NEW$ & VIEW$ (11 NOVEMBER 2013)



Jobs Strength Puts Fed on Hot Seat

The U.S. job market showed surprising resilience in October, rekindling debate about whether the economy is strong enough for the Federal Reserve to rein in its signature easy-money program.

The Labor Department reported that U.S. employers added 204,000 jobs last month, defying expectations for weaker hiring amid the shutdown and a debt-ceiling fight that knocked down consumer and business confidence.

Among the most encouraging revelations in the jobs report were upward revisions to government estimates of job growth in August and September, before the government shutdown, easing worries about a renewed slowdown in the labor market.

The 204,000 jump in nonfarm payrolls came on top of upward revisions of 60,000 for the two previous months.

With the revisions, the trend in job creation looks notably better than it did just a few weeks ago. The latest report showed that payroll employment grew by an average of just less than 202,000 jobs per month in the past three months. The previous jobs report, released Oct. 22, showed job growth had averaged 143,000 per month over the prior three-month period.

See the impact before and after the revisions. The “summer lull” was shallower and employment growth could be turning up:

image  image


The latest figures included a number of statistical quirks that will likely lead Fed officials to be even more cautious than usual about inferring too much from a single month’s jobs report. For example, the timing of the delayed monthly hiring survey might have skewed the data.

And these peculiar stats:

Retail boom coming to a store near you?

Pointing up CalculatedRisk writes that according to the BLS, retailers hired seasonal workers in October at the highest level since 1999. This may have to do with these announcements posted here on Oct. 1st.:

Amazon to Hire 70,000 Workers For Holiday Selling Season

Amazon plans to hire 70,000 seasonal workers for its U.S. warehouse network this year, a 40% increase that points to the company’s upbeat expectations about the holiday selling season. (…)

Wal-Mart, for instance, said this week it will add about 55,000 seasonal workers this year and Kohl’s Corp. is targeting 50,000. Target Corp.’s estimated 70,000 in seasonal hires is 20% lower than last year, the company said, reflecting the desire by employees to log more hours at work.

Punch But, out there, in Real-Land, this is what’s happening:

Personal spending, a broad measure of consumer outlays on items from refrigerators to health care, rose 0.2% in September from a month earlier, the Commerce Department said Friday. While that was in line with economists’ forecast of a 0.2% increase and matched the average rise over the July-through-September period, it is still a tepid reading when taken in broader context.

This is in nominal dollars. In real terms, growth is +0.1% for the month and +0.3% over 3 months. While the rolling 3-month real expenditures are still showing 1.8% YoY growth, the annualized growth rate over the last 3 and 6 months has been a tepid 1.2%.


Here’s the trend in PDI and “department store type merchandise” sales. Hard to see any reason for retailers’ enthusiasm.image

Confused smile More quirks:

The weirdness was in the household survey, which showed a 735,000 plunge in employment, mainly 507,000 workers who were kept home by the federal government’s partial shutdown. But private employment was down 9,000, while the Bureau of Labor Statistics counted a massive exodus of 720,000 folks from the workforce.

Accordingly, the six-month average through October now comes to an increase of 174,000, basically the same as the six-month average through September of 173,000.

From the GDP report:

Consumer spending rose at an annualised rate of just 1.5%, down from 1.8% in the second quarter and 2.3% in the first three months of the year. The increase was the smallest for just over three years and considerably
below the 3.6% average seen in the 15 years prior to the financial crisis.




In a nutshell, the BLS reports a surge in jobs thanks largely to accelerating retail employment that is not supported by actual trends in consumer expenditures nor by their ability to spend.

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

October Housing Traffic Weakest In Two Years On “Broad-Based” Housing Market Slowdown

In case the world needed any additional proof that the latest housing bubble (not our words, Fitch’s) was on its last legs, it came earlier today from Credit Suisse’ Dan Oppenheim who in his monthly survey of real estate agents observed that October was “another weak month” for traffic, with “pricing power fading as sluggish demand persists.” (…)

Oppenheim notes that the “weakness was again broad-based, and particularly acute in Seattle, Orlando, Baltimore and Sacramento…. Our buyer traffic index fell to 28 in October from 36 in September, indicating weaker levels below agents’ expectations (any reading below 50). This is the lowest level since September 2011.”

Other notable findings:

  • The Price appreciation is continuing to moderate: while many markets saw home prices rising if at a far slower pace, 7 of the 40 markets saw sequential declines (vs. no markets seeing declines in each of the past 8 months). Agents also noted increased use of incentives. Tight inventory levels remain supportive, but are being outweighed by lower demand.
  • Longer time needed to sell: it took longer to sell a home in October as our time to sell index dropped to 42 from 57 (below a neutral 50). This is  typically a negative indicator for near-term home price trends.


U.S. Stocks Rise as Jobs Data Offset Fed Stimulus Concern

U.S. stocks rose, pushing the Dow Jones Industrial Average to a record close, as a better-than-forecast jobs report added to signs growth is strong enough for the economy to withstand a stimulus reduction.

Nerd smile  Ray Dalio warns, echoing one of my points in Blind Thrust:

Ray Dalio’s Bridgewater On The Fed’s Dilemma: “We’re Worried That There’s No Gas Left In The QE Tank”

(…) As shown in the charts below, the marginal effects of wealth increases on economic activity have been declining significantly. The Fed’s dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing. If it were targeting asset prices, it would tighten monetary policy to curtail the emerging bubble, whereas if it were targeting economic conditions, it would have a slight easing bias. In other words, 1) the Fed is faced with a difficult choice, and 2) it is losing its effectiveness.

We expect this limit to worsen. As the Fed pushes asset prices higher and prospective asset returns lower, and cash yields can’t decline, the spread between the prospective returns of risky assets and those of safe assets (i.e. risk premia) will shrink at the same time as the riskiness of risky assets will not decline, changing the reward-to-risk ratio in a way that will make it more difficult to push asset prices higher and create a wealth effect.

Said differently, at higher prices and lower expected returns the compensation for taking risk will be too small to get investors to bid prices up and drive prospective returns down further. If that were to happen, it would become difficult for the Fed to produce much more of a wealth effect. If that were the case at the same time as the trickling down of the wealth effect to spending continues to diminish, which seems likely, the Fed’s power to affect the economy would be greatly reduced. (…)

The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed.  So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.

We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal. Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a reacceleration of that stimulation.  So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won’t matter that much.  What will matter much more is the efficacy of Fed stimulation going forward. 

In other words, we’re not worried about whether the Fed is going to hit or release the gas pedal, we’re worried about whether there’s much gas left in the tank and what will happen if there isn’t.


S&P Cuts France’s Credit Rating

The firm cut France’s rating by one notch to double-A, sharply criticizing the president’s strategy for repairing the economy.

“We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects,” S&P said. “Furthermore, we believe lower economic growth is constraining the government’s ability to consolidate public finances.”

S&P’s is the third downgrade of France by a major ratings firm since Mr. Hollande was elected. (…)

The political situation leaves the government with little room to raise taxes, S&P said. On the spending side, the agency said the government’s current steps and future plans to cut spending will have only a modest impact, leaving the country with limited levers to reduce its deficit.

Smile with tongue out  French Credit Swaps Fall as Investors Shun Debt Downgrade

The cost of insuring against a French default fell to the lowest in more than three years, as investors ignored a sovereign-credit rating downgrade by Standard & Poor’s.

Credit-default swaps on France fell for a sixth day, declining 1 basis point to about 51 basis points at 1:45 p.m. That would be the lowest closing price since April 20, 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012 when France lost its top rating at S&P.

“You need to ignore the S&P downgrade of France,” saidHarvinder Sian, fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It is behind the market.”

Surprise Jump in China Exports

Exports rebounded sharply in October from a September slump as demand improved in the U.S. and Europe, a potentially positive sign for the global economic outlook.

Exports in October were up 5.6% from a year earlier, after registering a 0.3% fall in September. The median forecast of economists surveyed by The Wall Street Journal was for an expansion of just 1.5%.

The news from China follows reports of a strong October performance from South Korea’s exports, up 7.3% from a year earlier, and suggests the recovery in the U.S. and elsewhere, though slow, is feeding through into increased demand for Asia’s export machine.

Shipments from China to the European Union were up 12.7% from a year earlier, while those to the U.S. were up 8.1%. But exports to Japan lagged behind, against a background of continued political tensions and a weakening of the Japanese yen.

China’s good export performance is even more striking given that last year’s figures were widely thought to have been overreported, so that growth looks weaker by comparison. Excluding that effect, real export growth could be as high as 7.6%, Mr. Kuijs estimated.

Imports to China also showed strength in October, up 7.6% from a year earlier, accelerating a bit from September’s 7.4% pace.

Surprised smile  China Auto Sales Climb at Fastest Pace in Nine Months

Wholesale deliveries of cars, multipurpose and sport utility vehicles rose 24 percent to 1.61 million units in October, according to the state-backed China Association of Automobile Manufacturers today. That compares with the median estimate of 1.5 million units by three analysts surveyed by Bloomberg News. (…)

Total sales of vehicles, including buses and trucks, rose 20 percent to 1.93 million units last month, the association said. In the first 10 months of the year, 17.8 million vehicles were delivered, with 14.5 million being automobiles.

Commercial vehicles sales increased 7.4 percent in the first 10 months of the year to 3.36 million units.

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

The consumer price index rose to 3.2% on a year-on-year basis in October, up from 3.1% in September. The rise was largely due to mounting food prices, which climbed 6.5%, and rising rents, according to government data released on Saturday. But it was still well within the government’s ceiling of 3.5% for the year.

Producer prices were down 1.5% year on year after moderating to a fall of 1.3% in September. This was the 20th month in a row of falling factory prices.

On a month-on-month basis, prices were even less of a concern, gaining only 0.1%.

CPI/non-food rose 1.6% YoY (same as September and vs. 1.7% a year ago), and was +0.3% MoM (+0.4% in September). Last 2 months annualized: +4.3%.

Data also showed China’s factory output rose 10.3% YoY in October. Fixed-asset investment, a key driver of economic growth, climbed 20.1% in the first 10 months. Real estate investment growth rose 19.2%, while property sales rose 32.3%.

Power production rode 8.4% YoY in October, compared to 8.2% in September and 6.4% a year earlier.

Retail sales were up 13.3%. Nominal retail sales growth has been stable at about 13% YoY for the past five months.


Central Banks Renew Reflation Push as Prices Weaken

A day after the European Central Bank unexpectedly halved its benchmark interest rate to a record-low 0.25 percent and Peru cut its main rate for the first time in four years, the Czech central bank yesterday intervened in currency markets. The Reserve Bank of Australiayesterday left open the chance of cheaper borrowing costs by forecasting below-trend economic growth. (…)

Other central banks also held their fire this week. The Bank of England on Nov. 7 kept its benchmark at 0.5 percent and its bond purchase program at 375 billion pounds ($600 billion).

Malaysia held its main rate at 3 percent for a 15th straight meeting to support economic growth, rather than take on inflation that reached a 20-month high in September.


The Economist agrees (tks Jean):

The perils of falling inflation In both America and Europe central bankers should be pushing prices upwards

(…) The most obvious danger of too-low inflation is the risk of slipping into outright deflation, when prices persistently fall. As Japan’s experience shows, deflation is both deeply damaging and hard to escape in weak economies with high debts. Since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further. There is a real danger that this may happen in southern Europe. Greece’s consumer prices are now falling, as are Spain’s if you exclude the effect of one-off tax increases. (…)

Race to Bottom Resumes as Central Bankers Ease Anew

The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

Canada’s housing market teeters precariously
Analysts warn nation is on verge of ‘prolonged correction’

(…) Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.

In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”

The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce. (…)

Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.

On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says. (…)


From various aggregators:

  • Bloomberg:

Among 449 S&P 500 companies that have announced results during the earnings season, 75 percent beat analysts’ estimates for profits, data compiled by Bloomberg show. Growth in fourth-quarter earnings will accelerate to 6.2 percent from 4.7 percent in the previous three months, analysts’ projections show.

  • Thomson Reuters:
  • Third quarter earnings are expected to grow 5.5% over Q3 2012. Excluding JPM, the earnings growth estimate is 8.2%.
  • Of the 447 companies in the S&P 500 that have reported earnings to date for Q3 2013, 68% have reported earnings above analyst expectations. This is higher than the long-term average of 63% and is above the average over the past four quarters of 66%.
  • 53% of companies have reported Q3 2013 revenue above analyst expectations. This is lower than the long-term average of 61% and higher than the average over the past four quarters of 51%.
  • For Q4 2013, there have been 78 negative EPS preannouncements issued by S&P 500 corporations compared to 8 positive EPS preannouncements. By dividing 78 by 8, one arrives at an N/P ratio of 9.8 for the S&P 500 Index. If it persists, this will be the most negative guidance sentiment on record.
  • Zacks:

Total earnings for the 440  S&P 500 companies that have reported results already, as of Thursday morning November 7th, are up +4.6% from the same period last year, with 65.7% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 51.4% beating revenue expectations with a median surprise of +0.1%.

The charts below show how the results from these 440 companies compare to what these same companies reported in Q2 and the average for the last 4 quarters. The earnings and revenue growth rates, which looked materially weaker in the earlier phase of the Q3 reporting cycle, have improved.

The earnings beat ratio looks more normal now than was the case earlier in this reporting cycle. It didn’t make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.

The composite earnings growth rate for Q3, combining the results from the 440 that have come out with the 60 still to come, currently remains at +4.6% on +2.9% higher revenues. This will be the best earnings growth rate of 2013 thus far, though expectations are for even stronger growth in Q4.

We may not have had much growth in recent quarters, but the expectation is for material growth acceleration in Q4 and beyond. The chart below shows total earnings growth on a trailing 4-quarter basis. The +3.1% growth rate in the chart means that total earnings in the four quarters through 2013 2Q were up by that much from the four quarters through 2012 2Q. As you can see, the expectation is for strong uptrend in the growth momentum from Q4 onwards.

Guidance has been overwhelmingly negative over the last few quarters and is not much different in Q3 either, a few notable exceptions aside.

Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. And with the market expecting the Fed to wait till early next year to start Tapering its QE program, investors may shrug this coming period of negative estimate revisions, just like they have been doing for more than a year now.



Stocks Regain Broad Appeal

Mom-and-pop investors are returning to stocks, but their renewed optimism is considered by many professionals to be a warning sign, thanks to a long history of Main Street arriving late to market rallies.

(…) “Frankly, from 2009 until recently, I wanted to stay very conservative,” said Chris Rouk, a technology sales manager in Irvine, Calif. Now, he said, “I want to get more aggressive.” (…)

More investors are saying they are bullish about the stock market, according to the latest poll from the American Association of Individual Investors, which found that 45% of individuals are bullish on stocks, above the long-term average of 39%. Last month, the same survey said the number of investors who said they were bearish on stocks fell to the lowest level since the first week of 2012. (…)

Flurry of Stock, Bond Issuance Is a Danger Sign for Markets

Just as financial markets were recovering from the Washington turmoil, a new danger signal has started blinking, in the form of a flood of stock and bond issues.

So far this year, U.S. companies have put out $51 billion in first-time stock issues, known as initial public offerings or IPOs, based on data from Dealogic. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped.

Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic’s records, which start in 1995.

It isn’t just stock. U.S. corporate-bond issues have exceeded $911 billion, also the most in Dealogic’s database. Developing-country corporate-bond issues have surpassed $802 billion, just shy of the $819 billion in the same period last year, the highest ever. (…)

Small stocks with weak finances are outperforming bigger, safer stocks. And the risky payment-in-kind bond, which can pay interest in new bonds rather than money, is popular again. (…)




Tepid Jobs Report Muddies Fed Plans

The disappointing jobs report released Friday leaves Fed officials without a clear-cut signal of an economy on the mend, creating a dilemma for the central bank as it contemplates pulling back on a bond-buying program.

Employers added a steady, if unspectacular, 169,000 jobs in August, and  unemployment rate fell to 7.3% last month. That’s notable improvement from the 8.1% unemployment rate when Fed officials launched the latest stimulus program late last year, but job growth has been anemic in recent months, below the 200,000-a-month level some officials want to see. (…)


“Steady”? Payrolls growth has averaged 148,000 for the past three months, a notable decline from the 199,000 pace of the previous 5 months and well below the 184,000 average of the past twelve months.

Add the significant revisions (net downward revision for June and July of 74,000 jobs) and you get deep in the mud if your job is first to know where you are before finding the right direction.

Then, in the household survey, the total number of people employed declined by 115,000, but the size of the labour force fell by a much higher 312,000, accounting for the decline in the unemployment rate to 63.2%, which is the lowest rate since August 1978 and before the enormous influx of women in the workforce in the 1980s and 1990s.

Bespoke Investment adds:

While much, if not all, of the increase in the labor force participation rate in the 1970s was attributable to women entering the workforce, the shrinking of the labor force since the peak in early 2000 is due in majority to the exit of men from the work force.  For example, since the labor force participation rate peaked, the participation rate among women has declined by just 2.8 percentage points.  Men, on the other hand, have seen their participation rate decline by twice that at 5.6 percentage points.

Due to the fact that men are exiting the labor force at nearly twice the rate of women, the gap between the participation rate among men and women has been steadily shrinking.  The participation rate among men currently stands at 69.5%, while the rate among women is 57.3%.  With a spread of 12.2 percentage points, the gap between the sexes has never been narrower.

More important is that men employment (+ 947,000 or +1.3%) has seriously lagged women employment (+2,326,000 or +3.5%) since 2012. Given the (15-28% depending on industry) gender pay gap, this has probably contributed to corporate profit margins in the past 18 months.



The only piece of good news came from the household survey, which despite the net job losses showed a second consecutive increase in full time jobs.

High five  But as today’s Hot Charts show, despite those gains in full-time positions the share of part-timers in total employment remains much too high. (…) That in turn is restraining the economy e.g. preventing an improvement in home ownership rates and capping wage growth and hours worked. The annualized growth rate in aggregate hours is tracking just +1% so far in Q3, a deceleration from Q2’s pace, suggesting a likely return to sub-2% GDP growth in Q3 after the spike in the last quarter. (NBF Economy & Strategy)


The WSJ keeps hammering:

Part of the problem is also the growing attraction of not working. These columns have reported on the explosion in both the food-stamp and federal disability rolls since the recession ended. A new Cato Institute study shows that the full plate of welfare benefits—food stamps, housing assistance, Medicaid and so on—now pays more than a $12 an hour job in half the states. This, too, plays a role in the expanding number of people who are leaving the workforce. Reforms in those programs would help, but the real cure is faster economic growth.

Why Is One-Sixth of U.S. on Food Stamps? Food-stamp use grew 2.3% in June from a year earlier, with nearly one-sixth of the U.S. population receiving benefits.

One of the largest social safety net programs in the United States, food stamps – formally known as the Supplemental Nutrition Assistance Program, or SNAP – expanded substantially during and after the recession, with enrollment rising about 70% from 2007 to 2011. At the same time, the government also temporarily increased benefits and allowed users in the hardest-hit areas to receive aid for longer-than-usual periods of time. The average monthly benefit was $133 last year.

Critics clamor against what they see as a disturbing rise in government dependency. But new economic research suggests the program’s expansion isn’t alarming and can, in fact, be explained by business cycles. (…)

The 2009 fiscal stimulus program’s temporary increase in food stamp benefits, which may have also boosted incentives to enroll, is set to expire Nov. 1. Congress is not expected to mitigate the scheduled cuts.

Surprised smile


Fingers crossed A Hire Calling for Companies

Companies remain reluctant to add jobs. They may not be able hold off for too much longer.

image(…) One indication companies may need to step up hiring is that there hasn’t been much firing going on. The four-week moving average of initial jobless claims, at 328,500, has reached its lowest level since October 2007. Companies also had workers clocking more time last month, with private payroll hours rising 0.4%. To add that many hours of work without increasing each worker’s time on the job, private employers would have had to increase payrolls by 464,000 positions, rather than the 152,000 they delivered.

High five  What the WSJ fails to mention is that last month’s increase in weekly hours was tiny and left average hours near the low end of their range of the last 3 years. There is thus no immediate need to boost payroll as the WSJ article suggests.image

Here’s a more solid sign of hope from the August NFIB survey (via John Mauldin):

Job creation plans rose a very large 7 points to a net sixteen percent planning to increase total employment, the best reading since January, 2007 and historically a very strong reading. Not seasonally adjusted, 15 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (down 1 point). If this reading is not a fluke, it signals a substantial resumption of hiring in the coming months. Hopefully, the September survey will validate the August readings and reports of actual hiring will turn positive.



How about a baby taper? One little step at a time…

One option that has gained support among some Fed officials in recent weeks: Reduce monthly bond purchases by a small amount, say by $10 billion, to $75 billion a month, and signal as loudly as possible the next step will depend on more evidence the job market is continuing to improve and inflation is moving back toward 2% from its current low levels.

Obama will copycat, one little tomahawk at a time…

Obama’s Limited Strikes Plan Faces Risks of Escalation

An old military mantra — “the enemy has a vote” — describes the situation President Barack Obama is confronting as he tries to muster support for U.S. military strikes against Syria.

Facing a divided Congress and a war-weary public, Obama has promised that any U.S. action will be “limited and proportionate.” Syrian President Bashar al-Assad and his allies, though, will also help decide how long and how big any American military mission in Syria will be.

Canadian Job Creation Triples Forecasts in August

Employment increased by 59,200 and the jobless rate fell to 7.1 percent from 7.2 percent, Statistics Canada said today in Ottawa. (…)

Part-time employment in Canada rose by 41,800 in August, with full-time jobs rising by 17,400, Statistics Canada said. Service industry employment increased by 40,600 and goods-producing companies hired 18,600.

Canada has added 38,400 full-time jobs so far this year, the second-least in that period since 1995. (…)

Job gains have averaged 12,700 this year, compared with 25,900 in 2012. The world’s 11th largest economy needs to add more than 22,000 jobs a month for the rest of 2013 to avoid suffering the weakest annual gain since 2001, except for the recession years of 2008-2009.

Bank of Mexico Takes the Plunge, Surprises With Rate Cut

(…) The central bank, led by Governor Agustín Carstens, was clear in its reasons for cutting the overnight rate target to 3.75%: the economic downturn in the second quarter was “faster and deeper” than expected, and the slack in the economy is likely to remain for a prolonged period.

The bank acknowledged that economic growth this year will be well below the 2%-3% estimate it gave in August, about a week before the National Statistics Institute released the bad news about second-quarter gross domestic product, which contracted 0.7% from the first quarter and was up just 1.5% from a year earlier.

Credit Suisse economist Alonso Cervera, who alone had predicted a quarter-point reduction in the overnight rate Friday, says it’s significant that the Bank of Mexico didn’t call this a one-off cut, as it had done with the half-point reduction in March. (…)

The central bank was sanguine about inflation, which it said is likely to follow a lower path than the 3.5% it recently predicted for coming months. The bank’s permanent CPI target is 3%.

German Factory Output Drops

[image]Data indicators across the euro zone Friday reinforced remarks made Thursday by European Central Bank President Mario Draghi to the effect that while signs of recovery are indeed apparent, they remain weak and somewhat inconsistent.

Industrial output in Germany fell 1.7% on the month in July, the country’s economics ministry reported Friday. This was well below expectations of a 0.5% dip in a Dow Jones Newswires survey of analysts. The data followed an earlier release from the statistics agency that showed exports dropping on the month and the country’s trade surplus narrowing.


China’s Exports Accelerated in August

China’s economy shows new signs of resilience in August, with key trade data pointing to a sustained strengthening in global demand for goods from the country.

Exports continued to gather steam, rising 7.2% in August from a year earlier, according to data released Sunday by the General Administration of Customs. This was up from a 5.1% rise in July and a contraction of 3.1% in June. Imports rose 7.0% from a year earlier in August, down from 10.9% in July.

Shipments to the U.S. rose 6.1% on-year in August, up from 5.3% in July, which marked an improvement from shrinking sales earlier in the year.

Sales to countries in the Association of Southeast Asian Nations — a 10-nation grouping that includes Indonesia, Malaysia, Thailand and Singapore — rose 30.8%.


Credit Suisse analysts track the quarterly change in China premier’s three favoured economic measures in a forward-looking indicator they call the Li Keqiang Momentum Index (LKMI):

Graph China

(…) all three of the LKMI’s indicators have started to gather steam in the third quarter, which reflects the positive news the economist and his team of analysts have been hearing anecdotally (…).


(…) None of the new supports to growth are robust. But they should at the very least keep things in China from getting much worse. (…)


Mutual-Fund Investors Halt March Into U.S. Stocks

Investors pulled a net $226 million out of U.S. equity mutual funds in the week ended Sept. 4, their first week of outflows since the week ended June 5, according to fund tracker Lipper. That was a reversal from the $1 billion of inflows the previous week. (…)

ETF investors have pulled $23 billion from U.S. stock funds over the past four weeks, after sending cash to U.S. stock ETFs for six weeks in a row. In the latest week, they pulled $4.8 billion from U.S. stock ETFs.

TRAVELLING for the rest of the month. Why not?

image(BMO Capital)


NEW$ & VIEW$ (9 AUGUST 2013)

China slowdown shows signs of abating
Industrial production rises 9.7% in July

Industrial production at large enterprises, a closely watched measure that usually tracks China’s gross domestic product, increased 9.7 per cent from a year earlier in July, sharply up from 8.9 per cent growth in June and the fastest pace since February.

The unexpectedly strong performance was driven mostly by rebounding production of steel, cement, power and nonferrous metals, underscoring the fact that China’s growth remains disproportionately reliant on credit-fuelled infrastructure and property construction.

In contrast, growth in retail sales slipped slightly in July, increasing 13.2 per cent from a year earlier compared with 13.3 per cent growth in June.

Fixed asset investment, a key driver of China’s investment-led economy, stabilised in July with a 20.1 per cent rise in the first seven months from a year earlier, the same pace as in the six months to the end of June, following four consecutive months of deceleration.

Growth in real estate investment sped up in July, growing 20.5 per cent in the first seven months, compared with 20.3 per cent growth in the first six months.

Power production, another closely watched indicator, increased 8.1 per cent in July from a year earlier, up from 6 per cent growth in June and the fastest increase since December 2011.

On Friday, official figures showed consumer prices in China rose 2.7 per cent in July from a year earlier, the same pace as in June and well below Beijing’s 3.5 per cent upper limit. Meanwhile, producer prices stayed in deflationary territory for the 17th consecutive month, falling 2.3 per cent in July from a year earlier, compared with a 2.7 per cent drop in June.

China’s Credit Expansion Slows as Li Curbs Shadow Banking

Aggregate financing was 808.8 billion yuan ($132 billion), the People’s Bank of China said in Beijing today, compared with the 925 billion yuan median estimate of analysts surveyed by Bloomberg News. New yuan loans exceeded forecasts and accounted for about 87 percent of the total, the most since September 2011. M2 money supply growth unexpectedly accelerated to 14.5 percent.

New yuan loans were 699.9 billion yuan in July, compared with the 640 billion yuan median analyst estimate and 540 billion yuan a year earlier. Aggregate financing, which includes bond and equity sales, entrusted loans and bankers’ acceptance bills, compared with 1.04 trillion yuan in June and 1.05 trillion yuan a year ago.

Auto  China’s passenger-vehicle sales rose 10.5 percent in July as automakers increased production and dealerships stepped up discounts to clear inventory, figures from the state-backed China Association of Automobile Manufacturers showed today. Wholesale deliveries of 1.24 million units topped the median estimate of 1.22 million from six analysts surveyed by Bloomberg News.

Home Prices Rise In West, Sunbelt

Cities in the West and the Sunbelt, among the hardest hit during the real-estate downturn, continue to lead the nation’s housing recovery, posting double-digit gains in home prices.

imageIn the second quarter, median existing-home prices increased in 142 of the 163 metropolitan areas tracked by the National Association of Realtors, according to a survey released Thursday.

Nationally, the median existing-home price rose 12.2% in the second quarter from a year ago, to $203,500.

The fastest growth was the West, with 18.2% price growth, followed by the South (11.0%), the Midwest (7.9%) and the Northeast (6.9%).

U.K. Exports Rising to Record Signal Recovery Progress

Overseas sales increased increased 4.9 percent to 78.4 billion pounds ($122 billion), the most since the series began in 1998, the Office for National Statistics said today in London.

The growth in goods exports was led by demand outside the European Union, where sales surged 7.5 percent, exceeding 40 billion pounds for the first time. Exports to the EU increased 2.3 percent, though shipments to Germany dropped 7.9 percent, widening the U.K.’s trade gap with Europe’s largest economy.

French Industrial Output Unexpectedly Drops

Industrial production fell 1.4 percent from the previous month, state statistical institute Insee said today. The drop was worse than any of the predictions made by 22 economists in a Bloomberg survey, whose estimates ranged from a 0.5 percent decline to a 0.5 percent increase. The median forecast was for a 0.3 percent gain.

In Germany, the measure rose 2.4 percent in June, adding to signs that growth in Europe’s largest economy accelerated in the second quarter. Even Italy, mired in its worst recession in 30 years, saw a 0.3 percent increase in production, the second monthly increase in a row and its best since January.image

Weak Demand Dogs Shipping Companies

(…) “This is primarily caused by very, very weak demand and capacity oversupply, causing downward pressure on freight rates,” acting finance chief Alan Tung said, calling the results “disappointing.” “But we do hope for an improvement in the second half.”

Singapore-based Neptune Orient Lines said on Wednesday it sees few signs of a quick recovery in freight rates, (…)

“There’s hope in this and, yes, the high season is coming,” he said. “I don’t know how successful the high season will be, but the initial sign is that we see cargo growth and that’s good news.”

Dutch mood shifts against austerity

Support for government plunges as protests grow

(…) The growing protest marks a slow but significant shift, as this prosperous Calvinist country, once strongly committed to austerity, has gradually turned against it. The Dutch government was among the strongest advocates of tough European budget deficit rules and enforcement powers from the start of the euro crisis in 2010. Now that the EU is forcing the Dutch to slash their deficits, public support for Europe in this once strongly pro-European country has plunged.

Indeed, with the economy in a deep and prolonged recession, austerity measures have sent popular support for the government plummeting to just 28 per cent in the latest polls. Meanwhile, support for the two parties firmly opposed to austerity, the far-right Freedom Party of Geert Wilders and the far-left Socialist Party, has soared; some polls put the Freedom Party in the lead. (…)

The resistance to EU-driven austerity comes not just from the unions, but from business leaders. Bernard Wientjes, the head of the Netherlands’ VNO-NCW business group who is one of the most influential lobbyists in the country, called in June for the government to drop the €6bn austerity plan if it meant raising taxes further. (…)

The head of the country’s small-business organisation has attacked austerity measures as well.

The unions, meanwhile, demand that any new austerity measures should rely on raising taxes. They say they will withdraw from a so-called “social accord” reached between business, labour and the government in April if the government extends pay freezes for healthcare and government employees, which have already persisted for three years.(…)

US oil demand growth at two-year high
Industrial products such as gasoil and LPG fuel growth

Demand for oil in the US has grown in four of the past six months – the strongest run since early 2011 – leading the industrialised countries’ energy watchdog to upgrade its forecast for US demand this year from zero growth to 0.3 per cent, which would be the first in two years.

Refinery runs have increased 5.1m barrels a day since April, the largest seasonal increase in runs since the IEA began collecting data in 2004.

But the IEA also highlighted supply outages across the Opec oil producers’ cartel as a reason for price strength.

In Libya, production fell to 1m b/d in July, a sharp drop from June, when production was already at its lowest since the country’s civil war in 2011. A wave of strikes and militia activity have closed export terminals in the North African producer.

In Iraq production dipped below 3m b/d for the first time in six months. The IEA said planned maintenance to a key export terminal in September, which is expected to reduce exports by a further 500,000 b/d, could drag on for several months.

Saudi Arabia increased production to 9.8m b/d in July, according to the IEA, in part to meet domestic demand for electricity to run air conditioners in the summer months, but also to compensate for reduced supplies elsewhere. But Opec’s overall crude oil output fell to 30.4 mb/d in July, from 31 mb/d in May.

Auto  Energy Journal: America to Its Auto: Long May You Run The 247 million cars and trucks on U.S. roads are growing old together. New auto sales may have reached a five-year high in June, but Americans are keeping their vehicles longer.

The average age of an American car or truck in January was 11.4 years, the oldest on record and a nearly a full two years older than in 2007.

On top of this, Americans are driving less and, as Quartz explains, young Americans aren’t interested in a brand new Cadillac.

The IEA’s latest oil market report said that while U.S. demand has been rising in recent months for products that closely track industrial activity, such as liquefied petroleum gas, demand for fuel oil and gasoline has been eroding.

Some could benefit from such a shift—auto-repair shops or hire firms—but as Geoffrey Styles writes for Pacific Energy Development, if the number of Americans who drive continues to fall then this will require some serious thinking by fuel producers, established and upstart auto makers, transportation planners and policy makers.

Auto  Magna raises sales forecast after profit beats forecasts

Auto parts maker Magna International Inc reported a stronger-than-expected 19-per-cent rise in second-quarter profit and raised its sales forecast for the year, buoyed by increased vehicle production in North America.

  The company raised its sales forecast for the year to $33.3-billion (U.S.)-$34.7-billion from $32.6-billion-$34-billion.

Magna also raised its expected total production sales for the year to be between $27.7-billion and $28.7-billion, up from its previous forecast range of $27.2-billion-$28.2-billion.

Production sales are Magna’s core business of manufacturing vehicle parts and exclude its smaller vehicle assembly and tooling operations.

Aurora, Ont.-based Magna’s fortunes are closely linked to the health of the U.S. vehicle market and Detroit’s Big Three – Ford Motor Co., General Motors Co. and Fiat SpA’s Chrysler.


Of 442 companies in the S&P 500 that reported earnings through Thursday morning, Thomson Reuters data showed that 67 percent topped analysts’ expectations, matching the beat rate over the past four quarters. In terms of revenue, 53.6 percent exceeded estimates, more than the 48 percent rate over the past four quarters, but below the 61 percent average since 2002.

Pointing upBut here’s the meat from Moody’s:

(…) according to the 87% of the non-financials that have reported, Q2-2013’s operating income contracted by -1.3% annually, partly because of a weak 2.6% yearly rise by the group’s revenues. For the third-quarter, the consensus expects the operating income of the S&P 500’s nonfinancial companies to grow by a mediocre 3.5%. (…)

Nevertheless, the consensus somehow believes that the operating income of the S&P 500’s nonfinancial companies will recover to annual a growth rate of 8.8% by Q4-2013.

Fingers crossed  The hope:
New US listings at post-crisis high in Q3

A total of 28 companies have raised $5.2bn from US initial public offerings since July, which marks the fastest rate of activity and amount raised in the same period since 2007, according to data from Dealogic. A further six companies are looking to price deals and begin trading by the end of this week.

IPOs this year have gained an average of 13.2 per cent on their first day of public trading and are up on average just over 30 per cent from their listing price, Dealogic said.

Morning MoneyBeat: The Growing ‘1700 Club’ The number of Wall Street strategists who predict the S&P 500 will finish the year above 1700 keeps growing as stocks keep rallying.

At the beginning of 2013, when the S&P 500 was at 1426, none of Wall Street’s leading prognosticators had 1700 on their radars. Now, at least seven strategists expect the index will finish above 1700 by year’s end.

Wall Street’s 13 leading strategists, on average, expect the S&P 500 to finish the year at 1669, according to Mr. Birinyi. That estimate, while up from the 1544 forecast at the beginning of the year, is still below Thursday’s close.

Even the skeptics are turning a bit less bearish. Earlier this week Barry Knapp of Barclays boosted his year-end target to 1600 from 1525. “It appears that our bull case – faster-than-expected improvement in capital investment and better-than-expected consumer resiliency to tax hikes – may be playing out,” he said.

Stocks Start to Look Overvalued

For the past several years, stock-market bulls have been able to argue that stocks are cheap. That argument is increasingly on shaky ground.

The S&P 500 is trading at 14.5 times its expected earnings for the next 12 months, according to FactSet. That is above the index’s average P/E of 14.2 for the past 10 years, and the highest monthly reading since September 2009. The S&P 500’s forward P/E hasn’t crossed above 15 since October 2007.

The S&P 500 remains below its average valuation of 16.6 since 1988, according to S&P Dow Jones Indices. But that includes the dot-com bubble of 1999 and 2000, when investors paid as much as 27.6 times every dollar of the S&P 500’s expected earnings. Investors haven’t paid more than 20 times the coming year’s earnings for the S&P 500 since 2002, according to FactSet.

Stock futures lower, pointing towards worst week since June

Stock index futures were lower on Friday, putting major indexes on track for their worst week since June, as investors found few reasons buy with equity prices near record levels.


NEW$ & VIEW$ (13 JUNE 2013)

Lightning  Nikkei Enters Bear Market

Markets suffered another bruising day as investors scrambled for the exits, with Japanese stocks entering a bear market. The Nikkei ended 6.4% lower. Declines continued in the U.S. and Europe.

Core benchmark indexes in Europe were all down more than 1%. (…)

The fear that the Fed could change its monetary policy, along with signs that the U.S. economy is recovering, has encouraged investors to pull money out of emerging markets that are typically perceived as risky.

The resulting outflows have hit some of Asia’s smaller markets the hardest—such as the Philippines and Thailand, which were down 6.8% and 2.1% respectively Thursday. Along with Japan, these markets were previously some of the region’s best performers before the selloff started. (…)

In Thailand where the baht has fallen recently, the finance minister said it is at an “appropriate” level and that outflows were to blame. In Korea, the central bank said the yen’s recent swings and the possible end to aggressive monetary easing in the U.S. are key downside risks for the country’s growth.

The other dampener to sentiment came from China. Chinese stocks plunged after markets in the mainland reopened after a three-day public holiday, getting their first chance to react to signs the economy is slowing.

The Shanghai Composite Index hit a six-month low of 2126.22 in the session and finished down 2.8% at 2148.36. The Hang Seng China Enterprises Index, a measure of Chinese companies in Hong Kong, plunged 3.4%, its worst percentage fall since May 2012.

The dollar was last at ¥94.35 compared with ¥96.01 late Wednesday in New York. The dollar hit a two-month low against the dollar of ¥93.76 earlier in the session and has now lost around 9.2% of its value against the yen from the multiyear peak it reached on May 22.

EM economies in danger of overheating, World Bank says
Development bank says growth may be unsustainably fast

Some of the world’s fastest growing emerging economies are in danger of overheating and should tighten monetary or fiscal policy, the World Bank has warned.

The world’s largest development bank called out the Philippines, Thailand and Vietnam in East Asia, Colombia and Ecuador in South America and Ghana in Africa as countries where growth may be unsustainably fast.

Emerging Markets Act to Stem Capital Flight

Emerging markets from Brazil to India took steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era pumping unprecedented liquidity.

India’s central bank sold dollars the past two days to stem the rupee’s slide, two people familiar with the matter said, while Indonesia unexpectedly raised its benchmark interest rate today. Brazil said yesterday it would unwind some of the capital controls it began putting in place in 2010 — when the Federal Reserve was embarking on its second round of quantitative easing, known as QE2. Thailand said it sold dollars in the past week.

 Indonesia Unexpectedly Raises Rate for First Time Since 2011

Bank Indonesia unexpectedly raised its key interest rate for the first time since 2011 as Governor Agus Martowardojo accelerates efforts to support the currency and cool inflation expectations. The rupiah pared losses.

The central bank increased the reference rate by a quarter of a percentage point to 6 percent, it said in Jakarta today.

Indonesia joins emerging markets such as Brazil in addressing an outflow of capital amid concern that developed nations will scale back the liquidity they have been pumping.

CHINA SUMMARY CHART: Still slowing(Ed Yardeni)

BoJ insider warns on impact of tax rises
Planned tax increases could derail Abe inflation targets

Addressing a meeting of business leaders in Hokkaido, Sayuri Shirai said that the chances of the BoJ hitting its two-year, 2 per cent inflation target were “tilted somewhat to the downside”, bearing in mind the planned rises in Japan’s rate of consumption tax from 5 per cent to 8 per cent next April, and to 10 per cent in 2015.

“If many firms perceive that the price increase triggered by the tax hikes could be sufficiently large to constrain household domestic demand, they may partially postpone raising their final sales prices”, Ms Shirai said.

If that happens, the rate of consumer price inflation “could be lower than that projected by the Bank,” she said. (…)

The comments from Ms Shirai, seen as one of the more dovish figures at the BoJ, mark the first time that a board member has spoken out on the feasibility of the inflation target in the context of Japan’s fiscal tightening.

The overhaul of the country’s consumption tax was the final act of Japan’s previous prime minister, Yoshihiko Noda, who pushed for a deal under which the tax would begin rising provided the government were convinced that the economy was strong enough to bear it.

Mr Abe is expected to make that judgment in October, with some close to the prime minister describing his decision as finely balanced. The last increase in Japan’s consumption tax, from 3 per cent in April 1997, is still blamed by some economists for tipping the country back into recession in 1998. (…)

Lightning  Spanish House Prices Slump

According to data released Thursday from Spain’s National Statistics Institute, or INE, house prices in the first quarter dropped 6.6% from the fourth quarter, the fastest pace since INE began collecting house price data in 2007. The annual pace of decline was 14.3% compared with a year earlier, accelerating from 12.8% in the fourth quarter.

The latest decline is expected to add to pressure on Spanish banks, which are still loaded with loans to developers and are already hurt by tumbling prices and property assets that keep depreciating. In recent months, many of them transferred €50 billion ($66.69 billion) worth of such assets to a “bad bank” created to relieve them of toxic assets in their balance sheets under the terms of a European Union bailout for the banks agreed on last year. But the continued slump in the housing market threatens to create more problematic assets further down the road.

Southern Europeans Flee to Germany

(…) The OECD said around 34,000 Greeks and 28,000 Spaniards moved to Germany between September 2011 and September 2012, according to preliminary data for that period. The number of Greeks and Spaniards emigrating over the four-year period to 2011 more than doubled, the OECD said.

“Altogether, this represents an increase of almost 40,000 additional immigrants from crisis countries to Germany in 2012 compared to 2011,” the report said.

The OECD said that altogether 116,000 people from “crisis countries” had moved to Germany in 2012, and while acknowledging that figure doesn’t constitute an “exodus,” it still shows a “significant contribution to workforce entries in Germany.”



Second-quarter earnings guidance looks extremely weak, with 93 of the 116 preannoucements negative. The healthcare sector has the most negative N/P ratio, and the consumer discretionary sector is also very negative.

Of the 116 second-quarter earnings preannouncements given by S&P 500 companies, 93 of them have been negative, while only 14 have been positive. The resulting 6.6 negative to positive guidance ratio is the most negative since the first quarter of 2001. As seen below in Exhibit 1, the recent trend has been toward more negative preannouncements as earnings growth has slowed. While there is still more guidance to come as the second-quarter earnings season approaches, the N/P ratio as it stands is significantly more negative at 6.6 than for the first quarter, which itself was the most negative since Q3 2001, at 4.3. Exhibit 1.  S&P 500: Negative to Positive Guidance Ratio, 2008–Present

Exhibit 2.  S&P 500: Q2 Guidance — Negative to Positive Ratio by Sector


U.S. Notches Biggest Gain in Oil Output

The U.S. last year posted the biggest increase in oil production in the world and the largest increase in U.S. history, the latest sign of the shale revolution remaking world energy markets.

imageIn the latest sign of the shale revolution remaking world energy markets, crude production in the U.S. jumped 14% last year to 8.9 million barrels a day, according to the newly released Statistical Review of World Energy, an annual compilation of industry trends published by BP PLC for more than six decades.

imageBeyond the U.S., oil production increased almost 7% in Canada, raising North America’s profile as a global oil producer. (…)

While the U.S. shale boom increased production, many other oil-producing regions struggled with declining volumes. U.K. production fell 13.4% in 2012, as some of its North Sea oil fields near their fourth decade of life. Former OPEC member Indonesia experienced a 3.9% decline.

Libya grew its production from 479,000 daily to 1.5 million, mostly because it was able to restart output following disruptions related to its civil war. Powerhouse Saudi Arabia raised its world-leading output almost 4% to 11.5 million barrels per day. (…)

BP said world consumption grew 0.9%. Europe and North America used less oil, while the rest of the world, led by China, used more. (…)

Measured in 2012 dollars, the average oil price last year of $111.67 per barrel of Brent crude was just $2 lower than in 2011, which was the highest price at any time since the post-Civil War boom in Pennsylvania in the 1860s, BP said. Both prices were higher than such watershed years as 2008, when oil nearly hit $150 a barrel in the summer and the average was $103.71 a barrel in current dollars; 1979, when the Iranian revolution roiled markets; and 1973, the year of the Arab oil embargo. (…)

Pointing up  Fed Could Drain the Oil Market’s Tank

There is a shadow looming over oil prices in the shape of a big tank—and a big central bank.

At around 394 million barrels, U.S. commercial stocks of crude oil, excluding the strategic petroleum reserve, are hovering around their highest levels since the early 1980s.

image(Bespoke Investment)

In part, that reflects the shale-led surge in U.S. supply, with domestic production outpacing imports in late May for the first time since January 1997. (…)

Meanwhile, domestic demand is sluggish. The IEA expects it to average slightly less than 18.6 million barrels a day this year, down for the third year in a row. (…)

But another factor keeping inventories high has nothing to do with roughnecks or commuters. It emanates from Washington.

Refiners and oil marketing and trading firms keep stocks on hand to ensure they can supply customers. Low interest rates, facilitated by the Federal Reserve’s policy of quantitative easing, make it cheaper to finance those inventories. Indeed, those low rates can make it very profitable to buy oil, store it and lock in a margin by selling futures.

Energy economist Phil Verleger estimates that with short-term interest rates around 0.25%—roughly in line with Libor—the financing cost of holding stocks today is around two cents a barrel every month. Right now, three-month oil futures trade at about a 30 cents a barrel premium to the spot price. On that basis, assuming 90% leverage, an investor could buy oil and sell it three months forward, earning a 2.5% return after costs.

That might not sound like much. But it is five times the yield on three-month U.S. Treasurys and a no-brainer for a trader at an oil firm with access to storage capacity.

But the trade is getting squeezed over time. Back in February, the spread was around $1 a barrel, implying a return over three months of almost 10%. While spot prices have held pretty steady over the past few years, futures further forward have been slipping, likely reflecting rising expectations for U.S. supply and acceptance that the global economy’s recovery will be a gradual, drawn-out affair.

The upshot is that, with bond yields rising as the end of quantitative easing becomes a more realistic prospect, profits on the carry trade are likely to shrink further. The same trade described above at current spreads but with a 1% financing cost earns a return over three months of less than 0.7%.

As this squeeze becomes more apparent, it can become self-fulfilling as those holding inventories sell them in the expectation that futures will decline further. That liquidation adds further pressure to prices as it increases available supply.

Say 50 million barrels were liquidated over the second half of the year, which would simply bring U.S. inventories down to around their five-year average. That would amount to almost 274,000 barrels a day. To put that in perspective, it equates to about a third of the IEA’s expectation for global oil-demand growth this year.

The past few weeks have seen yields rise globally as bond investors raise their expectations of the Fed taking its foot off the gas. Oil investors won’t be immune.

Smile  U.S. Set for Smallest Deficit in 5 Years

The budget deficit for the first eight months of the fiscal year, which started Oct. 1, totaled $626.33 billion, down about 26% from the same period a year earlier, the Treasury Department said Wednesday in its monthly report.

Under current policies, the deficit is expected to fall to $642 billion for the full fiscal year and get as low as $378 billion in 2015, according to Congressional Budget Office projections. The last time the deficit was under $1 trillion was 2008, when spending outpaced revenue by $458.55 billion.

The government isn’t spending less. Outlays totaled $2.427 trillion from October through May, compared with $2.408 trillion a year earlier.

Rather, receipts so far this year have jumped about 15% to $1.801 trillion, thanks largely to higher payroll taxes, higher tax rates for households making more than $450,000 and stronger incomes.


NEW$ & VIEW$ (12 JUNE 2013)

Global Tumult Grips Markets

The tectonic plates of the world economy are shifting, raising the question of whether markets are experiencing a bumpy return to a new normal or new period of volatility.

The big questions hanging over markets and the global economy now: Is this is the inevitably bumpy beginning of a welcome return to normal—a world in which the U.S. economy doesn’t need big and repeated doses of imagemonetary stimulus, Japan grows again and China’s economy gently slows to a sustainable speed?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called “escape velocity”?

Shaken Global Markets

And these charts from Bespoke Investment:



Reuters’ Analysis: Emerging market crunch may cause Fed to think twice  If currency turbulence in emerging markets escalates into full-scale investor flight, the Federal Reserve may have a fresh headache in deciding when to slow its dollar printing policy.

India’s Slower Industrial Growth Adds Policy-Change Pressure

Production at factories, utilities and mines rose 2 percent from a year earlier after a revised 3.4 percent gain in March, the Central Statistical Office said in New Delhi today. Another report showed consumer prices climbed 9.31 percent in May from a year earlier, exceeding the median 9 percent estimate in a Bloomberg News survey.

Asia’s third-largest economy expanded at the weakest pace in a decade in the year ended March, hurt by an uneven global recovery and moderating investment. The rupee fell to a record low this week, a drop that may make imports costlier and stoke price increases that have narrowed the Reserve Bank of India’s scope for a fourth straight interest-rate cut on June 17.

Export slowdown threatens emerging Asia’s credit-fuelled boom

Export growth throughout Asia has sagged in recent months, hit by slackening demand from the United States, Europe and China and by slumping commodity prices. Leading indicators are also pointing to weaker factory activity in the coming months. (…)

Malaysia’s trade surplus fell to its lowest level in April since the 1997 crisis with a surprise 3.3 percent year-on-year fall in exports announced last week. The country could soon run its first trade deficit in 16 years.

Exports from the Philippines, which already runs a trade deficit and last month reported the fastest annual economic growth in Asia of 7.8 percent, plunged 12.8 percent in April from a year earlier. Indonesia reported a trade deficit in April after exports contracted for a 13th straight month. Thai exports have slowed, contributing to a record trade deficit in January.

Underlining broader Asian trade weakness, China posted on Saturday its lowest export growth in almost a year in May. China’s economy has been a major source of export demand for other Asian nations, but that is expected to fade as the world’s second-largest economy begins shifting to a slower growth path. (…)

Protectionism Surges to Worst Since Crisis as G-8 Nears

Four-hundred-thirty-one new protectionist measures were imposed from June 2012 to this month compared with 141 steps taken to liberalize commerce, said GTA, which was created in 2009 by University of St. Gallen professor Simon Evenett in Switzerland. Another 183 practices aimed at restricting trade are in the pipeline.

Euro-Zone’s Woes Stretch to Finland  The prime minister warned more budget cuts may be needed to halt an inexorable rise in the debt level because of the stagnant economy.

Eurozone Industrial production up by 0.4% in euro area

In April 2013 compared with March 2013, seasonally adjusted industrial production grew by 0.4% in the euro area (EA17) and by 0.3% in the EU27, according to estimates released by Eurostat, the statistical office of the European Union. In March production rose by 0.9% in both zones.



Total industry numbers firmed up nicely during Feb-April when IP rose at a 6.6% annualized rate on strong energy production and a 20.6% annualized rate of growth in capital goods during the same 3 months. Meanwhile, consumer goods production kept declining.

Fingers crossed  As Current Quarter Looks Worse, Higher Hopes for Second Half  Forecasts for second-quarter economic growth started off weak and are getting weaker as new data come in. And to that, many economists say what they’ve been saying throughout much of the recovery: stronger growth is just around the corner.

(…) The forecasting firm Macroeconomic Adviserslast week lowered its estimate for second-quarter growth in the nation’s gross domestic product to a 1.2% pace from 1.4% because of lower-than-expected consumer spending on some services. After April’s wholesale inventory numbers, released Tuesday, economists at Barclays lopped one-tenth of a percentage point off their calculation and now predict 1.1% growth. (…)

But not to worry, many forecasters say. The economy is expected to pick up as the effects of the tax hikes and spending cuts abate and rising wealth — from a resurgent housing market and improving stock market — boosts consumer spending.

Macroeconomic Advisers, for example, sees 2.4% growth in the third quarter and significantly faster expansion after that — 3.4% in the fourth quarter and an average of 3.25% in both 2014 and 2015. (…)

Of course, economists have been expecting the U.S. economy to turn a corner for a while now, only to be foiled by actual events. In November 2011, for example, the Federal Reserve forecast GDP growth as high as 3.5% this year. The actual result will likely be about a full percentage point below that. (…)

Auto  Auto Makers Diverge From Weakening Factory Sector


The inventory of cars held at the wholesale level hit exceptionally low levels in April, the Commerce Department said Tuesday. The ratio of inventory to vehicle sales dropped to 1.43, down from 1.44 the prior month. That’s now at its lowest level since April 2007, before the recession began.

High five  But sales have been tapering off lately (Chart from Barclays via Zerohedge)


The labor markets continue to take baby steps toward improvement. Businesses are filling slots when they can, and hiring might be stronger except that companies face difficulty filling certain slots. More workers are willing to jump ship, another sign of progress.

Data from the Bureau of Labour Statistics showed the recruitment rate remained at 3.3 per cent and the quitting rate was 1.7 per cent of total employment, up a little on the month before but still well below levels enjoyed before the recession.

Main hiring community feeling a bit less bad…
Small Business Sentiment: Highest Level Since May 2012

The latest issue of the NFIB Small Business Economic Trends is out today (see report). The June update for May came in at 94.4, which, despite a 3.2 point gain, remains in the lowest quartile of this indicator across time at the 22nd percentile in this series. A more optimistic view is that the index is its highest since its 94.5 reached twice since the onset of the Great Recession, first in February 2011 and 15 months later in May 2012. The index ended a sustained, 14-year cycle above this level in January 2008, the month after the onset of the Great Recession.

Click to View

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was unchanged at a negative 4 percent, the best reading in nearly a year but still more firms reporting declines than gains.

(Bespoke Investment)


A high rate may be a risk in the very long run – but right now the risk is that it may be too low

Ingram Pinn illustration

Investors are fleeing debt that protects them against inflation, amid signs that the Federal Reserve is preparing to trim its bond purchases.

The rout has sent the yield on 10-year Treasury inflation-protected securities into positive territory for the first time since December 2011. When bond prices fall, yields rise. The selloff in TIPS shows that investors believe the U.S. recovery is on track and that the risk of an inflationary spike is receding. (…)


TIPS are bonds or notes issued by the U.S. government that provide a shield against inflation. If the consumer-price index goes up, the principal on TIPS goes up, too. That boosts semiannual interest payments and repayment of principal at the date of maturity. (…)

The yield on TIPS—reflecting the so-called real, inflation-adjusted, yield on 10-year Treasury securities—traded at 0.07% on Tuesday afternoon, according to Tradeweb. That compares with a recent low of minus-0.74% on April 5. That means investors were willing to lock in a small negative return to reduce the risk that inflation would erode their purchasing power. (…)

TIPS investors have been hit by a double-whammy of headwinds in recent weeks: tame inflation in the U.S. and comments from Federal Reserve officials indicating they are making plans to cut back purchases of Treasurys and mortgage bonds.

Investors in mutual funds and exchange-traded funds that buy TIPS have pulled $7.2 billion out of the funds this year, according to Lipper, flushing out more than the $5.2 billion of new money the funds received in 2012. (…)

Confused smile  All this when the economy is on a firmer footing, austerity is out the window, the unemployment rate is declining, many inflation gauges remain firm and the Fed Chairman says that it would tolerate inflation up to 2.5%. Go figure!

Pointing up  Caterpillar Workers Approve Contract

Union workers for Caterpillar Inc. in Wisconsin on Tuesday approved a revised contract that will freeze hourly wages for existing workers for the next six years and establish a lower pay scale for new hires. (…)

Although workers secured some tactical victories by improving benefits and some contract provisions, the Peoria, Ill., company largely succeeded in putting a ceiling on wage increases for the next several years and aligning the Steelworkers’ contract with the contracts in place for other Caterpillar workers.


NEW$ & VIEW$ (10 JUNE 2013)



Jobs Rise Enough to Soothe Markets

Employers added 175,000 jobs in May, maintaining a pace that hasn’t brought unemployment down quickly but has been enough to ease worries of a summer slowdown after a run of murky economic reports.


(…) “Adding it all up, today’s report has a little something for everyone,” said Michael Feroli of J.P. Morgan Chase. “If the last week or two of soggy data generated renewed…fears, today’s report should help to mollify those concerns. On the other hand, the figures do little to suggest the economy is shifting into higher gear.”

Muddling Through

image image


We were most encouraged by the fact that the household survey (from which the unemployment rate is derived) showed an 185,000 monthly increase in full-time employment, the best such performance in 2013.
This is a crucial development for continued household formation and higher home prices.

The demographics of job creation certainly argue for such a scenario to take place. As today’s Hot Chart shows, employment for people aged 25+ is now virtually back to its pre-recession peak. Impressively, more than half of the jobs created in May were for people aged 25-34. This sets the
stage for more consumer-driven spending growth in H2 2013. Youth employment might be depressed in the U.S., but that is mostly concentrated in the younger age cohorts (16-24). (NBF Financial)



Not so long ago, the media would have highlighted the fact that monthly trends are down, both in total and in private employment. A slower swoon, but a swoon nonetheless.



And this from Bloomberg:

Bulk of U.S. Payroll Gain in Jobs Paying Less-Than-Average Wages

Occupations paying below-average wages accounted for more than half of last month’s U.S. payroll increase, a dynamic that may restrain consumer spending and the economic recovery.

Retailers, the hospitality industry and temporary-help agencies accounted for 96,300, or 55 percent, of 175,000 jobs added in May, figures from the Labor Department showed today in Washington.

The composition of the employment gain caused hourly earnings for all employees to stagnate at $23.89 on average last month, up a cent from April. They rose 2 percent over the past 12 months, compared with year-to-year increases averaging 3.5 percent in the 10 months leading up to the recession that began in December 2007.

The leisure and hospitality industry, which includes hotels, restaurants, casinos and amusement parks, added 43,000 workers to payrolls last month. On average, those employees are paid $13.45 an hour, the lowest of any of the 10 major employment categories, according to the Labor Department.

Retailers added 27,700 jobs in May, with an average hourly wage of $16.63. Temporary help accounted for 25,600 jobs with an average wage of $15.74 an hour.

In contrast, construction companies, which pay employees an average $26.06 an hour, added 7,000 jobs in May. Manufacturing, which pays $24.22 an hour, lost 8,000 jobs.

Twenty-one percent of all job losses during the recession were in occupations paying median hourly wages of $13.83 or less, according to the National Employment Law Project in New York, a non-profit employee-advocacy group. By contrast, those occupations accounted for 58 percent of new positions during the recovery from February 2010 to March 2012.

As a result, average hourly earnings have sharply decelerated from a +2.1% annualized rate during 2012 to +1.35% during Q1’13 and to +1.17% during the last 3 months. This combination of slowing employment growth and slowing wage growth is obviously not conducive to much enthusiasm on consumer spending. Keep in mind that inflation remains in the 1-2% range and that oil prices have stopped falling.


And yet:

Fed on Track to Ease Up on Bond Buying

Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year.

A good-but-not-great jobs report Friday ensured officials wouldn’t want to act right away and would instead want to see more data before taking a delicate step toward winding down the program. But they could point at their next meeting to improvement they’re seeing in the economy, a prerequisite to reducing the so-called quantitative-easing program.

Plotting out a move is a tricky task, in part because investors are on edge about the Fed’s plans for the program. Fed Chairman Ben Bernanke signaled last month that the central bank could start pulling back the program “in the next few meetings,” a view echoed by other officials in recent weeks, including some of the program’s most vocal supporters. (…)

Many Fed officials believe the job market and the broader economy have made enough progress to warrant considering a partial pullback in their bond buying, but they still have reservations about the outlook that give them pause.

Most notably, officials are expecting the combination of federal tax increases and spending cuts to weigh on growth in the second and third quarters. Many want to see how the economy weathers that fiscal drag before altering the bond-buying program.

Officials believe the private sector, aided by a rebounding housing market and solid consumer spending, has enough momentum to drive a pickup in growth later in the year. Moreover, the effects of state and local government cutbacks show signs of waning.

Are we heading towards another policy mistake?

Housing’s Up, but Is Foundation Sound?

(…) Housing bulls see the slow economic recovery releasing pent-up demand, first for rental housing and then for home purchases. More young adults—many of them among the 65 million “echo” boomers born to baby boomers between 1981 and 1995—are moving out of their parents’ homes and into apartments. Others that had delayed home purchases during the bubble are ready to buy.

Rising prices in many parts of the country today show what happens when demand outstrips supply. To be sure, some homes are being held off the market by owners who can’t sell because they owe more than their homes or worth. Others are reluctant to sell at prices that leave them with little money to make a down payment on their next home.

Meanwhile, bulls still see too few homes being built, even after accounting for that “shadow” inventory. Population growth will require 14 million additional housing units this decade, around three-quarters of them single-family homes, according to Zelman & Associates, a research and advisory firm. Analysts at Zelman estimate that only 5.7 million of those units will be built by 2015, meaning the U.S. would need to add two million homes a year over the last four years of the decade—spurring a big boost of construction that would ripple through the economy. (…)

Equally important is that home prices have stopped falling, convincing consumers that they’re no longer at risk of catching a falling knife. (…)

The bear case, the outlines of which are laid out in a forthcoming paper by Joshua Rosner, managing director of Graham Fisher & Co., draws attention to several forces that had helped housing—and the economy—expand over the past few decades but whose end will now hinder growth. (…)

The democratization of credit ended during the bust, and a new period of much tighter credit standards has replaced it. Mortgage lending has seen little expansion amid a slew of new regulations and tougher capital rules.

Tight credit isn’t the only problem, argue the bears. Many Americans will face trouble qualifying for loans because they have too much debt relative to incomes that aren’t growing fast—particularly first-time buyers from the “echo” boom who have taken on heavy student-debt loads over the past decade. All of this is likely to unfold in a rising-interest-rate environment. (…)

Skeptics also haven’t taken comfort in the housing rebound because they see it as too dependent on investors. “We shouldn’t look at it as a fundamentally recovered housing market,” says Mr. Rosner. Sooner or later, he says, there needs to be “a handoff from the investor purchase to the primary-resident purchase.”

How that handoff unfolds will go a long way toward deciding whether the bulls or the bears have the last laugh.

Good read on U.S. housing:  Blackstone Denies It Is the Cause Of Housing Bubble 2.0

 Consumers Boost Borrowing for Cars, Education


Consumer credit, a measure of lending that excludes home mortgages, rose by $11.06 billion to a seasonally adjusted $2.820 trillion, a Federal Reserve report showed Friday. That’s a little short of economist expectations of a $13.4 billion advance, but overall figures have now grown steadily for 20 straight months.

Non-revolving credit, which includes student loans and auto financing, rose by $10.38 billion to $1.970 trillion on a seasonally adjusted basis. It was the 20th consecutive monthly increase.

More detailed figures aren’t seasonally adjusted so comparisons are imperfect. But the Fed numbers suggest a good chunk of that increase was related to borrowing for cars, trucks, boats, motor homes and the like.

Revolving credit, which is mainly credit-card debt, rose only $682.3 million to $849.81 billion. Outstanding credit card debt bottomed out two years ago and has only crept ahead in fits and starts since.

 Home Loan Rates Near 4% Send Buyers Scurrying

Mortgage applications to purchase homes fell 1.6 percent last week and are 6 percent below a three-year high at the beginning of last month. Applications to refinance loans dropped 15 percent, the fourth straight decline, to the lowest level in more than a year, according to the Mortgage Bankers Association.

Surprised smile  Canada posts biggest job gains in more than a decade as sentiment firms up

A surprising 95,000 jobs were created last month, marking the biggest gain in almost 11 years and just shy of the record 95,100 of August, 2002. The surge pushed the unemployment rate down a notch to 7.1 per cent, Statistics Canada said Friday.

Even though such month-to-month numbers can be volatile, the economy still likely created at least 38,000 jobs even when standard errors from the survey are taken into account.



China’s Export Growth Slumps

China’s exports edged up a meager 1% in May over a year ago while imports slipped 0.3%. That left a wider surplus of $20.4 billion—up from $18.16 billion in April, according to customs figures.

The export rise was less than a 5.6% gain forecast by economists polled by The Wall Street Journal and well below the 14.7% climb year over year in April. The April figure was widely believed to have been distorted by exporters inflating their data, trying to skirt capital restrictions and move capital into China to take advantage of a rising Chinese currency.

Exports to Hong Kong, a key focus of suspected data problems, showed the clearest evidence of an impact of tighter regulations. Exports in May rose 7.7% year on year, but they were up 69.2% in the first four months of the year compared with the same period in 2012.

Exports to large markets such as the U.S. and the EU were down 1.6% and 9.7% in May compared with a year ago, according to The Wall Street Journal calculations.

China’s CPI grows 2.1%

China’s consumer price index, a main gauge of inflation, grew 2.1 percent year-on-year in May,down from 2.4 percent in April.

In May, food prices, which account for nearly one-third of the weighting in China’s CPI, increased 3.2 percent year on year, NBS data showed.

On a monthly basis, the CPI in May edged down 0.6 percent from April, compared to a rise of 0.2 percent in April from March.


Non-food CPI fell 0.1% MoM, after having risen 0.2% in April and 0.1% in March.

China’s May PPI down 2.9%

China’s producer price index, which measures inflation at the wholesale level, fell 2.9 percent year-on-year in May, the National Bureau of Statistics announced on Sunday.

The figure marked a further drop of 0.6 percent from April’s, according to data released by the NBS. For the January-May period, the PPI fell 2.1 percent.


China’s fixed-asset investment up 20.4% in Jan-May

China’s urban fixed asset investment rose 20.4 percent year-on-year to 13.12 trillion yuan ($2.13 trillion) in the first five months.



China’s retail sales up 12.9% in May

China’s retail sales grew 12.9 percent year-on-year to 1.89 trillion yuan ($306.8 billion) in May, the National Bureau of Statistics announced



Nominal retail sales rose 1.17% MoM in May, compared to 1.25% in April and 1.11% a year ago. Sales of gold, silver and jewelry rose 38.4% YoY in May and are up 31.3% YTD.

China’s Risky Move to Slow Credit

(…) Total social financing, China’s widest measure of credit, fell by about one-third to 1.19 trillion yuan ($194 billion) in May from April, the second month of substantial decline, the People’s Bank of China said Sunday. And new bank loans, a subset of total social financing, also have fallen substantially in the past two months.

[image]Total social financing consists of all manner of financing including banks, trusts, financing companies, trade credit, corporate bonds, certain kinds of interbank lending and informal lending by individuals, among other kinds of credit.

Regulators, however, have a way to go to curb overall lending. In the first five months of 2013, total social financing was up 52% from 2012. (…)

In May, both traditional bank loans and nontraditional lending fell. (…)

China’s industrial output was up 9.2% year-to-year in May, off fractionally from April’s growth rate, and much slower than the rates of expansion routinely recorded in 2010 and 2011.

Pointing up  Electricity output, a barometer of industrial activity, rose 4.1% year-to-year in May versus 6.2% in April. Construction starts by area, a key measure of the health of the property market, were up just 1% in the January-to-May period, versus the same five months last year. (…)

German Industrial Production Increases Most in a Year

Production jumped 1.8 percent percent from March, when it gained 1.2 percent, the Economy Ministry in Berlin said today. That’s the third consecutive increase and the strongest gain since March last year. From a year earlier, production rose 1 percent when adjusted for working days.

Poland Warns on Further Volatility Curbs

Poland’s central bank took the market by surprise by intervening on the local currency market in order to limit the Polish zloty’s volatility Friday, and central bank Governor Marek Belka said they could do it again.

The zloty, Polish bonds and other emerging market assets have been under immense pressure since the Federal Reserve indicated in late May that it may consider unwinding its bond-buying stimulus program if the U.S. economy continues to improve. The prospect of tighter policy in the U.S. has prompted investors to exit riskier assets and rush to safe-haven currencies and bonds.

Italian Economy Contracts as French Confidence Stalls: Economy

Italian gross domestic product fell 0.6 percent from the previous three months, the Rome-based National Statistics Institute, said today, after a May 15 estimate of a 0.5 percent drop. A French index of sentiment among factory managers was unchanged at 94, while an index of service companies fell to 88 from 89, according to the Bank of France.

Exports dropped 1.9 percent in the first three months, the first quarterly fall since the second quarter of 2009, today’s report showed. Industrial output unexpectedly declined in April.

Sweden Industrial Output Declines as Domestic Demand Falters

Industrial production fell an annual 0.8 percent after sliding a revised 0.1 percent the previous month, Stockholm-based Statistics Sweden said today. Output fell a monthly 0.5 percent after rising a revised 0.6 percent the previous month.

Industrial orders rose an annual 1.7 percent in April and plunged a monthly 10.3 percent, Statistics Sweden said. Domestic orders slid 4.6 percent in the year while export orders rose 6.5 percent.

Sweden’s exports, which account for about half of the country’s output, fell 5.5 percent in the first quarter from the same period last year as countries in Europe cut spending to reduce debt.

Philippine Peso Falls to Lowest Level in a Year  The Philippine peso on Monday depreciated to its lowest level against the U.S. dollar in a year, and analysts think it may retreat further along with other Asian currencies as the U.S. economy gains traction and U.S. Treasury yields improve.

Japan sharply revises up Q1 growth
Rate stronger than initial estimate of 3.5%, in a boost to Abe

Government data released on Monday showed that the economy expanded at an annualised rate of 4.1 per cent between January and March, lifted by strong household spending and a pick-up in private residential investment. That was much higher than the preliminary estimate of 3.5 per cent, which was already the fastest rate recorded by any Group of Seven economy.

Composite Leading Indicators (CLIs), OECD, June 2013

The United States and Japan are the only countries where the CLIs point to economic growth firming. In other major economies, the CLIs point to limited growth momentum.

In the Euro Area as a whole, the CLI continues to indicate a gain in growth momentum. In Germany, the CLI shows that growth is returning to trend. As in April and May, the CLI points to a positive change in momentum in Italy. In France, the CLI does not indicate any change in momentum.

The CLIs for the United Kingdom, Canada, China and Brazil point to growth close to trend rates. The CLI indicates that growth is losing momentum in Russia, whereas for India, it continues to indicate growth below trend.

Fears of hyperinflation grip Venezuela
Prices rise by highest monthly amount on record in May
Sudan orders halt to South Sudan oil
President tells army to prepare for holy war

South Sudan had started to pump 200,000 barrels per day in April. Its output was around 300,000 bpd before the shutdown.


U.S. Expansion Poised for Longevity Without Many Excesses

Record $12.5bn outflows from bond funds
Selling wave across all major classes in past week

Two-thirds of the total outflows came from US funds, where nervousness over the Federal Reserve’s next moves in monetary policy is at its height.

(…) The accelerating outflows are already showing up in junk bond prices, which have fallen sharply, sending yields higher. The average yield has surged from its historic low of 4.95 per cent on May 9, to 6.20 per cent on Thursday night, according to a Barclays index.

Forecast Calls for a Summer of Swings

Investors are bracing for a stormy summer, as steady asset-price gains fueled by bottomless central-bank liquidity have given way to sharp swings jolting stocks, currencies and commodities alike.


Good FT piece by David Rosenberg today: The Fed has turned things upside down

  • That is how the Fed has turned things so upside down and inside out. Investors in the Treasury market today are not there for the income but for the prospective capital gain should yields decline. And when you look at the sectors that have done best this year on a risk-adjusted basis, they are the stodgy defensives for the most part that carry a 3.5 per cent dividend yield – investors are here not for the capital gain (though it is always welcome) but for the income. Equities for income and bonds for capital gains. How fascinating.
  • Yet, in the past month, more than 60 per cent of the incoming US economic data have come in below expectations versus 34 per cent above expectations. Two months ago, only 42 per cent of data were disappointing and 53 per cent surprising to the upside.
  • While there has been some reversal in recent weeks, the defensive segment of the stock market is up nearly 20 per cent so far this year versus just over 10 per cent for the cyclicals in the largest outperformance in a good 15 years.
  • Cyclical stocks command an average yield of only 1.8 per cent and you can see how income-hungry investors in the stock market are paying up for the yield characteristics: at a price/earnings multiple of nearly 19 times, the defensives command a 20 per cent multiple premium over their economically-sensitive cousins.

NEW$ & VIEW$ (15 MAY 2013)

Lightning  Euro-Zone Recession Drags On Economic output contracted in the euro zone for a sixth-straight quarter, as a slight recovery in Germany failed to offset recessions in France and Italy.

Gross domestic product fell 0.2% in the first quarter from the final three months of 2012, according to a report Wednesday from the European Union’s statistics office Eurostat. In annualized terms, which is how the U.S. and some other countries report output, GDP fell 0.9%.

GDP fell 2.3%, in annualized terms, in the fourth quarter. The current downturn in the euro zone has now stretched for longer than the 2008-2009 recession, though the cumulative 1.5% drop in output since the summer of 2011 isn’t yet as severe as the nearly 6% that was sliced off of GDP four years ago. (…)

French GDP fell 0.7% in annualized terms from the fourth quarter due to drops in consumer spending and exports, its second-straight contraction.

(Chart from Bloomberg via Zerohedge)

The FT adds:

Italy, the bloc’s third-largest economy, saw GDP shrink 0.5 per cent in the first quarter, after a fall of 0.9 per cent in the fourth quarter, according to its national statistics office.  (…)

Germany, by contrast, managed to return to growth, but only barely. First-quarter GDP grew 0.1 per cent, up from a downwardly revised contraction of 0.7 per cent in the fourth quarter of last year, according to a preliminary estimate by the Federal Statistics Office.

Dutch GDP shrank 0.1 per cent and Spain has already reported a 0.5 per cent contraction in the first quarter.



That sighing sound you hear from China

… is strategists everywhere cutting their GDP forecasts.

China - Freight and investment to April 2013 - StanChart

China - Electricity and construction starts - StanChart

Li Signals Reluctance on Stimulus to Boost China Growth

“To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big — we must rely on market mechanisms,” Li said in a May 13 speech broadcast to officials around the country, according to a transcript published last night on the central government’s website. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said. (…)

Thumbs up  Li’s strategy for growth includes a call to unleash private investment by simplifying bureaucratic procedures. “Private investors have money but no place to invest; they want to enter certain areas but they can’t find the way,” Li said. A company has to spend six to 10 months seeking approvals at 27 government departments to start a new investment project, he said.

The central government will delegate more power to local governments in approving new projects, he said. “Not every matter has to come to Beijing for approval,” he said.

Malaysia’s Growth Slows to Below 5% First Time in Seven Quarters

Gross domestic product rose 4.1 percent in the three months through March from a year earlier, after a revised 6.5 percent gain in the previous quarter, the central bank said in a statement in Kuala Lumpur today. That is lower than all 22 estimates in a Bloomberg News survey. The monetary authority kept its full-year growth forecast at as much as 6 percent. (…)

Surprised smile  Malaysian exports have fallen in four out of six months through March. (…) Net exports of goods and services slumped 36.4 percent in the first quarter from a year earlier, after falling 9.3 percent in the final quarter of 2012, today’s report showed.


One of the few reliable Chinese indicators ticks up in April. Total electricity consumption came in at +6.8% YoY in April, from +2.1% in March. This is the best number this year. It is better than the 2012 average of +5.5% and the +4.2% of Q1’13. Yet, the March-April average is but +4.4%, down from the 5.3% Jan-Feb average. The trend remains weak. Northern Trust’s view that “Negative economic surprises set the stage for improving sentiment” may just be wishful thinking (see chart below).

While I’m at it”:


Yesterday’s IP stats from the Eurozone seemed to cheer markets. Markit explains why we should be careful before rejoicing:

Eurozone industrial production rose surprisingly strongly in March, but divergent trends within the region and recent weak business surveys suggests there is scant evidence to suggest that the region is staging any sort of sustained industrial-led recovery.

Official data showed Eurozone industrial production rising 1.0% in March, well above expectations of a mere 0.4% increase, according to a Reuters poll. The March rise in production was the largest since July 2011, but was in part buoyed by a 3.8% surge in energy production. The upturn also masked worryingly strong variations within the single currency area: production surged 1.7% higher in Germany but fell by 0.9% and 0.8% in France and Italy respectively.


The upturn nevertheless pushes eurozone production 0.2% higher over the first quarter as whole, which compares well with a 2.1% decline in the fourth quarter. The data therefore bode well for GDP to show a significantly weaker decline than the 0.6% contraction seen at the end of last year, and even raises the possibility of the recession having ended.

However, any improvement or respite from recession looks likely to be short-lived, as the business surveys have already started signalling a renewed weakening.

Most importantly, Markit’s PMI data had indicated a German-led easing in the industrial sector’s woes earlier in the year, but have more recently signalled that the downturn deepened again at the start of the second quarter. The PMI surveys are now once again registering contraction in all major eurozone countries. Although some easing in the rate of decline was signalled for Italy, Spain, France and Greece, Germany saw the steepest deterioration for four months in April, contrasting with the growth seen in the region’s largest economy earlier in the year.


Fingers crossed  EUROPE’S BIG HOPE:

Crude Futures Down as Inventories Soar

(…) “The body language from Brent at the moment suggests a contract ready to take another look at the territory below $100/bbl,” they wrote. Confused smile


High five  However, the language from the Saudis is that $100 is the floor.

Mug  Pay rise of 3.4% agreed for German engineering workers
Deal will avert strike in country’s manufacturing sector

The two-phase wage increase will give workers a 3.4 per cent rise in July this year, followed by a further 2.2 per cent increase in May 2014. The whole agreement will last for 20 months.

If it is followed in the rest of German industry, the agreement should provide some eagerly awaited stimulus to domestic demand in Germany, given the initial rise of more than 3 per cent, compared with an inflation figure of just 1.15 per cent.

HSBC Plans Cost Cuts

HSBC, laying out its next three-year strategy, said it plans to achieve further cost cuts of $2 billion to $3 billion by 2016, including eliminating 14,000 more jobs.


Strong U.S. Dollar Keeping Import Prices in Check

The price of goods imported to the U.S. has fallen, on annual basis, in 11 of the past 12 months. While that reflects the declining cost of oil, it also indicates that an increasing value of the dollar is improving America’s purchasing power abroad. (…)

The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, has advanced 6% since the start of the year. The rise again the yen is even stronger.

The price of imported goods from Japan fell 0.6% during April, the largest monthly decline since September 2008. The fall in import prices from Japan over the past three months parallels a drop in the Japanese yen relative to the U.S. dollar, the Labor Department said. Japan, the fourth largest trading partner with the U.S., is an important supplier of consumer goods and vehicles.

Prices from China, the second-largest trading partner, are down 0.9% from a year earlier, and import costs from the U.K. have fallen 6.1% during that time.

Actually, most commodity prices are weak, leading to slower inflation across the world (e.g. 1.2% in Germany, 1.1% in Italy, 1.4% in Spain, 4.9% in India…)


S&P’s latest update to May 9 covers 453 companies: 66.5% beat and 25.4% missed. The late comers must have been shy to disclose their results: of the 48 companies that reported in the last week, only 46% beat and 48% missed. The miss rate has seriously risen as time went by: up to March 28, the miss rate was 21%; the following week, it was 28% and last week it jumped to 48%.

Curiously, earnings estimates for Q1’13 are now $25.96, up $0.18 from the previous week. Estimates for the next 3 quarters edged down but not enough to cut 2013 estimates which are now $109.94, up $0.05 from last week’s estimate.

Trailing earnings post Q1 should come in at $98.54, up 1.8% from 3 months ago but still below the $98.69 reached post Q2’12.

Quarterly sales are up only 1.4% YoY in Q1, down from 5.6% in Q4’12.


(…) The combination of wobbly fundamentals and zippy prices has murdered short sellers. If one had bought the 30 most shorted stocks in the S&P 500 at the start of the year, as measured by the proportion of total shares shorted, one would be up 28 per cent, 11 percentage points ahead of the index itself. Much of the outperformance has come from volatile and financially unsteady companies such as First Solar, Netflix, AMD and Best Buy. (…) (FT)

FYI from Bespoke Investment:


NEW$ & VIEW$ (14 MARCH 2013)

Strong retail sales. Strong housing. Strong dollar. Weak Europe. Weak China electricity consumption. Strong sentiment.

Smile  Consumers Open Wallets, Save Less

Retail sales rose 1.1% to a seasonally adjusted $421.4 billion, the Commerce Department said Wednesday. January’s increase was revised up to 0.2% from a 0.1% earlier estimate.

So-called core sales, which exclude autos, gasoline and building materials, and which many economists consider a better gauge of spending trends, increased 0.4%.

Whichever way you look at the stats, one has to be impressed by the resilience of the U.S. consumer. Core sales rose 0.4% in February, following gains of 0.3% and ).6% in the two previous  months. This is a +5.3% annualized rate over the last 3 months! And they keep buying new cars. (Chart and table from Haver Analytics)

large image



Home Repossessions Drop 29% to Lowest in U.S. Since 2007

Banks took 45,038 properties from delinquent borrowers in February, an 11 percent decrease from the previous month and the fewest since September 2007, the Irvine, California-based data provider said today in a report. Forty-one states had drops in completed foreclosures from February 2012, led by declines of 78 percent in Oregon and 69 percent in Massachusetts.

Zillow Forecast: January Case-Shiller Composite-20 Will Be Up 8% Year-Over-Year




The Almighty Dollar Is Back

The dollar is powering higher against other major currencies after months of decline, driven by the relative health of the U.S. economy.

The WSJ Dollar Index, a gauge of the dollar’s exchange rate against seven of the world’s most heavily traded currencies, is up almost 5% this year and hit its highest level since July 2010 on Monday.

(…) But the stronger dollar is starting to show up in corporate earnings, as companies find overseas profits are worth less when translated into U.S. currency. Tourists are seeing their cash stretch a little further on vacation abroad, while U.S. destinations may see fewer British and Japanese visitors with the pound and yen in steep decline.

Firing Up a Stronger Dollar The reversal of America’s steady decline of oil-and-gas production due to the shale boom is giving the Fed chairman, and the U.S. economy, important room for maneuvering.

[image]Altogether, Citi estimates reduced energy-import dependence and cheaper gas could squeeze the current-account deficit by 2.4 percentage points of GDP by 2020. All else equal, that would take 2012’s deficit of 3.6% down to 1.2%, which would be the lowest since 1997. (…)

BofA Merrill Lynch estimates the U.S. paid just $76 billion for its natural gas in 2012, a full $140 billion less than in 2008—a saving bigger than the payroll-tax cuts of 2011. And unlike the latter, this benefit looks set to stay for a while.

Cheaper energy does Mr. Bernanke a favor by helping to keep a lid on inflation—the great fear, as yet unfounded, arising from the Fed’s policy of quantitative easing. And the extra money in consumers’ pockets, both from fuel savings and the jobs associated with rising domestic energy production, aids in the economic healing process from the last recession. (…)

BofA estimates the European Union’s natural-gas bill in 2012 equated to 1.3% of GDP against 0.5% for the U.S. Already, firms ranging from Austrian steelmaker Voestalpine to French utility EDF have announced plans to try to tap into cheaper U.S. natural gas to offset the competitive disadvantages of high energy costs at home. These are likely to rise as the euro weakens against the dollar, in which the majority of international energy trade is priced. (…)

U.S. Oil Output Rises to Highest Level Since July 1992

(…) Output climbed 66,000 barrels a day, or 0.9 percent, to 7.159 million in the seven days ended March 8, the Energy Information Administration said today, extending a gain of more than 1.13 million barrels a day last year, according to data from the Energy Information Administration, a division of the Energy Department. (…)

Production could increase to as much as 7.7 million barrels a day by the end of the year, Lipow said.

Domestic crude output will average 7.31 million barrels a day in 2013 and 7.88 million in 2014, the EIA forecast yesterday in its Short-Term Energy Outlook.

The U.S. met 84 percent of its own energy needs in the first 11 months of last year, on pace to be the highest level since 1991, EIA data show.

Lightning  Euro-Zone Employment Hits Seven-Year Low

The number of people holding down jobs in the euro zone fell to its lowest in nearly seven years in the final three months of 2012, official figures showed, a stark illustration of the economic and social price of the bloc’s fiscal crisis

Employment in the 17 countries that use the euro fell 0.3% in the fourth quarter from the third, to 145.7 million in seasonally adjusted terms, the European Union’s statistics agency Eurostat said on Thursday.

The number of people with jobs fell 2% from the previous quarter in Portugal, 1.4% in Spain, 1.3% in Cyprus and 0.4% in Italy.

Smile with tongue out  Germany defies calls for stimulus

Plan to cut spending and balance budget revealed

Germany has ignored calls from its eurozone partners for more economic stimulus by tabling plans to cut spending and balance its budget ahead of schedule on the eve of an EU summit dedicated to growth.

Wolfgang Schäuble, German finance minister, said on Wednesday that his budget for 2014, involving spending cuts of more than €5bn to trim the total below €300bn, was “a strong signal for Europe”.

Indeed! Nobody sings John Lennon in Europe:

Oh I get by with a little help from my friends,
Mmm,I get high with a little help from my friends,
Mmm, I’m gonna try with a little help from my friends.

Volkswagen to boost China production to offset weak Europe

Volkswagen , Europe’s biggest carmaker, will step up production in fast-growing emerging markets like China to offset deteriorating demand closer to home, it said on Thursday.

SNB Keeps Up Franc Defense as Euro Crisis Risks Persist

The Swiss central bank pledged to keep up its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro zone’s crisis.

Surprised smile  China’s power consumption drops in February China’s electricity consumption dropped 12.5 percent year on year in February, the National Energy Administration said on Thursday.

Pointing up  ISI calculates that Jan + Feb consumption grew 5.5%. Consumption rose 5.5% for all of 2012, down from 11.7% in 2011.



Stocks firm as traders eye S&P record
US economic data underpin bullish mood

(…) the Dow is riding a nine-day winning streak, its longest since 1996, according to WSJ Market Data Group. The blue-chip index has risen every day this month, although over the past two days it has waffled between small gains and losses before finishing with a combined eight-point gain. (WSJ)

European Stocks Rise to 2008 High as Treasuries Decline


Ninja  U.S. Probes Metals Pricing by Banks

The Commodity Futures Trading Commission is scrutinizing whether the daily setting of gold and silver prices in London is open to manipulation.

The inquiry comes as regulators expand their review of global financial benchmarks in the wake of an interest-rate rigging scandal. Three large banks have agreed to pay a total of $2.5 billion in penalties over alleged manipulation of the London interbank offered rate, or Libor, and more than a dozen financial firms are still under investigation.