NEW$ & VIEW$ (29 AUGUST 2013)

U.S. Pending Home Sales Decline Further

The National Association of Realtors (NAR) reported that pending sales of single-family homes during July declined 1.3% m/m but remained up 6.7% versus July of last year. The monthly decline followed an unrevised 0.4% June slip.

Last month’s sales decline again reflected mixed performance around the country. Home sales in the Northeast fell 6.5% (+3.3% y/y) while sales in the West dropped 4.9% (-0.4% y/y). Also moving 1.0% lower were home sales in the Midwest but they remained up 14.6% y/y. Pending home sales in the South rose 2.6% (7.7% y/y).

BMO Capital:


U.S. foreclosures fall in July from year ago: CoreLogic

There were 49,000 completed foreclosures last month, down from a 65,000 in July of last year, CoreLogic Inc said. There were 53,000 foreclosures in June, down from an originally reported 55,000.

Before the housing market’s downturn in 2007, completed foreclosures averaged 21,000 per month between 2000 and 2006. (…)

There were about 949,000 homes in some stage of foreclosure, down from 1.4 million a year ago. That foreclosure inventory represented 2.4 percent of all mortgaged homes, down from 3.4 percent in July last year.

German Jobless Figures Unexpectedly Rise in Summer Lull

The number of people out of work increased by a seasonally adjusted 7,000 to 2.95 million, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to the median of 25 estimates in a Bloomberg News survey. The adjusted jobless rate stayed at 6.8 percent, near a two-decade low.

Brazil raises rates for fourth time since April
Central bank in drive to tame stubbornly high inflation

imageThe central bank’s monetary policy committee, Copom, raised Brazil’s benchmark Selic rate by 50 basis points to 9 per cent late on Wednesday, the latest increase in a 175 basis point tightening cycle since April.

Indonesia Raises Rates in Unplanned Move to Shore Up Rupiah

The central bank increased the reference rate to 7 percent from 6.5 percent, it said, after a meeting in Jakarta today that came before the next scheduled policy review. It also raised the deposit facility rate by half a point to 5.25 percent, and extended a bilateral swap deal with theBank of Japan valued at $12 billion that will allow the two to borrow from each other’s foreign-exchange reserves.

Indonesia raised the key rate by a combined 75 basis points in June and July before keeping it unchanged at its meeting on Aug. 15 as slowing growth deterred a third consecutive increase. The rupiah’s more-than-5 percent slump in the past two weeks may have pressured the central bank to increase borrowing costs again before a scheduled policy review on Sept. 12.

Philippine economy maintains strong growth
Services led by trade and real estate fuel 7.5% GDP rise

GDP grew 7.5 per cent in the second quarter from a year ago after expanding by a revised 7.7 per cent from the previous period, making it the fourth straight quarter that the economy climbed more than seven per cent, the government National Statistical Coordination Board said. (…)

Though personal consumption spending still accounts for almost 70 per cent of the economy, it contributed less than half of second-quarter GDP growth. Most of the expansion came from government spending, boosted by the May 2013 midterm polls, and investments, particularly public and private construction.

Construction grew by 15.6 per cent in the quarter to June after rising by 30.1 per cent in the previous period, buoyed by government infrastructure projects as well as a boom in high-rise residential condominiums, office towers and other types of housing.

Is The Japanese Consumer Losing Faith?confidence is waning. More data on Friday may underline this trend.

Last week, subdued department store sales set off alarm bells. On Thursday, preliminary retail sales figures brought more bad news, falling 0.3% on year in July. On a seasonally adjusted basis, retail sales were down 1.8% on the previous month, the biggest fall since August 2011.

Oil market: multiple worries
Libya may be bigger threat to oil price than Syria

(…) Syria always has been and always will be a marginal player in the oil market. Before the civil war, it produced about 370,000 barrels of oil equivalent a day; that may have fallen to about 70,000 b/d now. Nor is it a significant transit point. (…)

More troubling is Libya, which produced almost 2 per cent of the world’s total oil and gas output last year. Earlier this year, Libya was boasting that it was almost back to its prewar production level of about 1.6m b/d (of which 1.3m b/d is exported). But strikes and protests have cut its daily oil production to an average of just 500,000 b/d this month. The chaos that has gripped the country since the ousting of Muammer Gaddafi in 2011 now threatens to curtail production indefinitely.

The “War” Effect

How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts…? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya… and why Syria is arguably more complex than these previous conflicts

Via Citi,

S&P: trades better once conflict begins. This time should be no different.

Gold: falls after start of action. Again should be no different.

Crude: usually falls at or just prior to start of military action.

USD: reverts back to dominant trend. USD weakened post-action in 1991, 2003, 2011 as it was in a bear market. The opposite happened in 1999 and 2001 (USD bull market). This time around USD strength should return once military intervention begins.

One counterpoint: Syria is arguably more complex than these previous conflicts. Military objectives are also not as well defined. Russia and Iran will also weigh in both pre- and post-action. The usual market reaction may be more muted and short-lived because of greater uncertainties.


Links Between Capacity Utilization, Profits and Credit Spreads

From Moody’s:

Though the share of jobs directly linked to goods producing activity has shrunk considerably over time, the percent of industrial capacity in use remains highly correlated with overall profitability, credit spreads, and business debt repayment. In all likelihood, the large amount of economic activity that is indirectly linked to the production of tangible goods helps to explain the still strong correlation between industrial activity and the corporate credit cycle. For example, much service sector activity is derived from the transportation, storage, sale, and maintenance of tangible merchandise. Capacity utilization’s ability to offer useful insight shows that tangible goods still figure prominently in a post-industrial economy. We still consume a lot of things.

(…) Amid sufficient slack, rising rates of capacity utilization often generate percent increases by profits that are a multiple of the accompanying percent increase in business sales. This phenomenon is referred to as operating leverage.

Ordinarily, the bigger is the year-to-year percentage point increase in capacity utilization, the faster is the year-to-year growth rate of profits. For example, when the year-to-year increase by the rate of industrial capacity utilization most recently peaked at the 6.8 percentage points of 2010’s third quarter, the annual growth rate of the moving yearlong sum of profits from current production also crested at 33%. Subsequently, the yearly change of the capacity utilization rate eased to the 0.0 points of 2013’s second quarter and profits growth slowed to 3%. (Figure 1.)


Capacity utilization has declined in each of the last 5 months, from 78.2% in March to 77.6% in July. It has also declined in each of the last 7 cycles.


David Rosenberg recently wrote on the “normal” biz cycle:

I think we are heading into mid-cycle where consumer spending is going
to take the baton from the housing market. This is currently being
delayed by the lagged impact of the early year tax bite and the current
round of sequestering, but next year we should begin to see the impact
of gradually improving job market fundamentals spill into a pickup in
consumer spending growth. This would not just be desirable — it would
be natural. Exports should also take on a leadership role as the
recession in Europe ebbs and Chinese growth stabilizes. The cyclical
outlook in Japan is also constructive as the monetary and fiscal stimulus
has to fully percolate but there is already evidence that the two-decade
experience with deflation is drawing to a close.


The next chapter would then involve capital spending and plant
expansion, and capacity utilization rates and an increasingly obsolete
private sector capital stock will trigger accelerating growth in business
spending, likely by 2015 or perhaps even earlier. Profit growth is slowing and normally that would be an impediment, but there is ample cash on balance sheets and what businesses need is a less clouded policy
outlook, which hopefully will be resolved in the coming year as we get a
new Fed leader, greater clarity on monetary policy and some fiscal
resolution ahead of or following the mid-term elections.

That may be nothing but a hope and prayer, but more fundamentally, productivity growth has stagnated and the best way the corporate sector can reverse the eroding trend and protect margins at the same time will be to move more aggressively to upgrade their operations and facilities — we are coming off the weakest five-year period in the past six decades with regards to growth in capital formation.

Moody’s makes the link between capacity utilization and the high yield market:

Given the capacity utilization rate’s significant correlations with both the high-yield default rate and the delinquency rate of bank C&I loans, it is not surprising that the high-yield bond spread tends to widen as the capacity utilization rate falls. The diminution of cash flows and pricing power that accompanies a lowering of capacity utilization will increase the yield that creditors demand as compensation for default risk. Thus, a narrowing by the high-yield bond spread from its recent 460 bp to its 418 bp median of the previous two economic recoveries will require the fuller use of production capacity. (Figure 6.)

After rising sharply from June 2009’s record 66-year low of 64.0% to February 2013’s current cycle high of 76.5%, the capacity utilization rate of US manufacturers has since eased to July’s 75.8%. An extension of the current credit cycle upturn requires the return of a rising rate of capacity utilization.  (…)


However, U.S. capex are not about to turn up:

An unexpected second monthly decline in nondefense capital goods shipments in July, coupled with weak orders, flags slower business capex in Q3. (BMO Capital)



NEW$ & VIEW$ (20 AUGUST 2013)

Fear of Easy Money Retreat Roils India

The Fed’s plan to reduce monthly bond purchases is exposing the deep-seated fragility of India’s economy, underscoring the risks facing emerging markets at a time of rising global interest rates.

India’s stock market tumbled 1.6% Monday, adding to a 4% decline Friday, and the rupee hit a fresh low against the dollar. Government-bond prices slumped, sending yields sharply higher.

(…) as their export engines have sputtered, because of China’s slowing growth and uneven demand in the U.S. and Europe, these [emerging] economies have started to run large current-account deficits, which occur when imports outweigh exports. As investors begin demanding higher returns for taking on risk, nations with large economic imbalances are getting punished. (…)

The selloff in Indian assets began in May, as Fed officials started discussing plans to pull back from the $85 billion of monthly bond purchases designed to bolster uneven U.S. economic growth. Seeing interest rates rise in rich-country markets such as the U.S., investors who had sought investments in faster-growing emerging markets pulled their funds.

The selloff has since spread to other developing nations, such as Indonesia and Thailand, which like India are exposed to rising global interest rates, thanks to budget and current-account deficits that mean they must borrow to finance daily spending.

The Indonesian rupiah fell to its lowest level in four years Monday. Shares slid 5.6% in Indonesia and 3.3% in Thailand. Asian shares fell further in early trading Tuesday. Indexes in Japan and Australia were both down 0.7%, and Indonesia’s main index dropped 3%. (…)

Just kidding  Let’s not forget that financial markets are communicating vessels.

Emerging markets selling hits sentiment
Sell-off worsens in Indonesia, India and Thailand


Brazil’s Currency Slides to New Low

Brazil’s currency hit a new low against the dollar amid increasing concerns that the country’s policy makers are failing to reinvigorate the South American economy.


(…) Brazil’s central bank has tried to fight the outflows by raising interest rates three times this year, raising the yields on the country’s debt. It also has stepped up market interventions, pumping $7.6 billion into the currency-futures market in the past week and $45.8 billion since May 31. The real is down more than 10% over that period.

“They’re intervening like crazy, and it’s still not working,” said Sara Zervos, portfolio manager of the $11.7 billion Oppenheimer International Bond fund . “It’s gotten to the point where investors and even domestic citizens have lost confidence in the ability of the government to navigate the country into growth.” (…)

Bond Market Bear Markets

After a 71.35% rally over 4,571 calendar days from 1/18/2000 to 7/24/2012, the US long bond future is quickly approaching bear market territory for the first time in more than 13 years. 

Ed Yardini reveals who the big sellers are (US International Capital Flows)

The US Treasury released data last Thursday tracking international capital flows for the US through June. The outflows out of US securities was shocking. Especially troubling was the amount of US Treasuries sold by foreigners. Their outflows exceeded those from US bond funds. Of course, some of the outflows from the bond funds could be attributable to foreign investors. Nevertheless, the data suggest that foreign investors may have been more spooked by the Fed’s tapering talk in May and June than domestic investors.

Ghost  This a.m.:

  • Morning MoneyBeat: Stock Selloff Starting to Get Serious (WSJ)

This selloff is proving to be more than just a blip on investors’ radars.

The Dow and S&P 500 are each riding their first four-day losing streaks of the year and have fallen in nine of the past 11 trading days. The Dow is down 4.1% from its record high hit earlier this month, a skid that has brought back memories of the spring swoon that was also driven by worries about future Fed stimulus.

A lackluster earnings season, negative technicals – the S&P 500 fell through its 50-day moving average with authority on Monday – and historically tough months ahead are making some investors nervous that this selloff could be worse than what transpired a few months back.

Stocks are Tapering Themselves (Barron’s)

The Dow Jones Industrial Average is coming off its worst week of the year and now, for the second time in 2013, it is trading below its important 50-day moving average. Even without any fancy indicators, it is not difficult to surmise that something has changed in the stock market. Now is not the time for taking big risks.

Not only has the blue chip index dipped below its 50-day average, but it is the first major index to fall below its rising trendline from the market’s 2012 low (see Chart 1). That is a big deal, but unfortunately for the bears the Dow is the only major index to accomplish this dubious feat.


Fingers crossed  (…) A longer-term view of this index suggests that it has its sights set on the vitally important 200-day moving average, which should provide some comfort to the bulls. After all, one simple definition of a bull market is consistent trading above this metric. At its current rate of advance, this average will rise roughly 150 points to meet chart support from the Dow’s June low in two or three weeks. This is where the risk/reward equation will once again be favorable for the bulls. (…)



The Philly Fed ADS Business Conditions Index

The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but relatively little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed’s National Activity Index, the August update for which will be published tomorrow (more about the comparison below).

Named for the three economists who devised it, the index, as described on its home page, “is designed to track real business conditions at high frequency.”

The index is based on six underlying data series:

  • Weekly initial jobless claims
  • Monthly payroll employment
  • Industrial production
  • Personal income less transfer payments
  • Manufacturing and trade sales
  • Quarterly real GDP


This next chart shows that business sales are growing very, very slowly, in both nominal and real terms.


And this one from Bloomberg Briefs shows that the Fed is not helping at all and is not about to begin helping.


Meanwhile, the U.S. consumer seems exhausted:
Japan exports slide amid subdued demand
Decline puts spotlight on plan to raise consumption tax

(…) Figures from the finance ministry on Monday showed that total exports fell 1.8 per cent from June, to Y5.78tn ($59bn), when adjusted for seasonal variations. That marked the first month-on-month decline in the yen value of shipments since November last year, when Shinzo Abe’s Liberal Democratic party began to push for a lower currency to support an ambitious, multifaceted growth programme.

Falls were led by the US, Japan’s top export partner, where the nominal value of shipments dropped almost 3 per cent from June to just over Y1.1tn, on an unadjusted basis. Taking into account fluctuations in exchange rates and prices, overall exports in July were 2.1 per cent weaker than the previous three-month average, according to calculations by Nomura. (…)


Big debate whether China has hit bottom. CEBM Research’s mid-August surveys say:

  • The general condition of the steel market improved over the last month, with nearly 60% of respondents reporting sales better than expectations.
  • In August, the cement market remained stable and in-line with seasonal trends. Most respondents reflected that they had not observed any “stabilizing growth” policies from their local governments. Presently the amount and demand of projects in progress was considerable but some projects were terminated due to funding shortages. Compared with survey results in July, the proportion of producers we surveyed reporting that sales in the first half of August were below expectations declined from 37% to 23%.
  • Actual demand for construction machinery is not recovering. Historically, sales in August are generally at the year’s bottom. Most clients do not want to buy equipment before the second half of September unless it’s an urgent necessity. Most dealers did not see project starts or preparations for new construction. Progress of ongoing construction projects also remains slow. Funding constraints took the largest share of the blame.
  • During the August Heavy Truck Dealer Survey, 0% of the respondents reported sales in the first half of August exceeded expectations, while 63% believed sales were in-line with expectations and 37% reported sales below expectations. Generally speaking, respondents believe that sales in August will be increasingly weaker than seasonal trends.
  • Pointing up July Copper Imports Driven by Financing Demand Rather Than End Consumption We did not find any obvious signs of demand rebound in the August communication between copper traders and end users, and end demand is believed to be flat in September according to respondents. Although July copper import volume reached a 14-month high, based on our communication with copper importers, a large portion of copper imports were driven by tight liquidity rather than robust end consumption, as most copper import transactions are settled by letters of credit rather than cash. Some copper traders also said that the impact of these copper imports has not reached the Shanghai spot market yet, but this is ultimately inevitable. This revival in copper financing may distort the copper balance in China once again.

Work or Welfare: What Pays More?

(…) The report, by Michael Tanner and Charles Hughes, is a follow-up to Cato’s 1995 study of the subject, which found that packages of welfare benefits for a typical recipient in the 50 states and the District of Columbia not only was well above the poverty level, but also more than a recipient’s annual wages from an entry-level job.

That hasn’t changed in the years since the initial report, said Mr. Tanner, a senior fellow at Cato. Instead, the range has become more pronounced, as states that already offered substantial welfare benefits increased their packages while states with lower benefits decreasing their offerings. (…)

The authors found that in 11 states, “welfare pays more than the average pretax first-year wage for a teacher [in those states]. In 39 states, it pays more than the starting wage for a secretary. And, in the three most generous states a person on welfare can take home more money than an entry-level computer programmer.”

Fed advises US banks to lift capital targets More regulatory capital needed for periods of market stress

The largest US banks should hold regulatory capital beyond their own internal targets to better prepare them for periods of market stress, according to a study published by the Federal Reserve on Monday.

The study, which examined banks’ approaches to the Fed’s recent stress tests, also said that while banks had “considerably improved” their regulatory capital planning in recent years, they had “more work to do to enhance their practices”.

Follow up on The Coming Arctic Boom:

From China to Europe, Via Arctic

China’s Yong Sheng is an unremarkable ship that is about to make history. It is the first container-transporting vessel to sail to Europe from China through the arctic rather than taking the usual southerly route through the Suez Canal, shaving two weeks off the regular travel time in the process. (…)

The travel time of about 35 days compares with the average of 48 days it would normally take to journey through the Suez Canal and Mediterranean Sea.


Chinese state media have described the approximately 3,400-mile Northern Sea Route, or NSR, as the “most economical solution” for China-Europe shipping. Cosco has said that Asian goods could be transported through the northern passage in significant volumes.

The NSR, at roughly 8,100 nautical miles, is about 2,400 nautical miles shorter than the Suez Canal for ships traveling the benchmark Shanghai-to-Rotterdam journey, according to the NSR Information Office. (…)

The Yong Sheng’s travel comes as shipping volumes on the arctic route are rising fast amid warmer weather, which has kept the passage relatively free of ice for longer than in recent decades.

The Russian-run NSR Administration has so far issued 393 permits this summer to use the waters above Siberia, compared with 46 last year and a mere four in 2010. The travel window usually opens in July and closes in late November when the ice concentration becomes prohibitive for sailing. (…)

Mr. Balmasov said even ships without ice-breaking capabilities received permits as the weather became warmer. “This cuts the cost of operators as the seaway is free of ice and the voyage time significantly lower,” he said.

Arctic ice covered 860,000 square miles last year, off 53% from 1.8 million square miles in 1979, according to the National Snow and Ice Data Center of the U.S. (…)

“It’s warming very quickly in the arctic and I would not be surprised if we see summers with no ice at all over the next 20 years. That’s why shipping companies are so excited over the prospects of the route,” Mr. Serreze said. (…)

The benchmark Asia-to-Europe shipping route accounts for 15% of total trade. (…) Shipowners recognize the potential of the route, but say it will take years to determine whether it will become commercially viable.

“We are looking into it but there are still many unknowns,” said a Greek shipowner whose vessels are chartered by a number of Chinese companies that trade with Europe. “The travel window is short and if ice forms unexpectedly your client will be left waiting and your cost will skyrocket to find an icebreaker. But if climate change continues to raise temperatures, the route will certainly become very busy.” (…)

Lloyd’s List, a shipping-industry data provider, estimates that in 2021 about 15 million metric tons of cargo will be transported using the Arctic route. That will remain a small fraction of the volumes carried on the Suez Canal. More than 17,000 vessels carrying more than 900 million tons of cargo plied the canal route last year.


NEW$ & VIEW$ (12 AUGUST 2013)


The earnings season is almost complete. S&P reports that of the 446 S&P 500 companies that have reported, 65% beat estimates and 27% missed. As expected, the beat rate has diminished slightly throughout the season and the miss rate has gradually edged up to 27%. The miss rate has been rising steadily from 23.7% in Q3’12 to 24.8% in Q4’12 and 25.9% in Q1’13.

Q2 earnings are now seen at $26.43, in line with the $26.40 estimated at the end of June, and up $1.00 or 3.9% YoY, a deceleration from the 6.3% YoY growth rate recorded in Q1’13. Trailing EPS should thus come in at $99.35, up $1.00 or 1.6% from the previous quarter, a slight advance from the $96.82-98.69 range since March 2012, a period during which the S&P 500 Index rose 20.7%.

Girl Boy A Tough Test for Back-to-School Sales

With Wal-Mart, Macy’s, Kohl’s and Nordstrom all reporting their second-quarter results this week, all eyes will be on their early reads about back-to-school sales and the outlook for the rest of the year.

The National Retail Federation forecast spending this fall on K-12 students to drop 12% to $26.72 billion after a record 2012, with a slowdown also expected for back-to-college spending. Meanwhile, the ICSC projected sales to rise 3.1%, the smallest gain since 2009.

Doubts Arise Over Dollar Strength

The dollar is stumbling as investors begin to question the strength of the U.S. economic recovery, which had powered a first-half rally in the currency.

Driving the reversal: a shift in views on when the Federal Reserve might start reining in some easy-money policies that are a legacy of the financial crisis, many fund managers say.

Many investors had piled into the dollar earlier this year on the belief that robust growth in the U.S. would lead the Fed to scale back its bond-purchase program, which has been pumping $85 billion into the economy each month, in the fall.

Not only would a receding flood of dollars raise the greenback’s value, the positive signal it would send about the U.S. economy would give the dollar additional fuel by attracting money flows from outside the U.S., analysts say.

However, disappointing economic data, mainly weaker-than-expected jobs growth and tepid retail sales, have prompted some currency investors to back away from bullish dollar bets that were based on the Fed reducing—or “tapering”—bond purchases in September, well before other major central banks would be ready to start tightening monetary policy.


At the same time, there are signs that Europe’s year-and-a-half-long recession is coming to an end, enhancing the allure of the euro. As well, fears that a slowdown in China would drag down the global economy appear overblown for now, a factor that could revive the appeal of riskier assets such as emerging-market currencies.

Although the selloff in the dollar is in its early stages, the implications could be wide-ranging. For example, in the longer term, a weaker dollar could bolster corporate earnings, as multinational companies find that profits made outside the U.S. are worth more when translated into dollars. (…)

Meanwhile (via FT Alphaville):

Ghost  ‘Sept-Taper’ Odds Soar

Just over a week ago, the probability of a September ‘Taper’ were a mere 14% with the majority of the ‘smart’ money betting on a ‘December 2013 at the earliest’ start to the Fed’s removal of the punchbowl. September 2013 is now the front-runner at a 36% probability, based on PaddyPower’s latest odds. September has surged from a 7/1 outsider to a 7/4 favorite in that brief time (and October also improved from 11/1 to 7/1). It seems that JPY-carry is well aware of this shift (having surged over 4% in the same period). Between Merkel’s election and the FOMC, the 3rd week of September (which just happens to perfectly correspond to an option expiration) looks set for some fireworks one way or another.

Food-Stamp Use Rises; Some 15% Get Benefits Food-stamp use rose 2.4% in the U.S. in May from a year earlier, with more than 15% of the U.S. population receiving benefits.

The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), is at 47.6 million, or nearly one in six Americans.

Canada Loses 39,400 Jobs in July as Government Hires Wane

Employment fell by 39,400 last month, while the jobless rate rose to 7.2 percent from 7.1 percent, Statistics Canada said today in Ottawa.

Canada’s job gains have slowed so far this year, with the average monthly gain of 6,000. That’s down from the 27,820 average recorded in the second half of last year.

Japan GDP growth misses expectations
Weak business investment continues to slow economy

Gross domestic product expanded at an annualised rate of 2.6 per cent, a preliminary government estimate showed on Monday.

Japan GDP

That was more than twice as fast as Japan’s average over the last decade, but it was less robust than the previous quarter and a full percentage point slower than the average forecast of economists surveyed by news agencies.

The preliminary data are being watched especially closely in light of the debate over the sales tax, which has divided advisers to Shinzo Abe, the prime minister who is attempting to lead Japan out of a more than 15-year period of deflation. (…)

GDP growth for the previous quarter was revised down, from an annualised 4.1 per cent to 3.8 per cent.

In the latest quarter, private consumption increased 3.1 per cent and the value of exports rose 12.5 per cent, suggesting a run-up in the stock market and a weak yen, two by-products of the monetary and fiscal stimulus at the core of Mr Abe’s “Abenomics” policies, continued to help lift the economy.

But business investment, a crucial element for any sustained recovery that has been largely missing in the Abenomics boom so far, continued to shrink, albeit at a milder pace than in previous periods. It fell by an annualised 0.4 per cent. (…)

 Russia’s Growth Pace Weakens

imageRussia’s State Statistics Committee said the growth rate fell to 1.2% in the second quarter of the year, down from 1.6% in the first three months and far below government forecasts of 1.9%.

The results add pressure on Russian policy makers to lower interest rates—something the Central Bank of Russia has lately resisted, saying that inflation is untamed. The bank left its key rates unchanged Friday for the 11th consecutive month. The Economy Ministry said it sees inflation in August at 6.4%, just a notch lower than in July, but still above the Central Bank of Russia’s target of 6%.

IEA Trims Estimate for 2014 Global Oil Demand Growth on Economy

Global consumption will increase by 1.1 million barrels a day, or 1.2 percent, to 92 million next year, the Paris-based adviser to energy-consuming nations said today in its monthly market report. The expansion is 100,000 barrels a day less than last month, when the estimate for 2014 was first introduced. Refinery operating rates will ease after a record surge in July, the IEA said.

Demand for crude produced by the Organization of Petroleum Exporting Countries will shrink by 400,000 barrels a day next year to 29.4 million a day as higher output from other nations, such as the U.S. and Canada, exceeds the expansion in global oil consumption, the agency said.

Production from OPEC’s 12 members fell by 165,000 barrels a day last month to 30.41 million a day, the lowest in six months, amid supply disruptions in Libya and Iraq, according to the IEA. The North African nation’s output slipped to 1 million barrels a day, while the Persian Gulf state’s fell to 2.99 million. Supplies from Saudi Arabia, the group’s biggest member and de facto leader, increased by 150,000 barrels a day in July to a one-year high of 9.8 million.

The decline still leaves OPEC output about 400,000 barrels a day higher than the amount the IEA estimates will be needed from the group in the third quarter, and the organization’s own formal target, at 30 million a day. OPEC, which accounts for about 40 percent of global supplies, will meet next to review production targets on Dec. 4.

The agency kept estimates for supplies from outside the group in 2014 unchanged. Non-OPEC producers, led by the U.S., Canada and Brazil, will bolster production by 1.4 million barrels a day, or 2.6 percent, next year to 55.9 million a day.

The IEA also kept its projection for world oil demand in 2013 mostly unchanged. Consumption will rise by 895,000 barrels a day this year to 90.8 million, amounting to a reduction of 70,000 barrels a day from last month’s report.

Oil price held high by supply disruptions  Outages expected to reach almost 4% of global demand

(…) From oil theft in Nigeria to the closure of ports in Libya and transit disputes in South Sudan, unplanned outages are on the rise. By September they are set to hit a 10-year high of 3.4m barrels a day, according to Energy Aspects, a consultancy.

That is almost 4 per cent of global demand. It is also more than double the combined output of the Bakken and Eagle Ford shale formations – the twin centres of the US oil revolution – underlining how rising North American supplies are being overwhelmed by problems elsewhere. (…)



NEW$ & VIEW$ (1 AUGUST 2013)

Jobless Claims in U.S. Fall to Lowest Level in Five Years

Applications for unemployment insurance payments declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, from a revised 345,000 the prior week, the Labor Department reported today in Washington. The median forecast of 50 economists surveyed by Bloomberg called for 345,000. A government analyst said no states were estimated, and the data were still being influenced by the auto plant shutdowns that play havoc with the figures at this time of year.

The less-volatile four-week moving average declined to 341,250 last week, a two-month low, from 345,750.

Tepid Growth Restrains Fed The U.S. economy is faring a little better than previously thought, but the overall picture is still one of lackluster growth.

The Commerce Department reported Wednesday that the economy grew at a 1.7% annual rate in the second quarter, enough to ease fears of a full-on summertime economic stall but still a sluggish pace by historic standards. (…)

Still, the April-June performance was only a small acceleration after the first quarter’s revised paltry 1.1% growth rate and represents little comeback from the end of last year, when the economy barely grew.

More than 24% of the quarter’s growth came from an increase in inventories—a buildup that is unlikely to be repeated and could even be erased in subsequent data revisions.

Consumer spending, which has been the backbone of the recovery recently, grew at a slower pace in the second quarter, with Americans cutting spending on hotels and restaurants—a possible indication families are pulling back on discretionary items.

The Commerce Department also significantly reduced its estimates for the prior four quarters and said the annual pace of growth since the recovery began in mid-2009 was only 2.2%, well below the nation’s long-term trend of over 3%. (…)

Against that backdrop, the Fed on Wednesday said it would continue an $85 billion-a-month bond-buying program meant to boost growth and hiring and offered no substantive changes in its stance on how long the purchases would continue.

Fed officials nodded in their statement to a few economic developments of late that could cause them concern if they persist. They described the pace of growth in the first half as “modest” and noted risks to the economy if inflation runs “persistently below” their 2% objective, as it has been. The Commerce Department report showed inflation running near a 1% annual rate in the last three months, well below the Fed’s goal.

Draghi Signals Worst Over as ECB Reiterates Low Rate Guidance

“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark rate at 0.5 percent. Policy makers expect to keep borrowing costs “at the present or lower level for an extended period of time,” he said, repeating a formula first deployed last month.

How confident should we all be on “confidence indicators”? More on that? CONSUMER SENTIMENT SURVEYS. DON’T BE TOO SENTIMENTAL!

I prefer economic facts such as

  • German retail sales declined 2.8% YoY in June following a 0.4% advance in May.
  • Spain’s workday-adjusted real retail sales decreased 5.0% in June after a 4.5% decline in May.

And this from

The data on lending also continues to show signs of weakness. Loans to
nonfinancial corporations, adjusted for sales and securitization, fell 2.3 percent year over year in June versus minus 2.1 percent in May. The equivalent figure for households stood at 0.3 percent year over
year, unchanged from the previous month.

The ECB’s quarterly bank lending survey provided little reason for optimism. It indicated: “looking forward to the third quarter of 2013, banks expect the net decline in demand for loans across all loan
categories to continue.”


Japanese PMI signals near-stalling of manufacturing sector

PMI survey data hinted at a waning impact of Japan’s  economic stimulus plan, dubbed ‘Abenomics’, at the start of the third quarter. After strong survey readings pointed to a further strengthening of GDP growth in the second quarter, the third quarter may bring disappointment to policymakers.

The manufacturing PMI signalled a near-stalling of growth in the sector in July. Alongside an easing in growth of manufacturing output, new orders and exports, the survey found price pressures to have eased again, and that employment started to fall again as companies cut capacity in line with weak demand.

Having risen to its highest for over two years in June, rounding off the best quarter of growth for the manufacturing sector for three years, the Markit/JMMA PMI fell in July. Dropping from 52.3 in June to a four month low of 50.7, the PMI signalled a marked easing in the rate of growth of the goods-producing sector at the start of the third quarter.


Output grew at the slowest rate since February, registering only a modest increase after the strong gains seen throughout the second quarter. New order growth also slowed, registering the weakest increase since March.

imageJuly’s PMI survey showed that, although new export orders rose for the fifth straight month, the latest increase was only modest and the smallest seen over this period. Any increase in competitiveness resulting from the weaker yen is being in part countered by weak economic growth in key export markets, notably China. (…)

Najib Plans Budget Measures After Fitch Cuts Malaysia’s Outlook

Fitch cut its outlook to negative from stable this week, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform. The credit rating company’s concerns are shared by the government, Najib told reporters at an Islamic finance event in Kuala Lumpur today, without giving details of fiscal measures planned for his October 25 budget address.

“We are just looking at various policy options but we do understand that there’s a need for us to strengthen the fiscal and macro position of the government,” he said. “The actual details will be unveiled shortly, particularly in the forthcoming budget.”

Najib, who is also finance minister, led his Barisan Nasional coalition to victory in Malaysia’s general election in May following a spending spree which saw him raise civil servants’ salaries and give cash handouts to the poor. He also froze planned cuts in state subsidies on essential items and stalled on introducing a goods and services tax. (…)

Indonesia Inflation Rate at 4-Year High as Economy Set to Slow

Consumer prices rose 8.61 percent in July from a year earlier, after a 5.9 percent gain in June, the Statistics Bureau said in Jakarta today. That exceeded all estimates in a Bloomberg survey of 23 economists. Gross domestic product probably grew 5.9 percent last quarter from a year earlier, the first drop below 6 percent since March 2010, a separate survey showed before a report due tomorrow.

Higher costs may hurt domestic consumption that has been the driver of growth in Indonesia, at a time of falling demand for the country’s commodity exports. Bank Indonesia has already raised its benchmark interest rate by 75 basis points in the past two meetings to fight inflation.


some prominent fund managers/commentators are now advocating investing in European stocks, moving some money out of “highly valued” U.S. equities into “better valued” European equities.

ISI tries to support this notion with this chart on Price/Sales.


My own observations:

  • U.S equities P/S is above the historical mean but so is France and Germany.
  • The Stox600 P/S ratio is somewhat below its mean but within a very narrow range.
  • P/S ratios are near useless without profit margins trends. Margins in the U.S. are much, much higher that in Europe, suggesting much better comps on P/Es.
  • The real bargains on a P/S basis are obviously in Spain and Italy. These countries may be where the U.S. was in early 2009 but their economic, financial, fiscal and political complexion is far different and much less comfortable than that of the U.S. I see no reason for Spanish or Italian companies selling at P/S ranges so much above German companies. Why should Spain P/S be similar to the U.S.?
  • Why would anybody want to invest in France?
  • The U.K. market does look appealing, however.

NEW$ & VIEW$ (30 JULY 2013)

Japan suffers industrial output drop June’s 3.3% fall is first in five months

Japan’s industrial output declined for the first time in five months in June, contracting 3.3 per cent, but manufacturers’ promises of production increases this month suggested the broader growth trend remained intact. (…)

Other economic data were also mixed. The unemployment rate fell below 4 per cent for the first time since 2008, dropping to 3.9 per cent in June from 4.1 per cent in May.

However, household spending fell by 0.4 per cent year on year, confounding market expectations for a 1 per cent increase. The decline was blamed in part on a fall-off in spending on home renovations after the expiry of a housing-investment tax break.

Spending on everyday items was stronger: outlays for clothing and footwear were up 8.1 per cent.

Spain on track for return to growth Sustained recovery still some way off

The Spanish economy may finally be about to turn the corner, with official estimates showing that gross domestic product fell by just 0.1 per cent in the second quarter – the slowest rate of decline in almost two years. (…)

In the last three months of last year, GDP fell 0.8 per cent, the worst rate of decline since the start of the crisis 2009. The first quarter of this year then saw a fall in GDP of 0.5 per cent, while output in the second quarter appears to have been almost flat.


US money market funds return to EU banks
10 biggest funds increase allocation by 90%

In the first half of the year, the 10 biggest US money market funds allocated about 15 per cent of their $652bn in assets to short-term deposits and debt securities with eurozone banks, according to Fitch, the credit rating agency. (…)

French banks have been the main recipients of money market funds’ recent largesse. Funds have increased their exposure to them by 255 per cent since the end of June 2012, according to Fitch.

Euro-Area Economic Confidence Jumps to Highest in 15 Months

An index of executive and consumer sentiment rose to 92.5 from 91.3 in June, the European Commission in Brussels said today. (…)

Manufacturers across the currency bloc have increased their capacity utilization to the highest in more than a year, today’s report showed. An indicator of capacity usage at euro-area factories increased to 78.3 percent for the current quarter, the highest since the second quarter of 2012, the commission said.


China injects funds into money markets
Liquidity injection is the first since early February

The People’s Bank of China pumped Rmb17bn ($2.8bn) into the money market via seven-day reverse repurchase agreements on Tuesday, the first time it has conducted that kind of liquidity injection since February 7.

The amount was relatively small but its intent to prevent cash rates from drifting too high was clear, and the impact was immediate. The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, fell 14 basis points to 4.98 per cent. The stock market also jumped, with the Shanghai Composite Index gaining nearly 1 per cent. (…)

Even while conducting the injection on Tuesday, the central bank also made clear that the cost of capital had risen in China. The central bank set the seven-day repo rate at 4.4 per cent, well above the 3.35 per cent at its February auction. Wee-Khoon Chong, an economist with Société Générale, said in a note to clients that this was “a signal that the era of ultra loose and easy money is over”.

China’s Provinces Trail Growth Targets in Slowdown Signal

Seventeen of 30 provinces and provincial-level cities said January-to-June expansion trailed 2013 targets, compared with 14 of 31 in last year’s first half, according to data compiled by Bloomberg News. Inner Mongolia, Jilin and Ningxia had the widest gaps, each at 3 percentage points below a 12 percent target. One province, Qinghai, has yet to release its latest figures.

“Local governments’ growth targets were too aggressive to begin with and heavily relied on fixed-asset investment,” said Yao Wei, China economist at Societe Generale SA in Hong Kong. “As credit conditions are no longer easy, it is actually no surprise that they cannot meet the targets.”

China Politburo Pledges to Press On With Restructuring Economy

Authorities will maintain steady second-half economic growth amid “extremely complicated domestic and international conditions,” the official Xinhua News Agency said today after a meeting led by President Xi Jinping. China will keep a prudent monetary policy and a proactive fiscal stance, Xinhua said.

Pointing up Cities Begin Hiring Again  Cities are starting to hire teachers, police and firefighters as a deep slide in local-government employment appears to have bottomed out four years after the recession ended.

Monthly jobs data from the Labor Department show local governments, which make up about 65% of the overall government workforce, added workers in seven of the past eight months, the longest such streak in five years. So far this year, 46,000 new jobs have been created on a seasonally adjusted basis. Local-government employment through June stood at 14.08 million, the highest level in more than a year and a half, though still well below a peak of 14.61 million in mid-2008. (…)


Moody’s Analytics is forecasting a continued rise in hiring, with local government adding a total of 90,000 jobs this year and 300,000 jobs in 2014. The firm, however, doesn’t expect local-government payrolls to reach their all-time peak until late 2015 at the earliest. (…)

Young CEOs Feeling More Optimistic A survey of young CEOs shows they’re feeling a bit sunnier about the U.S. economy, opening the way for more hiring in the months ahead.

The Young Presidents’ Organization’s latest confidence survey ticked up 1.1 points to 62, its highest level since April of last year. Any reading above 50 indicates a positive outlook—the higher the number above 50, the greater the positive attitude.

Nearly half of the 746 U.S. CEOs surveyed by the group said business and economic conditions have improved in the last half year. CEOs in the construction sector particularly upbeat: 65% said conditions have improved–up from 46% three months earlier. The survey is done quarterly. Across the board, smaller companies were more likely to see improvements than larger companies.

The CEOs were more optimistic in their outlook for sales than for hiring or capital spending. A hefty majority—62%–said they expect their sales to increase over the next 12 months. But only about four in 10 said they expected to add workers in the next year, a slight improvement over the previous survey. (…)

Companies Hold On to Their Cash

A survey of chief financial officers and treasurers released Monday shows firms are hoarding increasing amounts of cash, after loosening their grip on their money last year.

The July survey by the Association for Financial Professionals of companies with $1.5 billion in median annual revenues also showed CFOs expect to have more cash by the end of the third quarter than they do now.

PhotoThe study said the executives’ confidence is waning as the Federal Reserve considers winding down its $85 billion a month bond-buying program. The Fed has said a pullback depends on strengthening U.S. growth, but expectations for less stimulus have made executives and investors anxious about whether the economy can stand on its own feet. These fears are crimping company spending on everything from mergers to building new plants and hiring workers. (…)

Only 16% of CFOs in a recent Bank of America survey said they had merger or acquisition plans for 2013, down from 22% in the previous survey six months ago. Merger and acquisition activity is up 20% by dollar volume in the U.S. over last year’s levels, but the number of deals announced is flat, according to data from Thomson Reuters. (…)


NEW$ & VIEW$ (26 JULY 2013)

Just How Bad Is The US Economy?


image(Bloomberg Briefs)

Fingers crossed image

Moody’s adds:

Not only has unemployment been skewed lower by labor force dropouts, but the quality of new jobs also appears suspect.

Despite accounting for 36% of payroll employment as of year-end 2012, the comparatively low-paying and less-stable job categories of retailing, health care, private education, temporary work, leisure and hospitality supplied 71% of the new payroll jobs created during the three-months-ended June.

Moreover, part-time jobs accounted for 19.5% of household survey employment in both June 2013 and for the current recovery to date. By contrast, the 17.6% of jobs were deemed to be part-time during the three previous economic recoveries.

But, housing is strong enough to keep the U.S. economy going, no?

Pointing up  Hmmm…Moody’s warns about the housing house of cards:

Housing might soon sag under the weight of costlier mortgage yields. A climb by the moving four-week average of the MBA’s effective 30-year mortgage yield from June 21’s 4.33% to July 19’s 4.75% significantly pared mortgage applications for the purchase of a home. In terms of a moving four-week average, July 19’s mortgage applications from potential homebuyers were down by -4.5% from the contiguous four-weeks-ended June 21, 2013, as the metric’s yearly increase sagged from June 21’s 11.6% to July 19’s 7.0%.

Accordingly, Q2-2013’s 13.2% year-over-year increase by unit sales of new and existing one-family homes should slow. From a historical perspective, the current housing recovery already looks weak. Despite the significantly smaller population 1998-1999, the current pace of home sales trailed its average of 1998-1999 by 9.2%. If housing loses momentum, the bond vigilantes will look foolish chasing phantoms.

ZeroHedge sums it all up:

There appears to be a level of optimism priced into every macro-economic forecast. Whether this is simply mean-reverting models or a systematic need to justify an ever-increasing equity market is unclear but over the past few years the consensus GDP growth forecast has fallen by around 0.7 percentage points over the year before its final release (as hope turns to reality). So just how bad is the current environment? With the latest update of Q2 2013’s GDP consensus forecast now at 1.0%, the last year has seen the consensus drop a stunning 2.0 percentage points (almost triple the average loss of hope). Of course, as we noted here, we’ll make it all up in H2 2013 (even as CEO after CEO adjust down their outlooks).

Punch QE4 on its way? Surprised smile

Japanese Prices Rise

Japanese consumer prices rose in June for the first time in more than a year, and by the largest amount in nearly five years, the latest sign of progress in the government’s campaign to end more than a decade of economic decline.


The price increases have so far largely come from rising costs of imported materials such as energy and other commodities, the result of a sharp fall in the value of the yen, which makes goods purchased abroad pricier in Japan. In June, electricity prices were a whopping 9.8% higher than a year earlier, while gasoline was up 6.4% on the year in June.

(…) prices of desktop computers were up 21% from a year earlier, the sixth consecutive month of price increases following years of steady double-digit declines. TV prices still fell—by 5.5%—but that’s considerably smaller than recent declines of 25% or greater.

(…) the Japanese government reported Friday that its “core” Consumer Price Index—a basket of goods and services excluding fresh foods—rose by 0.4% over the same month a year earlier. That is the gauge most commonly used by the Bank of Japan, among others, to track price trends.

That marked the second consecutive month that prices didn’t fall. The same index was flat in May, following six consecutive months of decline. The last such price increase was a 0.2% rise in April 2012. The last time prices rose at that pace came during a brief stretch of inflation in 2007 and 2008 amid soaring fuel prices. (…)

High five But wait, Japanese core is not everybody else’s core. Take energy out now as SoGen does (via ZeroHedge):

However, the ex food and energy core measure was stable at -0.4%, which was weaker than expected (median -0.3%, SG -0.2%), and the result of the first monthly decline in this measure, of 0.1% mom (seasonally adjusted) in seven months. (…)

At the component level, electricity prices rose by 9.8% yoy (nationwide) and gasoline prices rose by 6.4% yoy (nationwide) (15.4% yoy and 10.2% yoy respectively in Tokyo)… However, prices in a broad range of areas such as housing rent, recreation, furniture/household utensils and medical care still show price declines from a year ago.

So no victory for Abenomics just yet…

Euro Zone Nears Stabilization

(…) The CEPR and the Bank of Italy said Friday the Eurocoin indicator rose to minus 0.09% in July from minus 0.18% in June to reach its highest level since the first half of 2012.

The rise in the index, one of the earliest measures of economic activity in the currency area, is consistent with other recent surveys and indicators in recording an improvement in the economy, although it is at odds with manufacturing and services purchasing managers’ surveys in that they pointed to an expansion this month for the first time since early 2012.

The CEPR and the Bank of Italy said the Eurocoin had been pushed higher by “the favorable signs coming from the surveys of households and firms and from the easing of tensions in the financial markets.”

Those favorable signs continued to arrive Friday, as the results of a monthly survey conducted by France’s national statistics agency showed consumers became more optimistic about their prospects in July. Insee’s headline measure of consumer confidence rose to 82 from 79 in June. That follows improvements in measures ofbusiness confidence in Germany, the Netherlands and Belgium, and consumer confidence in Italy. (…)

But how low can it get?

image(Bloomberg Briefs)

China Cuts Capacity in Some Industries to Reshape Economy

China ordered more than 1,400 companies in 19 industries to cut excess production capacity this year, part of efforts to shift toward slower, more-sustainable economic growth.

Steel, ferroalloys, electrolytic aluminum, copper smelting, cement and paper are among areas affected, the Ministry of Industry and Information Technology said in a statement yesterday, in which it announced the first-batch target of this year to cut overcapacity. Excess capacity must be idled by September and eliminated by year-end, the ministry said, identifying the production lines to be shut within factories. (…)

More than 92 million tons of excess cement capacity and about 7 million tons of excess steel production capacity are expected to be wiped out under the government’s plan, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in an e-mailed research note yesterday. Nomura maintained its forecast of 7.4 percent economic growth for China in this quarter and 7.2 percent in the fourth quarter.

China also plans to shut 654,400 tons of copper and 260,000 tons of aluminum capacity as part of its first-batch target, according to Bloomberg calculations based on the ministry’s statement yesterday. (…)

High five  All closures are at private SMEs. No SOEs involved! The steel capacity to be shut accounts for less than 1 percent of the nation’s total, according to Bloomberg calculations. (…)

Moody’s Sees Local Default as $21 Billion Matures

Local-government financing vehicles need to repay a record amount of debt this year, prompting Moody’s Investors Service to warn Premier Li Keqiang may set an example by allowing China’s first onshore bond default.

Some 127 billion yuan ($21 billion) of so-called LGFV notes expire in the second half, according to Everbright Securities Co., the most in its data going back to 2000 and more than double the 62.7 billion yuan that matured in the first six months. The yield premium over top-rated notes for one-year AA debt, the most common rating for LGFVs, widened to 67 basis points yesterday, the highest level since Jan. 16, Chinabond data show. The comparable gap in India is 47. (…)

Next year, 208.8 billion yuan of LGFV debt comes due, up 10 percent from this year and 122 percent than in 2012, according to Shanghai-based Everbright. Guotai Junan Securities Co., which uses a different classification system, estimates a record 160 billion yuan of the debt matures both this year and next, up from 110 billion yuan in 2012. (…)

Local governments set up more than 10,000 LGFVs to fund the construction of roads, sewage plants and subways after they were barred from directly issuing bonds under a 1994 budget law. A 4 trillion yuan stimulus plan during the 2008-09 financial crisis swelled loans to the companies, which they have been rolling over or refinancing with new note sales.

LGFVs may hold more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said in April. That’s double the figure given by the National Audit Office in 2011. (…)

China MNI Business Sentiment Indicator fell to 51.3 in July from 53.7 in June but continuously down from 61 last February. Lowest level since August 2012. New orders rose however.


(Bloomberg Briefs)

Russian Growth Forecasts Trimmed as Recession Risks Rise

Gross domestic product will advance 3 percent from a year earlier in the third quarter compared with 2 percent in the second, the median of 15 estimates in a Bloomberg survey showed. That’s down from 3.1 percent and 2.1 percent in June’s poll. There’s a 30 percent chance of a recession next year, up from 20 percent a month ago, according to a survey of 13 economists.


This Moody’s table covers Q2-to-date results (46% of S&P companies). Note how Financials are positively influencing profits as operating income ex-Fins are flat YoY on 3.2% revenue growth.


Opec dilemma World might be drifting into oil price shock

(…) A significant consequence of the upheaval in the Middle East and north Africa is that oil-producing governments need more revenue to pay for social policies that will assuage popular unrest. This requires higher prices. For example, in 2008 it was estimated that Saudi Arabia needed about $50 a barrel to balance the books. Last year estimates put the figure closer to $95.

Such high prices will produce market responses and this is where shale technology comes in. (…)

At the same time, high prices will also lead to oil demand destruction. In particular the impact will be felt in the Middle East, India and China. The MICs, according to the International Energy Agency, are expected to account for 68 per cent of the increase in non-OECD oil demand between 2011 and 2035. However, all three have historically had heavily subsidised oil that encouraged oil demand growth. This has been changing. With price reform in the MICs, the higher prices needed by Opec will be paid directly by consumers. That will cut demand growth. The result is unsustainable. Higher supply and lower demand will put the high prices needed by Opec under pressure.

Markets do work and the situation is very reminiscent of the period 1981-86 which culminated in the dramatic 1986 oil price collapse. Saudi Arabia then was acting as the so-called swing producer in order to defend high prices. Its eventual rejection of that role in 1985 triggered the 1986 price collapse. In the past nine months, Saudi Arabia has quietly resumed that role. (…)

The key will be how long Saudi Arabia continues to act as swing producerbefore the pain becomes too great, as it did in 1985. (…)

But there are differences between today and the 1981-86 period that complicate the story. Then there were no “paper” markets trading future barrels of oil. Today futures markets play a big role in price determination and lead to prices changing at a much faster rate than before. The new supplies today have a different cost structure: supplies will respond faster to lower prices than was the case in the early 1980s.

If prices do drop, it could lead to further unrest in oil-producing nations, spooking the markets. The result would be much greater oil price volatility. In that case, security of supply concerns – based on fears of physical disruption – would be overtaken by concerns about the macroeconomic impact of oil price volatility. At the very least, this would increase pressure to further regulate the paper markets.

For producers it would bring to the very top of the agenda the need to diversify their economies away from oil dependence. This has long been an aim but for the most part with very disappointing results which will, in turn, feed the consequent political upheavals. Overall, oil markets are in for a rough ride.


NEW$ & VIEW$ (11 JULY 2013)

Jobless Claims in U.S. Unexpectedly Rise to Two-Month High

First-time claims rose by 16,000 to 360,000 in the week ended July 6 from a revised 344,000, Labor Department figures showed today in Washington. Claims are difficult to adjust in July for seasonal events such as vehicle plant shutdowns and the Independence Day holiday, a Labor Department spokesman said as the data were released.

The four-week moving average, a less volatile measure than the weekly figures, climbed to 351,750 last week from 345,750.

Fed Affirms Easy-Money Stance

Bernanke sought to reassure markets that officials aren’t abandoning a broader commitment to easy-money policies.

“You can only conclude that highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” he said Wednesday at a conference held by the National Bureau of Economic Research, citing the high unemployment rate, low inflation and “quite restrictive” fiscal policy. He said he expects the Fed won’t raise short-term rates for some time after the unemployment rate hits 6.5%, which would be more than a full percentage point lower than its current level.

The remarks Wednesday came a few hours after minutes of the Fed’s June policy meeting showed officials deeply divided over when to start unwinding the bond-buying program. About half the officials walked into the meeting thinking the central bank might end the program altogether by the end of the year, the minutes showed. (…)

The minutes may count the number of officials who adhere to a particular view, but that obscures the fact that key Fed officials such as Mr. Bernanke, Vice Chairwoman Janet Yellen and New York Fed President William Dudley are still strongly committed to pressing forward with the program, and their views dominate the policy-making process. (…)

Before the meeting, Fed officials submitted projections for the economy and also a description of the outlook for interest rates and the Fed’s bond-buying program that they felt best suited the economic outlook. A summary of these projections described by the Fed in the minutes showed that “about half of these participants indicated that it likely would be appropriate to end asset purchases late this year.” (…)

In short, they have no clue what’s going to happen next on the economy. Not convinced? Read this: Key Passages From Fed Minutes

Mid-June, Bernanke sank stocks, now:

Bernanke Sends Stocks To New All-Time Highs

Pointing up  Meanwhile, market rates are reacting:

Banks Try to Adjust to Rate Surge  A rise in long-term interest rates is creating challenges and opportunities for the largest U.S. banks.

The full percentage-point jump in long-term rates, the sharpest increase since 2010, already has eroded $31 billion in accounting gains from banks’ securities portfolios through late June, according to Federal Reserve data.

At the same time, some bankers said the upward move in long-term rates allows them to raise prices on new commercial loans, an encouraging sign for an industry pummeled in recent years by slim lending margins. Average rates on fixed-rate 10-year commercial loans increased to 3.9% in June from 3.3% in April, according to banking software and data company Automated Financial Systems Inc. (…)

Zions Bancorp, a midsize lender in Salt Lake City with $54 billion in assets, warned investors in a recent presentation what would happen to the industry’s capital if long-term rates were to rise by three percentage points.

The amount of capital held by the industry would drop by $200 billion to $250 billion after taxes, or 17% of the tangible common equity that exists in the banking system, according to the presentation it gave investors at a conference.

That would result in $2 trillion of reduced lending capacity, Zions Investor Relations Director James Abbott said. “We have seen that movie several times,” Mr. Abbott added.

David Zalman, chief executive of Prosperity Bancshares Inc., a midsize lender based in Houston with $16.1 billion in assets, said he anticipates criticism if previous gains in the bank’s $8 billion bond portfolio turn into losses. But over the longer term, “we need rising rates to make more money,” he said.

Some smaller banks already are adjusting their prices. Kevin Cummings, chief executive of the $13 billion-asset Investors Bancorp. Inc. in Short Hills, N.J., said when long-term rates rose, his team decided to increase prices on certain commercial-real-estate and apartment loans.

Lee Roberts, chief operating officer for VantageSouth Bank in Raleigh, N.C., said he noticed rivals Wells Fargo and BB&T Corp. revising prices on certain deals upward and telling clients that existing terms can’t hold for much longer. (…)

Loan “rates are going up,” said Scott Shay, chairman of Signature Bank, an $18.5 billion-asset bank in New York. “If a bank isn’t increasing rates, frankly it is closing its eyes.”

Housing Markets Spurt in Brooklyn, Queens

The shortage of listings and frothy activity reported in the Manhattan market is broadening to communities elsewhere in the city and nearby areas, driving up the price of condos in Long Island City, co-ops in Brooklyn Heights and single family houses in White Plains.


A series of market reports to be released on Thursday paint a picture of a hot market in the region in the second quarter as buyers—including many worried about rising interest rates on mortgages—competed for a shrinking supply of available property. There were also some negatives in the market. Tight credit conditions made it hard for would-be sellers to trade up to larger apartments, shrinking the available supply. (…)

In Brooklyn, the market was so tight that brokers brought in extra staff to handle crowds—of 50 to 60 people in some cases—that have started to show up at open houses, said Frank Percesepe, who oversees Corcoran Group’s operations in Brooklyn.

June has been the most incredible month in the history of Brooklyn sales,” Mr. Percesepe said. He said inventory fell during the second quarter even though the increasing prices had “whet the appetite of sellers” because many new listings were selling quickly. (…)

In Westchester County, Chris Meyers, the managing principal of Houlihan Lawrence, said the quarter was the strongest second period since 2007, and that since then market remained “scorching hot” into the summer. (…)

Pointing up Mr. Meyers said some buyers had locked in interest rates and were rushing to close their deals. He said he expected price increases to moderate because a bump up in interest rates and higher monthly mortgage costs would limit how much some buyers could afford to spend. (…)

Ghost  Should We Be Concerned About These Real Estate Breakdowns?

The rally over the past few years, after the huge declines in Real Estate, has been impressive to say the least. The 4-pack above reflects a variety of leading Real Estate indexes, ETF’s and one stock that is key to home improvements. What do they all have in common? After huge rallies they all formed bearish rising wedges with support lines being broken of late!


…And these turns of events (chart from ISI)?



Prices for U.S. imports and exports fall in June

Export prices fell by 0.1 percent, matching the expectation in a Reuters poll, Labor Department data showed on Thursday.

The drop probably reflects weakness in global demand which has been hit by Europe’s debt crisis and slowing growth in China.

Import prices slipped 0.2 percent last month, dragged down by another month of declining costs outside of the fuels category. Petroleum prices rose 0.2 percent.

Prices for both imports and exports have fallen every month since March, the longest such streak since 2008 when the world was mired in a financial crisis.

BOJ Upgrades Assessment of Economy

Using its most optimistic language in more than two years, the Bank of Japan upgraded its assessment of the economy Thursday, saying it is starting to “recover moderately.” (…)

But speculation for fresh easing measures may surface in the autumn or later, as the central bank slightly lowered its projected inflation figures for the current and following fiscal years and cut its growth forecast for the current fiscal and subsequent two fiscal years.


Auto  China Car Exports Stall

China’s ambition to become an auto export powerhouse like Japan and Germany has hit a speed bump with shipments of domestic brands falling for the last two months in a row.

The country exported 84,400 cars last month, around one-fifth fewer than the same period last year, an auto industry group said on Wednesday. That follows a 16% slump in May—the first year-over-year drop in five years. (…)

June’s export drop was disclosed on the same day that statistics showed a 11% rise in total vehicles sold in China last year, indicating the local market remains solid despite slowing domestic economic growth. (…)

Chinese car makers captured 38% of the country’s passenger-vehicle sales in June, down from 47% at the end of last year. The figures suggest foreign-branded cars continue to dominate the market, pointing to problems for Chinese brands facing a market flush with auto factories.

CLSA auto analyst Scott Laprise said some Chinese car makers had turned to export markets because they struggled to sell their cars at home. The country has about 140 domestic auto makers.

The yuan has gained this year about 20% against the Japanese yen and 10% against the Korean won.


Pointing up  Total auto sales in China reached 1.75 million vehicles in June, while sales of passenger vehicles rose 9.3% to 1.4 million units. In the first half of this year, vehicle sales grew 12% to 10.78 million, and  passenger cars rose 14% to 8.67 million, CAAM said.

China’ Crude-Oil Imports Fell in the First Half

China’s crude-oil imports fell in the first half of 2013, marking the first January-June contraction since 2009, but the second half could see a pickup as refineries emerge from maintenance.

China imported 138 million metric tons, or an average of 5.6 million barrels a day, of crude in the first half of 2013, preliminary data from the General Administration of Customs showed Wednesday. This was 1.4% less than in the first half of 2012.

In contrast, China’s crude imports rose by 7% in the first half of 2011 and 11% in January-June 2012.

Crude imports could accelerate in the third quarter now that some domestic refineries are restarting operations after a period of heavy maintenance, Barclays said Wednesday. (…)

In June, the International Energy Agency predicted that China would use 3.8% more oil this year, while the U.S. government’s Energy Information Administration put China’s oil demand growth at 4.1%. Both the IEA and EIA trimmed their forecasts from ones made earlier in the year.

China relies on imports for around 60% of the oil it uses, and domestic output has remained stagnant for the past few years.

Indonesia Raises Rates as Other Asian Banks Stand Pat

Indonesia’s central bank, caught between rising inflation and weakening growth, raised its main interest rate by a half-percentage point Thursday, while other central banks across Asia stood pat as sluggish exports and a slowdown in China weigh on their economies.

Bank Indonesia had just lowered its growth forecast for the year but said the larger-than-expected rate increase was necessary after last month’s reduction in fuel subsidies drove fuel prices sharply higher. It was the second straight month the bank has raised rates as inflation, which had fallen from a high of 7.02% in January 2011 to a low of 4.57% two years later, again presses upward. (…)

The decision came the same day as central banks in South Korea and Japan held rates steady and lowered their inflation outlooks, while Malaysia’s central bank stayed on hold for a 13th consecutive meeting. The Bank of Thailand held rates steady on Wednesday.

The decisions reflect how Indonesia is increasingly out of step with its neighbors, which are worried about their growth prospects as China’s economy loses momentum and recovery in the West is slow in coming. (…)

Indonesia’s move shows how some countries are more vulnerable to global economic forces like the expected tapering of the U.S. Federal Reserve’s bond-buying program. Indonesia is one of the few countries in the region to run a current-account deficit, which makes it especially sensitive to outflows of foreign capital at a volatile time in global markets.

Money has flowed out of emerging markets since the Fed starting talking in May about scaling back its quantitative-easing program. That knocked the rupiah perilously close to the key level of 10,000 to the dollar, just when Indonesia could have used a stronger currency to damp growing price pressures. (…)

Brazil holds course on inflation fight
Central bank increases benchmark rate by 50bp

The central bank’s monetary policy committee, Copom, increased the benchmark Selic rate by 50 basis points to 8.5 per cent, its third consecutive increase bringing the total rise since it started tightening in April to 125 basis points.

Brazil Signals World’s Biggest Key Rate Rise Far From Over

Brazil’s central bank raised the benchmark interest rate a third consecutive time and said it was giving continuity to the world’s biggest tightening cycle, signaling increases may be extended through year-end as policy makers battle inflation.

Brazil is one of only three countries among 50 major economies tracked by Bloomberg that is raising borrowing costs this year as above-target inflation undercuts months of government stimulus by curbingretail sales growth. After a quarter-point rate increase in April, policy makers in Brazil doubled the pace in May and reiterated warnings that the outlook for inflation remains unfavorable.


NEW$ & VIEW$ (2 JULY 2013)

U.S. Factories Buck Global Growth Slowdown

The Institute for Supply Management on Monday said its broad index, in which any reading above 50 indicates expansion, rose to 50.9 last month from 49 in May. The report showed growth in new orders, production and inventories. However, in a potentially troubling sign for Friday’s jobs report, the employment index contracted for the first time since September 2009.



The JPMorgan Global Manufacturing PMI, produced by Markit from its worldwide business surveys, was unchanged at 50.6 in June. At a level close to the nochange mark of 50, the index signalled a continuation of the near-stagnant trend recorded throughout the first half of the year.


While the near-stagnation is an improvement on the mild rate of decline seen throughout much of the second half of last year, the survey data indicate that the underlying trend in the global manufacturing economy remains well below the trend rate of approximately 5% per annum seen in the years leading up to the financial crisis, growing instead at an annual rate of just 1-2%.

imageHowever, the unchanged reading masks diverging manufacturing performances by country, with the top of the manufacturing PMI rankings dominated by developed countries.

The top of the table was in fact dominated by developed countries, with the UK followed closely by Japan, where the PMI came in at 52.3 and signalled the fastest rate of improvement since February 2011. Meanwhile, the Markit US PMI dipped to an eight month low, which was in turn linked to the steepest drop in export orders for four years. The US
nevertheless ranked third in the PMI rankings. Part of the global export weakness reflected theongoing recession in the eurozone. However,  although euro countries continued to dominate the lower end of the PMI rankings, the single-currency area’s manufacturing PMI rose to 48.8 in June, indicating that the region is contracting at the slowest rate for 16
months. Output and new orders more or less stabilised, following big improvements in the survey data for Spain, Italy and France in recent months, and offsetting a slight deterioration in the German survey numbers.

In Asia, the ongoing improvement in the Japanese PMI, linked to rising domestic and export orders, contrasted with the PMI for China hitting a nine-month low of 48.2.

The increased rate of decline in China came as the country’s manufacturers reported the steepest monthly fall in export orders for four years. China sank to third from the bottom of the PMI ranking table as a result. Taiwan’s manufacturing sector meanwhile contracted for a second successive month, the PMI at 49.5, while the PMI for South Korea also dipped below the 50-line for the first time in five months with a reading of 49.4. At 46.4, the PMI for Vietnam registered the steepest
downturn for almost a year, and at 51.0 the PMI indicated the weakest expansion for four months in Indonesia. Of all the countries surveyed in June, the scale of the downturn seen in Vietnam was only exceeded by that recorded in Greece.

In India, the PMI ticked higher to 50.3, but nevertheless indicated the second-weakest expansion for over four years as orders fell for the first time since March 2009.

Elsewhere, the PMI for Mexico fell to 51.3, its lowest since data collection began in early-2011, and Brazil’s PMI was unchanged on May’s seven-month low of 50.4, with weakness fuelled in both bases by increased
rates of decline of exports. Russia bucked the deteriorating trend seen in other emerging markets, with rising domestic orders helping push the PMI to a four-month high of 51.7.


(Business Insider)

Air freight market struggled to grow in May: IATA

The international air freight market grew by a mere 0.1 percent in May compared to April, and was up 0.8 percent from May 2012, as slowing business confidence and weaker Asian trade undermined cargo demand, the International Air Transport Association (IATA) said on Tuesday.

Construction Spending Hits 3½-Year High

Total U.S. construction spending rose by 0.5% in May from the prior month to a seasonally adjusted annual rate of $874.9 billion, the Commerce Department said Monday. That was the highest level since September 2009.

The rise was driven by residential construction, which rose 1.2% from a month earlier and 22.7% from a year ago. Private residential construction, which excludes public housing, rose to the highest level since October 2008.

Meantime, spending on construction of public buildings—including, state, local and federal government structures—rose 1.8% in May from April, but was down 4.7% from a year ago.

Household Incomes Languish

Four years into recovery, parts of the economy have strengthened but real median household income remains below prerecession levels. The Household Income Index came in at 92.2 in May, below the 97 of June 2009, when the recession ended. It is also lower than the 98.8 reading seen in December 2007, when the recession began. In May, real median annual household income was $51,500.

Clouds Over Canada Damp Loonie

The Canadian dollar, also known as the “loonie,” has dropped 5% against the U.S. dollar since mid-May amid a broad downdraft in currencies of big commodity-exporting countries. On Friday, it hit its lowest level since October 2011. (…)

The combination of lower global commodity prices and nervousness about housing has become a drag on growth, which the Bank of Canada forecasts will slow to 1.5% this year from 1.8% in 2012.





China Home Prices Jumped in May

Housing prices in China’s 70 major cities in May registered their highest annual growth rate in more than two years, at 5.3%, which could increase pressure on cities to enforce the government’s property-cooling measures.

Average prices of newly built homes in China’s 70 major cities rose 5.3% in May compared with a year earlier, up from a 4.3% rise in April, according to calculations by The Wall Street Journal based on National Bureau of Statistics data. That is the highest reading since March 2011, when prices rose 5.3% as well. On a month-to-month basis, the increase in prices was 0.9%, the same as in April.

Prices rose in 69 cities in May compared with a year earlier, up from 68 cities in April. But there has been a moderation on a month-to-month basis, with prices of new homes in 65 of 70 cities rising in May from the month before, down from 67 cities in April.



Inside China’s Bank-Rate Missteps

A rare peek into the actions of China’s leaders in a month when a Chinese cash crunch spooked global investors shows a leadership falling short in its struggle to redirect China’s economy.

The People’s Bank of China instigated the cash shortages that catapulted Chinese interest rates to nosebleed highs during the past two weeks because the central bank felt it had no alternative amid what it saw as out-of-control credit growth, according to an internal document reviewed by The Wall Street Journal.

But by failing to make that clear—at a time when worries about slowing Chinese demand had already scared away some foreign capital, and as signals from the U.S. Federal Reserve also were redirecting global cash flows—the Chinese central bank inadvertently contributed to a surge in global market anxiety.

(…) Chinese leaders are blaming market speculation and what the authorities view as overly aggressive media coverage for the problems. Some critics, however, say the fault lies partly with clumsy maneuvering by the central bank and the senior officials who oversee it, saying it exposed their inexperience in anticipating how markets—domestic and foreign—would interpret their actions. (…)

According to a previously undisclosed summary of a PBOC internal meeting on June 19, the central bank was especially concerned that in the first 10 days of June, Chinese banks increased lending by 1 trillion yuan ($163 billion)—an amount the central bank said “had never been seen in history.” About 70% of that amount consisted of short-term notes that mostly don’t show up on banks’ balance sheets—making it easier for the banks to get around regulatory lending restrictions-—rather than lending the money to promising companies or projects.

The PBOC interpreted banks’ actions to mean that “some banks thought the government would launch stimulus policies as the economy slows, and positioned themselves in advance,” according to the summary. (…)

Spanish unemployment falls for fourth month Temporary hiring stepped up for holiday season

The number of Spaniards claiming unemployment benefits fell by more than 127,000 last month, a record drop for the month of June, as hotels and other businesses exposed to the holiday season stepped up temporary hiring.

Spain’s labour ministry said the number of registered unemployed now stood at 4.76m, down 2.6 per cent from the previous month. It was the fourth consecutive month that saw a drop in registered unemployment.

High five  However, economists warned that the drop in registered unemployment was likely to be a fleeting phenomenon – and that there was no sign yet of a genuine turnround in the labour market. Their case was bolstered by news that the seasonally adjusted number of registered unemployed in June rose by 996 to 4.88m. The number of workers on permanent contracts also fell compared with both the previous year and the month before, another sign that Spain has yet to enter a new phase of lasting job growth. (…)

The discrepancy between the registered employment data published monthly by the labour ministry and the more closely watched survey released by the statistics office has long been a topic of controversy in Spain. Experts say the difference is largely the result of the fact that many unemployed have little incentive to register with employment offices, for example because they are too young to claim benefits.



France, Spain, Italy Drag on Car Market

Europe’s car market is struggling to get out of reverse gear with sharp declines in new-car registrations in France, Spain and Italy in June.

In France, registrations fell 11% in the first half of the year, putting the proxy for new-vehicle sales on course for their lowest level since 1997.

The overall French market for passenger cars fell 9% in June from a year before. Adjusted for an equivalent number of working days, the year-over-year decline in June would have been 4.4%.

In Spain, new-car registrations slid 4.9% in the first half.

Italy saw a drop similar to that of France, with registrations down 10% at 731,203 units between January and June.



Germans Let Cars Age as Consumers Halt Buying in Crisis

Cars on German roads are older than they’ve ever been as consumers balk at replacing aging models with new ones amid Europe’s sovereign-debt crisis.

Registrations of new models in the country slumped 4.7 percent in June, the fifth decline this year, leading to an 8.1 percent drop for the first half of 2013 to 1.5 million vehicles, according to data released today from Germany’s motor vehicle office, KBA.

The lack of buying meant cars are 8.7 years old on average, a new high and a full year older than the pre-crisis level in 2007, the VDA, Germany’s auto-industry association, said today.

Maruti Posts Decline in Sales

Maruti Suzuki, the India’s largest car maker by sales, posted its sixth straight drop in monthly sales in June, as rising fuel prices and high loan rates continued to weigh on purchasing decisions by customers.

Total sales at Maruti fell 13% in June to 84,455 vehicles from 96,597 a year earlier. Sales in the local market dropped 7.8% to 77,002 vehicles, while exports plunged 43% to 453 vehicles.

Maruti—the biggest overseas unit of Japan’s Suzuki Motor Corp.–is considered the benchmark of the vitality of India’s car market as the company sells small cars, which comprise about three fourth of overall car sales in Asia’s third-biggest economy.

Revitalized Car Industry Cranks Up U.S. Exports

The U.S. auto industry, in tatters just four years ago, is emerging as an export powerhouse, driven by favorable exchange rates and labor costs in a trend experts say could drive business for many years.

(…) More competitive labor costs and restructurings that closed unproductive factories have made American auto plants tougher competitors in the global market. Some are also looking at U.S. production as a way to serve booming emerging markets. (…)

U.S.-made cars are being shipped to China, the world’s largest auto market, Saudi Arabia, the second largest destination for U.S.-made cars behind Germany, and South Korea, which now has a free-trade agreement with the U.S. (…)

Labor agreements paved the way for the two auto makers to hire thousands of workers who earn $14 an hour, about half that of veteran workers. Ford, which restructured without government intervention, got much the same terms from the United Auto Workers union as its crosstown rivals.

The leaner U.S. industry also contrasts with Europe and Japan, which are struggling with too much capacity, rising labor costs and shrinking domestic demand.

The average cost of a U.S. auto worker’s pay and benefits was $38 an hour in 2011, compared with $60 in Germany and $37 in Japan, according to the Center for Automotive Research. That’s up only $3 an hour from 2007. In Germany, the per-hour compensation has jumped $14 in the same period; in Japan, it is up $12. These trends have encouraged German and Japanese auto makers to boost exports from their U.S. factories. (…)

Forces Converge in Emerging Markets

Countries from Turkey to Brazil to China are getting hit by a brutal combination of events, as economies slow, investors pull out cash and protesters take to the streets—all fresh reminders that these markets can be difficult places to try to make money.