NEW$ & VIEW$ (14 MAY 2013)

Posted on May 14, 2013 by Denis Ouellet

Retail Sales Gain Shows Resilient American Consumer

The U.S. retail sales report showed that figures used to calculate growth, which exclude categories such as gasoline and automobiles, climbed 0.5 percent for the second time in three months.

Nine of 13 major retail sales categories showed gains last month, led by a 1.2 percent advance at clothing stores, the biggest in more than a year, according to today’s report. Receipts at general merchandise outlets, which include department stores, climbed 1 percent, the most since March 2012.

Cars and light trucks sold at a 14.9 million annual pace in April, down from a 15.2 million rate the prior month, according to data from Ward’s Automotive Group. The average for the first quarter was 15.3 million, the strongest since the same period in 2008 and a sign the longer-term outlook remains positive. (Chart from Haver Analytics)

Markit provides more details:

US retail sales rose 0.1% in April, according to official data, representing a welcome improvement after sales had dropped 0.5% in March (revised from -0.4%). Core sales, which exclude building materials, car dealers and gasoline, were even perkier, rising 0.5% after a 0.1% increase in March.

Core retail sales in the three months to April were up just 0.9% on the previous three-month period; the weakest rate of expansion since last October and down from 1.3% at the start of the year.

However, weekly chain store sales actually peaked at the end of April and have declined 3% sequentially during the last 2 weeks. Not new for this volatile series but the 4-week moving average has clearly rolled over and is now only up 2.0% YoY.

Small Business Optimism Up in April

The Index gained 2.6 points, rising to 92.1. That beats falling, but it is
barely above the recovery average of 90.7, making it another very poor
reading. Four Index components rose, 2 fell, 6 were unchanged, a lot of
“noise”, no clear direction. Owners are very pessimistic about the
economy, with a net negative 15 percent expecting business conditions to
be better in 6 months. As bad as that sounds, it was a 13 percentage point
improvement over March.

Economists Cut China Forecasts

Many economists are cutting their forecasts for China’s economic growth this year after a fourth month of disappointing data prompted fresh looks

A survey of 18 economists by The Wall Street Journal late last year showed the median forecast for economic growth in 2013 at 8%, up from the 7.8% rise China’s economy posted last year.
But now the numbers are telling a different story. A new survey of 12 economists this week showed that the median forecast has since fallen to 7.8%.

The chart illustrates what I pointed out yesterday.

Industrial production up by 1.0% in euro area

In March 2013 compared with February 2013, seasonally adjusted industrial production grew by 1.0% in the euro area (EA17) and by 0.9% in the EU27, according to estimates released by Eurostat, the statistical office of the European Union. In February production increased by 0.3% in both zones.

A turn? Only very cold weather that boosted energy production in February and March. Still, cap. goods and durable cons. goods, though volatile, are perking up.

German Investor Confidence Rose Less Than Forecast in May

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, increased to 36.4 from 36.3 in April.

ZEW’s gauge of the current situation fell to 8.9 from 9.2 in April.

EARNINGS WATCH

Updated Q1 Earnings Season EPS and Revenue Beat Rates

About 500 companies reported earnings last week, pushing the total number of companies that have reported this season up to more than 2,100. And while the market is up on the week, earnings haven’t been great. At the start of the week, the percentage of companies that had beaten earnings estimates this season stood above 59%. The additional 500+ companies that reported this week only beat earnings at a 52% rate, pushing the overall earnings beat rate down to 57.6%. As shown below, this would be the weakest reading of the entire bull market if earnings season ended today.

Guidance Spread Negative But Inching Higher

More than 2,000 companies have reported earnings so far this season, which ends next Thursday when Wal-Mart (WMT) reports. So far this season, the spread between the percentage of companies raising guidance minus those lowering guidance has been -2.9 percentage points. This means that more companies have lowered guidance than raised guidance, and if it holds in negative territory, it will be the seventh straight quarter with a negative guidance spread. As shown in the chart below, the spread this season is much better than it was in the prior three quarters. If we hear positive things from companies next week before earnings season ends, the spread could get a little better even. That being said, it’s pretty amazing that companies have had a negative slant regarding the future for nearly two years now, and over this time period the market has soared. What would the market be doing if companies were actually optimistic? Who knows with so much attention paid to Bernanke and his easy money policy.

And this from ISI: revisions remain negative.

That equities/commodities disconnect

The moves are logical. Stocks are up because of rampant QE, which is squeezing investor flows out of bond markets and into equities. And the reason we’ve got rampant QE is the continued lack of near-term economic recovery globally, which is manifestly bad for industrial commodities.

I thought QEs were supposed to lift all asset classes. Well, there is something called supply in the demand/supply equation…

OIL: This is now a front page story (see Facts & Trends: The U.S. Energy Game Changer):

IEA: North American Oil to Dominate World Supply Growth North American oil production will dominate world-wide supply growth over the next five years, the International Energy Agency predicted, the result of growing production from “fracking” and other technologies.

In its most recent analysis, which takes a five-year view of the oil market, the IEA said U.S. production is rising much faster than previously forecast as a result of sustained high prices and more-efficient operations.
The latest forecast marks a shift in the IEA’s previous thinking, which saw supply growth split between OPEC and non-OPEC countries in the medium term. The fast U.S. supply growth has diminished U.S. demand for oil from OPEC members like Nigeria, and in the long term, growing U.S. exports of oil and natural gas could further weaken OPEC, says Amy Myers Jaffe, who studies energy and the oil industry at the University of California at Davis but didn’t know the contents of the IEA report. (…)
According to the IEA, average North American production is expected to grow by 3.9 million barrels a day between 2012 and 2018, accounting for more than half of the increase in non-OPEC production for the period.
(…) the IEA expects demand for OPEC oil to fall below 30 million barrels a day—the organization’s self-imposed production ceiling. IEA expects that trend to endure until 2018. (…)
According to the IEA’s projections, average OPEC production capacity will rise by 1.75 million barrels a day between 2012 and 2018 to reach 36.75 million barrels a day by the end of the period. The previous estimate pegged OPEC production capacity between 2011 and 2017 to grow 3.34 million barrels a day to 37.54 million barrels a day in 2017.
These changes coupled with the continuing rise in Asian demand will have a profound impact on the market over the next five years, the IEA said.
“There is hardly any aspect of the global oil supply chain that will not undergo some measure of transformation over the next five years, with significant consequences for the global economy and oil security,” the IEA said.

SENTIMENT WATCH

IPOs Set to Raise Most Cash Since Crisis

U.S. companies are on track to raise the most money through initial public offerings since before the financial crisis, driven by the same thirst for risk among investors that has pushed the stock market to new highs.

Already this year, 64 U.S.-listed public offerings have raised $16.8 billion, according to Dealogic. In the same period in 2012, the biggest year in dollars since the financial crisis, 73 companies raised a total of $13.1 billion. Last week alone brought 11 U.S.-listed IPOs, making it the busiest week for such deals since December 2007.

The largest 25 IPOs this year have risen on average 22% from their initial prices, according to Dealogic, versus a 15% gain for the Standard & Poor’s 500-stock index since the beginning of the year.

NEW$ & VIEW$ (8 MAY 2013)

Posted on May 8, 2013 by Denis Ouellet

Americans Pick Up Borrowing

America’s credit crunch is easing. For the past six years, consumers and businesses have struggled to borrow money, but slowly, things are getting easier.

(…) Large U.S. companies are taking advantage of low interest rates to borrow record amounts of capital in bond markets. Banks are opening the spigots for commercial and industrial firms, and loans grew at an 11% annualized rate in the first quarter of this year, the sixth double-digit percentage increase in seven quarters, Federal Reserve data show.

According to the Fed’s survey of senior bank-lending officers released Monday, 28% of banks lowered the cost of credit lines early this year to smaller firms like Mr. Aaron’s that have annual sales of less than $50 million. Residential lending began edging up last year, and even people with bad credit can get a loan to buy a car these days.

In all, some $713 billion in credit flowed to U.S. households and nonfinancial businesses last year, double 2011′s $336 billion, according to the Fed. That is still a fraction of the $2.2 trillion in credit that lifted American consumers and businesses in 2007. (…)
Even borrowers with patchy credit can now qualify for “subprime” car loans, which were 43% of auto loans made in the fourth quarter of 2012, according to Experian, a credit-reporting firm.
Home-equity loans, which allow homeowners to tap their homes for cash, are creeping back. It is the same story with jumbo mortgages, usually taken out by affluent people. The bottom line is that banks are dipping their toes back into riskier territory.

There also are signs traditional mortgage lending is picking up: Residential home loans from banks expanded at an annualized rate of 1.4% in the first quarter, after contracting in the final months of last year, Fed data show. The Fed’s latest survey of bank lending officers showed nearly 10% of banks polled said they were easing standards on “prime,” or low-risk, mortgages, compared with less than 5% in a previous survey. (…)

Credit-Card Debt Declines for First Time in 2013 Americans cut their credit-card debt in March, a sign some consumers are cautious about the sluggish economic recovery. But total debt increased due to jumps in student and auto loans.

While total consumer borrowing increased slightly during the month, revolving credit, a category dominated by credit card debt, fell 2.4% in March at an annual rate, the first decline this year, a Federal Reserve report showed Tuesday. (…)
Credit card debt now only accounts for 30% of total consumer borrowing other than home loans, its lowest level since 1991, O’Keefe’s research showed. Before the financial crisis, credit card debt accounted for more than 37% of consumer credit. (…)
Total consumer credit, defined as lending to consumers excluding home mortgages, increased by $7.97 billion to a seasonally adjusted $2.807 trillion, the Fed report said. Revolving credit shrank by $1.7 billion during the month, contributing to the smallest gain in total credit since July.
The gain was entirely due to an increase in nonrevolving credit, which includes student loans and auto financing. That borrowing increased 6% in March at an annual rate compared with an 11% jump in February.
The smaller increase largely comes from auto lending, which eased in March after consistent growth over the prior year, O’Keefe said.
The student-loan market, now dominated by the government, has expanded steadily during the economic recovery. Federal education lending rose by $3.9 billion in March to $560.8 billion. That number is reported without seasonal adjustments.

U.S. Gets Free Cash in Sale of 4-Week Bills

Short-term Treasury bills sold at auction for zero yield as the U.S. borrowed less than expected amid a surge in tax receipts.

China Trade Surplus Draws Doubts China’s trade swung to a surplus in April after showing a small deficit in March—but analysts cautioned that the 14.7% growth in exports may have been a bit too good to be true.

(…) analysts cautioned that the 14.7% growth in exports during the month, after a rise of 10% in March, may have been a bit too good to be true, with some of the gains due to overinvoicing by exporters claiming higher payments than they actually receive from their customers. (…)
Another telltale sign of problems with China’s trade data is the weakness of tallies from other key exporters in the region such as South Korea, which saw exports rise only 0.4% over a year ago in April, and Taiwan, which showed a downturn of 1.9%.
Key markets have shown weak demand this year. Exports to the U.S. in the January-April period were up 5% from a year earlier while those to the European Union were down 0.9%, according to customs data released Wednesday.
Imports in April alone were stronger than expected at 16.8% after a 14.1% rise in March, giving some encouragement about China’s appetite for global commodities.

China Taiwan trade data SocGen

(SoGen via FT Alphaville)

CURRENCY WARS

Borg Joins Wheeler in Escalating Response to Currency Gains

Sweden’s government abandoned its hands-off stance on the krona and New Zealand announced it sold the kiwi, joining a growing band of countries to escalate their response to strengthening currencies.
In Sweden, Finance Minister Anders Borg said the krona’s appreciation warrants central-bank consideration. The won’s advance prompted Kim Seong Wook, a director in South Korea’s finance ministry, to say the government will closely monitor any “unnecessary movement” that increases exchange-rate volatility.

Wheeler Sold Kiwi to Weaken World’s Best-Performing Currency

The New Zealand dollar plunged after Reserve Bank Governor Graeme Wheeler said the central bank sold the kiwi and can do so again to protect economic growth.
“There has been some intervention,” Wheeler told parliament’s finance and expenditure select committee in Wellington today, driving the New Zealand currency down as much as 1.1 percent to 83.60 U.S. cents, the lowest level since April 1. The central bank last confirmed a currency intervention in June 2007, when it sold New Zealand dollars. (…)
Policy makers from Zurich to Tel Aviv and Tokyo have sought to limit currency gains even as the Group of 20 last month affirmed pledges to avoid deliberately weakening exchange rates. Wheeler’s action contrasts with Australian counterpart Glenn Stevens, who has said he’d need to be convinced the Aussie dollar is “seriously overvalued” before intervening to weaken it and is using interest rate reductions instead. (…)
The central bank is “on-the-record that it is prepared to intervene in the exchange rate,” Wheeler said. The currency, which he described earlier today as significantly overvalued, needs to be lower to boost exports, which make up 30 percent of the economy, he said.

SNB’s Danthine Says Cap on Franc Remains ‘Indispensable’

Bears Weigh Bets Against Canada

(…) Speculative traders held a net short position on the Canadian dollar of $6.7 billion last week, according to the Commodity Futures Trading Commission’s weekly report on the commitment of traders, a larger short position than for any major currency, except the yen. The positions, which are down from an all-time high reached in mid-April, have yet to be rewarded with a major selloff. The Canadian dollar has fallen 1.2% against the U.S. dollar this year. Late Tuesday in New York, the Canadian dollar was at $0.9955, compared with $0.9932 late Monday.

Meanwhile, short positions on Canada’s two main exchanges have risen 11% from a year earlier, a higher increase compared with the 3% rise in short positions on the New York Stock Exchange during the same period. (…)

Poland Cuts Interest Rates to Record Amid Lack of Recovery Signs

Inflation slowed to its weakest in more than six years and manufacturing shrank the most in 45 months in April. Poland is fighting against the steepest slowdown in more than a decade.

German Recovery Signs Mount as Industrial Output Rises:

Production increased 1.2 percent from February, when it gained 0.6 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.1 percent decline, according to the median of 40 estimates in a Bloomberg News survey. From a year earlier, production fell 2.5 percent when adjusted for working days.

Production increased 0.2 percent in the first quarter from the fourth, the ministry said, adding that improving order books and an expected rebound in construction “should lend impetus to industrial production in the coming months.”
Factory orders rose 2.2 percent in both February and March.

High five On the other hand, Markit’s April Manufacturing PMI for Germany was not that good:

Germany’s manufacturing sector started the second quarter of 2013 with declines in output, new orders and employment. As a result, the final seasonally adjusted Markit/BME Germany Purchasing Managers’ Index® (PMI®) – posted below the neutral 50.0 mark in April. At 48.1, down from 49.0 in March, the latest reading indicated a moderate worsening of overall business conditions, and the rate of deterioration was the most marked since December 2012.

April data indicated that manufacturing production levels decreased for the first time so far this year. Although only a moderate overall reduction in output levels, the decline was broad-based across the three market groups monitored by the survey.

Manufacturers recorded a fall in new orders for the second month running during April, and the rate of decline was the fastest in 2013 to date.

High five And Germany’s Services PMI was also weak:

Adjusted for seasonal influences, the headline Markit Germany Services Business Activity Index dipped back below the 50.0 no-change value in April. At 49.6, down from 50.9 in March, the index signalled the first reduction in business activity since November 2012.

Europe’s Job Seekers Flock to Germany

(…) Data released Tuesday by the German statistics agency showed immigration hit a 17-year high last year, with the increase from Europe’s crisis-riddled nations “particularly evident.” (…)

Last year, Germany took in a record 690,937, according to provisional German data. Just from Greece, Portugal, Spain, Italy and Ireland, the number was 134,151—more than twice the level before the euro crisis began.

NEW$ & VIEW$ (6 MAY 2013)

Posted on May 6, 2013 by Denis Ouellet

Job Gains Calm Slump Worries

Nonfarm payrolls rose by 165,000 last month and the jobless rate ticked down to 7.5%, the lowest level since December 2008. The Labor Department also significantly raised hiring estimates for the two prior months, by a combined 114,000 jobs. (…)

The increase in 176,000 private-sector jobs, on top of a loss of 11,000 government jobs, was concentrated in a handful of service industries. The professional and business-services sectors added 73,000 jobs, including 31,000 temporary workers. Manufacturing employment stalled and construction employment contracted after gains earlier in the year.

High five But, as Markit notes:

So far this year, 783,000 new jobs have been created, comprised of a 813,000 rise in the private sector and a 30,000 drop in government jobs. That compares less favourably with last year, when a 899,000 increase
was seen in the four months to April, buoyed by a 916,000 increase in the private sector.

Sad smile In reality, after 4 months, the U.S. economy, still on hyper-strong financial heroin, has created 13% fewer jobs than during the same months in 2012.

Americans actually worked less last month because of a 0.2- hour drop in the workweek, resulting in total hours worked dropping 0.4% for the month. The U-6 underemployment rate, which covers folks who are working part-time but want full-time gigs or have stopped looking for work, ticked up to 13.9% from 13.8%, the first rise since last July, Philippa Dunne and Doug Henwood of the Liscio Report note. And in the household survey, some 306,000 joined the ranks of the self-employed, more than the total 293,000 overall gain. (Barron’s)

And this from NBF:

Private employment expanded by a consensus-beating 176,000 during the month. The rise, however, was not widespread as only 53.9% of industries increased their headcounts, the lowest proportion in eight
months (the goods sector actually shed 9,000 jobs in April).

The end result is that aggregate hours worked are only up an annualized 0.14% early in Q2, the weakest showing since Q4 2009. As today’s Hot Chart shows, this development is consistent with a significant slowdown in real nonfarm business GDP.

Spring Swoon Alive and Well in Manufacturing

The manufacturing sector failed to add any jobs last month after a meager 2,000 increase in March payrolls, a black spot on the otherwise rosy jobs report. Those numbers add to other economic data showing that demand for factory goods is falling and the sector is seeing a broad slowdown this spring. And that spring swoon could turn into a summer slide.

(…) with car sales slowing and dealer inventories climbing, the auto industry growth is likely to ease. (…)

Vehicle sales peaked in November and have fallen in four of the past five months but auto production continued at double-digit year-on-year rates through March, he said. That disconnect could result in longer summer shutdowns or slow down at some factories, robbing manufacturing of one of its growth engines.
If the auto sector is starting to sputter, the defense industry has stalled. Military factory orders plunged 34% in March, the month across-board-government cuts backs known as the sequester began. Defense spending has been volatile in recent months, but is down 25% from a year ago. (…)

Factory Orders Fell 4% in March

Demand for U.S. factory goods in March fell 4% to a seasonally adjusted $467.29 billion, the latest evidence that manufacturing sector began to slow during the month.

(…) Orders for long-lasting items, including cars and machinery, fell 5.8%, slightly worse than last week’s initial estimate.
Demand for civilian aircraft and parts fell 48.3% in March. Orders for metals dropped 3.2% and machinery demand eased 0.8%.
Meanwhile, March orders for nondurable products, reported for the first time Friday, fell 2.4%. (…) Petroleum refining fell 7.3% in March, partially reflecting lower prices. Food processing, clothing and chemical production also declined during the month. (…)
Defense capital goods orders fell 34.4% in March, the first month of the so-called sequester.
Outside of defense, factory orders fell 3.5%
Total factory shipments, including durable and nondurable goods, decreased 1% during March, compared with small gains the prior two months, the Commerce Department said. (…)

ISM Services Weaker Than Expected

This was the lowest reading since last July. Combining both the ISM Manufacturing and Services indices based on their weighting in the overall economy, the ISM for April came in at 52.8 versus last month’s reading of 54.0.

EUROZONE RETAIL SALES KEEP FALLING

Total retail volume fell 0.1% MoM in March after a 0.2% decline in February. Real retail sales have dropped 0.4% since September 2012. Core sales volume slumped 0.5% in March, following a 0.7% drop in February. Core sales volume is down 1.0% since September 2012.

This Eurostat data is for March. Markit’s retail PMI released last week said that sales continued to decline at a “sharp rate” in April:

Spanish Jobless Claims Dwindle

The ministry said the number of people filing for jobless benefits fell 0.9% in April from the prior month, to 4.99 million. Although the figures aren’t adjusted for distortions caused by seasonal trends, they show the second-largest fall in joblessness for any April since 2007, before the global financial crisis later that year sparked a deep recession across Europe in 2008 and 2009 from which countries have struggled to recover.

Portugal Unveils Budget Cuts

The prime minister’s plan would cut the number of public employees by 5%, lengthen their workweek and raise the retirement age by a year, to 66.

The plan, which aims to save €4.8 billion ($6.1 billion) through 2015, is certain to face resistance from the Socialist-led opposition and trade unions.

The government has promised to cut its budget deficit to 3% of gross domestic product by 2015, two years later than initially planned and the year Mr. Passos Coelho’s term ends. Last year’s deficit was 6.4%.

France Says Austerity Over on Germany Flexibility

French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies. (…)

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3 percent of GDP this year. The shortfall will amount to 3.9 percent of GDP this year and 4.2 percent next year with no policy change, the commission said.
There is a “certain flexibility” in allowing France, as well as Spain, to meet its deficit targets, Schaeuble told the Bild am Sonntag newspaper in an interview published yesterday. “This comes with clear conditions for the necessary reforms. The commission will make concrete proposals by the end of May which then will be discussed and decided upon among the euro area finance ministers.” (…)

Indonesian growth slips to two-year low Domestic consumption helps keep growth above 6%

(…) Gross domestic product grew 6 per cent in the first quarter compared with a year earlier, according to government data released on Monday, lower than the 6.1 per cent delivered in the last quarter of 2012.
(…) the breakdown of the GDP data shows that the pace of growth in investment across the economy is starting to slow because of the knock-on effects of lower export commodity prices.

Australia Retail Sales Fall

March retail sales were down 0.4% from February, the Australian Bureau of Statistics reported Monday, whereas economists had expected a 0.1% increase. First-quarter sales, meanwhile, rose by 2.2%—the biggest quarterly gain in six years—as consumers took advantage of heavy price discounts offered by retailers. (…)

Australian retail sales declined toward the end of last year as the mining-dominated economy slowed alongside China, the nation’s biggest trading partner. They rose 1.3% in January and February, though, as house prices and consumer sentiment picked up.

EARNINGS WATCH

The earnings season is near complete as 84% of the S&P 500 companies have declared Q1 results. The beat rate computed by S&P is at 69% while the miss rate is at 22.7%.

Q1 earnings are now estimated at $25.78, up from the March 28 estimate of $25.49 but down from last week’s surprising $26.20 number. Nearly 28% of the 97 companies reporting last week missed (vs 21% up to then), including 44% of companies in Consumer staples (vs 14%), IT (21%) and Utilities (33%).

In addition, Factset calculates that 63 S&P 500 companies have issued negative EPS guidance for Q2 2013, while 17 companies have issued positive EPS guidance. While the 79% negative ratio is not much different than that preceding Q1, there is some concern in the fact that 63 companies have guided negatively so far this season compared to 50 at the same stage in Q1, although there have been 17 positive pre-announcements this year, up from 11 last year.

In light of the above, analysts are busy revising their estimates: while Q1 EPS remain 1.1% above their March 28 forecast, current estimates for the next 3 quarters are now 2.5%, 1.7% and 1.0% lower than their March 28 estimates.

In all, EPS (per S&P) are estimated up 6.4% YoY in Q1, +5.3% in Q2, +16.4% in Q3 and +27.3% in Q4 for full years earnings up 13.6% YoY to $109.94. We will see how that evolves in coming weeks…FYI, this chart from S&P shows the incessant decline in 2013 estimates. My experience with estimates is that a good rule of thumb is that yearly estimates are generally 15% too high, meaning that it would be safer to use EPS around $101 for 2013 if you wish to use forward earnings.

For now, trailing earnings should reach $98.36 after Q1, up 1.6% from trailing EPS after Q4’12. Trailing earnings remain within their very narrow $97.40-98.70 range of the last 5 quarters, confirming that earnings have completely stalled since the end of 2011.

Unsurprisingly, this has coincided with a complete flattening of revenues since Q4’12. Q1’13 revenues are estimated up 1.5% YoY but down 0.5% from their Dec. 2011 level. It is, indeed, very difficult to grow earnings when revenues stall. Here’s what Moody’s wrote last week, to be read in the context of deteriorating conditions in the economies of most of the U.S. trading partners:

Slower global expenditures now weigh on US business activity. It may be difficult to appreciably rejuvenate business sales without a rejuvenation of US exports. After slowing from Q1-2011’s 16.3% to Q1-2012’s 6.8%, the yearly increase by US exports eased to merely 2.1% in Q1-2013. The first quarter’s even slower 0.5% yearly rise by US merchandise exports was weighed down by outright declines of -8.0% for sales to the EU and of -8.5% by shipments to Japan.

U.S. exports have declined at a 4.9% annual rate in Q1. Recent PMIs offered little hope on that front.

This is why second half earnings growth projections of more than 20% appear rather heroic at this juncture.

While trailing earnings stalled, equities have roared ahead +21.8% since May 2012. During that period, U.S. inflation has declined from 2.3% to 1.5%. Under the Rule of 20, such a decline in inflation raises the fair PE by 4.5% (from 17.7 to 18.5). The remaining 17.2% advance in equity values is a re-rating of equity markets from a 27% undervaluation to a 12% undervaluation as of last Friday.

On the above chart, notice how the Rule of 20 Fair Index Value (yellow line) has moved sideways during the last 12 months while the S&P 500 Index (blue) has jumped. Stable earnings and inflation caused the sideway movement in fair value. This is why the Rule of 20 Value (black) has gone up from its May 2012 15.1 reading to its current 17.6.

Syria Strikes Raise Alarm

Strikes that Syria attributed to Israel hit an area around a research facility near Damascus, raising concerns of a widening conflict

NEW$ & VIEW$ (30 APRIL 2013)

Posted on April 30, 2013 by Denis Ouellet

Consumer Spending Rises 0.2% Americans boosted spending in March, partly due to high heating bills, but slow income growth suggests consumers may have trouble propping up the economy in coming months.

Much of last month’s spending increase was due to colder-than-normal weather. Outlays for services jumped 0.7%, partly reflecting payments to utilities. Spending on goods fell. (…)

Personal incomes, meanwhile, were up only 0.2% last month. Savings as a percent of disposable income held steady at 2.7% in March.

The price index for personal consumption expenditures, the Fed’s preferred measure for inflation, was up only 1% year-over-year in March. The closely watched core PCE index, which excludes volatile food and energy prices, was up a modest 1.1% from a year earlier.

Here’s the run down from Haver’s table below:

Personal income declined 2.3% in Q1. Wages and salaries: +0.3%. DPI:-2.7%.

U.S. Pending Home Sales Reach a New High

According to the National Association of Realtors (NAR), pending sales of single-family homes during March rose 1.5% (7.0% y/y) after a 1.0% February decline, revised from -0.4%. The latest level was the highest since April 2010. The sales rebound in the aftermath of the removal in 2010 of the home buyers tax credit has raised home sales by more than one-third from the low.
Last month’s sales gain reflected mixed performance around the country. Sales in the South rose 2.7% (10.4% y/y) to a three-year high. The 1.5% rise in sales in the West, however, left them down 4.4% y/y. Sales have moved erratically sideways since early-2011. Sales in the Midwest nudged up 0.3% (13.7% y/y) to nearly the highest level of the economic expansion. In the Northeast, sales were unchanged m/m but were up a modest 6.3% versus March of last year.

Euro-Zone Jobless Rate Rises

The euro zone’s unemployment rate rose to a fresh high while the annual rate of inflation hit its lowest level since 2010, a combination that increases the chance of an ECB rate cut.

The European Union’s official statistics agency Tuesday said the rate of unemployment across the 17 countries that share the euro rose to 12.1% from 12.0%, the highest level since records began in 1995.

German Unemployment Climbs in Sign Economic Recovery Delayed

Figures released by German’s Labor Ministry showed the number of people without shops rose by 4,000 in April, having risen by 12,000 in March. However, the unemployment as calculated using Germany’s own methodology was unchanged at 6.9%, near its lowest level since reunification in 1990.

Eurostat also said the annual rate of inflation fell to 1.2% in April from 1.7% in March, to hit its lowest level in more than three years. Core is +1.0%.

Spanish Sovereign Spreads Drop Below 300 Basis Points

While the ratings agencies continue to lower their ratings and outlooks of European sovereign debt issuers, investors can’t seem to get enough of the paper. Take the case of Spain. Last summer, traders couldn’t dump the paper fast enough as spreads on 10-year Spanish sovereign debt widened out to more than 600 basis points (bps) above 10-year German Bunds. Now less than a year later, spreads on that same Spanish debt have narrowed by more than 50% to 294 bps. This represents the lowest level since December 2011.

Ironically, the last time spreads on Spanish debt were this low was in late 2011 in the aftermath of the MF Global meltdown following its poorly timed bullish bets on European debt. The only difference between then and now is that back then spreads were widening out from much lower levels, while today they have come down significantly from even higher levels.

Taiwan’s Economy Expanded Slower Than Estimated Last Quarter

Gross domestic product rose 1.54 percent in the three months through March from a year earlier, after increasing 3.72 percent in the fourth quarter, the statistics bureau said in a preliminary report in Taipei today.

Taiwan’s export orders and industrial output for March unexpectedly fell, while Japanese and South Korean production missed forecasts as faltering demand limits Asia’s recovery.

U.S.: Crude oil imports continue to plummet

Just-released data from the U.S. Energy information Administration (EIA) continue to show the formidable impact on global energy trade patterns caused by the surge in U.S. crude oil production. As today’s Hot Chart shows, U.S. volume imports of crude oil plummeted to their lowest level since 1996 in April. At this juncture most of the decline has been at the expense of OPEC. As shown, U.S. net volume imports from the oil cartel have dropped more than 40% since 2007.

NEW$ & VIEW$ (26 APRIL 2013)

Posted on April 26, 2013 by Denis Ouellet

Jobless Claims Near Five-Year Low

Initial jobless claims, a proxy for layoffs, declined by 16,000 to a seasonally adjusted 339,000 in the week ended April 20, the Labor Department said. The four-week average of claims, which smooths weekly volatility in the figures, fell by 4,500 to 357,500.

Click to View (Chart from Doug Short)

SLOWER SALES AHEAD?

As derived from the Conference Board’s consumer confidence surveys of the 12-months-ended March 2013, the 15.2% of surveyed Americans expecting a higher income six-months hence was less than the 16.7% anticipating a reduction income. (Moody’s)

ATA Trucking Index increases in March

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index gained 0.9% in March after decreasing 0.7% in February. (The 0.7% loss in February was revised down from a 0.6% increase ATA reported on March 19, 2013.) Tonnage has now increased in four of the last five months. Specifically, since November 2012, the index is up 7.6%. (…)

“Expect freight tonnage will slow in the months ahead as the federal government sequester continues and households finish spending their tax returns,” he said. “The good news for tonnage is housing starts are growing and energy production is good – both of which generates heavy freight. However, these two sectors alone won’t be enough to keep the overall index growing at a 3.9% clip in the second quarter.”

Drop in Borrowing Squeezes U.S. Banks U.S. companies are pulling back on borrowing, which could put a drag on the limping U.S. economy and make it even harder for banks to break out of their long slump.

Outstanding loans by the biggest banks to U.S. companies declined 9% in the first two weeks of April compared with the end of March, according to Federal Reserve data. The slip followed a 2.7% rise in the first quarter, the smallest quarterly gain in two years. (…)
Business owners “feel very, very hesitant to invest,” and the economy is “struggling to get solid footing,” but “we didn’t expect the wall we hit,” BB&T Corp. Chairman and Chief Executive Kelly King said last week. Outstanding business loans by the Winston-Salem, N.C., bank, the nation’s 12th-largest by assets, were flat in the first quarter. “I think all of us are trying to figure out what happened.” (…)
The recent slowdown is especially disconcerting because demand for other types of loans is cooling, too. Consumer lending dipped in the first quarter as the recent surge in mortgage borrowing ebbed. As a result, total loans fell 0.6% in the first quarter at the biggest U.S. banks and 0.2% at the smaller banks, according to Federal Reserve data compiled by Barclays PLC analysts.

MEANWHILE IN EUROPE

Worryingly, the key credit and lending aggregates show continued deterioration. Lending to the private sector contracted for an eleventh straight month, with the rate of annual decline (-0.8% y/y) similar to February’s reading. Overall, the data underscore the ECB’s concerns that its loose monetary policy stance is not fanning out to the more vulnerable sectors of the euro area economy, and will increase pressure on them to respond, particularly in support of SMEs as they have been hinting at in recent weeks. The data also follows Wednesday’s Bank Lending Survey from the ECB, which revealed that weak underlying credit growth continued to reflect both constraints in supply, as well as limited demand for credit among businesses and households. (RBC capital)

BoJ raises economic forecasts

Data show deflation remains a major problem

On Friday, as the BoJ released its semi-annual report on prices and economic activity, it said that its policy board members expected inflation to average 1.4 per cent in the next fiscal year, rising to 1.9 per cent the year after. The current fiscal year began this month.
(…) it represents a dramatic shift from the BoJ’s expectations in January, when board members said they expected prices to rise at an annual rate of 0.9 per cent in the 2014 fiscal year.
In its report, the BoJ said the economy would start picking up by the middle of this year and lifted its forecast for real GDP growth to 2.9 per cent from 2.3 per cent. Thereafter, prices would be pushed up by a combination of increasing demand, a weaker yen and rising expectations of inflation, the BoJ said.

EARNINGS WATCH

Moody’s update:

The revenues and operating income of S&P 500 member companies have been growing at a very slow rate, according to data supplied by Bloomberg News. For the 34% of the S&P 500’s constituents that have released Q1-2013 results, a meager 1.5% annual rise by sales yielded a mediocre 3.5% yearly increase by operating income. For the subset of nonfinancial company members that have released first-quarter results, the annual growth rates were 1.9% for revenues and 1.1% for operating profits.

Slovenia struggles to quell bailout talk

Conflicts of interest dog efforts to overhaul economy

(…) But Andrej Šircelj, president of the board of BAMC, the bad bank, and an opposition SDS parliamentarian, says action is needed soon.

“Slovenia does not have much time,” he says. “The government has no programme, no strategy, no policy . . . Most financial investors would like to see what is going on with the banking system and privatisation.”

NEW$ & VIEW$ (23 APRIL 2013)

Posted on April 23, 2013 by Denis Ouellet

SOFT PATCH WATCH

Chicago Fed: Economic Activity Was Slower in March

Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.23 in March from +0.76 in February. Three of the four broad categories of indicators that make up the index decreased from February, and only one of the four categories made a positive contribution to the index in March.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.01 in March from +0.12 in February. March’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend.

The CFNAI Diffusion Index moved down to -0.02 in March from +0.13 in February. Twenty-eight of the 85 individual indicators made positive contributions to the CFNAI in March, while 57 made negative contributions. Fifteen indicators improved from February to March, while 70 indicators deteriorated. Of the indicators that improved, six made negative contributions.

Growth Indicators Going Down the Drain?

These three assets are “very sensitive” when it comes to the growth/inflation story. Each of them has been making a series of lower highs since May of 2011. Now they are breaking support lines of rising wedges and pennant patterns.

Home Sales See Growing Pains

Sales of previously owned homes in March fell 0.6% from February after adjusting for seasonal factors, the National Association of Realtors said on Monday. Sales were still up by 10.3% from a year earlier, marking the 21st consecutive month in which sales have increased from their year-ago levels.

The number of homes for sale in March totaled 1.93 million, up by 1.6% from February but down by 16.8% from one year ago. It was the lowest level of inventory for the month of March since 2000, according to the Realtors’ group.

The median home price in March rose to $184,300, up 11.8% from one year ago, but still well off the peak of $230,000 in July 2006. Median prices rose by 26% in the West, reflecting an increase in sales of more expensive homes. Homes are also selling more quickly: Some 37% of homes sold in March were on the market for less than a month, and half of all homes sold within two months, down from three months one year ago, according to the NAR.

Consumers Running on More Than Fumes American shoppers are facing some stiff headwinds this spring. But they’ve also got a fair amount of wind at their backs.

On Monday, regular averaged $3.54, according to the EIA’s weekly survey of gasoline stations, down 33 cents from $3.87 a year ago. And with the most recent downdraft in crude-oil prices, gasoline may go lower still.
Since Americans use roughly 135 billion gallons of gasoline a year, the 33-cent decline would, if it persisted, save them about $45 billion a year. That comes to about 40% of the estimated $115 billion that will come out of paychecks this year due to the reversal of the 2011 payroll-tax cut.
Wealth effects also are providing a boost. Economists at Credit Suisse calculate that over the past two decades, every 10% increase in housing wealth led to a 0.33% increase in consumer spending, while every 10% increase in stock-market wealth led to a 0.11% increase in spending.
Economists polled by The Wall Street Journal estimate home prices will rise 5.3% this year, which would translate into a spending increase of about $20 billion. The stock market is up about 9% so far this year, which would translate to a further spending increase of about $10 billion.

(Chart from Bespoke Investment)

Weekly sales bottoming out?

Delayed flights reignite US budget battle Cuts are beginning to produce tangible effects

On Sunday, the Federal Aviation Administration, which is part of the Department of Transportation, started implementing the furlough, or leave of absence, of 47,000 workers, many of them air traffic controllers.
They will be required to take unpaid leave for one day out of each 11 until the end of the fiscal year, in September, as the FAA tries to cut $637m out of its budget, which is mainly personnel costs.

EUROZONE WOES

Germany Joins Low-Speed Europe

When even Germany stops motoring, you know you’ve got a problem.

The woes of Europe’s auto industry show no sign of abating: European Union auto sales were down 9.8% year on year in the first quarter. But within the data, there is an anomaly. In Germany, Europe’s supposed economic strongman, car sales fell 12.9% over the first quarter compared with 2012(…).
The latest 17% year-on-year drop in sales in March was partially attributed to there being two fewer working days this year. But German car manufacturers are generally at a loss to explain the sales slump, other than to cite weak consumer confidence amid continuing uncertainty around the European economy.
The concern is that Germany’s car market is simply now catching up with other depressed European markets. Germany’s car sales last year were still only 11% short of their 2006 peak, whereas Spain and Italy’s markets have shrunk about in half since precrisis highs. (…)

German Economic Indexes Show Unexpected Decline

A gauge of manufacturing from a survey by Markit Economics fell to 47.9 from 49 the previous month. For services, the index fell to 49.2 from 50.9.

Italy: a senior moment

Turn on the liquidity taps and look the other way

Since the inconclusive election in late February, the 10-year yield has fallen 80 basis points to a whisker above 4 per cent. Italy’s political and economic plight is arguably worse now than 18 months ago. Projections show that public sector debt will be 130 per cent of gross domestic product this year – 4 percentage points higher than its last forecast in September. The head of the Confindustria business lobby says the gridlock has cost the economy 1 per cent of output.
The other beneficiary of liquidity is Spain. Despite its banking and financial crisis, a party funding scandal and the bailing-in of bank depositors in the rescue of Cyprus, Spanish 10-year bond yields are 300 basis points lower than last July.
The fundamentals are deteriorating in both Spain and Italy, political events are discouraging and policy makers are dithering. But the fact is that they can afford to. Italy without a government? Why worry? Thanks to central bank liquidity investors can look the other way.

Until…

Spain’s Recession Eases as Rajoy Prepares Growth Plan

Gross domestic product fell 0.5 percent from the fourth quarter, when it dropped 0.8 percent, the most since 2009, the Bank of Spain said in its monthly bulletin today. That’s the seventh quarterly contraction. (…)
The International Monetary Fund last week cut its outlook for Spain, predicting the economy to shrink 1.6 percent this year before growing 0.7 percent in 2014.

EARNINGS WATCH

First, the official S&P numbers as of last week: Of the 104 companies having reported on Apr. 18, 67% beat and 22% missed.

Q1 estimates are now $25.40, down from the Match 28 estimate of $25.49. Full year estimates are dropping markedly from $111.14 at the end of March to $109.52 as of Apr. 18, a 2.3% decline in lest than 3 weeks.

Factset calculates that of the 102 companies that have reported earnings to date for the quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 45% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters.

Remember that aggregators use different methods to compile earnings. I stick with S&P`s, especially since they consider pension amortization as operating costs, unlike most others.

Pointing up Bespoke Investment looks at the broad market:

Bottom-Line Average, Top-Line Bad

A little over 200 companies have reported earnings so far this season, and as shown below, 58% of them have beaten consensus earnings estimates. This is the exact same “beat rate” we saw last earnings season.

Unfortunately, top-line revenue numbers haven’t been pretty. As shown below, 43.9% of the companies that have reported have beaten revenue estimates, which would be the weakest reading seen since the financial crisis. Last earnings season, we saw a big bounce in revenue beats after two very weak quarters, but it looks now like we’re reverting back to what we saw in the middle of 2012.

Here`s a good analysis from Zacks: Evaluating Q1 Results – Focus on Technology

As of Monday evening (4/22/13), we have Q1 results from 15 of the 69 Tech sector companies in the S&P 500. This is barely 1/5th of all Tech companies in the index, but keep in mind that these 15 companies include many of the industry heavyweights, like Google, Microsoft, Intel, Oracle, Texas Instruments and others. These 15 companies combined account for 47.8% of total Tech sector market capitalization and account for 43.8% of all Q1 earnings expected from the sector.
Total earnings for these companies are up +3.9% from the same period last year, with 66.7% of companies beating earnings estimates. Total revenues are up +4.8%, but only 33.5% of the companies have come out with positive revenue surprises. The growth rates look decent enough, but they will disappear following Apple’s report, which is expected to show a -16.8% year over year decline. The composite earnings growth rate for the sector, where we combine the results that have come out with those still to come, is for a decline of -5.9% from the same period last year. Excluding Apple, Tech earnings would be down only -2.3%.
But irrespective of the growth rates, the ‘beat ratios’ (the percentage of companies coming ahead of expectations) are weak, and are notably so on the revenue side. The earnings ‘beat ratio’ of 66.7% is weaker than the aggregate for the S&P 500 as a whole and relative to how these same group of companies performed in 2012 Q4, but the revenue ‘beat ratio’ of 33.5% is outright mediocre.
So, what’s going on with Tech earnings?
Investors have soured on Apple big time and hardly anyone is expecting fireworks from the company in tomorrow’s release, particularly following last week’s negative pre-announcement from Cirrus Logic. But Apple still matters – to the sector as well as the market. After all, even if it’s results came in-line with expectations (a decline of -16.8%) tomorrow, its earnings will account for more than 22% of the entire sector’s Q1 earnings. (…)
Apple’s problems may be company specific, but plenty of its Technology peers are faced with similar earnings challenges. In Intel’s earnings report last week, we saw how the weak PC demand picture is weighing on its outlook. The situation isn’t much different for other PC centric players like Hewlett-Packard, Dell, Microsoft and Advanced Micro Devices, to name just a few. Ironically, Apple played a leading role in bringing the PC market to its knees.
Others are faced with different headwinds that lead to the same earnings challenges. Companies with advertising-based business models like Google, Facebook, Yahoo and others are struggling with monetizing the secular shift from PC to mobile devices. This platform shift has material consequences for these companies’ margins, as do the headwinds facing Apple and the PC players.
A key driver of the Q1 earnings weakness for the sector is from margin pressures. Net margins in the quarter are expected to be down 177 basis points from the same period last year, which more than offsets the stronger-looking +3.3% gain in revenues, resulting in -5.9% decline in total earnings.
The first and third quarters are typically the seasonally weakest periods for the sector. As such, the market may be willing to cut the Tech companies some slack for a weak showing this reporting season. But a lot will depend on how they guide towards the coming quarters, as expectations, particularly in the second half of the year, are for a resumption of strong growth.
Current consensus expectations are for total Tech sector earnings to increase by +8.3% in the second half of the year after declining by -5.2% in the first half. The second half recovery is then expected to carry into 2014, resulting in total earnings growth for the sector of +13.2%. A big part of these earnings recovery hopes rest on margin expansion.
On a quarterly basis, net margins for the sector peaked in 2012 Q3 and have yet to get back to those levels. On an annual basis, the sector’s net margins have been essentially flat since 2011, but are expected to make strong gains later this year and next year after contracting in the first half of 2013. Hard to envision such margin gains given the multiple headwinds facing them.
What all this boils down to is that earnings expectations for the broader S&P 500 in general and the dominant Technology sector in particularly remain elevated. I am not talking about estimates for the currently underway first quarter of 2013, but the coming quarters, particularly the second half of the year and next year. Those estimates need to come down and they most likely will come down after we hear from management teams.

NEW$ & VIEW$ (8 APRIL 2013)

Posted on April 8, 2013 by Denis Ouellet

How bad is it? Global negative surprises. Some positives. China also so-so, not so Europe. Copper.

HOW BAD IS IT?

Job Growth Slows

Employers slammed on the brakes in March, keeping the recovery from shifting to a higher gear despite a mending housing market and steady consumer and business spending.

The March reading stirred some fears of yet another “springtime swoon” for the labor market. In recent years, hiring has started the year strong, only to wilt as the weather warmed.

Friday’s report underscored this point, as the government revised up its estimates for January and February by a combined 61,000 jobs. Even with those revisions, however, job growth started 2013 weaker than in the same period a year ago, suggesting the pace of hiring was trending down before March.

Silver linings in the details were scant, beyond higher estimates for January and February’s tallies. Employers took on 20,000 temporary workers in March, often seen as a hiring bellwether. The construction sector added 18,000 jobs, reflecting the housing market’s healing, but well below the nearly 50,000 added the month before. Governments shed 7,000 jobs in March.

Jobs Report Hits Fed in the Jawbone The weak jobs numbers have put Federal Reserve officials back in wait-and-see mode.

(…) There’s reason to think the job market is in better shape than the report showed: The weakness may merely be a payback for February’s strong jobs count, which the Labor Department revised up by 32,000, to 268,000. A more wintry March than the U.S. has seen in recent years also may have pushed back some seasonal hiring. And given the employment report’s standard error of plus or minus 90,000 jobs, the three-month average gain of 168,000 might be a better reflection of what’s going on.

Doug Short did the work on revisions for us:

My approach is to take the employment numbers since January 2000 and plot the change from the first to third estimate for each month through January 2013, the most recent month for which we have three estimates.

During this timeframe there were 91 upward revisions and 63 downward revisions. The absolute mean (average) revision was 46 thousand, which breaks down as 48K for the upward adjustments and 44K for the downward adjustments.

Revisions remain generally positive, a good thing. Still, the 131k drop in the 3ms m.a. is significant. In April 2012, the 199k drop in the m.a. continued into a 463k loss through June.

What is also disturbing is that household employment has flattened out in the last 6 months while payroll employment kept rising. How will they meet next?

Hint: the NFP surveys were conducted in mid-March. Weekly unemployment claims rose in late March. To be closely monitored.

Surprised smile For every new job in March, five Americans left the labor market.

Dropout Number Is Worrisome for Labor Market

(…) The share of the population that’s either working or looking for work, a metric known as the participation rate, fell to 63.3% in March, its lowest level since 1979. Nearly half a million Americans dropped out of the labor force in March, the biggest one-month decline since December 2009.(…)

March’s labor force decline was concentrated not among retirement-age baby boomers but among those under age 25, who accounted for nearly half of all drop-outs. The participation rate among those under 25 has fallen below 55%, from just under 60% when the recession began. That reflects to some degree the long-run increase in college attendance, but the big one-month drop also suggests young people are struggling to find work in the still-shaky economy.
Among those in the middle of their working lives, the downward trend is milder but still unmistakable. The participation rate for so-called prime-age workers—those between 25 and 54—was 81.1% in March, the lowest level since 1984. There is no benign explanation for that decline: The number of prime-age workers counted as “unemployed” has fallen by 731,000 in the past year, but just 166,000 of those workers found jobs; the rest simply gave up looking. (Chart from IBD)

Politicians and economists often forget this is not a board game. Economic decisions have real meanings. If you raise payroll taxes, it will have two consequences:

People will spend less.
Employers will hire less.

Tack on to that ObamaCare’s incentives for employers to reduce staff count below 50, cut working hours and increase temps and you eventually get a nasty real world impact.

The 24k drop in retail workers in March reflects the big slowdown in sales, in spite of an early Easter:

The 20k gain in temp workers may not be the usual positive bellwether.
The decline in the labor force is extraordinary and not simply explained by demographics:

Has the great American work ethic suddenly vanished? Doubtful. A more likely explanation for the shrinking workforce is a failing education system that doesn’t give young adults the skills they need to compete in the information economy.
Another probable culprit is the rapid expansion of government payments—jobless insurance, food stamps, Medicaid, disability and various tax credits—that provide millions with an alternative income to getting a job. Research by Casey Mulligan of the University of Chicago and others shows that the generosity of federal benefit programs means that workers face very steep financial disincentives to take a low-wage job. The benefits phase out as they begin to work. (WSJ:Making Work Not Pay)

Regarding education, the March survey of National Federation of Independent Business revealed that

Forty-seven percent of the owners hired or tried to hire in the last three months and 36 percent (77 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions.

The NFIB continues:

Job creation plans fell 4 points to a net 0 percent planning to increase total employment, a disappointing outcome. Not seasonally adjusted, 15 percent plan to increase employment at their firm (down 2 points), and 5 percent plan reductions (down 2 points), a bit of frost on the “green shoots” that appeared to be emerging in the first quarter. Owners are still pessimistic and see little reason to hire.

And we have not seen much effect from the sequester, yet.

The sequester could take some time to show up in official data. The sweeping furloughs set to start in coming weeks will take a bite out of government workers’ paychecks, and most likely out of their consumer spending, but most of those jobs won’t disappear. The budget cuts would need to remain in place for months before more agencies start to shed jobs outright.(…)
In March, the federal government’s civilian workforce fell by just 2,000, apart from almost 12,000 cuts at the U.S. Postal Service. (…)
State and local governments get about a quarter of their funding from Washington. But the budget cuts don’t appear to have hit them hard in March, either. State-government jobs rose by 9,000 to 5.1 million, the second straight monthly increase. Local-government employment dipped by just 2,000 jobs, sitting around 14 million. (WSJ)

Meanwhile, weekly hours are rising at a snail’s pace and hourly earnings are not keeping pace with inflation.

Income supplement:

Consumer Credit Jumps on Student, Auto Loans

The month’s gain was largely due to a $17.6 billion increase in nonrevolving credit, which includes student loans and auto financing. Revolving credit, which mainly consists of credit-card debt, increased $532.82 billion in February to about $848 billion outstanding.

On the other hand…NBF economists keep their faith:

In our view, some of the softness was certainly attributable to unusually harsh weather. As today’s Hot Chart shows, agricultural employment slumped 64,000, the worst showing for a month of March in three years. Also, retail employment at building materials & garden supply stores fell 10,000 (the worst in three years) while that at clothing stores plummeted 15,300 (biggest drop since the recession). We expect the situation to improve in those industries as temperature returns to more normal patterns.

The authoritative Browning Newsletter cools any excessive weather enthusiasm, however:

For most of 2013, the dominant factor shaping the weather has been the Arctic Oscillation, the winds that circle the northern latitudes. Last year the AO was extremely positive, which meant that it trapped the cold polar winds north and relatively few escaped and chilled the middle latitudes.
This year, the AO was negative during a couple of weeks in December, positive during most of January and February and negative in March. During the last two weeks of March, it turned sharply negative. What this meant in North America is that December had some storms, January and February were warmer than average and March has been a beast. Cold Arctic winds poured through most of the US east of the Mississippi.

Reminder: the NFP surveys were conducted in mid-March.

Here’s the weather forecast:

Meteorologists are already predicting an unusually stormy springtime, pounding the Gulf in April and moving up the Eastern Plains to the Midwest and Great Lakes in May and June.

Housing is better but exports are flattening. Anybody surprised?

NEGATIVE SURPRISES ARE GLOBAL

Ineichen Research and Management AG

Of 15 PMI readings in March, 8 were below 50 vs 7 in Jan-Feb. The U.S. manufacturing ISM dropped from 54.2 to 51.3. The non-manufacturing index declined from 56.0 to 54.4.

POSITIVE NOTES

The BOJ announced “all the policy measures imaginable”, to be tacked on top of all other QEs of the world. ISI calculates that “the combined balance sheets of the Fed/BoJ will increase +$160b per month, or +$40b per week, or at almost a +$2t a.r. This is so hard to fathom that it’s unlikely market participants have fully digested it. And other central banks are likely to join in.”
Ward’s said that U.S. vehicle production is scheduled to grow 9% QoQ annualized.
Gasoline futures dropped nearly $0.25.
Cass Freight Index Report™ ‐ March 2013

Shipment volume jumped up 5.8 percent from February to March, following a 5.6 percent rise in February. Compared to March 2012, shipments were up 4.2 percent, the largest year‐over‐year increase since October 2012. On a cumulative basis, freight shipments have increased 6.4 percent since the end of last year over the same period in 2012.

Truck tonnage data is not yet available for March, but it has been on the rise since November, according to the American Trucking Association. Weekly truck loading indicators are showing an uptick in March. Rail reported mixed results, with carloads up 0.3 percent and intermodal down by 5.1 percent. Most of the carload gains are in petroleum and petroleum products. Shipments of products related to construction, including stone and gravel, lumber and fabricated steel, are increasing. Truck flatbed loads were reported up every week. Exports were also up in March.

Freight expenditures rose 6.5 percent in March and are 4.4 percent above the same period last year. Much of the monthly increase can be attributed to the rise in the number of shipments. However, in recent weeks there have been more reports of higher rates for truckloads, particularly on the spot market, as demand builds.

Well, we just got the Association of American Railroad report for March.

The Association of American Railroads (AAR) today reported that U.S. monthly rail traffic showed mixed results in March 2013, while both carloads and intermodal traffic declined for the week ending March 30, 2013.
Intermodal traffic in March 2013 totaled 933,208 containers and trailers, up 0.5 percent (4,859 units) compared with March 2012. That percentage increase represents the smallest year-over-year monthly gain for intermodal since August 2011.
Seven of the 20 major commodity categories tracked on a monthly basis by AAR saw year-over-year increases in March 2013 over March 2012.
AAR today also reported declines in rail traffic for the week ending March 30, 2013. U.S. railroads originated 281,367 carloads last week, down 1.9 percent compared with the same week last year, while intermodal volume for the week totaled 233,587 units, down 3.8 percent compared with the same week last year.

In all, a so-so month ending on a weak note.

CHINA RECOVERY ALSO SO-SO

In the traditional busy season, demand improved among industrial sectors. The demand recovery observed by respondents is slightly stronger than it was in March of 2012. Infrastructure projects were the main sources of demand in up- and midstream sectors. Respondents from the cement and construction machinery sectors reported above-expectations sales data. However, demand recovery for steelmakers and machinery tool manufacturers remained relatively weak. Auto sales were also below expectations, and automakers became more cautious as a result. The discrepancy among different sectors suggests that the seasonal recovery was relatively modest. (CEBM Research)

BUT NOTHING SO-SO IN EUROPE

Eurozone downturn intensifies as German economy shows near-stagnation

At 46.5 in March, the final Markit Eurozone PMI® Composite Output Index was unchanged on the flash reading, confirming that the rate of decline in activity accelerated for the second month in a row to reach the fastest since last November. (…)

Of the four largest euro nations, France saw the steepest downturn with output falling at the fastest rate for four years, while severe contractions were again recorded in Spain and Italy (albeit with the latter showing a marginal easing in the rate of decline). Only Germany continued to see higher business activity, though even there the rate of expansion slowed sharply to near-stagnation. (…)

March saw the largest monthly fall in new orders since December. New business dropped at the fastest rate since September in the service sector,
while manufacturers reported the steepest drop in new orders since December.

New orders fell for the first time in three months in Germany, accompanied by sharp rates of decline in France, Italy and Spain.

And in case you missed that in late March:

The downturn in the Eurozone retail sector gathered momentum at the end of the first quarter, Markit’s retail PMI® data for March showed. The rate of decline in sales in the latest period was the fastest since May 2012, and the trend over the first quarter as a whole was the second-weakest since Q1 2009. (…)

Retail PMI data by country signalled steep falls in sales in both France and Italy, and a broadly stable trend in Germany.

In particular, the month-on-month rate of decline in French retail sales accelerated further to a new survey record (data were first collected in January 2004). Moreover, the pace of contraction in France was fractionally faster than that registered in Italy – the first time that France had registered a worse performance than Italy since February 2011. Italian sales continued to fall sharply, but at a weaker rate than the trend shown over 2012.

German Industry Rebounds

Total industrial output in February increased 0.5% on the month, beating economists’ forecasts of a 0.4% gain, data from Germany’s Economics Ministry showed Monday. But a sharp downward revision of January’s industrial output data—to a 0.6% monthly drop from a previously reported flat reading—indicates that any industrial recovery remains muted and that overall economic activity in the first quarter may not have been as strong as previously expected. (…)

In an annual comparison, industrial production was down 1.8% when taking account of the number of working days in February 2013 vis-à-vis February 2012.

Bridgewater Asks “Could Italy Blow Up The Euro?”

Economic conditions in Italy are as depressed as they’ve been since the end of WWII, the economy is still contracting, Italy’s banks are in terrible shape, private sector lending is very strained, and the ECB’s policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. (…)
So there is a risk that if economic conditions continue to be terrible and the political situation gets more extreme, the pressure on the banks will increase, and the sovereigns could start to have trouble (and with the political uncertainty, should the need arise, who would the Troika negotiate with?).
Italian banks increasingly look strained, both outright and relative to Spain. Bank CDS spreads have risen 150 basis points and bank eguity prices have fallen 30% in the past two months, and there are some indications of stress in the bank funding flows. Unlike in Spain, Italian banks have not decreased their reliance on the ECB at all, and in February they actually increased their net ECB funding. At the same time, wholesale funding lines with banks and non-banks are falling, and Italian banks have had substantial bond redemptions that they haven’t rolled in February and March. Italian banks are getting liguidity by reducing private sector loans and through a healthy inflow of retail deposits, which is helping them to pay for the wholesale funding that is leaving. Italian banks bought government bonds at a healthy pace in January, but the purchases slowed in February, and they have been selling foreign corporate and bank bonds for the past six months. (…)

Eurobanks bleeding, even before Cyprus.

Deposits in Spain and Portugal are bleeding with annual rates of 10%. This, together with rising non-performing loans and increased capital requirements will make banks reduce their lending, choking small and medium-sized companies. (Lighthouse Investment Management)

EU’s Rehn: Big depositors could suffer in future bank bailouts under new law

“Cyprus was a special case … but the upcoming directive assumes that investor and depositor liability will be carried out in case of a bank restructuring or a wind-down,” Rehn, the European Economic and Monetary Affairs Commissioner, said in a TV interview with Finland’s national broadcaster YLE.
“But there is a very clear hierarchy, at first the shareholders, then possibly the unprotected investments and deposits. However, the limit of 100,000 euros is sacred, deposits smaller than that are always safe.”

Bank runs in Europe are now only one rumor away…

Portugal court rules against austerity

Move threatens €78bn bailout programme and 2013 budget

In a long-awaited decision late on Friday night, the constitutional court rejected cuts in state pensions and public sector wages in a ruling that could force Pedro Passos Coelho, the prime minister, to negotiate alternative deficit reduction measures with international lenders.
Economists calculated that the measures deemed unconstitutional represented between €900m and €1.3bn in government revenue and savings, about 20 per cent of the €5bn the government planned to gain from austerity measures this year.
The court rejected cuts in state pensions and public sector pay equivalent to about 7 per cent of annual income as well as cuts in sickness and unemployment benefits.
A contested “solidarity” tax surcharge ranging from 3.5 to 10 per cent on pensions of more than €1,350 a month was accepted by the court as well as a 50 per cent cut in overtime pay rates for public sector workers.

Portugal Plans Spending Cuts After Ruling on Salaries

When it rains, …

Copper price set to fall amid high output

Production rises at fastest rate in decade

Wood Mackenzie, a leading consultancy, expects 2013 to see the biggest percentage increase in global mine production since 2004.

NEW$ & VIEW$ (4 APRIL 2013)

Posted on April 4, 2013 by Denis Ouellet

Jobless claims rise, gasoline declines. Rental business could get nasty. Japan prints. Spain pains. Does Draghi have a plan B? Slovania next Cyprus? Eurowoes charted. Hungary, Russia slow down. Large caps vs small caps: warning sign?

Initial Jobless Claims: +28K to 385K vs. 350K consensus,

Gasoline Takes a Tumble

Gasoline futures tumbled 4.2% as increasing activity by refineries has investors betting on a jump in fuel supplies.

The average U.S. price of regular retail gasoline stood at $3.640 a gallon Wednesday, according to AAA’s Daily Fuel Gauge Report, down nearly 11 cents from a month ago.

Apartment Vacancy Rates Decline (CalculatedRisk)

Reis reported that the apartment vacancy rate fell to 4.3% in Q1, down from 4.5% in Q4 2012. The vacancy rate was at 5.0% in Q1 2012 and peaked at 8.0% at the end of 2009.

(…) By contrast, office sector vacancies have only fallen by a paltry 60 basis points since fundamentals began recovering five quarters ago.

The sector absorbed over 36,000 units in the first quarter, a relatively healthy rate comparable to the rise in occupied stock from one year ago (in 2012Q1). Deliveries have remained modest at 13,706 units, representing roughly the same pace of inventory growth as previous first quarter periods over the last two years.

Apartment landlords have another quarter or two to enjoy tight supply growth before a large number of new properties come online. Over 100,000 units are expected to enter the market, most scheduled to open their doors in the latter half of the year. (…)

Asking and effective rents both grew by 0.5% during the first quarter. This is the slowest rate of growth for both asking and effective rents since the fourth quarter of 2011; every single quarterly data point in 2012 showed stronger asking and effective rent growth versus what was observed in the current quarter. What does this mean?

Optimists will point out that the first quarter tends to be weak, as most households move during the second and third quarters and bolster leasing activity and rent increases. The seasonal waxing and waning in rent growth was evident in the prior year, when the strongest periods centered around the second and third quarters.

However, given how tight vacancies have become, rent growth ought to be stronger (for perspective, in prior periods when vacancies were in the low to mid‐4s, annual rent growth was well above 4%). (…)

Rents Soften as Investors Buy More Homes Investors have played key roles helping to stabilize home prices by scooping up distressed homes and renting them out. But a new report shows that those purchases also have begun to squeeze single-family rents.

Nationally, asking prices of single-family homes were up by 7.2% from one year ago in March, according to real-estate website Trulia. Asking rents, meanwhile, were up just 0.1% from one year ago.
The median asking rent for single-family homes in Las Vegas has fallen by 1.9% from a year ago. Rents are down by 1.2% in Fort Lauderdale, Fla., and Chicago, and by 0.7% in Washington, D.C., and Orange County, Calif.
Rents are still going up in several markets, with gains of at least 3.5% in Houston, Dallas, Orlando, Tampa, and California’s Inland Empire, about 45 minutes east of Los Angeles.
Trulia said Census data shows that there are nearly 4 million more single-family homes for rent in 2012 than in 2005, an increase of 32%. Meanwhile, the number of owner-occupied single-family units hasn’t changed over that span.

Japan Bets On Easing

The Bank of Japan launched an aggressive easing program as new Gov. Haruhiko Kuroda embarked on a two-year campaign to free the country’s economy from more than 15 years of deflation.

Among the key measures agreed upon at Mr. Kuroda’s inaugural policy board meeting were a major expansion of its government bond purchases, include buying longer-term debt. The move is designed to drive down longer-term rates, which have remained stubbornly high despite previous easing.
It will double its purchase of Japanese government bonds to 7 trillion yen ($75 billion) monthly and will also expand purchases of other assets, including exchange-traded funds and real-estate investment trusts.
The bank also said that it will purchase longer-term bonds, a move it had been reluctant to undertake previously because such assets can decline in value, creating future losses for the bank.

Spain threatened by resurgent credit crunch

Small businesses fold as bank loans dwindle

(…) In the five years since the crisis started, no fewer than 450,000 small and medium-sized enterprises have gone under, says Jesús Terciado, the president of Cepyme, the Spanish SME association. “But it is not just about staying in business – it’s also about growth. There is no way you can grow your business at the moment,” he says.
Countries such as Spain and Italy are acutely sensitive to a lending crunch for SMEs, because so much of their economy depends on them – and because companies such as Mr Rodriguez’s in turn depend so heavily on bank loans. In the case of Spain, SMEs make up 99.9 per cent of all businesses and employ almost three out of every four workers. If they cannot survive and thrive, neither can the Spanish economy at large. (…)
Data from the Bank of Spain shows that lending to companies has fallen in every quarter since 2009.

Draghi Considers Plan B as Sentiment Dims Post Cyprus

(…) With Europe entering a second year of recession and fragmented financial markets preventing the ECB’s record-low borrowing costs from reaching the countries that need them most, Draghi may prefer to use so-called non-standard measures. He is particularly concerned about a lack of credit being extended to small and medium-sized companies in countries such as Italy and Spain, two of the officials said on condition of anonymity. (…)

An asset-purchase plan targeted at small- and medium-sized business lending is far from straightforward, said Jan von Gerich, chief fixed-income analyst at Nordea Bank in Helsinki.
“There are a lot of expectations but they’re quite limited in what they can do,” he said. “It’s most likely for them to ease collateral requirements and make it easier to package SME loans. But it gets messy quickly and hawkish members are probably not comfortable with it.”

Slovenia May Finally Be The First Country To Access The ECB’s ‘OMT’ Program

Slovenia is the country the market appears to be viewing as the next likely candidate for a bailout from the euro zone.
Government bond yields have surged there in the wake of the Cyprus deal, though they have started to back off a bit.

Euro-Area Producer-Price Inflation Slows More Than Forecast

Factory-gate prices in the 17-nation economy rose 1.3 percent from a year earlier, compared with a 1.7 percent increase in the prior month, the European Union’s statistics office in Luxembourg said today.
Energy costs at the producer level rose an annual 1.6 percent in February after a 2.2 percent increase in the previous month, today’s report showed. Prices of intermediate goods rose 0.7 percent after a 1.3 percent gain in January.
In Germany, Europe’s largest economy, producer-price inflation decelerated to 1.2 percent in February from 1.7 percent in January.

A Graphical Walk-Through Of An ‘Un-Fixed’ Europe (Via ZeroHedge)

Here’s a more up-to-date chart on Euro retailing (Markit). Notice the recent slump in France…

These next charts should also change markedly after Cyprus…

Hungary to Use Central Bank Reserves in $2.1 Billion Growth Plan Hungary’s central bank has started a 500 billion-forint ($2.1 billion) program to boost lending and help end the country’s second recession in four years, Magyar Nemzeti Bank President Gyorgy Matolcsy said.

Russia’s bank chief warns on economy

Outgoing head of the central bank, Sergei Ignatiev, raises concerns

A sharp slowdown in economic growth in the first two months of 2013 is “causing serious concerns”, according to the outgoing head of Russia’s central bank, who said he “did not exclude” lowering interest rates if inflation targets were met.

Russell 2000 vs S&P 500 Divergence: April Fool’s Joke or Something Else?

(…) While the S&P 500 traded up modestly on Monday and Tuesday, the Russell 2000 traded down nearly 2%. Given the fact that the Russell 2000 has led the overall market higher, the recent divergence with the S&P 500 has been especially concerning.

Indonesian growth slips to two-year low Domestic consumption helps keep growth above 6%

Data show deflation remains a major problem

Conflicts of interest dog efforts to overhaul economy

Delayed flights reignite US budget battle Cuts are beginning to produce tangible effects

EUROZONE WOES

Turn on the liquidity taps and look the other way

Meanwhile, weekly hours are rising at a snail’s pace and hourly earnings are not keeping pace with inflation.

NEGATIVE SURPRISES ARE GLOBAL

Move threatens €78bn bailout programme and 2013 budget

Production rises at fastest rate in decade

Initial Jobless Claims: +28K to 385K vs. 350K consensus,

Small businesses fold as bank loans dwindle

Outgoing head of the central bank, Sergei Ignatiev, raises concerns