NEW$ & VIEW$ (28 JANUARY 2014)

Calm Returns to Emerging Markets Efforts by emerging-market central banks to counter a vicious market selloff in recent days brought a measure of calm.

The Turkish lira held on to the large gains it made Monday, after the country’s central bank announced a previously unscheduled interest-rate decision for late Tuesday, with the dollar pinned just under 2.27 against the lira, well below the near-2.39 peak it hit Monday.

Bank Gov. Erdem Basci said Tuesday he will “not refrain from permanent policy tightening,” which appears to reaffirm the market’s clear expectation for aggressive rate rises to support the currency at the coming rates announcement, scheduled for midnight local time.

An unexpected 0.25-percentage-point rate rise by India’s central bank has also lent support to battered emerging-market currencies, which have been dented by drab economic news from China, concerns over the effects of the U.S. Federal Reserve’s pullback from monetary stimulus, and a long list of geopolitical stresses including those in Turkey, Argentina, South Africa and Ukraine.

Italy Grabs Record Low 2-Year Funding Costs

At Tuesday’s auction, the Italian treasury sold €2.5 billion euros ($3.42 billion) in December 2015-dated zero coupon notes, or CTZ, and a further €1.25 billion euros in September 2018-dated inflation-index bonds, or BTPei, the Bank of Italy said. The amounts sold were at the upper end of the treasury’s respective target ranges.

The yield on the CTZ was 1.031%. Italy’s previous lowest funding cost in this maturity segment was 1.113%, in May 2013.

Fears had surfaced that ongoing emerging-market turmoil could spill into to the euro zone’s relatively weak sovereign debt markets as the single currency area tentatively emerges from recession. But these auction results suggest the risks to the euro zone can remain contained.

 Italian Retail Sales Offer Very Slow Progress

Retail sales for Italy in November were flat, marking their best performance since August when sales also were flat. The last increase in Italian retail sales came in May 2013 with a 0.1% rise. Retail sales dropped by 1.2% over 12 months, they fell at a 1.5% annual rate over six months and they fell at an even faster, 1.7% rate, over three months. (…)

Real retail sales excluding autos are flat in November, but they had risen by 0.1% in October. Retail sales are down by 1.9% over 12 months and they are falling at a faster, 2.6% annual rate, over six months. However, over three months, real retail sales are declining at only a 0.9% annual rate. (…)

SOFT PATCH WATCH

 

(…) Last week, the flash January factory survey by data provider Markit said some respondents stated “extreme weather conditions in January had temporarily disrupted output levels.” So, too, the Kansas City Fed said its survey of area manufacturers showed production declined slightly this month because of weather.

Store chains are also feeling the freeze.

“It was a slow period for sales over the past week with some bouts of abnormal seasonal weather curbing the consumers’ appetite to shop,” the International Council of Shopping Centers said.

Consumer spending may also take a hit because households are paying more for natural gas to heat their homes.

“Weather was mentioned 21 times in the latest beige book, almost always in a negative context, the most in any winter month Beige Book since at least 2011,” wrote John Canally, investment strategist at LPL Financial, after looking at the book.

Besides store sales and manufacturing, other activity that could be hurt by weather include home building and car sales (who wants to drive a shiny new car off the lot during a snow storm).

As one positive for growth: higher demand for heat is probably lifting utility output this month.

The end result is that when January data roll out in February, the weak tone may cause some economists to trim their tracking of first-quarter GDP growth. (…)

  • FYI, updated to last Saturday:

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Economists polled by Bloomberg anticipate the economy grew 3.2 percent during the final three months of the year, a bit softer than the 4.1 percent gain in the third quarter, which was overwhelmingly the result of a $115.7 billion inventory build. While optimists may claim the fourth quarter was still strong, the data may not provide an accurate depiction of underlying conditions.

First, there’s little doubt the strong economic reports for November were
payback for the sharp, albeit temporary, weakness in October caused by
the shutdown of the U.S. government. Second, with December data coming in softer than Street expectations, recent issues such as the mass layoff announcements by Wal-Mart, Macy’s, JC Penney, Target and Intel, as well as deterioration in China’s industrial sector and currency
issues in the emerging markets, the accumulation of negatives could end up being too much weight for the sluggish recovery to bear.

The Chicago Fed’s National Activity Index decreased to 0.16 in December
from the 0.69 posting in November. Similarly, The Conference Board’s index of leading economic indicators (LEI) inched up 0.1 percent in December following a 0.8 percent spike in November. The LEI is known for predicting turning points in the economy. And the Conference Board’s coincident-to- lagging indicator ratio continues its downward descent.

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Meanwhile, meaningful housing data have been bleak – new home sales
tumbled 7 percent in November – essentially unchanged from mid-year 2013 levels. From an economist’s standpoint, new home sales matter more than their existing home counterpart since they require building materials, new durable goods (washers, dryers, refrigerators, etc.) and employ specialty trade contractors such as plumbers, landscapers,
electricians and other tradesmen.

Similarly, the MBA Purchases Index fell 3.6 percent during the week ended Jan. 17, and is off 15.2 percent from year ago levels. This gauge has been mired in weak territory for years now with no sign of improvement. (…)

 

Sales of newly built homes fell 7% to a seasonally adjusted annual rate of 414,000 in December from 445,000 in November, the Commerce Department said Monday. November’s figure was revised down by 19,000.

December sales came in below the 455,000 annual pace forecast by economists and were at their lowest level since the summer, when rising mortgage rates undermined demand.

It was not just weather related as Haver Analytics points out:

Poor weather crimped sales by more than one-third m/m in the Northeast to 21,000 (-27.6% y/y). Sales also fell 8.8% (+5.1% y/y) to 103,000 in the West while sales were off 7.3% (+4.1 y/y) in the South to 230,000, the second month of sharp decline.

Royal Philips NV and Siemens AG, two of Europe’s biggest industrial groups by revenue, reported Tuesday robust results for the three months to end-December but cautioned that business conditions remain tough, partly because of the euro’s strength against major currencies.

The cautious outlook from the Dutch and German companies follows similar downbeat forecasts from other blue-chip European companies to have reported in the past two weeks, some of them issuing profit warnings.

The year will start a bit slow,” Philips Chief Executive Frans van Houten said.

At Siemens, orders at its power-generation equipment division fell in Europe, the Americas, and Asia in the quarter. The Germany company’s main European competitors in the sector, Alstom SA of France and ABB Ltd. of Switzerland, warned on their earnings prospects last week. (,,,)

Fingers crossed States Weigh Plans for Revenue Windfalls Governors across the U.S. are proposing tax cuts, increases in school spending and college-tuition freezes as growing revenue and mounting surpluses have states putting the recession behind them.

(…) The strengthening in tax revenue started in late 2012 as higher-income residents in many states took increased capital gains among other steps to avoid rising federal tax rates on certain income. Those tax payments spilled over into 2013, and further fuel for collections came from a record stock market and improving economy. State tax revenue nationally climbed 6.7% in the fiscal year ended June 30, 2013, Moody’s Analytics says. (…)

Some states already have responded to rising tax collections by increasing spending on education and other programs, or cutting taxes. (…)

Economists warn the surge in tax revenue already is showing signs of slowing. Some of the strength has been fueled by people shifting income for tax purposes, making the gains more about timing than growth. New York, for example, forecasts income-tax receipts will grow 3% in the fiscal year starting this April after projecting a 6.5% rise in the current fiscal year. And rising collections spurred in part by profits from a record stock market leave some states such as New Jersey and California subject to sharp swings in revenue from income taxes. (…)

Can we now reasonably hope that state employment has bottomed out?

FRED Graph

 

FRED Graph

 

President to Hike Minimum Wage for Federal Contractors

President Barack Obama plans to act unilaterally to raise the minimum wage for employees of federal contractors, asserting his executive powers before the State of the Union address.

The executive order would raise the minimum wage for workers on new federal contracts to $10.10 an hour, according to a fact sheet from a White House official. It said Mr. Obama would announce the new policy in his speech Tuesday, which is scheduled to begin at 9 p.m. Eastern Time.

The current federal minimum wage is $7.25 per hour, and hasn’t been raised since July 2009. About 16,000 federal employees were paid at or below minimum wage in 2012, according to the Labor Department. The agency doesn’t specify how many employees were government contractors.

Mr. Obama’s executive policy change is the opening salvo in a broader, election-year push by Democrats to raise the federal minimum wage to $10.10 an hour for all eligible workers.

SENTIMENT WATCH

 

The “January indicator” says that if the stock market falls in January, it usually falls for the remainder of the year. So far, January has been a disaster for stocks. (…)

High five Wait, wait! Mike Lombardi, in the above post, reproduced in many other blogs today, writes that “it usually falls for the remainder of the year”. Ever thought what “usually” really means? Mark Hulbert shows you the stats since 1880:

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Voilà! Now you know that “usually” means anything above 50% of the time. Hulbert continues where Lombardi did not:

A follower of the January Indicator in 2009 and 2010 would have missed out on two years of double-digit gains if one were to have used the occasion of a “down” January to get out of the market.

Another example that it is usually best to check the facts out. Here “usually” means “generally”, at a minimum, “always” if you really care.

 

BANKING

 

Loan-Loss Reserves Shrink

At the end of September, about 6,500 U.S. banks had set aside loan-loss reserves of just 1.83% of their roughly $7.80 trillion in loans, according to data provider SNL Financial.

That cushion has been shrinking since 2010, and banks are on pace to have ended 2013 with reserves amounting to about 1.66% of total loans, based on fourth-quarter reports from eight of the country’s largest banks provided to The Wall Street Journal by SNL.

That would be the lowest proportion of such reserves since 1.74% in mid-2008, a few months before the collapse of Lehman Brothers.

By contrast, reserves hit a near-term peak of 3.24% at the end of 2010 as banks grappled with troubled loans in the aftermath of the Great Recession.

Total bank loans outstanding, however, still are below prerecession levels of $7.91 trillion at the end of 2007. (…)

U.S. Banks Prune Branches

Bank branch closures in the U.S. last year hit the highest level on record so far, a sign that sweeping technological advances in mobile and electronic banking are paying off for lenders but leaving some customers behind.

U.S. banks cut a net 1,487 branch locations last year, according to SNL Financial, the most since the research firm began collecting the data in 2002.

Branch numbers have been on a steady decline since 2009 and reached a total of 96,339 at the middle of last year, the lowest since 2006, according to data from the Federal Deposit Insurance Corp.

 

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