NEW$ & VIEW$ (7 NOVEMBER 2013)

U.S. LEADING ECONOMIC INDEX KEEPS RISING

The Conference Board LEI for the U.S. increased for the third consecutive month in September. Improvement in the LEI was driven by positive contributions from the financial indicators, initial claims for unemployment and new orders. In the six-month period ending September 2013, the leading economic index increased 3.0 percent (about a 6.0 percent annual rate), much faster than the growth of 1.2 percent (about a 2.4 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread than the weaknesses.

These charts from Doug Short suggest that the probability of a recession remains very low:

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ISM Services Surprises to the Upside

Following up on the heels of Friday’s stronger than expected ISM Manufacturing report, Tuesday’s release of the non-manufacturing ISM index also came in ahead of expectations.  While economists were expecting the October headline reading to come in at a level of 54.0, the actual reading came in at 55.4.  This represents a one point increase from September’s level of 54.4.  With both the manufacturing and non-manufacturing indices having been released, we can see that the combined composite PMI (bottom chart) for October also increased from 54.6 to 55.5.

Of the ten components shown, only four increased this month, while six declined.  Compared to one year ago, ‘breadth’ in the components was more positive as seven increased and just three declined. 

Credit Jobs at 10-Month Low as Borrowing Slows

The credit-intermediation industry shed 7,700 workers — including commercial bankers, credit-card issuers and mortgage and loan brokers — in September, the biggest drop since June 2011, Labor Department figures show. The total fell to about 2.6 million, the lowest since November 2012. (…)

Mortgage refinancing is the more labor-intensive segment, so a recent rise in interest rates has resulted in sluggish credit growth and fewer people needed to make such loans (…)

German Industrial Production Falls as Recovery Slows

Output (GRIPIMOM), adjusted for seasonal swings, fell 0.9 percent from August, when it rose a revised 1.6 percent, the Economy Ministry in Berlin said today. Economists forecast no change, according to the median of 36 estimates in a Bloomberg News survey. Production advanced 1 percent from a year earlier when adjusted for working days.

Another highly volatile series.. Output is up 0.6% in the last 5 months but down 0.4% in the last 4 months.

CHINA ECONOMY NOT REACCELERATING

The CEBM November Survey indicates that aggregate demand has stabilized, but remains weak. From the perspective of domestic demand, overall consumer sector demand remained sluggish. From the perspective of external demand (…) overall Y/Y growth was flat. Commercial bank feedback communicated a cautious outlook for November.

SENTIMENT WATCH

Investors Rush Back Into Europe

Equities investors are returning in droves, but the region’s recovery remains fragile and deep structural problems remain.


Maligned Markets Return to Vogue

Cash is returning to emerging markets, sparking stock rallies and a surge in fundraising. Calm in the U.S., combined with low rates, has spurred global investors to try to juice returns before year’s end.

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The availability of foreign cash is also sparking a flurry of sales of corporate debt. Emerging-market companies have sold $71 billion of bonds since June, taking this year’s total to $236 billion, almost a third more than was sold at this stage in 2012, according to Dealogic, a data provider.

Yields on emerging-market sovereign debt, which rose until September, have also fallen sharply, signaling the return of foreign investors to the market. Average yields on five-year emerging-market government debt have dropped by 0.57 percentage point. In Indonesia, where the decline has been among the most dramatic, yields fell to 7.2% from 8.1%.

TAPER WATCH

Gavyn Davies
What Fed economists are telling the FOMC

(…) The implication of these papers is that these Fed economists have largely accepted in their own minds that tapering will take place sometime fairly soon, but that they simultaneously believe that rates should be held at zero until (say) 2017. They will clearly have a problem in convincing markets of this. After the events of the summer, bond traders have drawn the conclusion that tapering is a robust signal that higher interest rates are on the way.

The FOMC will need to work very hard indeed to convince the markets, through its new thresholds and public pronouncements, that tapering and forward short rates really do need to be divorced this time. It could be a long struggle.

Russia slashes long-term growth forecast
GDP growth will fall behind global average in the next 12 years

(…) The economy ministry said it now expected the economy to grow at an annual rate of just 2.5 per cent through to 2030, down from its previous forecast of 4.3 per cent made in April. Data for gross domestic product growth in the third quarter are due next week, and are also expected to show a continued slowdown.

The sharp cut follows a drop in fixed investment which independent analysts have warned can only be reversed by decisive structural reforms of which the government has so far given little indication.

At the end of September, fixed investment showed a 1.5 per cent drop year on year, and consumer spending slowed to 3 per cent from 7 per cent in the same period in 2012. (…)

The economy ministry said it expected corporate earnings and salaries growth to slow and the wealth gap to widen further, with the share of the middle class falling from half to just one-third of society. (…) …

EARNINGS WATCH

Q3 earnings season is almost over with more than 90% of S&P 500 companies having reported.

RBC Capital calculates that the earnings surprise was 64% with a 5.7% YoY EPS growth rate (3.6% ex-Financials) on a 3.1% revenue growth rate (3.3% ex-Financials). Bespoke Investment below writes about all NYSE companies:

Earnings Season Ending with a Whimper

As shown below, the percentage of companies that have beaten earnings estimates this season has dropped below the 60% mark (59.8%).  

Early on this season, the earnings beat rate looked pretty good, but things have turned around over the past few weeks.  The blue bars in the chart below show the overall earnings beat rate as earnings season has progressed.  The green area chart represents the total number of companies that have reported this season.  As of today, nearly 1,800 companies have reported.  

On October 23rd, 63.9% of the companies that had reported had beaten earnings estimates, which was the highest reading seen this season.  Since then the beat rate has trickled lower.  On November 1st, the beat rate was down to 61.1%, but as of today, it has crossed below the 60% mark (59.8%). 

 

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