NEW$ & VIEW$ (21 FEBRUARY 2014)


The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.3 percent in January to 99.5 (2004 = 100), following no change in December, and a 0.9 percent increase in November.
Philly Fed Misses Forecasts By a Wide Margin

Both the Empire and the Philly Fed declined “due to the harsh winter”. Yet, Markit’s flash PMI was very strong. Confused smile

Following on the heels of Tuesday’s weaker than expected Empire Manufacturing report, today’s Philly Fed also missed expectations by a wide margin.  While economists were forecasting a headline reading of 8.0, the actual reading was -6.3.  This is the lowest reading since February of 2013 and was the biggest miss relative to expectations since June 2012.

As shown in the table, just three (Delivery Time, Inventories, and Prices Received) of the nine components increased this month.  Of the six components that declined, Shipments and New Orders saw the largest drops, which doesn’t bode well in terms of economic strength. 

Once again, given the rough winter we have seen in the Philadelphia region, weather is being cited as the main culprit behind the weakness.  Whether or not you agree that the weather argument has any merit, the reality is that until it warms up, investors seem willing to give the economy the benefit of the doubt.  If you look at the forecast for the New York City area, it doesn’t look like it is going to consistently warm up any time soon.

Good news, though, lensing to small biz turned positive, barely (from BofAML)

(…) lending to small business is positive for the first time since the crisis — although nowhere near the level of the boom days of 2006 when credit expanded by more than a fifth.


imageThe U.S. CPI rose 0.1% in January, in line with the last six months, bringing the annualized rate of inflation to 1.2%. The total CPI’s 1.6% YoY increase should thus come down in coming months, unless monthly inflation picks up sharply.

Core CPI was also up 0.1%, also in line with the last six months (+1.4% a.r.), and is also up 1.6% YoY.

However, the Cleveland Fed median CPI rose by 0.2% for the third consecutive month, continuing to show YoY gains of 2.0%.

The inflation jury is still out, although there seems to be more and more inflation building in the pipeline. Consider that core PPI jumped 0.4% in January following a 0.3% rise in December. This is a 4.3% annualized rate over the last 2 months. Also, nonpetroleum import prices rose 0.4% in January.

Is Food Inflation Coming Back?


We highlighted the CRB/BLS Spot Foodstuffs Index last week. It’s continuing to rise but still remains lower year-on-year at this point. The question is whether this is the start of a broadly-based period of food price inflation?

Fingers crossed Grain prices forecast to fall to five-year lows Crop harvest expected to be close to record, says USDA

(…) We’re anticipating record crops in soyabeans and maybe even in corn with better production,” Joseph Glauber, US Department of Agriculture chief economist, said at the agency’s annual outlook forum. “All that will bring prices down.”

In the coming crop marketing year, corn will cost $3.90 per bushel, soyabeans $9.65 per bushel and wheat $5.30 per bushel, Mr Glauber said. These would be the lowest average prices since the year following a large 2009 US harvest.

Futures prices are currently far higher. CBOT December corn, a yardstick for this year’s harvest, was $4.6850 per bushel on Thursday, while CBOT November soyabeans were $11.4350 per bushel. (…)

High five  Richard Feltes, vice president of research at RJ O’Brien, a commodities broker, said the acreage forecasts did not appear to take into account the amount of land farmers were unable to plant last spring due to heavy rains.

“There is no allowance for the high ‘prevented plant’ that occurred last year. The trade is going to look on that with some degree of scepticism.” (…)


Even China’s Economists Are Singing the Blues China’s state media have long accused foreign analysts of being too bearish on the Chinese economy. Now domestic economist are chanting a pessimistic tune as well.

(…) “We are now in a painful stage,” economist Wang Luolin told a seminar this week.  “Let’s not try to dress things up,” said the consultant to the Chinese Academy of Social Sciences, a government think tank.

Yu Bin, a senior researcher at the influential Development Research Center under the State Council, took a similarly pessimistic view.

“The fact is, China’s economic growth is facing substantial downward pressure,” he said. “I don’t think we should get our hopes up for this year’s growth.” (…)

“We expect the economic growth rate to be just above 7% this year, and that’s about it,” Mr. Yu said. That would be well below the 7.7% expansion in all of 2013.

Mr. Yu added that all three big drivers of China’s growth — investment, consumption and exports— are looking weak.

Overall investment growth is expected to slip to around 18% this year from 19.6% last year, the researcher said. The manufacturing sector has been struggling with overcapacity and cut-throat competition, and oversupply of property in third- and fourth-tier cities will likely dampen overall investment. Meanwhile, mounting local government debt may weigh on infrastructure investment, he said.

Li Daokui, a former central bank adviser who normally has a more upbeat outlook, also sees slowing momentum – at least for now. “We should be prepared psychologically” for a shaky start to the year, he said, adding that growth could drop below 7.5% year-on-year in the first quarter.

Sad smile Slower growth adds to the increasing risk that borrowers won’t be able to repay their creditors.(…)

As a reminder, courtesy of Zerohedge which has a lot more to say about the China syndrome:



Brazil vows $18.5bn cuts to woo investors Move to restore fiscal credibility after downgrade threat

(…) The primary budget goal is predicated not only on problematic cuts to discretionary spending but is also based on an overly optimistic estimate of 2.5 per cent growth this year, says Tony Volpon, an economist at Nomura. “We’ve just changed our estimate to 1.3 per cent.”


Final Earnings and Revenue Beat Rates for Q4 2013

The Q4 2013 earnings season unofficially came to an end this morning with Wal-Mart’s (WMT) report before the open.  For the quarter, 61.9% of US companies beat consensus analyst earnings estimates.  As shown in the first chart below, 61.9% is at the top end of the range the earnings beat rate has now been in since 2011.

The top-line revenue beat rate for the just-completed reporting period finished at 63.8%.  Over the first three quarters of 2013, market bears often noted the weakness in top-line numbers, but they finished the year strong at least versus analyst estimates.  The 63.8% revenue beat rate was the best quarterly reading we’ve seen since Q2 2011.


The Thomson Reuters Same Store Sales Index is expected to struggle to a 1.0% gain in Q4 2013, which ends Jan. 31 at many store chains. That compares to a 1.7% actual gain in the index during Q4 2012 and would be below the 3% gain that indicates a healthy consumer sector. Excluding Walmart, the expected SSS growth rate for Q4 2013 increases to 1.6%, compared to 1.9% a year earlier.

(…) Of the 75 companies in the SSS index, 29 have reported Q4 results. Of these, 39% exceeded their SSS estimates, while 61% missed them.

In the Thomson Reuters U.S. retail universe, there have been 83 negative earnings per share pre-announcements for Q4, compared to only 18 positive EPS pre-announcements. By dividing 83 by 18, one arrives at a negative/positive ratio of 4.6 for the universe. Expect this to worsen for Q1 2014. To date, there have been 18 negative earnings per share pre-announcements vs. only 3 positive – which brings us to a negative/positive ratio of 6 for the universe.

As a result of the negative guidance, analysts have become bearish on retailers, and have been lowering both earnings and same store sales expectations since the beginning of the quarter. At the beginning of the quarter (November 2013) the Same Store Sales growth estimate for the holiday season was 2.0%. Today, it is 1.0%, as seen in the chart below.



                                                                                                Source: Thomson Reuters I/B/E/S

Confidence in global recovery grows Survey reveals new fears over shortage of skilled labour

The latest FT/Economist Global Business Barometer survey, conducted at the end of January during the peak of concerns about emerging market fragility, shows an uptick in all measures of confidence.

Asked about global business conditions, 49 per cent said they expected them to get “better” or “much better”, a rise of 8 per cent on the previous quarter.

Respondents were more bullish about their individual businesses, with 59 per cent expecting conditions to improve (4 per cent higher than the previous survey) and 43 per cent saying conditions were the same in their respective industries (a 7 per cent rise).

While economic and market risk remained by some margin the biggest perceived threat, there was a notable easing of concern as the percentage citing it dropped to 52 per cent from 65 per cent the previous quarter.

As businesses become more confident, they are concerned about skilled labour. The survey showed that “talent and skills shortages” were slowly increasing, and were cited by 34 per cent of respondents as a risk, closing on “political risk” at 36 per cent. Respondents from North America were most concerned about skills shortages with 39 per cent citing it as one of the biggest worries for their business. (…)

The changing geopolitics of energy By David Petraeus and Ian Bremmer

In yesterday’s FT:

(…) The US energy revolution is far from the whole story. In Mexico, President Enrique Peña Nieto is moving forward with a historic energy-sector reform programme. Though much work still has to be done, it is clear the state-owned oil group Pemex will finally be forced to shed its monopoly and allow production-sharing contracts (and thereby reverse years of declining production). Long lead times for exploration and development of deepwater offshore acreage suggest that large production increases will take time, but the long-overdue Mexican reforms are welcome.

The energy boom also extends to Canada. There, America’s number one trading partner continues to increase production as it also seeks to diversify its market outlets for oil and gas exports, though it clearly will continue to export the vast majority of its oil resources to the US, where it supplies more than one-quarter of crude oil imports. Beyond that, after considerable delay, the Obama administration will probably approve the Keystone XL pipeline this year, providing a useful export route from Canadian oil sands to US refining markets. The cumulative effect of the developments in gas and oil production in the US, Canada and Mexico will be a continent that has much greater energy independence.

Meanwhile, discoveries in Brazil, Colombia, east Africa and elsewhere will come on line, adding to the supply surge.

Even in the turbulent Middle East, oil production capacity will rise this year. In Iraq, deteriorating security conditions in the Sunni Arab areas are hundreds of miles from oil facilities in the south, where the bulk of the country’s oil is produced. Oil production in the rest of Iraq represents less than 15 per cent of total volumes, and almost all of this year’s increases in export capacity will come from southern fields – though markets will watch developments in the Iraqi Kurdish region in the north.

In Libya, central governance is severely challenged, but the country’s competing factions have been careful not to kill the “golden goose” by damaging oil infrastructure. And assuming some deals between regional power brokers and the central authorities, export volumes should increase in the first half of 2014 from a few hundred thousand barrels a day to half or more of their pre-crisis volumes of 1.4m b/d.

Over the course of this year, the negotiation over the future of Iran’s nuclear programme will be the wild card to watch.(…) the more likely outcome will be a further extension of the interim agreement, pushing the issue into next year. If an agreement is reached, gradual oil sanctions relief will delay any resumption of full volumes into 2015, at the least, but supplies would then increase sharply thereafter.

All of these developments are bad news for governments that depend heavily on energy exports for their revenue. The Saudis, for example, who are anxious over the possibility of improved US relations with Iran, are watching this market shift closely, because market pressure to restrain output will leave them with less money to spend on projects meant to safeguard the kingdom’s stability at a time when those outlays are increasing substantially.

Russia has headaches too. When Vladimir Putin became president in 2000, oil and gas accounted for less than half of the country’s export revenue. Since then the percentage is now about two-thirds. Moreover, Russia’s European energy customers will have new options as US liquefied natural gas projects progress and as other potential exporters develop natural gas production. (…)

Venezuela’s troubles are the most immediate of all. That country, mired in its worst economic crisis in 30 years, is already plagued with spiralling inflation, consumer good shortages, power cuts and one of the world’s highest crime rates. And it sold much of its future production to China to generate funds to help win the recent national election. The challenges have accumulated so much that Caracas no longer publishes oil production or export statistics. (…) That is why lower oil prices are a potential disaster for Venezuela’s ruling party – and for Cuba’s Communists, who get by with cheap energy imports from their friends in Caracas. (…)

For decades, shifts in energy markets have reshuffled the deck of geopolitical winners and losers. That is now happening again. The latest trend looks here to stay, and the fallout has just begun.

Obama Budget Plan Reflects Partisan Lines President Obama’s 2015 budget proposal will abandon overtures to Republicans and call for a large expansion in spending on education and job training, in a push certain to ratchet up tensions in the already-fractured capital ahead of November’s elections.


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