NEW$ & VIEW$ (16 JULY 2013)

Sad smile  Consumers Dial Back on Spending

Retail sales grew a softer-than-expected 0.4% last month, the government said Monday, as shoppers dialed back spending on restaurant meals and gardening equipment amid higher taxes and weak growth in wages. If purchases of cars and gasoline are excluded—these purchases tend to be volatile—spending actually dropped 0.1%, the first decline in a year.

The June report, which also revised down May’s figure to a 0.5% increase from 0.6%, suggests consumers remain cautious about buying anything other than basics four years into the recovery. (…)

Pointing up In a worrying sign, food-service sales fell 1.2% in June, the biggest decline since February 2008. Restaurants and bars have been among the biggest job creators this year, accounting for 51,700 of the 195,000 increase in payrolls last month.

Control sales (non-auto less gasoline and building supplies) rose 0.1% in June and are up 2.0% annualized in Q2. Pent-up demand continues to drive car sales higher. They rose 1.8% in June and +17.9% annualized in Q2.

Here’s the chart on control sales (quarterly) from BMO Capital:


Weekly chain store sales are up 2.1% (trailing 4 weeks) YoY, a sharp slowdown from their 3% pace of early June.  image

And to repeat myself, this won’t help:


What we have all been sensing for many weeks is now transpiring into economists’ numbers:

Second Quarter Looks Uglier and Uglier

Monday brought disappointing news on retail sales and business inventories. Retail purchases increased just 0.4% in June, not the 0.8% expected, and May’s sales were revised down. The control sales group, which goes into GDP and which excludes vehicles, building materials and gasoline, rose 0.15% in June, half the gain forecasted.

In addition, businesses increased their inventories level by just 0.1% in May, and April’s increase was revised from 0.2% to 0.3%.

The list of economic shops now estimating real GDP grew by less than a 1% annual rate last quarter include Goldman Sachs (0.8% as of Monday), Macroeconomic Advisors (0.6%), Royal Bank of Scotland (0.5%) and Barclays (0.5%).

Smile Empire Manufacturing Stronger Than Expected

The Empire Manufacturing report for July was positive (9.46) and better than expected (5.00) for the second straight month.  Unlike last month’s report which had a lot of weak undertones in it, this month’s report was considerably better. 




China in the rear view mirror: not pretty.


China forward looking: not much better:

Markit’s monthly manufacturing and services PMI surveys, produced on behalf of HSBC, collectively indicated the first contraction of economic activity for ten months in June, the rate of growth having slowed over the previous two months.



CLSA’s Andy Rothman is not overly worried:

None of the data, however, signals more than a continued, gradual cooling of growth rates.  There is no reason to anticipate a sharper macro deceleration, and we do not expect the Party leadership to implement a significant stimulus.  Beijing seems comfortable with the shift to gradually slower growth, and the leadership also appears committed to further structural reforms.

This is interesting:

We do not see evidence for declining competitiveness or a serious drag from RMB appreciation.

Pointing up For example, at the end of 2004, Chinese goods accounted for 13% of total US goods imports. During the first five months of this year, Chinese goods had an 18% share of US goods imports, up from 17% during the same period last year.

Given that real appreciation of the RMB was 32% from the end of 2004 through the end of last year, and another 2% this year, the problem with China’s exports is not primarily due to its currency.  The bigger issue is weak global demand.  Therefore, while we expect the 1H13 pace of RMB appreciation (3.8% annualized) to slow, we do not expect a full year devaluation against the dollar.  As in 2009 – – when Beijing did not devalue despite an export collapse – – the trade benefits of a devaluation would be far too small to outweigh the negative political consequences.

Unless a sharp fall in exports leads to widespread unemployment, the Party will not turn to a stimulus.

The FT is not as complacent:

(…) And worse – demand for China’s exports is looking shaky.

Since it was allowed to appreciate the renminbi has been eroding Chinese exporters’ price competitiveness.

Renminbi dollar

On the plus side, productivity is rising.

China output

But that isn’t enough to preserve China’s competitive advantage in manufacturing.

China manufacturing costs

As a result, some countries are now buying less from China.

China exports

However, exports are not crucial to China’s growth:

China GDP components

On the other hand:

Perhaps more importantly for the global economy, the Chinese slowdown means it’s buying less from much of the world.

China imports

The global impact of China’s slowdown could be the most important economic story of the moment. Which countries will be hit, how badly, and what will the consequences be?

Here’s a hint:

Lost amid the sigh of relief on China’s GDP figures was the fact that the country’s industrial production slowed to a 8.9% y/y pace in June. While no doubt impressive as a standalone data point, Q2 was actually the slowest pace since 2001, aside from the 2008/09 global recession. We find that industrial output is a better driver of commodity prices than GDP and, over the past 15 years, anything south of 12% output growth has meant declining commodity prices.



Even more so when considering that IP is slowing everywhere else.

Lightning Euro-Zone Exports Slump

The European Union’s statistics agency said Tuesday that adjusted for seasonal factors, exports from the euro zone to the rest of the world fell 2.3% from April, while imports were down 2.2%. It was the second straight month in which exports fell sharply, and the largest month-to-month fall since June 2011.

The drop in exports to countries outside the European Union was particularly sharp in Germany, falling by 9% from April. By contrast, Italian exports to non-EU countries rose by 3.6%, while Spanish exports rose by 0.8%.

Auto  European Car Sales Fall Again

The number of new car registrations in the EU continued to fall in June, squelching hopes they had already reached bottom after a multiyear downturn.

Registrations fell 5.6% on the year in June to 1.13 million passenger cars, leading to a 6.6% decline in the first half of 2013, according to data published Tuesday by industry association ACEA. Registrations in June were almost 25% lower than six years ago.

Car sales fell 4.7 per cent in Germany, 8.4 per cent in France and 5.5 per cent in Italy, according to ACEA.

Annoyed  South Korea Cautions Fed on Stimulus

South Korean Finance Minister Hyun Oh-seok urged the U.S. Federal Reserve to take into account the global impact of its eventual exit from stimulus measures, warning of possible “reverse spillover” effects.

“The U.S. should consider not only its own economic conditions but also the global impact carefully to determine the timing, pace and manner of its exit from stimulus,” Mr. Hyun said in a news briefing Tuesday. (…)

Mr. Hyun warned that emerging economies could be badly hit if the Fed isn’t careful in unwinding its easy-money policy—and that could lead to what he called a reverse spillover, with the emerging economies forced to cut their imports from the U.S, so delaying the U.S economic recovery. (…)

Spillover effects:

India Joins Brazil to China in Efforts to Tighten Liquidity

India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets. Bond yields and the rupee surged. (…)

Emerging markets from Brazil to Indonesia have raised borrowing costs in 2013 to aid their currencies as the prospect of reduced U.S. monetary stimulus curbs demand for emerging-market assets. Turkey’s central bank said yesterday it may raise interest rates at its meeting next week. (…)


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