NEW$ & VIEW$ (29 AUGUST 2013)

U.S. Pending Home Sales Decline Further

The National Association of Realtors (NAR) reported that pending sales of single-family homes during July declined 1.3% m/m but remained up 6.7% versus July of last year. The monthly decline followed an unrevised 0.4% June slip.

Last month’s sales decline again reflected mixed performance around the country. Home sales in the Northeast fell 6.5% (+3.3% y/y) while sales in the West dropped 4.9% (-0.4% y/y). Also moving 1.0% lower were home sales in the Midwest but they remained up 14.6% y/y. Pending home sales in the South rose 2.6% (7.7% y/y).

BMO Capital:

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U.S. foreclosures fall in July from year ago: CoreLogic

There were 49,000 completed foreclosures last month, down from a 65,000 in July of last year, CoreLogic Inc said. There were 53,000 foreclosures in June, down from an originally reported 55,000.

Before the housing market’s downturn in 2007, completed foreclosures averaged 21,000 per month between 2000 and 2006. (…)

There were about 949,000 homes in some stage of foreclosure, down from 1.4 million a year ago. That foreclosure inventory represented 2.4 percent of all mortgaged homes, down from 3.4 percent in July last year.

German Jobless Figures Unexpectedly Rise in Summer Lull

The number of people out of work increased by a seasonally adjusted 7,000 to 2.95 million, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to the median of 25 estimates in a Bloomberg News survey. The adjusted jobless rate stayed at 6.8 percent, near a two-decade low.

Brazil raises rates for fourth time since April
Central bank in drive to tame stubbornly high inflation

imageThe central bank’s monetary policy committee, Copom, raised Brazil’s benchmark Selic rate by 50 basis points to 9 per cent late on Wednesday, the latest increase in a 175 basis point tightening cycle since April.

Indonesia Raises Rates in Unplanned Move to Shore Up Rupiah

The central bank increased the reference rate to 7 percent from 6.5 percent, it said, after a meeting in Jakarta today that came before the next scheduled policy review. It also raised the deposit facility rate by half a point to 5.25 percent, and extended a bilateral swap deal with theBank of Japan valued at $12 billion that will allow the two to borrow from each other’s foreign-exchange reserves.

Indonesia raised the key rate by a combined 75 basis points in June and July before keeping it unchanged at its meeting on Aug. 15 as slowing growth deterred a third consecutive increase. The rupiah’s more-than-5 percent slump in the past two weeks may have pressured the central bank to increase borrowing costs again before a scheduled policy review on Sept. 12.

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Philippine economy maintains strong growth
Services led by trade and real estate fuel 7.5% GDP rise

GDP grew 7.5 per cent in the second quarter from a year ago after expanding by a revised 7.7 per cent from the previous period, making it the fourth straight quarter that the economy climbed more than seven per cent, the government National Statistical Coordination Board said. (…)

Though personal consumption spending still accounts for almost 70 per cent of the economy, it contributed less than half of second-quarter GDP growth. Most of the expansion came from government spending, boosted by the May 2013 midterm polls, and investments, particularly public and private construction.

Construction grew by 15.6 per cent in the quarter to June after rising by 30.1 per cent in the previous period, buoyed by government infrastructure projects as well as a boom in high-rise residential condominiums, office towers and other types of housing.

Is The Japanese Consumer Losing Faith?confidence is waning. More data on Friday may underline this trend.

Last week, subdued department store sales set off alarm bells. On Thursday, preliminary retail sales figures brought more bad news, falling 0.3% on year in July. On a seasonally adjusted basis, retail sales were down 1.8% on the previous month, the biggest fall since August 2011.

Oil market: multiple worries
Libya may be bigger threat to oil price than Syria

(…) Syria always has been and always will be a marginal player in the oil market. Before the civil war, it produced about 370,000 barrels of oil equivalent a day; that may have fallen to about 70,000 b/d now. Nor is it a significant transit point. (…)

More troubling is Libya, which produced almost 2 per cent of the world’s total oil and gas output last year. Earlier this year, Libya was boasting that it was almost back to its prewar production level of about 1.6m b/d (of which 1.3m b/d is exported). But strikes and protests have cut its daily oil production to an average of just 500,000 b/d this month. The chaos that has gripped the country since the ousting of Muammer Gaddafi in 2011 now threatens to curtail production indefinitely.

The “War” Effect

How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts…? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya… and why Syria is arguably more complex than these previous conflicts

Via Citi,

S&P: trades better once conflict begins. This time should be no different.

Gold: falls after start of action. Again should be no different.

Crude: usually falls at or just prior to start of military action.

USD: reverts back to dominant trend. USD weakened post-action in 1991, 2003, 2011 as it was in a bear market. The opposite happened in 1999 and 2001 (USD bull market). This time around USD strength should return once military intervention begins.

One counterpoint: Syria is arguably more complex than these previous conflicts. Military objectives are also not as well defined. Russia and Iran will also weigh in both pre- and post-action. The usual market reaction may be more muted and short-lived because of greater uncertainties.

WHY EARNINGS GROWTH MAY REMAIN SUBDUED:

Links Between Capacity Utilization, Profits and Credit Spreads

From Moody’s:

Though the share of jobs directly linked to goods producing activity has shrunk considerably over time, the percent of industrial capacity in use remains highly correlated with overall profitability, credit spreads, and business debt repayment. In all likelihood, the large amount of economic activity that is indirectly linked to the production of tangible goods helps to explain the still strong correlation between industrial activity and the corporate credit cycle. For example, much service sector activity is derived from the transportation, storage, sale, and maintenance of tangible merchandise. Capacity utilization’s ability to offer useful insight shows that tangible goods still figure prominently in a post-industrial economy. We still consume a lot of things.

(…) Amid sufficient slack, rising rates of capacity utilization often generate percent increases by profits that are a multiple of the accompanying percent increase in business sales. This phenomenon is referred to as operating leverage.

Ordinarily, the bigger is the year-to-year percentage point increase in capacity utilization, the faster is the year-to-year growth rate of profits. For example, when the year-to-year increase by the rate of industrial capacity utilization most recently peaked at the 6.8 percentage points of 2010’s third quarter, the annual growth rate of the moving yearlong sum of profits from current production also crested at 33%. Subsequently, the yearly change of the capacity utilization rate eased to the 0.0 points of 2013’s second quarter and profits growth slowed to 3%. (Figure 1.)

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Capacity utilization has declined in each of the last 5 months, from 78.2% in March to 77.6% in July. It has also declined in each of the last 7 cycles.

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David Rosenberg recently wrote on the “normal” biz cycle:

I think we are heading into mid-cycle where consumer spending is going
to take the baton from the housing market. This is currently being
delayed by the lagged impact of the early year tax bite and the current
round of sequestering, but next year we should begin to see the impact
of gradually improving job market fundamentals spill into a pickup in
consumer spending growth. This would not just be desirable — it would
be natural. Exports should also take on a leadership role as the
recession in Europe ebbs and Chinese growth stabilizes. The cyclical
outlook in Japan is also constructive as the monetary and fiscal stimulus
has to fully percolate but there is already evidence that the two-decade
experience with deflation is drawing to a close.

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The next chapter would then involve capital spending and plant
expansion, and capacity utilization rates and an increasingly obsolete
private sector capital stock will trigger accelerating growth in business
spending, likely by 2015 or perhaps even earlier. Profit growth is slowing and normally that would be an impediment, but there is ample cash on balance sheets and what businesses need is a less clouded policy
outlook, which hopefully will be resolved in the coming year as we get a
new Fed leader, greater clarity on monetary policy and some fiscal
resolution ahead of or following the mid-term elections.

That may be nothing but a hope and prayer, but more fundamentally, productivity growth has stagnated and the best way the corporate sector can reverse the eroding trend and protect margins at the same time will be to move more aggressively to upgrade their operations and facilities — we are coming off the weakest five-year period in the past six decades with regards to growth in capital formation.

Moody’s makes the link between capacity utilization and the high yield market:

Given the capacity utilization rate’s significant correlations with both the high-yield default rate and the delinquency rate of bank C&I loans, it is not surprising that the high-yield bond spread tends to widen as the capacity utilization rate falls. The diminution of cash flows and pricing power that accompanies a lowering of capacity utilization will increase the yield that creditors demand as compensation for default risk. Thus, a narrowing by the high-yield bond spread from its recent 460 bp to its 418 bp median of the previous two economic recoveries will require the fuller use of production capacity. (Figure 6.)

After rising sharply from June 2009’s record 66-year low of 64.0% to February 2013’s current cycle high of 76.5%, the capacity utilization rate of US manufacturers has since eased to July’s 75.8%. An extension of the current credit cycle upturn requires the return of a rising rate of capacity utilization.  (…)

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However, U.S. capex are not about to turn up:

An unexpected second monthly decline in nondefense capital goods shipments in July, coupled with weak orders, flags slower business capex in Q3. (BMO Capital)

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