere near good, the fact that only 27% expect them to improve is nothing to write home about. It also seems to me that the ratios have deteriorated some since February. World shippers were likely not among the upbeat folks in this survey. Read on:

Maersk Warns of Subdued Demand

“Global demand for seaborne containers is expected to increase by 2% to 4% in 2013, lower on the Asia-Europe trades but supported by higher growth for imports to emerging economies,” the company said.
Indications for the first quarter of 2013 “show modest improvements in the global demand for container transport, reflecting the weak economic situation, especially in developed countries.”
“Demand is expected to stay subdued in 2013 while capacity will grow significantly. Accordingly, conditions for the container industry remain challenging and managing supply will be even more important this year,” it said.

Japanese machinery orders see monthly rise

Companies more confident about investing in equipment

Japanese core machinery orders jumped a bigger-than-expected 14.2 per cent in March, the quickest monthly pace in eight years, in a sign a weaker yen and surging stock prices are making companies more confident about investing in equipment.
Manufacturers surveyed by the government expect core orders to fall 1.5 per cent in April-June from the previous quarter after flat growth in the first three months of this year, the Cabinet Office data showed.

Growth shows signs of fatigue in Mexico

Estimates suggest worst quarterly figures since 2009

Spain Posts First Trade Surplus on Record

Imports dropped 15 percent in March from the same month a year ago while exports rose 2 percent.

Europe Car Sales Post First Gain in 19 Months on Germany

Registrations in April increased 1.8 percent to 1.08 million vehicles from 1.06 million cars a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Four-month sales fell 7 percent to 4.18 million vehicles. (…)

Car sales in the region fell 8.7 percent in January and 10 percent in February and March.
Regional car sales last month were helped by the most of the Easter holiday shifting to March this year from April in 2012. The decline may resume for the rest of this year, though at a slower rate than in the earlier months, according to estimates by IHS Automotive Research.
Auto sales in Germany, Europe’s biggest economy, rose 3.8 percent in April, ending five months of drops. Registrations surged 15 percent last month in the U.K., the only car market of Europe’s top five to grow in 2012, and 11 percent in Spain. French auto sales fell 5.3 percent and demand in Italy dropped 11 percent. (…)

S&P affirms negative outlook on India; warns of downgrade risk

Storm cloud Finally, this China update from CEBM Research:

The conclusion from our mid-month steel trader survey is that actual sales remained weak and the traditional peak season was almost non-existent this year. Furthermore, nearly all respondents do not expect a strong rebound in the steel market next month. (…)

The cement market has continued to recover over the past two months.

Most construction machinery dealers surveyed mentioned that sales in the first half of May were lower than their expectations. It is likely that construction machinery sales in May will achieve only modest Y/Y growth. In general, the peak season for construction machinery sales has passed, and the market in May has become tepid.

Bank credit has been tightened. Respondents from Shanghai mentioned that since a contract scandal involving false inventories was revealed recently, banks have tightened mortgages and some have even raised lending rates by 30% to 40%.

In summary (chart from ISI)

U.S. INFLATION

US consumer prices drop most in four years

The labour department’s consumer price index edged 0.4 per cent lower, the largest decrease since December 2008 when the US was suffering some of the darkest days of its financial crisis. The decline was greater than the 0.2 per cent dip in March and economists’ expectations of a 0.3 per cent decline.
Much of April’s drop was driven by an 8.1 per cent slide in petrol prices, the most since December 2008, following a less severe 4.4 per cent fall in March. The average price for a gallon of unleaded petrol fell by about 13 cents in April, ending the month at $3.51, according to AAA.
This drove overall energy prices down 4.3 per cent in April, following a 2.6 per cent drop in the previous month. Food prices rose 0.2 per cent.
This weakness extended to the measure for core prices, which excludes the volatile food and energy segments. Core prices increased 0.1 per cent, less than projected.

Data Quirks May Ease Fed’s Mind on Inflation Slowdown

One set of inflation measures, which Fed watches very closely, is down a lot more than another set of inflation measures, which the public watches closely.

The disparity between core PCE (1.13%) and core CPI (1.70%) is especially striking. (…)

There’s reason to be cautious about the PCE number. Though Fed officials favor it — because they believe it does a better job reflecting changes in the economy — there have been some quirks in it lately.
One of them is a measure known as “financial services furnished without payment.” This is the government’s way of tracking what households pay for bundled bank services like access to ATM machines or check-writing. “This would be any service provided by a bank for which there is no explicit payment,” says Brent Moulton, the associate director of the Bureau of Economic Analysis. Without a market price to go on, the Commerce Department imputes a cost to consumers for these services based on complex formulas that move as interest rates shift.
It turns out that right now interest rates are shifting in a way that drives down the imputed value of this service. In the first quarter the price of this service fell 2.2% from a year earlier and since the second quarter of 2011 it has fallen on average by 1% annually, according to the Bureau of Economic Analysis. These measures are down largely because interest rates are falling, Mr. Moulton said, not necessarily because the actual cost of the service is going down. Strip out the quirky number and the decline in core consumer prices was 0.2 percentage points less severe in the first quarter than the official figure, according to Bureau of Economic Analysis data. A measure which strips out all imputed prices in the core consumer price index was up 1.31% in March, again more than the 1.13% number.
Underlying inflation, in other words, perhaps wasn’t slowing quite as much as the Fed’s favored measure suggested.
Because the Labor Department’s consumer price index doesn’t perform these kinds of imputations, its consumer price measures warrant close monitoring right now. The CPI index has its own quirks — including the heavy weight it places on home rental costs. Still, it might be telling a meaningful story about the true underlying inflation trend. Up 1.7% from a year earlier, the core consumer price index change suggests that inflation has indeed slowed, but not to the alarmingly low levels that the PCE numbers imply.
That — along with stable inflation expectations — helps explain why Fed officials themselves haven’t yet expressed too much concern about inflation getting too low or deflation threats growing.

There’s more: US INFLATION IS ACTUALLY STUCK AT 2.0%

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.8% annualized rate) in April. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.0% annualized rate) during the month. The BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.4% (-4.3% annualized rate) in April. The CPI less food and energy increased 0.1% (0.6% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.1%, and the CPI less food and energy rose 1.7%

Pointing up However you slice it, U.S. inflation is 2.0% so far in 2013. Core CPI, median CPI and the 16% trimmed-mean CPI have all rise at a 2.0% annualized rate since December 2012. The 0.5% jump in core CPI in Jan-Feb has not been followed by a decline. Rather, core prices have kept rising by 0.1% per month. The median CPI has gained 0.2% monthly in all of the last 6 months but one. All this to say that, in spite of strong desinflationary trends across the world, U.S. core inflation is showing no signs of slowing below 2.0%.

Housing-Permit Surge Suggests Blip

Housing starts fell 16.5% in April to a seasonally adjusted annual rate of 853,000 units, the lowest level since last November but still up 36% from the level of a year earlier.

Multifamily homes with at least five units plunged 37.8%. Single-family home construction dropped by 2.1% to an annual rate of 610,000 units in April, the second straight monthly drop and the lowest level reported this year. Housing starts can be volatile, due in part to weather, and can be subject to large revisions.

Building permits, which are less volatile and serve as a leading indicator of future construction, rose to the highest level since June 2008. They increased 14.3% to an annualized rate of 1.02 million in April. (…)
The pullback in housing construction comes amid reports from home builders that they are deliberately slowing their rate of expansion in order to boost prices at a time when inventories of homes for sale are already extremely low. Rising land costs in some markets, higher costs of building materials, and difficulty in finding skilled workers have also cut into their margins.

Nearly 60% of builders in April said that they had slowed their sales pace in at least one new-home community by limiting the release of new homes or boosting prices, according to a survey released earlier this week by research firm Zelman & Associates. That dynamic isn’t limited to solely California and other Western markets that have witnessed the strongest price growth, according to the Zelman report. Builders in less-heated markets from Texas to the Carolinas to Detroit have also been managing sales.

Tepid Earnings Season Doesn’t Sway Investors

A so-so first-quarter earnings season hasn’t dented investors’ enthusiasm for stocks.

Of the 458 companies in the Standard & Poor’s 500-stock index that have reported results, 70% have beaten forecasts for earnings, in line with the average for the past four years. If results continue as projected, first-quarter earnings will rise 3.4% from the previous year, according to FactSet.
Meanwhile, sales have come in below forecasts, declining 0.2%, while analysts had expected 0.5% growth. Among companies that have reported, 48% beat Wall Street’s projections for sales, below the average of 52% from the past four years, according to FactSet.

China Wages Rose Sharply in 2012 Wages in China continued to climb at a double-digit pace last year despite a slowing economy, with inflation-adjusted wage growth actually accelerating from 2011.

Average wages for employees at non-private enterprises were up 11.9% from the year before in nominal terms, to 46,769 yuan ($7,543), the National Bureau of Statistics said in a statement Friday, compared with a 14.4% pace in 2011.
Non-private enterprises include state-owned companies, listed companies and joint ventures.
Average wages for employees at private companies were up 17.1% to 28,752 yuan, compared with an 18.3% pace in 2011.
With inflation taken into account, wages of employees at nonprivate companies were up 9% in 2012 from a year earlier, exceeding 2011′s 8.5% pace. Real wages in the private sector were up 14%, accelerating from 12.3% in 2011.

Bergsten Warns of Currency Wars in Peterson Valedictory Speech In his valedictory speech as the head of one of the most respected economic think tanks in the world, Fred Bergsten issued a clarion call about “a clear and present danger” that continuing “currency wars” represent to the U.S. economy, global trade and the international monetary system.

“Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs,” he said in prepared remarks to the Peterson Institute of International Affairs Thursday afternoon.
Those currency tensions, and the policies that are fueling them, are costing the U.S. economy millions of jobs and threatening to create the kind of global problems that contributed to the Great Depression, he said.

NEW$ & VIEW$ (16 MAY 2013)

Posted on May 16, 2013 by Denis Ouellet

U.S. Industrial Production Moves Lower

Activity in the factory sector is weakening. Industrial production fell 0.6% during April following a 0.3% March increase, earlier reported as 0.4%. Declines in activity were broad-based amongst industries last month. Factory sector production fell 0.4% (+1.4% y/y) following its unrevised 0.2% March slip. Utility output reversed course and fell 3.7% (+3.4% y/y) following a 6.4% March owing to warmer-than-normal temperatures.
The drop in factory sector output reflected across-the-board industry weakness. Consumer goods production fell 0.6% (+2.3% y/y) as motor vehicle output dropped 1.2% (+5.2% y/y). Elsewhere, appliance, furniture & related goods production fell 0.8% and was unchanged y/y. In the nondurables area, apparel output fell 1.6% (-2.9% y/y) while paper production dropped 0.6% (-1.9% y/y). For business equipment, output fell 0.5% (+3.5% y/y). Output of information processing and related equipment fell 0.5% (+3.2% y/y) and transit equipment production fell 0.5% (+5.9% y/y). Excluding the output of high tech products & motor vehicles, production fell 0.5% (+1.8% y/y) during April.
The capacity utilization rate fell to 77.8% from a downwardly revised 78.3% in March.

Pointing up Everything is slowing! Might it be because of the following?

Currencies react to Bank of Japan’s recent monetary moves

These are big, big moves!

The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, has advanced 6% since the start of the year. The rise again the yen is even stronger.

EMPIRE STATE MANUFACTURING TURNS SOUTH

The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. Employment
indexes were mixed, showing both a modest increase in the number of
employees and a slight decline in the length of the average workweek.

New orders have been weakening for 3 months before crossing below the zero line (-1.17)in May.

Interesting:

After Prices Paid, the next largest decline came in the Average Workweek, which fell from 5.7 in April to negative 1.1 in May. The decline in the average workweek comes on the heels of the Non-Farm Payrolls report two weeks ago, where the average workweek also showed a sizable decline. It is still early, but this could be an early indication that employers are cutting hours in an effort to stay below the thresholds that would require providing health coverage under the Affordable Care Act. (Bespoke Investment)

Home-Sales Expectations Hit 5-Year High

The National Association of Home Builders said Wednesday that its housing-market index was 44 in May, up three points from April. All three components of the index rose, with builders’ expectations of sales for the next few months hitting the highest level since February 2007.

High five Curb your enthusiasm:

A reading above 50 in the NAHB index means that more builders view conditions as good rather than poor. The overall gauge hasn’t been in positive territory since April 2006. At the height of the building bubble, readings were in the high 60s and low 70s.

(Charts from Haver Analytics)

Look at this next chart from BMO Capital remembering that Canada is the U.S. main trading partner.

JAPAN, the only growth game in town:

Japan Reports Growth Surge

The country’s gross domestic product, the broadest measure of goods and services produced across the economy, grew at an annualized pace of 3.5% in the first three months of the year, as consumers loosened their purse strings and exports to the U.S. picked up, lifted by a weaker yen.
The figures reported by the government early Thursday marked a sharp improvement from the tepid 1% growth rate at the end of last year, which followed six months of contraction.

A government official said the GDP data showed consumers spent more overall, particularly on recreation, cars and dining out, and exports were lifted by stronger car exports to the U.S.

The price of imported goods from Japan fell 0.6% during April, the largest monthly decline since September 2008. The fall in import prices from Japan over the past three months parallels a drop in the Japanese yen relative to the U.S. dollar, the Labor Department said. Japan, the fourth largest trading partner with the U.S., is an important supplier of consumer goods and vehicles.

Baring teeth smile It will not take much more before U.S. manufacturers start complaining about the weak Yen.

Of course, quite a lot happened after the end of Q1 as well.
It was just in early April that the BoJ announced open-ended QE and promised to double the monetary base, while prime minister Shinzo Abe pledged to boost competition in the quasi-monopolistic power sector. Since then the yen broke 100, the stock market continued soaring, and in recent days Japanese government bond yields have sold off. Even activist investors from the US are taking notice.
But it is early days yet. The unexpectedly strong first quarter growth numbers were driven mainly by exports — to be expected given the yen’s continued decline. (FT Alphaville)

How long will the ROW allow Japan to poach?

CHINA

Foreign Investment in China Lags

Foreign direct investment in China sputtered in the first four months of the year, despite renewed signs of strength from the U.S. and the European Union, showing only a modest 1.21% rise from a year ago.

Foreign direct investment in China was $38.3 billion in the January to April period, including $8.4 billion in April, for a feeble 0.4% rise from April 2012. (…)
Investment from the U.S. was up 33.2% over last year in the four-month period, inflows from the EU rose 29.7%, while Japanese investment climbed 9.2%. But investment from the rest of Asia was very weak, rising just 0.21% from a year earlier.

More signs of weakness: China’s freight traffic was unchanged MoM in April, +7.8% YoY, same as in March. YTD to April: +8.7% YoY, down from +12% in 2012. Looks slower to me. April coastal container throughput was up 8.6% YoY, +8.4% YTD.

China Signals Concern at Yen Weakness as Japan Growth Quickens

Japan’s policy of monetary easing “makes it hard for China to increase exports to Japan,” Shen Danyang, a ministry spokesman, said at a briefing in Beijing today. The rising yuan is eroding profit margins of Chinese exporters, he said. (…)

A survey by the ministry found that the profit margins of 78 percent of exporters are narrowing, and 73 percent will report flat or lower profits for 2013, Shen said. Exporters at the Canton Trade Fair in April and May didn’t want to accept long-term orders because of concerns that the yuan will gain, he said.

Beijing signals concern at rising jobless

Li warns on challenge of finding work for graduates

(…) In a nationwide teleconference on Monday that was widely reported in state media on Wednesday, Mr Li said that nearly 7m tertiary students would enter the job market in July in China, the largest number in the country’s history.
He said it was an “important task” to find jobs for all these graduates, who make up a demographic considered potentially threatening to Communist Party rule if they become disaffected in large numbers.
“In the first few months of the year, as economic growth has slowed the employment trend has remained stable but employment pressures remain and the problem of employment for tertiary students is particularly prominent,” Mr Li said, according to a transcript of his speech.
But Mr Li also disappointed many investors by ruling out a large government-directed stimulus or investment boom this year.
“To achieve this year’s development targets the room to rely on stimulatory policies and direct government investment is not big and we will need to rely on market mechanisms,” Mr Li said. Relying on government efforts to boost growth “is not only difficult to sustain but also creates new problems and risks”. (…)
Disgruntled students have played a powerful destabilising role throughout modern Chinese history, leading enormous social movements in 1919, in the 1966-1976 Cultural Revolution and in the Tiananmen Square movement in 1989. (…)
Of the nearly 7m students who graduate in July most of them have not yet found jobs and the employment rate for these people is lower than in the past, according to state media reports.
By late last month, just 28 per cent of graduating students in Beijing had been hired while the rate was 29 per cent in Shanghai and 47 per cent in southern Guangdong Province.
The official urban unemployment rate in China was just 4.1 per cent by the end of March but the figure is regarded as deeply unreliable because it does not capture many demographic groups such as fresh graduates.

EUROPE

European Recession Is Longest Since War

The euro-zone debt crisis has mutated into Europe’s longest slump of the postwar era, with no recovery in sight for a broad swath of the continent.

(…) Depression-like conditions in Southern Europe, combined with slowing global growth, are dragging down the core economies: Germany is barely growing and France is steadily contracting.

The 17-nation euro zone, which accounts for 17% of world GDP, remains the weakest link in the global economy, mired well below its level of economic activity before the 2008 financial crisis. Social strains, political paralysis and rising debt burdens are reigniting doubts about its economic future. (…)
Business surveys for April suggest the euro-zone economy could well shrink again in the second quarter. (…)

Sustained Pain

Italy airs pessimistic view on recovery

Government has little room for stimulating growth

(…) “I don’t see any signs of recovery at the moment,” commented Emma Marcegaglia, president-elect of Business Europe.
“The credit crunch is strong, internal demand and the construction sector are very bad, exports are slowing and investments have stopped. The recession is very severe,” she told the Financial Times.
At best, she said, the eurozone’s third-largest economy might see a bottoming out of its longest postwar recession in the final quarter of 2013. On the bright side, analysts noted the pace of contraction was declining more slowly than in the final quarter of 2012 when GDP shrank 0.9 per cent. (…)
By July the government needs to find a further €2bn to avoid a scheduled increase in sales tax although declining tax revenues put that goal in doubt, with Rome promising Brussels that it will stick to its budget targets in order to escape from the European Commission’s excessive deficit procedure. (…)
Bankers are starting to sound rather more upbeat however. Reporting quarterly results in recent days, the heads of Italy’s largest banks share the view that the recession is bottoming out.
The strongest indicator came from loan loss provisions which fell in the first three months of the year from the end of 2012 at UniCredit, Italy’s largest bank by assets. Intesa Sanpaolo, its largest retail bank, said inflows of bad loans were down by a third, quarter on quarter.

Euro Zone Runs Record Trade Surplus

Adjusting for seasonal effects, exports grew 2.8% from February, while imports fell 1.0%, to give a surplus of €18.7 billion, up from €12.7 billion in February.

March is really the first solid month in a while. Let’s see a couple more months, given that the EZ export markets all seem to be slowing now, perhaps because their own exports to the EZ are collapsing.

Slovenia Premier Bratusek Defies Markets With No-Aid Vow

(…) Bratusek says time is what she needs to fix the banks — by deploying a rescue package she opposed before she came to office — and that her nation won’t need an international rescue. By next month, she promises, her coalition government will begin swapping as much as 4 billion euros ($5.2 billion) in bad bank loans for government-guaranteed debt. After eight weeks in office, investors are questioning whether she can deliver.

“Talk is cheap,” Egon Zakrajsek, a Slovenian-born Federal Reserve economist in Washington, said in an e-mail. Slovenia needs “fundamental economic and social reforms” to restore market confidence and “neither the current government nor any of its predecessors has been able to deliver.” Zakrajsek said he was commenting in a private capacity. (…)
Slovenia’s overhaul drive has “failed to deliver on transparency and thus credibility, consistent with our concerns about implementation risks,” Mai Doan, an emerging-markets economist at Bank of America Merrill Lynch in London said in a note to clients today. The program could “disappoint the European Commission, which would probably prefer more rigorous measures and transparency.”
Opening the door to a bailout would expose Bratusek to the risk of having to impose Greece-like austerity measures in return for aid.

EARNINGS WATCH

Wal-Mart Second-Quarter Forecast Trails Estimates

Wal-Mart Stores Inc., the world’s largest retailer, forecast second-quarter profit that was less than analysts estimated as shoppers struggle amid the slow U.S. economy and higher taxes.
Earnings per share will be $1.22 to $1.27, the Bentonville, Arkansas-based company said today in a statement. Analysts had projected $1.29, the average of 24 estimates compiled by Bloomberg.
Sales at U.S. Wal-Mart stores open at least 12 months excluding fuel fell 1.4 percent, the first decline after six straight gains. Analysts estimated a 0.1 percent decline.

Look at the rare long flattening in earnings. The tail wind to equities from rising profits has disappeared. Hmmm….

NEW$ & VIEW$ (15 MAY 2013)

Posted on May 15, 2013 by Denis Ouellet

Euro-Zone Recession Drags On Economic output contracted in the euro zone for a sixth-straight quarter, as a slight recovery in Germany failed to offset recessions in France and Italy.

Gross domestic product fell 0.2% in the first quarter from the final three months of 2012, according to a report Wednesday from the European Union’s statistics office Eurostat. In annualized terms, which is how the U.S. and some other countries report output, GDP fell 0.9%.

GDP fell 2.3%, in annualized terms, in the fourth quarter. The current downturn in the euro zone has now stretched for longer than the 2008-2009 recession, though the cumulative 1.5% drop in output since the summer of 2011 isn’t yet as severe as the nearly 6% that was sliced off of GDP four years ago. (…)

French GDP fell 0.7% in annualized terms from the fourth quarter due to drops in consumer spending and exports, its second-straight contraction.

(Chart from Bloomberg via Zerohedge)

The FT adds:

Italy, the bloc’s third-largest economy, saw GDP shrink 0.5 per cent in the first quarter, after a fall of 0.9 per cent in the fourth quarter, according to its national statistics office. (…)

Germany, by contrast, managed to return to growth, but only barely. First-quarter GDP grew 0.1 per cent, up from a downwardly revised contraction of 0.7 per cent in the fourth quarter of last year, according to a preliminary estimate by the Federal Statistics Office.
Dutch GDP shrank 0.1 per cent and Spain has already reported a 0.5 per cent contraction in the first quarter.

Chart

MEANWHILE IN CHINA

That sighing sound you hear from China

… is strategists everywhere cutting their GDP forecasts.

China - Freight and investment to April 2013 - StanChart

China - Electricity and construction starts - StanChart

Li Signals Reluctance on Stimulus to Boost China Growth

“To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big — we must rely on market mechanisms,” Li said in a May 13 speech broadcast to officials around the country, according to a transcript published last night on the central government’s website. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said. (…)

Li’s strategy for growth includes a call to unleash private investment by simplifying bureaucratic procedures. “Private investors have money but no place to invest; they want to enter certain areas but they can’t find the way,” Li said. A company has to spend six to 10 months seeking approvals at 27 government departments to start a new investment project, he said.
The central government will delegate more power to local governments in approving new projects, he said. “Not every matter has to come to Beijing for approval,” he said.

Malaysia’s Growth Slows to Below 5% First Time in Seven Quarters

Gross domestic product rose 4.1 percent in the three months through March from a year earlier, after a revised 6.5 percent gain in the previous quarter, the central bank said in a statement in Kuala Lumpur today. That is lower than all 22 estimates in a Bloomberg News survey. The monetary authority kept its full-year growth forecast at as much as 6 percent. (…)

Malaysian exports have fallen in four out of six months through March. (…) Net exports of goods and services slumped 36.4 percent in the first quarter from a year earlier, after falling 9.3 percent in the final quarter of 2012, today’s report showed.

CHINA ELECTRICITY CONSUMPTION

One of the few reliable Chinese indicators ticks up in April. Total electricity consumption came in at +6.8% YoY in April, from +2.1% in March. This is the best number this year. It is better than the 2012 average of +5.5% and the +4.2% of Q1’13. Yet, the March-April average is but +4.4%, down from the 5.3% Jan-Feb average. The trend remains weak. Northern Trust’s view that “Negative economic surprises set the stage for improving sentiment” may just be wishful thinking (see chart below).

While I’m at it”:

EUROZONE INDUSTRIAL PRODUCTION UPTURN?

Yesterday’s IP stats from the Eurozone seemed to cheer markets. Markit explains why we should be careful before rejoicing:

Eurozone industrial production rose surprisingly strongly in March, but divergent trends within the region and recent weak business surveys suggests there is scant evidence to suggest that the region is staging any sort of sustained industrial-led recovery.

Official data showed Eurozone industrial production rising 1.0% in March, well above expectations of a mere 0.4% increase, according to a Reuters poll. The March rise in production was the largest since July 2011, but was in part buoyed by a 3.8% surge in energy production. The upturn also masked worryingly strong variations within the single currency area: production surged 1.7% higher in Germany but fell by 0.9% and 0.8% in France and Italy respectively.

The upturn nevertheless pushes eurozone production 0.2% higher over the first quarter as whole, which compares well with a 2.1% decline in the fourth quarter. The data therefore bode well for GDP to show a significantly weaker decline than the 0.6% contraction seen at the end of last year, and even raises the possibility of the recession having ended.

However, any improvement or respite from recession looks likely to be short-lived, as the business surveys have already started signalling a renewed weakening.

Most importantly, Markit’s PMI data had indicated a German-led easing in the industrial sector’s woes earlier in the year, but have more recently signalled that the downturn deepened again at the start of the second quarter. The PMI surveys are now once again registering contraction in all major eurozone countries. Although some easing in the rate of decline was signalled for Italy, Spain, France and Greece, Germany saw the steepest deterioration for four months in April, contrasting with the growth seen in the region’s largest economy earlier in the year.

EUROPE’S BIG HOPE:

Crude Futures Down as Inventories Soar

(…) “The body language from Brent at the moment suggests a contract ready to take another look at the territory below $100/bbl,” they wrote.

High five However, the language from the Saudis is that $100 is the floor.

Pay rise of 3.4% agreed for German engineering workers

Deal will avert strike in country’s manufacturing sector

The two-phase wage increase will give workers a 3.4 per cent rise in July this year, followed by a further 2.2 per cent increase in May 2014. The whole agreement will last for 20 months.
If it is followed in the rest of German industry, the agreement should provide some eagerly awaited stimulus to domestic demand in Germany, given the initial rise of more than 3 per cent, compared with an inflation figure of just 1.15 per cent.

HSBC Plans Cost Cuts

HSBC, laying out its next three-year strategy, said it plans to achieve further cost cuts of $2 billion to $3 billion by 2016, including eliminating 14,000 more jobs.

INFLATION DECELERATES JUST ABOUT EVERYWHERE:

Strong U.S. Dollar Keeping Import Prices in Check

The price of goods imported to the U.S. has fallen, on annual basis, in 11 of the past 12 months. While that reflects the declining cost of oil, it also indicates that an increasing value of the dollar is improving America’s purchasing power abroad. (…)

The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, has advanced 6% since the start of the year. The rise again the yen is even stronger.
The price of imported goods from Japan fell 0.6% during April, the largest monthly decline since September 2008. The fall in import prices from Japan over the past three months parallels a drop in the Japanese yen relative to the U.S. dollar, the Labor Department said. Japan, the fourth largest trading partner with the U.S., is an important supplier of consumer goods and vehicles.
Prices from China, the second-largest trading partner, are down 0.9% from a year earlier, and import costs from the U.K. have fallen 6.1% during that time.

Actually, most commodity prices are weak, leading to slower inflation across the world (e.g. 1.2% in Germany, 1.1% in Italy, 1.4% in Spain, 4.9% in India…)

EARNINGS WATCH

S&P’s latest update to May 9 covers 453 companies: 66.5% beat and 25.4% missed. The late comers must have been shy to disclose their results: of the 48 companies that reported in the last week, only 46% beat and 48% missed. The miss rate has seriously risen as time went by: up to March 28, the miss rate was 21%; the following week, it was 28% and last week it jumped to 48%.

Curiously, earnings estimates for Q1’13 are now $25.96, up $0.18 from the previous week. Estimates for the next 3 quarters edged down but not enough to cut 2013 estimates which are now $109.94, up $0.05 from last week’s estimate.

Trailing earnings post Q1 should come in at $98.54, up 1.8% from 3 months ago but still below the $98.69 reached post Q2’12.

Quarterly sales are up only 1.4% YoY in Q1, down from 5.6% in Q4’12.

SHORT SELLERS SCRAMBLE

(…) The combination of wobbly fundamentals and zippy prices has murdered short sellers. If one had bought the 30 most shorted stocks in the S&P 500 at the start of the year, as measured by the proportion of total shares shorted, one would be up 28 per cent, 11 percentage points ahead of the index itself. Much of the outperformance has come from volatile and financially unsteady companies such as First Solar, Netflix, AMD and Best Buy. (…) (FT)

FYI from Bespoke Investment:

NEW$ & VIEW$ (14 MAY 2013)

Posted on May 14, 2013 by Denis Ouellet

Retail Sales Gain Shows Resilient American Consumer

The U.S. retail sales report showed that figures used to calculate growth, which exclude categories such as gasoline and automobiles, climbed 0.5 percent for the second time in three months.

Nine of 13 major retail sales categories showed gains last month, led by a 1.2 percent advance at clothing stores, the biggest in more than a year, according to today’s report. Receipts at general merchandise outlets, which include department stores, climbed 1 percent, the most since March 2012.

Cars and light trucks sold at a 14.9 million annual pace in April, down from a 15.2 million rate the prior month, according to data from Ward’s Automotive Group. The average for the first quarter was 15.3 million, the strongest since the same period in 2008 and a sign the longer-term outlook remains positive. (Chart from Haver Analytics)

Markit provides more details:

US retail sales rose 0.1% in April, according to official data, representing a welcome improvement after sales had dropped 0.5% in March (revised from -0.4%). Core sales, which exclude building materials, car dealers and gasoline, were even perkier, rising 0.5% after a 0.1% increase in March.

Core retail sales in the three months to April were up just 0.9% on the previous three-month period; the weakest rate of expansion since last October and down from 1.3% at the start of the year.

However, weekly chain store sales actually peaked at the end of April and have declined 3% sequentially during the last 2 weeks. Not new for this volatile series but the 4-week moving average has clearly rolled over and is now only up 2.0% YoY.

Small Business Optimism Up in April

The Index gained 2.6 points, rising to 92.1. That beats falling, but it is
barely above the recovery average of 90.7, making it another very poor
reading. Four Index components rose, 2 fell, 6 were unchanged, a lot of
“noise”, no clear direction. Owners are very pessimistic about the
economy, with a net negative 15 percent expecting business conditions to
be better in 6 months. As bad as that sounds, it was a 13 percentage point
improvement over March.

Economists Cut China Forecasts

Many economists are cutting their forecasts for China’s economic growth this year after a fourth month of disappointing data prompted fresh looks

A survey of 18 economists by The Wall Street Journal late last year showed the median forecast for economic growth in 2013 at 8%, up from the 7.8% rise China’s economy posted last year.
But now the numbers are telling a different story. A new survey of 12 economists this week showed that the median forecast has since fallen to 7.8%.

The chart illustrates what I pointed out yesterday.

Industrial production up by 1.0% in euro area

In March 2013 compared with February 2013, seasonally adjusted industrial production grew by 1.0% in the euro area (EA17) and by 0.9% in the EU27, according to estimates released by Eurostat, the statistical office of the European Union. In February production increased by 0.3% in both zones.

A turn? Only very cold weather that boosted energy production in February and March. Still, cap. goods and durable cons. goods, though volatile, are perking up.

German Investor Confidence Rose Less Than Forecast in May

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, increased to 36.4 from 36.3 in April.

ZEW’s gauge of the current situation fell to 8.9 from 9.2 in April.

EARNINGS WATCH

Updated Q1 Earnings Season EPS and Revenue Beat Rates

About 500 companies reported earnings last week, pushing the total number of companies that have reported this season up to more than 2,100. And while the market is up on the week, earnings haven’t been great. At the start of the week, the percentage of companies that had beaten earnings estimates this season stood above 59%. The additional 500+ companies that reported this week only beat earnings at a 52% rate, pushing the overall earnings beat rate down to 57.6%. As shown below, this would be the weakest reading of the entire bull market if earnings season ended today.

Guidance Spread Negative But Inching Higher

More than 2,000 companies have reported earnings so far this season, which ends next Thursday when Wal-Mart (WMT) reports. So far this season, the spread between the percentage of companies raising guidance minus those lowering guidance has been -2.9 percentage points. This means that more companies have lowered guidance than raised guidance, and if it holds in negative territory, it will be the seventh straight quarter with a negative guidance spread. As shown in the chart below, the spread this season is much better than it was in the prior three quarters. If we hear positive things from companies next week before earnings season ends, the spread could get a little better even. That being said, it’s pretty amazing that companies have had a negative slant regarding the future for nearly two years now, and over this time period the market has soared. What would the market be doing if companies were actually optimistic? Who knows with so much attention paid to Bernanke and his easy money policy.

And this from ISI: revisions remain negative.

That equities/commodities disconnect

The moves are logical. Stocks are up because of rampant QE, which is squeezing investor flows out of bond markets and into equities. And the reason we’ve got rampant QE is the continued lack of near-term economic recovery globally, which is manifestly bad for industrial commodities.

I thought QEs were supposed to lift all asset classes. Well, there is something called supply in the demand/supply equation…

OIL: This is now a front page story (see Facts & Trends: The U.S. Energy Game Changer):

IEA: North American Oil to Dominate World Supply Growth North American oil production will dominate world-wide supply growth over the next five years, the International Energy Agency predicted, the result of growing production from “fracking” and other technologies.

In its most recent analysis, which takes a five-year view of the oil market, the IEA said U.S. production is rising much faster than previously forecast as a result of sustained high prices and more-efficient operations.
The latest forecast marks a shift in the IEA’s previous thinking, which saw supply growth split between OPEC and non-OPEC countries in the medium term. The fast U.S. supply growth has diminished U.S. demand for oil from OPEC members like Nigeria, and in the long term, growing U.S. exports of oil and natural gas could further weaken OPEC, says Amy Myers Jaffe, who studies energy and the oil industry at the University of California at Davis but didn’t know the contents of the IEA report. (…)
According to the IEA, average North American production is expected to grow by 3.9 million barrels a day between 2012 and 2018, accounting for more than half of the increase in non-OPEC production for the period.
(…) the IEA expects demand for OPEC oil to fall below 30 million barrels a day—the organization’s self-imposed production ceiling. IEA expects that trend to endure until 2018. (…)
According to the IEA’s projections, average OPEC production capacity will rise by 1.75 million barrels a day between 2012 and 2018 to reach 36.75 million barrels a day by the end of the period. The previous estimate pegged OPEC production capacity between 2011 and 2017 to grow 3.34 million barrels a day to 37.54 million barrels a day in 2017.
These changes coupled with the continuing rise in Asian demand will have a profound impact on the market over the next five years, the IEA said.
“There is hardly any aspect of the global oil supply chain that will not undergo some measure of transformation over the next five years, with significant consequences for the global economy and oil security,” the IEA said.

SENTIMENT WATCH

IPOs Set to Raise Most Cash Since Crisis

U.S. companies are on track to raise the most money through initial public offerings since before the financial crisis, driven by the same thirst for risk among investors that has pushed the stock market to new highs.

Already this year, 64 U.S.-listed public offerings have raised $16.8 billion, according to Dealogic. In the same period in 2012, the biggest year in dollars since the financial crisis, 73 companies raised a total of $13.1 billion. Last week alone brought 11 U.S.-listed IPOs, making it the busiest week for such deals since December 2007.

The largest 25 IPOs this year have risen on average 22% from their initial prices, according to Dealogic, versus a 15% gain for the Standard & Poor’s 500-stock index since the beginning of the year.

NEW$ & VIEW$ (13 MAY 2013)

Posted on May 13, 2013 by Denis Ouellet

Europe Tries to Boost Economy After Pressure From U.S.

The bloc’s finance ministers and central bankers left weekend talks of the Group of Seven signaling that they’re poised to scale back austerity, are open to increased monetary aid and looking to unfreeze bank lending. European officials will meet in Brussels today to discuss the economy and review aid payments for crisis-struck nations from Greece to Spain. (…)

Authorities are keen to rally lending at banks, which account for about 80 percent of corporate financing in the euro area, compared with less than 20 percent in the U.S. Small companies in the periphery are especially starved of cash, hurting a traditional engine for hiring.

But there’s this problem as FT Alphaville explains:

(…) Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs [...]
It is not surprising that the periphery is exhibiting a rising pattern in terms of NPL ratios. What is worrying is the speed of increase, at 2.5% per year. Within the periphery, Greece is the outlier with a NPL ratio of 25%, and no signs of that abating yet. Ireland follows with a NPL ratio of 19%. Italy (at 13.4%) is above Spain and Portugal (at close to 10%) but this reflects the reporting biases mentioned above. (…)
The German divergence is making the task of the ECB very difficult both in terms of setting monetary policy for the whole region, but also in terms of dealing with an impaired transmission outside Germany. Draghi clarified in its latest press conference that it is not the ECB’s role to clean up banks’ balance sheets, meaning that the ECB is unlikely to deal itself with the €500bn large non-performing loan problem in periphery. (…)
However, the problem of NPLs may require more targeted solutions. This leaves the onus on sovereigns, or the ESM or other supranational bodies to deal with the more important problem of cleaning up bank balance sheets from non-performing loans and bad debts. (…)

G-7 Intensifies Japan Focus Signaling Acceptance of Yen Drop

While signaling acceptance of the yen’s decline through 100 per dollar for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen 15 percent against the dollar this year and 13 percent versus the euro as the Bank of Japan stepped up monetary stimulus.
“Everybody watches exchange rate developments,” German Finance Minister Wolfgang Schaeuble said after the meeting. “We had a very intense discussion about Japan with our Japanese colleagues.”
The yen weakened past 102 per dollar for the first time since October 2008 today. (…)
Canadian Finance Minister Jim Flaherty said that there were “expressions of concern” about exchange rates, although “all the countries in the G-7 consider themselves to be free-trading.”
A U.S. official said there had been an in-depth discussion on Japan, a day after Treasury Secretary Jacob J. Lew told CNBC Television that he had “made it clear that we’ll keep an eye on” ensuring countries aren’t trying to devalue exchange rates.
While ministers discussed recent stimulus efforts by central banks, “there is close attention that there are no unintended consequences on other countries both via capital flows or exchange rate movements,” Italian Finance Minister Fabrizio Saccomanni said in a Bloomberg Television interview with Francine Lacqua after the talks.
Schaeuble said finance ministers told the central bankers that they’re “increasingly concerned” about “relative high liquidity.”

Yen at Four-Year Low Prompts Fujitsu to Raise PC Prices

Fujitsu Ltd., a Japanese maker of personal computers, plans to raise domestic prices as the yen’s drop to a four-year low boosts the cost of importing components.
The price increases will take effect by July and apply to models released in the summer, Chief Financial Officer Kazuhiko Kato said in an interview at Fujitsu’s Tokyo headquarters. The company may also curb discounts on existing lines, he said.

China Makes Gains, But Doubts Persist

China recorded a modest improvement in its industrial output and retail sales in April but the slight gains were not enough to erase concerns over a weak recovery for the world’s second-largest economy.

Data released on Monday showed that industrial output in April came in at 9.3% over a year ago—a tally that was better than the weak 8.9% reading in March but below expectations of 9.5%, according to economists polled by The Wall Street Journal. Nomura analyst Zhiwei Zhang noted that April 2013 had two more working days than 2012; accounting for the difference, he figures that industrial production “likely slowed.”
The property sector showed continued signs of strength, despite the government’s crackdown on speculators. Investment in real estate development in the first four months of the year was up 21.1% to 1.92 trillion yuan ($312.3 billion), an acceleration from a low of 15.4% in the first 10 months of last year, the data released Monday showed.
Retail sales were 12.8% higher than a year ago in April, accelerating from a 12.6% increase in March, data from the National Bureau of Statistics showed Monday. But consumer reluctance to spend kept sales increases below the 15.2% mark recorded in December. Economists say that reflects in part the government’s campaign against corruption, which has hurt the restaurant and tourism industries among others.

CHINA’S MYSTERIES

China’s recent trade data surprised most observers but nevertheless cheered equity markets. Trade data are possibly the worst set of stats coming out of China (fake invoicing is a national sport there). Considering that most other data are pretty bad…A reader (tks Frank) sent me Eric Sprott’s view on Chinese imports and exports data. In the same vein, here is CLSA’s Andy Rothman’s analysis of the recent data related to Chinese consumers:

Consumption growth disappointed during 1Q, largely because nominal urban wage growth slowed to 8.3% YoY compared to 13.8% a year ago, according to the National Bureau of Statistics. This is, however, a bit of a mystery, given that firms we have spoken to reported that wages for both unskilled and skilled workers rose faster in 1Q than in the previous quarter, and that labor markets were tighter in 1Q than in the previous quarter.

As a result of slower wage growth, NBS reported that in 1Q, urban household disposable income rose by 6.7% YoY in real terms, down from 9.8% in 1Q12 and the slowest pace since 2001. To put the 1Q13 rate of 6.7% in context, the average annual growth rate for the last decade was 9.3%.

Real per capital rural cash income also rose at a slower pace in 1Q, 9.3% YoY compared to 12.7% a year ago, due in part to slower growth in food prices.

One positive sign is that despite slower income growth, real retail sales growth was 10.8% YoY in 1Q13, down only 0.1ppt from the first quarter of last year.

More troubling is that real household consumption growth was 7.3% YoY in 1Q, down from 10.6% a year ago and 7.8% in 4Q12.

Among all these peculiarities, Andy does not explain why retail sales growth was stable while consumption growth decelerated so significantly. To me, the important things to consider are:

Domestic demand cannot be very strong when income growth is slowing so significantly and the party is so vigorously attacking corruption.
Exports cannot be much stronger when most of China’s important trade partners are showing few, if any, signs of reacceleration.
Most important, growth in electricity consumption, a more trustworthy stat, remains pretty weak.

Zerohedge adds this:

EARNINGS WATCH

Factset:

Of the 451 S&P 500 companies that have reported earnings to date for the quarter, 70% have reported earnings above estimates. This percentage is in-line with the average of 70% recorded over the past four quarters. However, only 48% of companies have reported sales above estimates. This percentage is below the average of 52% recorded over the past four quarters. If 48% is the final percentage, it will mark the third time in the last four quarters that the percentage of companies reporting revenue above estimates finished below 50%.
The blended earnings growth rate for Q1 2013 is 3.2% this week, unchanged from last week’s growth rate of 3.2%. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date, led by the Financials and Telecom Services sectors.
Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 69 companies have issued negative EPS guidance for Q2 2013, while 18 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth rate for Q2 2013 has dropped to 1.6% today from an expectation of 4.5% on March 31.

We should get the official S&P data pretty soon.

Lufthansa says April passenger traffic stagnant

German airline Lufthansa said on Monday that April passenger traffic in terms of revenue seat kilometers was flat from a year earlier.

Food-Stamp Use Rises From Year Ago

Food-stamp use rose 2.7% in the U.S. in February from a year earlier, with 15% of the U.S. population receiving benefits. (See an interactive map with data on use since 1990.) (…)
Food stamp rolls increased on a year-over-year basis, but were 0.4% lower from the prior month, the U.S. Department of Agriculture reported. (…)
The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), reached 47.6 million, or nearly one in seven Americans.

Alan Abelson: 1925 to 2013

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Financial journalism lost one of its leading lights today when Alan Abelson died at the age of 87. Alan had served Barron’s as a writer, editor, and chief columnist the past 57 years.

(…) During his career, Alan trained dozens of journalists to be skeptical, to be exacting, to help average investors, and to be on the lookout for Wall Street’s crooks. About 10 of these fine journalists still work at Barron’s, I’m happy to say. Others have gone on to do ground breaking work at The New York Times, Bloomberg BusinessWeek, and numerous financial newsletters.
One of the unique things about Alan was that his keen knowledge of Wall Street was matched by his love of artful writing. Before Alan began his newspaper career in 1947, he earned a bachelor’s degree in English and Chemistry from The City College of New York and a master’s degree from the prestigious Writers’ Workshop at the University of Iowa, which counts among its alumni Flannery O’Connor, Jane Smiley, and John Irving. In our view, Alan ranks among them. (…)
Alan’s quest for truth and justice greatly enriched the traditions begun by Clarence Barron, who bought Dow Jones & Co. in 1902 and founded this magazine in 1921. A year earlier, Clarence Barron’s stories had exposed Charles Ponzi, the Boston swindler who gave rise to the phrase “Ponzi scheme.”
In 2001, thanks in large part to editors who trained under Alan, Barron’s published the first major story that questioned the investment claims of Bernie Madoff. Seven years later, Madoff was charged by the government and proved to be the Ponzi of our era.

LONG TIME CLOSE FRIENDS PARTING WAYS

…WHILE THE ROW IS STRUGGLING…

Global economy lacking demand growth For every nation reporting good news, there are weaker data elsewhere

Russia grows at slowest rate since 2009 Economy hurt by falls in investment and commodity prices

Fresh rate cut call on poor Thai GDP data Despite annualised growth Q1 contraction raises fears over economy

…EXCEPT JAPAN

EARNINGS WATCH

Obama approves wider LNG exports as door opens to Japan and EU

Positive trend continues from start of year

Companies more confident about investing in equipment

Estimates suggest worst quarterly figures since 2009

U.S. INFLATION

JAPAN, the only growth game in town:

CHINA

Li warns on challenge of finding work for graduates

EUROPE

Government has little room for stimulating growth

Deal will avert strike in country’s manufacturing sector

But there’s this problem as FT Alphaville explains: