NEW$ & VIEW$ (8 FEBRUARY 2013)

U.S. economy: so far, so good. Good January sales. Consumer credit rises. China’s meaningless stats. Euro risk is back. German stats. GDP Growth Vs Stock Returns.

Fingers crossed The fiscal drag, higher gas prices, the coming sequester all combine to threaten the recent positive momentum in the U.S. economy. So far, so good:

Retailers See Strong January

U.S. retailers are turning in strong sales for January, a time of heavy promotions to clear holiday goods and make way for early spring merchandise. Gap’s same-store sales were up 8% and Macy’s surged 12%.

The 18 retailers tracked by Thomson Reuters posted 5.8% growth in January same-store sales, or sales at stores open over a year.

Part of the reason for continued good sales is higher borrowing:

Student, Auto Loans Surge, as Credit-Card Debt Shrinks  Borrowing by U.S. consumers rose in December for a fifth consecutive month, driven by a surge in student and auto loans, in a sign that consumers are more comfortable about making big spending decisions.

Consumer credit, a measure of lending that excludes home mortgages, rose by $14.6 billion to a seasonally adjusted $2.778 trillion, a Federal Reserve report showed Thursday.

The advance was due to a $18.2 billion increase in nonrevolving credit, which includes student loans and auto financing. It was the largest monthly increase since November 2001, when those loans grew by $20.75 billion.

Revolving credit, which mainly consists of credit-card debt, declined by $3.6 billion in December to $849.8 billion.

Pointing up  Use of non-revolving credit lines continued quite strong and rose $18.2B, the fifth consecutive double-digit monthly rise. The y/y increase of 8.3% was its strongest since late-2002.



Steven Hansen of Global Economic Intersection posted this chart showing how higher borrowings helped sustain spending in recent months (this data series does not include mortgages):


Smile  Jobless Claims Decline

The number of U.S. workers filing first-time applications for unemployment benefits fell by 5,000 to a seasonally adjusted 366,000 last week, signaling a modestly improving labor market.

A more-reliable gauge of claims—the four-week moving average, which smooths out week-to-week volatility—fell by 2,250 to 350,500. The average level of claims hasn’t been that low since March 2008. (Chart from Haver Analytics)

Plate  McDonald’s January sales down 1.9 percent, worse than expected

McDonald’s Corp said on Friday that January sales at established hamburger restaurants around the world fell 1.9 percent, as fast-food chains fight hard for diners, who continue to spend cautiously due to lackluster economic growth in most major markets.


Chinese stats should always be regarded with suspicion. This is even more true in the first quarter of any year due to the shifting holidays of the Chinese New Year. So be cautious with Chinese data over the next 3 months. It is better to aggregate the monthly results and compare them with last year’s data. The Chinese New Year begins Feb. 5 this year vs Jan. 23 in 2012. It effectively added five more working days to January compared to the same period last year.

Inflation Eases in China

The main measure of consumer inflation eased to 2% in January, after a 2.5% rise in December from a year earlier. Non-food CPI was +1.6% vs +1.7% Y/Y in December.

Pointing up  January’s CPI rose 1.0% M/M.

Wholesale prices fell 1.6% in January from a year earlier, compared with a 1.9% year-on-year drop in December, but they are expected to pick up soon as warmer weather leads to more construction activity. On a month-on-month basis, the PPI reversed a dropping trend to grow 0.2 percent in January, according to the bureau.



China Exports

Exports climbed 25% after a 14.1% rise in December, while imports jumped 28.8%, well ahead of the previous month’s 6.0% increase, according to customs data. According to the customs agency’s own calculation, exports were up 12.4% on an adjusted basis, while imports rose 3.4%.

Morning MarketBeat: Remember Europe?

(…) This week has brought Europe’s ills back into focus, and has put at least a temporary damper on the Dow Jones Industrial Average’s indomitable march toward a new record high.

Let’s start with Italy, where there are two big dramas playing out. The first is the return of perennial prime minister Silvio Berlusconi. His center-right coalition may throw Italy’s shaky economy into turmoil if it does well in elections later this month, signaling a possible reversal of the reforms put in place by the outgoing prime minister, Mario Monti.

The other drama surrounds Italy’s third-largest lender, the 541-year old Monte dei Paschi di Siena. The bank is at the center of a complex criminal probe over purported secret loans from the Bank of Italy in 2011 after MPS had exhausted all other means of getting cash.

Then there’s Spain, where the party of Prime Minister Mariano Rajoy is embroiled in a scandal over alleged kickbacks and calls for his resignation are getting noisy. The last thing this recession-plagued nation needs is political upheaval. (…)

Europe’s leader descended on Brussels Thursday for the beginning of a meeting to try and hammer out a seven-year budget, with all the familiar splits— north vs. south, growth vs. austerity, France vs. Germany—on display. Expect the usual Byzantine maneuverings—and keep an eye on that Spanish 10-year.

Yesterday, U.S. equities dropped along with Euro bourses. After these closed, U.S. markets recovered most of their morning losses. Bespoke Investment has these 3 charts revealing the risk that U.S. stocks might be dragged down by European woes:

German Industrial sector shrinks at fastest pace since 2009

Manufacturing output in Germany is falling at the fastest quarterly rate since early 2009, according to official data which are now confirming the downbeat messages from gloomy business surveys. However, those same surveys are now indicating a revival of the sector as we move into 2013.

imageAlthough data from the Federal Statistics Office showed output rose 0.2% in December, revisions to back data means that the sector is experiencing a strong downward trend in production. Over the fourth quarter as a whole, manufacturing output was down 3.1%, the largest three-month fall since May 2009.

The wider measure of industrial production, which includes construction and energy production, also fell at a steep rate in the fourth quarter. A 3.0% drop compared to the third quarter was likewise the steepest rate of decline seen since May 2009.

The steepness of the decline in production in part reflects pay-back from a surprisingly strong third quarter, which saw manufacturing output rise 0.7% and industrial production increase by 0.9%. The business surveys, such as the PMI, had in contrast indicated that output had fallen during over the summer.

Rainbow The weakness of the recent official production data therefore point to an element of catch-up with the business surveys. However, while the surveys gave an advance indication in the summer of impending economic weakness, some comfort can be drawn from the recent upturn in those surveys, which point to a strengthening of the manufacturing sector at the start of 2013. The PMI survey showed manufacturers reporting the strongest monthly increase in production since September 2011.

The first quarter is therefore starting off to be a far better one for the German manufacturing sector than the final three months of last year. (Markit)

I must tamper the enthusiasm with this comment from Markit’s German PMI for January:

Production levels were supported by a stabilisation of new order intakes during January, which contrasted with the sharp fall seen in the previous month. This in part reflected greater support from domestic demand, as new business from abroad dropped marginally at the start of 2013. That said, the latest decrease in new export orders was much slower than in December, with some firms suggesting that improved demand from Asia had helped partially offset lower new business volumes from clients in southern Europe. (…)

Staffing levels in the manufacturing sector decreased for the fourth month running in January, despite stronger trends in output and new business. Moreover, the pace of job shedding accelerated to its fastest since July 2012, reflecting lower workforce numbers in all three market groups monitored by the survey.

German retail PMI also suggests caution:

Actual sales in the German retail sector fell short of initial targets during January, as has been the case in each month since April 2012. Moreover, the degree to which sales were lower than expected was the most marked for one year. Retailers also anticipate that sales will continue to disappoint during the month ahead.

And this morning:

Decline in construction activity continues in January

January PMI data showed a continued contraction in overall German construction activity, although also signalled improved trends in a number of key areas.

Rates of decline in activity and new orders slowed since December, while the rate of job losses eased to only a marginal pace. Expectations regarding the year-ahead outlook for output levels were also
higher. Businesses meanwhile faced both a further deterioration in vendor performance and rising purchasing costs, despite substantially reducing their demand for materials over the month.

The ongoing downturn in German construction activity stretched to ten months in January, with the Purchasing Managers’ Index® (PMI®) – a single figure snapshot of overall activity in the construction economy – posting at 47.7. This was up on December’s ten-month low of 43.3, however, signalling a reduction in the overall pace of contraction. (…)

German trade data show consumers still reluctant to spend

Both exports and imports fell in December compared to their levels a year earlier, reflecting weakness in Europe’s largest economy in the fourth quarter, which is expected to improve this year. (…) exports to eurozone partners fell by 2.1 per cent while imports rose by 0.7 per cent last year.

European auto sector stabilises in January

Having undergone the steepest downturn since the height of the financial crisis last year, January PMI® data for the European automobiles industry raised the likelihood of a recovery in business conditions within
the sector in early-2013.

Although new orders continued to fall, the rate of decline was the weakest since last February and output was broadly stable. The Markit EU Automobiles & Parts Output Index rose for the sixth successive month, to a level broadly consistent with no change in production since December. The latest figure was the second-highest in the past 16 months. (…)

Data for new business suggest that exports helped to support workloads in January, reflecting in particular rising demand in Asian markets for European marques. This contrasts with 2010-11, when domestic markets
provided the main source of demand as European governments introduced incentive schemes for motorists to scrap older models.

Although output stabilised, auto manufacturers continued to shed staff in January. The current sequence of decline in employment in the sector now stretches to ten months. (Markit)


In all, what we are witnessing in Europe is an improving second derivative for most data. The ship is still sinking, but at a slower pace. Not a green shoot yet. Hence this:

Draghi’s Remarks Damp Euro

European Central Bank President Mario Draghi on Thursday said the euro’s rise may damp the central bank’s inflation outlook, suggesting the ECB could take action to stimulate the economy if the currency’s strength further undermines growth prospects.


EU leaders near €960bn budget deal
Hawks prevail as spending set to be cut for first time

If approved, the budget, which covers the seven-year period from 2014 to 2020, would be about 3 per cent less than the current long-term budget and represent the first ever decline in EU spending.

It would be a sharp cut from the €1,033bn first proposed by the European Commission, the EU’s executive arm, at the outset of negotiations. (…)

High five  But in an ominous warning of trouble ahead, Martin Schulz, president of the European parliament, said his institution might yet reject it.

“The further we step away from the commission’s proposed figures, the more likely the proposal will be rejected,” he said, adding that MEPs were “extremely sceptical”.

Light bulb  GDP Growth Unrelated to Stock Returns

Economists and most strategists spend much time forecasting GDP growth, linking their market strategy to their economic crystal ball. Jeremy Grantham has this chart that should free them from this boring chore of forecasting economic growth.


This is shown for the last 30 years only and for developed countries only, but in earlier work (which can be found on our website1) we went back a hundred years for some developed countries and looked at emerging country equity markets as well and all had the same negative correlations.

We know, although many often forget, that equity prices = earnings x P/E. Grantham goes one step further with this next chart that reveals a negative correlation between real earnings growth and real GDP growth.


Not that economy watching is useless. Just that the actual growth rates have little to do with equity returns. Understanding the drivers and the momentum in the economy and how they differ from expectations is far more useful.


One thought on “NEW$ & VIEW$ (8 FEBRUARY 2013)

  1. Any comments on the disparity non-revolving credit ex federal student loans relative to the reported numbers? Student loans have been propping up the nonrevolving dataset (from a y/y growth perspective) since mid-2009. Even of late, the non-revolving ex student loans has only been growing in the mid single digit range y/y as opposed to the “double digit” increases shown in the financial media.

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