NEW$ & VIEW$ (28 FEBRUARY 2013)

U.S. durable goods orders jump. Pending home sales rise. Eurozone slump to continue. Is the sell-off in materials overdone? Global IP. A new bull market for the dollar? The U.S. energy revolution.

U.S. DURABLE GOODS ORDERS JUMP

Forget the 5.2% decline in total new orders. The important stats are:

  • New orders ex-transportation (-19.8% in January) rose 1.9% in January after rising 1.0% and 1.2% in the previous 2 months respectively. That’s almost 18% annualized for the last 3 months.
  • Orders for non-defense capital goods ex-aircrafts jumped 6.3% in January after -0.3% in December and +3.3% in November. That’s 44% annualized! This series is now +4.7% Y/Y after edging down 0.5% in 2012. (Chart from IBD, table from Haver Analytics)

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U.S. Pending Home Sales Recover To Highest Since 2010

Pending sales of single-family homes jumped 4.5% (9.5% y/y) last month after a revised 1.9% December decline, according to the National Association of Realtors (NAR).

 

Euro-Zone Slump Set to Continue

 

  • The euro-zone economy appears unlikely to emerge this quarter from a contraction that has already lasted for nine months, despite a low rate of unemployment in Germany, its largest member.

The Centre for Economic Policy Research and the Bank of Italy Thursday said their Eurocoin indicator—which is intended to estimate quarter-on-quarter growth in gross domestic product—showed the euro-zone economy shrank again in February, although at a slower pace than in recent months.

  • Credit is the lifeblood of an economy. While U.S. bank loans have turned Y/Y positive in early 2011, Eurozone loans are showing little vital signs if any. France economy is turning for the worse, Spain in nowhere near water level and Italy can only sink further with its messy politics. Germany can only weaken with such weak “partners”. Meanwhile, lending standards are tightening!

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U.S. BANK LOANS

FRED Graph

Markit’s Eurozone retail PMI® data for February signalled a record year-on-year fall in retail sales revenues in the single currency area. Sales were also down sharply compared with January, as signalled by a PMI reading of 44.5, down from 45.9.

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Retail PMI data by country signalled a broad-based downturn in sales revenues in February. Germany registered a fourth decline in sales in the past seven months, while French retail sales fell for a survey-record eleventh consecutive month and at the fastest pace since last August. Italy continued to show the strongest overall decline, albeit the weakest since last September.

All three countries registered stronger year-on-year falls in retail sales in February. The annual rates of decline in Germany, France and Italy were the sharpest in 34, nine and two months respectively.

Faced with declining sales, retailers made further cuts to purchases of new stock in February. The value of new purchases fell for the nineteenth
successive month, and at the fastest rate since last June. Consequently, the value of goods held in stock at retailers declined for the sixth month running, and at the strongest pace in over three years.

image image

The number of people out of work fell a seasonally adjusted 3,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said today. The adjusted jobless rate held at 6.9 percent this month after the January rate was revised up from an initially reported 6.8 percent.

IS THE SELL-OFF IN MATERIALS OVERDONE?

Materials are down 5% in the past month. Myles Zyblock, RBC Capital’s strategist believes that

the sell-off appears to be an over-reaction given the sharp acceleration in Chinese money metrics and the ongoing upturn in global leading economic data. We believe that base metals, chemicals and agriculture are likely to offer leadership in the resource space given the profile of leading indicators.

This excellent strategist offers two charts to support his expectation.

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Myles adds the following chart reflecting the tight inverse correlation between Materials and the U.S. dollar, probably hoping that the dollar’s rally will soon reverse.Fingers crossedimage

Materials are indeed highly inversely correlated to the U.S. dollar (read below) but they also need demand momentum which can be monitored through the trends in industrial production across the world. Outside the U.S., IP trends are not buoyant.

U.S. IP Y/Y GROWTHFRED Graph

JAPAN IPFRED Graph

GERMAN IPFRED Graph

U.K. IPFRED Graph

FRANCE IP FRED Graph

BRAZIL IPFRED Graph

ITALY IPFRED Graph

RUSSIA IPFRED Graph

KOREA IPFRED Graph

I am missing China, a big piece admittedly. China’s IP continues to grow but the rate of growth, currently in the 10% range is nowhere near the 15-20% growth rates pre-2011.

Output climbed 1 percent from December, when it rose 2.4 percent, the Trade Ministry said in Tokyo today. The ministry said that increases in production of cars and memory chips contributed to the overall gain in the month.

Pointing up Of the 138 companies on the Nikkei 225 Stock Average for which Bloomberg News has estimates, almost 64 percent beat earnings estimates for the most recent quarter, as a weaker yen pushes up profits.

Back to the weak dollar hope. I am no forex expert but there are signs out there suggesting that the dollar may in fact be about to rise. Excerpts from a good analysis by George Magnus, UBS.

A U.S. DOLLAR BULL MARKET?

(…) If history is anything to go by, and the nascent signs of economic healing in the US become more convincing, the US dollar could yet rise significantly further over the next two to three years, perhaps reaching 120- 130 against the Japanese Yen, and parity to 1.05 against the Euro. More than likely, many emerging countries will be prepared to allow their currencies to decline against the US dollar too.

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(…) according to the Congressional Budget Office, the budget deficit under current laws will drop to under $500 billion in 2013, or 5.3% of GDP, the lowest since 2008. The central forecast, based on an undemanding GDP growth rate, is that it will continue to drop to 2.4% of GDP by 2015.

The CBO notes that the real fiscal and debt sustainability issues for the US are unlikely to become pressing until later in the decade and the 2020s. If the deficit should halve in the next two years, as suggested, sentiment in US capital markets is likely to be buoyed, for a while at least.

A higher US dollar, and an increase in US real interest rates would mark a significant shift in the financial and investment environment. But the most challenging implications might be for emerging markets and industrial commodity prices, both of which have prospered during the US dollar downwave since 2001. The two previous US dollar bull markets since the collapse of Bretton Woods, from 1978-1985, and from 1992-2001, had a detrimental effect on Latin America, and Asia, respectively. (…)

There are no grounds for complacency, of course, but several other parts of the US economic and financial kaleidoscope seem to be slowly falling into place. Nominal GDP growth from the trough in 2009 to the end of 2012 had moved up to 4%. The housing sector has stabilised, capital spending by companies is contributing more to GDP growth, and non farm payroll jobs have averaged a little over 150,000 per month for two years, topping 200,000 in the fourth quarter 2012.

(…)  And if the economy remains on a growth path of around 2-3%, the debate about QE exit strategies will gather relevance this year and next, not least in the expectations of US bond investors. If US bond yields rise to reflect more robust expectations of a turn away from QE because of the return of selfsustaining growth, they are likely to pull the US dollar higher. (…)

From a more structural standpoint, there has been a lot of conjecture about the path towards US energy independence, courtesy of growing domestic energy output and foreign sales of natural gas and oil. (…) But whether or not the US achieves independence any time soon, the steady decline in the energy trade deficit is already fact.

And similarly, the US technological lead in advanced manufacturing is an asset that should stand it in good stead for a long time to come, as cost structures decline, sharpening the country’s competitive edge and providing incentives to create output and jobs at home.

Even if you want to reserve judgment about the prospects for US fiscal politics, energy independence, and leadership in advanced manufacturing, the US dollar may still appreciate against other major
currencies. The US economy is, relatively speaking, in better cyclical and
structural shape, the Fed will likely be the first central bank to exit QE, and the US dollar faces weak competition in the rest of the developed world. (…)

And this from Bill Gross in today’s FT:

Sell currencies of serial QE offenders 

(…) How should an investor respond? Respect the drone, I suppose, and don’t fight the central bank in the immediate term.

In currency terms, one has only to observe the 15 per cent depreciation of the yen against the dollar and its 20 per cent depreciation versus the euro without a shot even being fired. Japan’s Prime Minister Shinzo Abe has one-upped Federal Reserve Chairman Ben Bernanke simply with a promise to print.

Instead of Big Mac prices, then, or money in/money out trade and investment flows, investors and market speculators should analyse promises, observe QE purchases as a percentage of gross domestic product or outstanding debt, and sell the most serial offender or obsessive-compulsive printer.

The yen is a first choice, the pound a close second based on incoming Bank of England governor Mark Carney’s inaugural addresses, with the euro holding up the rear. European Central Bank President Mario Draghi may promise to support the euro, but to date that hasn’t meant printing many of them.

Once an investor has picked winners and losers based upon the increasing size of a central bank’s balance sheet, however, he or she should understand that all of these QE bullets are reflationary attempts that may produce a semblance of real growth, but rather more inflation in future years.

Unless there is a white flag or an ultimate ceasefire, money printing lowers the value of all global currencies – much like horsemeat lowers the value of any burger or shepherd’s pie.

Talking of the U.S. energy revolution:

  • Gas Boom Projected to Grow for Decades 

    U.S. natural-gas production will accelerate over the next three decades, research indicates, a further sign the energy boom remaking America will be long-lived

imageThe most exhaustive study to date of a key natural-gas field in Texas, combined with related research under way elsewhere, shows that U.S. shale-rock formations will provide a growing source of moderately priced natural gas through 2040, and decline only slowly after that.

The research provides substantial evidence that there are large quantities of gas available that can be drilled profitably at a market price of $4 per million British thermal units, a relatively small increase from the current price of about $3.43. (…)

The shale-gas boom has led to a reorientation of the U.S. energy economy. This has led to a steep decline in coal consumption for electric generation and prompted companies to announce or consider multibillion-dollar investments to export gas and build chemical, steel and fertilizer plants that will consume enormous quantities of gas.

oilThe Energy Information Administration released new data today for US oil production by state through the end of last year, and its report showed that “Saudi Texas” produced an average of 2.22 million barrels per day (bpd) in December, the highest average daily output in the state in any month since June 1986, more than 26 years ago. Texas oil production increased by 30% in December from a year earlier, and by 73% from two years ago.

Amazingly, oil production in the Lone Star State has doubled in only three years, from 1.1 million bpd in January 2010 to 2.22 million bpd in December 2012, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. (…)

 
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