NEW$ & VIEW$ (31 OCTOBER 2013)

Fed Opts to Stay Course For Now

Fed officials emerged from a policy meeting with their easy-money program intact and no clear signal about whether they would begin pulling it back at their December meeting or continue it into 2014.

(…) “The housing sector has slowed somewhat in recent months,” the Fed said in its statement. All in all, however, officials stuck to their view that the economy is expanding “at a moderate pace” and exhibits growing underlying strength.

Inflation Stays Tame, Supporting Fed on Easy-Money Strategy

U.S. consumer prices climbed modestly in September, underscoring weak inflation and supporting the Federal Reserve in keeping its bond-buying program intact.

The consumer-price index, which measures what Americans pay for everything from bread to dental care, rose 0.2% from August, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, increased 0.1%.

From a year ago, overall prices were up 1.2% while core prices were up 1.7%.

Wednesday’s report is particularly noteworthy because it’s used to calculate annual cost-of-living increase in Social Security payments for almost 58 million Americans. The Social Security Administration said Wednesday that benefits would increase 1.5% in January.

Pointing up But underlying inflation trends remain above 2.0%:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in September. The 16% trimmed-mean Consumer Price Index also increased 0.2% (2.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

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Another Downbeat Payrolls Report

ADP private-sector payrolls rose a lackluster 130,000 in October following a downwardly-revised 146,000 increase in September. While firms are still hiring, there’s no denying the slowing trend. Pronounced weakness among small service-providing businesses suggest the 16-day government shutdown was a special factor this month, and that payrolls will rebound in November…unless business owners fear another shutdown in the New Year. (BMO Capital)

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Money  Rich People’s Views of the Economy Near Pre-Recession Levels

Affluent U.S. households, buoyed by a surging stock market, feel better about the economy this fall than at any time since before the recession began.

A gauge of sentiment about current economic conditions among the wealthiest 10% of Americans jumped 22 points from the spring to a fall reading of 93, a survey by the American Affluence Research Center showed.

It’s the first “neutral” reading after five years mired in “negative” territory. The last time the index found positive sentiment — above 100 — was the fall of 2007, just before the recession began.

(…) “The stock market has made a big recovery…and these people control over 80% of all stocks and securities owned by the general public.”

Despite the optimism, many wealthier Americans said they’re reluctant to open their wallets further.

Of 17 categories tracked by the biannual survey, respondents only expect spending on domestic vacations to increase during the next 12 months.

The affluent said they plan to decrease spending on designer apparel, fine jewelry and camera equipment. They expect to hold steady in most other categories, including entertainment, dining out and home furnishings.

Ghost The rich even said they’ll cut back on holiday shopping.

The survey found affluent households plan to spend an average of $2,175 on holiday gifts, a 2.8% decline from 2012. (…) Last year, the rich spent 7% more than they said they would in the fall 2012 survey, Mr. Kurtz said.

Goldman Shrinking Pay Shows Wall Street Poised for Bonus Gloom

The firm’s average compensation cost per employee fell 5 percent to $319,755 in the first nine months of 2013. At JPMorgan Chase & Co.’s investment bank, it fell 4.8 percent to $165,774. The figure plummeted 16 percent at Zurich-based Credit Suisse Group AG to $204,000.

At the other extreme:

Retailers Brace for Cut in Food Stamps

Retailers and grocers are bracing for another drain on consumer spending when a temporary boost in food-stamp benefits expires Friday.

The change will leave 48 million Americans with an estimated $16 billion less to spend over the next three years and comes just months after the expiration of a payroll tax cut knocked 2% off consumers’ monthly paychecks.

On the business side of the equation, the cuts will fall particularly hard on the grocers, discounters, dollar stores and gas stations that depend heavily on low-income shoppers. Weak spending in that stressed consumer segment has already led retailers including Wal-Mart Stores Inc. and Target Corp. to lower their sales forecasts for the rest of the year ahead of holidays. (…)

Enrollment in food-stamp benefits surged during the recession and in its wake, increasing by 70% from 2007 to 2011 before leveling off. The government’s stimulus program increased Supplemental Nutrition Assistance Program, or SNAP, benefits across the board by 13.6% in 2009.

As that temporary increase expires on Friday, benefits for a family of four receiving a maximum allotment will drop by 5.4%, the equivalent of about $36 a month, or $420 a year, according to the U.S. Department of Agriculture.

The $16 billion, three-year toll of the cuts estimated by the Center on Budget and Policy Priorities pales in comparison with the estimated $120 billion, one-year hit caused by the earlier expiration of the payroll tax cut. But for many retailers the two have a cumulative effect.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps. That would mean it pulled in $14 billion of the $80 billion the USDA says was appropriated for food stamps in the year ended in September 2012.

THE EUROZONE IS NOT OUT OF THE WOODS JUST YET

Storm cloud  Eurozone retail sales fall at faster rate in October

Eurozone retail PMI® data from Markit showed a steeper drop in sales at the start of the final quarter of 2013. The Markit Eurozone Retail PMI remained below neutrality and declined to 47.7, from 48.6, indicating the fastest monthly rate of decline since May. In contrast, the average reading over the third quarter was the highest since Q2 2011 (49.5).

The faster decline in eurozone retail sales mainly reflected a steeper contraction in Italy, which had seen the slowest fall in sales in two years one month previously. Sales fell further in France, albeit at a slower rate, while the rate of growth in Germany was the weakest since May.

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France September consumer spending was down 0.1% on the month, having dropped 0.4% in August and was down 0.1% YoY.

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Euro Inflation Slows, as Rate-Cut Pressure Grows

Annual inflation in Germany fell in October to 1.3% from 1.6% the previous month based on common European Union definitions, Germany’s statistics office said. In monthly terms, consumer prices fell 0.2% from September.

Separately, Spain’s statistics institute said annual price growth in the euro zone’s fourth-largest economy fell to 0.1% in October from 0.5% in September.

Belgium also reported low inflation rates this month, with annual consumer price growth of 0.6%, the lowest since January 2010.

Taken together, Wednesday’s reports suggest annual euro-zone inflation, due for release Thursday, will come in as low as 0.9%, economists said. That compares with 1.1% in September and is far below the ECB’s target of just under 2% over the medium term.

The October CPI Flash Estimate rose 0.7% YoY up 1.1% in September.

SENTIMENT WATCH

From Bank of America Merrill Lynch:

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US stock market cap to GDP (Exhibit 2), one of Warren Buffet’s favored valuation metrics, is currently 1.12x, clearly high by the standards of the last 60 years. The measure is at the very least a reminder that growth in 2014, rather than liquidity, is essential to prevent an overshoot of the equity market.

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U.S. Blasts German Policy

The Treasury’s semiannual report says Germany’s export-led growth is creating problems for the euro zone and the global economy.

Employing unusually sharp language, the U.S. on Wednesday openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy.

In its semiannual currency report, the Treasury Department identified Germany’s export-led growth model as a major factor responsible for the 17-nation currency bloc’s weak recovery. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the “key findings” section of the report. (…)

The focus on Germany represents a stark shift in the Obama administration’s economic engagement with one of its most important allies. (…)

Punch  Jacob Kirkegaard, an expert on the euro zone at the Peterson Institute for International Economics, said the timing of the criticism is likely an attempt to influence economic policy in Germany while a new coalition government is being formed and is debating its agenda for the next several years. (…)

Ninja  The currency report comes at a time when officials in Berlin and Washington are already clashing over other issues including allegations about U.S. spying. (…)

THE STATE OF THE UNION

 

2 thoughts on “NEW$ & VIEW$ (31 OCTOBER 2013)

  1. Regarding the need for growth versus liquidity in 2014: Based on history, isn’t it plausible equity valuations substantially overshoot on the upside in this low interest rate environment. Don’t we need to see a change in fed policy or a more substantial slow down in earnings before a large pull back in stocks? What is the alternative for investors?

    • Harry, an overshoot is entirely possible (which is different from “plausible”) for the very reasons you raise: liquidity, low rates, few alternatives. Just what Bernanke hoped for. Nobody really knows how markets will go from here because greed could take over. The Rule of 20 helps us understand what the risk/reward relationship is, thereby adjust our equity exposure based on our own individual risk profile. In a week, most Q3 earnings will be in and we will have a better idea of the earnings backdrop. Remember that earnings are the main and most reliable fuel for equities. Rates are currently abnormally low and inflation remains a better gauge for P/E ratios. While inflation remains in the 2% range, there are few signs that it will shortly accelerate. So, unless earnings disappoint, equities should not decline much as long as the financial heroin keeps coming…
      Two more caveats on this Halloween day: keep in mind that all central banks are desperately pumping without knowing how this will end.
      Finally, also consider that the absolute P/E is 17.2x trailing eps when the historical median and average are 13.8x. P/Es rarely exceed 20x except in bubbles. P/Bk is historically high when ROEs are not.
      In all, absolute valuations are stretched while relative valuations (incl. the Rule of 20) remain barely ok but mainly because inflation is very low. Caveat emptor!

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