NEW$ & VIEW$ (13 DECEMBER 2013)

U.S. Retail Sales Rose 0.7%

Consumers spent more freely in November, buoying hopes that economic growth could accelerate in the months ahead.

Retail sales rose a seasonally adjusted 0.7% in November from October, marking the biggest gain since June, the Commerce Department said Thursday. The prior month’s gain was revised up to 0.6% from 0.4%. (…)

In addition to strong auto sales, the report also showed that consumers spent freely last month on furniture, electronics and building materials. Retail sales were up 4.7% from the same period last year, the largest annual gain since July.

The improvement prompted several forecasters to upgrade their predictions for economic growth in the final three months of the year. Economists at Barclays raised their estimate to a 2.2% annual rate from 2%, while J.P. Morgan Chase economists boosted their forecast to 2% from 1.5%. (…)

 

It Wasn’t Holiday Spending That Boosted Retail Sales

When you just look at categories where people buy gifts, such as electronics, clothing and department stores and even add in online retailers, and exclude car dealers, gas stations and restaurants, sales were up just 2.8% in November from a year earlier. That represents the weakest nonrecession November in at least 20 tears and compares to a 4.7% gain for total retail sales.

(…)  maybe it just means that more people decided to get their holiday shopping done in December. And if that holds true, it means December’s retail sales could be a blockbuster.

Sales of motor vehicles & parts led the increase with a 1.8% gain (10.2% y/y). Furniture & electronics/appliance store sales jumped 1.1% (8.2% y/y) following a 2.2% October surge.

Is The Consumer Slowing Down?

Written by Lance Roberts

(…) The problem with any single data point is that it obscures the trend of the data, as shown in the chart below, which is more telling of the overall strength or weakness of the consumer.  

The chart above is the 12-month average of non-seasonally adjusted retail sales data.  This eliminates all of the questionable gimmickry of the seasonal adjustments to reveal the underlying trend of actual retail sales data.  Surging asset prices have done little to boost retail sales which have stagnated in recent months just above the level which has normally been indicative of recessionary drags in the economy.  (…)

But that helps:image

U.S. Business Inventories Continue to Climb

Total business inventories increased 0.7% in October (3.6% y/y) following a 0.6% September gain. These inventories accompanied a 0.5% rise in business sales (3.9% y/y) after September’s 0.3% increase. As a result, the inventory-to-sales ratio remained at 1.29, where it’s been since April.

In the retail sector, inventories advanced 0.8% (6.1% y/y) in October, including a 2.1% jump (11.5% y/y) in motor vehicles. Inventories excluding autos rose 0.2% (3.6% y/y) in October. Inventories of furniture, electronics and appliances rose 0.4% (-1.5% y/y) while building materials slipped 0.2% (+2.7% y/y).

Euro-Zone Jobs Market Stabilizes

The euro-zone jobs market stabilized in the six months to September, according to employment figures, bringing an end to a long decline in the number of people at work in the 17 countries that use the euro.

The European Union’s statistics agency said that on a seasonally adjusted basis, 145 million people were in work across the currency area during the third quarter, a figure unchanged from the previous period. Eurostat also revised its figures for the second quarter, and now calculates that there was no change in employment levels, having previously estimated there was a 0.1% decline.

In Germany, employment levels were up 0.6% on the same period last year, while in Greece they were down 2.9%. Indeed, seven of the euro zone’s members were still experiencing a decline in employment during the three months to September.

Saudi Arabia Exposes OPEC’s Fissures

(…) As The Wall Street Journal’s crack OPEC team reports, Saudi Arabia has essentially promised to steady markets for the past two years. But now, with pressure growing over a possible output cut to steady markets, the Saudis are signaling they are no longer willing to go it alone. (…)

Riyadh sees no reason why it and it alone should have to shoulder the burden of trimming and this week’s apparent withdrawal from its role as swing producer is the clearest sign yet of its deep concern.

This month’s OPEC meeting in Vienna was, on the face of it, a cut-and-dried affair. For reporters, the focus was on Iran more than the collective, as the decision to stand pat on overall production was widely expected.

But behind closed doors great rifts are opening up, with Saudi and its Gulf neighbors in one camp, Iran in another and Iraq in a third. Each has issues, both oil-related and political, with the others. (…)

House Approves Budget Pact

The House passed a budget bill designed to avoid a government shutdown next month and relax spending limits in the next two years.

The bill passed with a wide bipartisan margin, on a vote of 332-94. Voting for the measure were 169 Republicans and 163 Democrats, while 62 Republicans and 32 Democrats voted against.

Approval of the bill, which is expected to pass the Senate next week, clears the way for a less-glamorous stage of budgeting as lawmakers set out to make line-by-line spending decisions before current funding runs out Jan. 15. (…)

“Elections have consequences,”‘ said Mr. Ryan, who was his party’s 2012 vice-presidential nominee.  (…)

There is no guarantee that the bipartisan deal signals the end of brinkmanship or that this episode of bipartisanship will reach into other areas. The most immediate test will be the next month’s work on appropriations legislation, which must be enacted before Jan. 15.

The agreement sets only the overall spending targets for domestic and defense programs: $1.012 trillion in the current fiscal year, which is more than the $986 billion provided in 2013. Spending this year would have been even lower—$967 billion—had the sequester cuts taken effect. Under the deal, it would increase to $1.014 trillion in the year starting next Oct. 1. (…)

Goldman Sachs Goes Against Consensus in Dollar Call

Goldman Sachs Group Inc.’s Thomas Stolper, who correctly predicted the dollar’s slide against the euro this year, is deviating from the consensus that the greenback will be among the best currencies to own in 2014.

The dollar will weaken through 2014, reaching $1.40 per euro for the first time since October 2011, Goldman’s London-based chief currency strategist said. The mean estimate in a Bloomberg survey of 46 contributors is for a 7 percent rally to $1.28 per euro from $1.3758 today.

 

NEW$ & VIEW$ (30 OCTOBER 2013)

U.S. Retail Sales Slip But Spending less Autos Firms

Retail sales and food services posted a 0.1% slip (+3.2% y/y) during September following an unrevised 0.2% August rise. A 2.2% decline (+5.1% y/y) in motor vehicle purchases held back total sales for the month. It was consistent with the earlier reported fall in unit vehicle sales. Retail sales excluding autos rose 0.4% (2.8% y/y) after a 0.1% August uptick. A 0.3% rise had been expected.

Sales at general merchandise stores gained 0.4% (0.6% y/y) after a 0.2% August decline. Sales at furniture and electronics stores also rose 0.4% (3.0% y/y) on the heels of a 0.6% rise. Sales of nonstore retailers gained 0.4% (8.9% y/y) following a 0.3% August increase. Sales of building materials and garden equipment ticked up 0.1% (5.8% y/y) following their 0.3% shortfall. Countering these gains was a 0.5% decline (+2.7% y/y) in apparel store sales after a 0.2% August drop.

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Morgan Stanley economist Ted Wieseman said that post-shutdown auto-sales numbers still look weak and traffic at shopping malls remained slow into the second half of the month. “We’re not off to a strong start in the fourth quarter,” Mr. Wieseman said. (WSJ)

HALLOWEEEN SPENDING (Bus. Week)

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Home Prices Rose in August, but Pace of Gains Is Slowing

U.S. home prices continued to advance in August but increases are decelerating, according to the S&P/Case-Shiller home-price report released Tuesday.

Home prices in August were up 12.8% from the year-earlier period, the fastest pace since early 2006, according to the Standard & Poor’s/Case-Shiller home-price index. Of the 20 cities in the main index, 13 posted double-digit annual gains.

However, monthly details of the Case-Shiller report show some softening. Home prices rose 1.3% in August, the smallest monthly gain since March, as 16 of the 20 cities saw slower growth. After seasonal adjustments, home prices in August rose 0.9%, below a recent peak of 1.9% in March.

Land Prices Hit the Brakes

The slowdown in sales of newly built homes since last summer has sapped momentum from the land market, as home builders are starting to balk at paying increasingly lofty prices for lots.

Nationally, lot prices have gone from a gain of nearly 7% in the first quarter of 2013 compared with the previous quarter, to gains of about 6% in the second quarter and 4% in the third quarter, according to a survey of land buyers and sellers in 55 U.S. markets conducted by housing-research and advisory firm Zelman & Associates. (…)

The land-price increases went hand-in-hand with the rising prices of new homes. The average price of a new home in the U.S. reached an all-time high of $337,000 in April, census data show. During the housing crisis, the average dipped as low as $245,000 in January 2009.

Wholesale Prices Tame as Fed Meets

The producer-price index, which measures how much companies pay for everything from footwear to computers, fell 0.1% in September from August, the Labor Department said Tuesday. The decline was primarily the result of an 18% decline in fresh-vegetable prices.

Excluding food and energy components, core wholesale prices rose 0.1%. Compared to the same period last year, September wholesale prices rose by 0.3%, the lowest annual level since October 2009.

German Unemployment Rises a Third Month as Growth Slows

The number of people out of work climbed a seasonally-adjusted 2,000 to 2.97 million, after gaining by a revised 24,000 in September, the Nuremberg-based Federal Labor Agency said today. Economists predicted no change, according to the median of 36 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.9 percent.

Unemployment in East Germany rose by 2,000, leaving the jobless rate unchanged at 10.3 percent. The number of people out of work in West Germany was unchanged and the rate stayed at 6.1 percent. The national rate of 6.9 percent is near the lowest level in two decades.

Euro-Zone Banks Tighten Lending Standards

Euro zone commercial banks tightened their standards on new loans to private-sector firms during the third quarter, the European Central Bank said Wednesday, suggesting the region’s recovery remains hampered by a lack of funds to finance new spending, investment and hiring. (…)

The net percentage of banks reporting higher lending standards to nonfinancial businesses stood at 5% in the third quarter, the ECB said, compared with 7% in the second quarter. The figures are calculated by subtracting the percentage of banks reporting looser standards on new loans from those saying that they have made it tougher for companies and households to obtain them.

The findings “confirmed the ongoing stabilization in credit conditions for firms and households in the context of still weak loan demand,” the ECB said.

The sluggish economy continued to weigh on business demand for new credit, according to the report. Demand for housing loans and consumer credit rose slightly in the third quarter from the second, the ECB said.

Banks in the region expect loan demand to pick up across all categories in the fourth quarter.

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Troubled loans double at Europe’s banks
Non-performing loans approach €1.2tn as review of assets looms

A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. (…)

He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012. (…)

PwC’s figures, which are derived from lenders’ accounts, showed that Germany, the EU’s biggest economy, had the highest amount of non-performing loans at the end of 2012, at €179bn, unchanged on the previous year’s number.

Spain had €167bn of NPLs, up sharply from the €136bn recorded for 2011. Britain’s €164bn of non-performing loans represented a decline from €172bn in 2011. (…)

EARNINGS WATCH

296 companies representing 66.0% of S&P 500’s market-cap have reported so far. Surprise is at 64% on earnings (63% last week) and 31% on revenues (30%). RBC Capital’s blended earnings growth for Q3 is now +4.9% (4.6% last week).

 

NEW$ & VIEW$ (30 AUGUST 2013)

This is a long post but I think well worth reading during the long week-end.

 

Second-Quarter GDP Revised Upward

The U.S. economy entered the second half of the year on firmer footing than previously estimated, with stronger growth, an uptick in corporate profits and consumers feeling better amid a rebound in housing.

[image]Strong exports, improved business investment and solid consumer spending helped U.S. gross domestic product grow at a 2.5% rate in the second quarter, the Commerce Department said Thursday. That marked a significant improvement both from the first three months of the year, when the economy grew at a 1.1% annual rate, and from the government’s earlier, preliminary estimate of second-quarter growth of 1.7%. The latest report means U.S. per capita economic output has finally—four years after the end of the recession—returned to the pre-crisis peak it reached in late 2007.

BMO Capital offers a good summary:

The good news is, the U.S. economy grew more than initially expected a month ago. The first stab at the Q2 real GDP on July 31st was 1.7% a.r. Then the trade numbers came out and wow, the view changed and it looked like GDP grew in the neighborhood of 2½% a.r. Then, as the
days went by, more data on inventories and consumer spending caused estimates to be trimmed, leaving consensus and us at around 2.2%-to-2.3% for the second quarter. Now, gentle reader, it looks like we should’ve stuck with the trade data as real GDP did rise 2.5% a.r. in Q2, the largest increase in nearly one year. That and the fact that consumer spending wasn’t revised at all (still 1.8% a.r.) is encouraging. Exports were revised up nicely, and inventories added more to the bottom line.

But perhaps the biggest surprise was the huge swing in nonresidential investment in structures (factories, buildings, etc)—initially pegged at 6.8% and is now looking like 16.1%. One should, perhaps, regard this with some skepticism, particularly as private nonresidential construction spending has been soft over the past year. Offsetting all of these pluses was a larger-than-estimated drop in government spending.

But aside from the stronger headline, underlying demand isn’t what I’d describe as … fabulous. It’s alright, but not fab. Final domestic demand (GDP excluding inventories and net exports) was trimmed to +1.9% a.r. from +2.0% but this also takes into account government cutbacks. Private final sales (GDP excluding inventories, net exports  and government) was unchanged at 2.6%, which is not fabulous but still decent.

Doug Short illustrates the difference between “fabulous” and “alright”. Quite a step down from a 3.3% cruising speed to 1.8%.

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The only thing not revised up was consumer spending, 70% of the economy. There, the downshifts were from 5.5% in the late 1990’s to 3-4% in the mid-2000’s to the current 2% pace.

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But that is in spite a real disposable income per capita no longer growing. How long can a 2% spending pace be sustained without income growth?

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In the second half of 2012, consumer spending got support from a sharp drop in gas prices. Ain’t happening just yet.image

Could that help? Saudi Arabia Set to Pump 10.5M Barrels of Crude a Day

Saudi Arabia is set to pump 10.5 million barrels a day of crude in the third quarter, a million bpd increment over the second quarter and its highest quarterly level of production ever, leading U.S. energy consultancy PIRA said. (…)

“This is the tightest physical balance on the world oil market I’ve seen for a long time.” PIRA reported its estimate to clients earlier this week.

Libyan oil output has fallen from 1.4 million bpd to just 250,000 bpd after protesters shut oilfields. (…)

Ross said about 400,000 bpd of the incremental supply would go to feed domestic Saudi power usage during peak summer demand for air conditioning. (…)

U.S. Prepares for Solo Strike Against Syria

The Obama administration laid the groundwork for unilateral military action, a shift officials said reflected the U.K.’s abrupt decision not to participate and concerns Bashar al-Assad was using the delays to disperse military assets.

France ready for Syria strike without UK
Hollande to discuss next move with Obama
 

Hmmm…

This morning:

Consumer Spending in U.S. Increase Less Than Forecast as Income Gains Slow

Consumer purchases, which account for about 70 percent of the economy, rose 0.1 percent after a revised 0.6 percent increase the prior month that was larger than previously estimated, the Commerce Department reported today in Washington.

Sad smile Adjusting consumer spending for inflation, purchases were unchanged in July compared with a 0.2 percent increase the previous month, according to today’s report.

The Commerce Department’s price index tied to spending, a gauge tracked by Federal Reserve policy makers, increased 1.4 percent in July from the same period in 2012. The core price measure, which excludes volatile food and energy categories, rose 1.2 percent from July 2012.

U.S. HOUSING COOLING?

Bidding Wars Continue to Tumble as Housing Market Rebalances

Competition in the US residential real estate market dropped for the fourth consecutive month in July, underscoring the market’s overall trend towards balance. Nationally, the percentage of offers written by Redfin agents that faced multiple bids fell to 63.3 percent in July, down from 68.6 percent in June, and 75.7 percent at the peak in March.image

The slide in competition reflects multiple factors that are beginning to erode sellers’ market dominance across the nation:

Buyer Fatigue: First and foremost, Redfin agents report that buyers in the nation’s most competitive markets are growing weary. (…)

Budgets: The combined effect of rising prices and mortgage rates continues to price buyers out of the market, reducing competition for available inventory. Nationally, the median home price per square foot for single-family homes was up 18.7 percent in July from the year before and average weekly 30-year fixed mortgage rates in July were up about one percentage point from May. For a $250,000 mortgage, this jump in prices and mortgage rates translates to a rise in mortgage payments of more than $300 per month.image

Growing Inventory: Rising prices and mortgage rates are also driving homeowners to list their homes in greater numbers, which is boosting options for buyers. As of June, the number of single-family homes for sale in Redfin markets was up 7.8 percent from March and the national months of supply of inventory grew from 2.7 in May to 3 in June. Some homeowners who were underwater on their mortgages are becoming more confident that their homes can fetch a fair price and are deciding to list. Furthermore, our agents in San Francisco and Chicago report that mortgage rates are also leading homeowners to list. Homeowners, too, want to capitalize on historically low rates and move up before rates increase further. (…)

Further Cooling on Tap for Autumn: Looking forward, we expect that bidding wars will continue to cool slightly during the autumn months. The real estate market was atypically hot during autumn of 2012 because buyers were rushing to lock in low mortgage rates once home prices stabilized. Now that rates are higher, home prices continue to rise, and more inventory is coming available, buyers are likely to battle for homes less often.(…)

EUROTURN?

 

Euro-Zone Adds 15,000 Jobs

The number of people unemployed in the euro zone fell in July for the second month in a row, adding to tentative signs that a modest recovery under way in the currency bloc’s economy is starting to erode its sky-high levels of joblessness.

Eurostat said the annual rate of consumer-price inflation fell to 1.3% in August from 1.6% in July, putting it considerably below the central bank’s target area of a little below 2%.

Sad smile  German Retail Sales Unexpectedly Drop in Sign of Uneven Recovery

German retail sales unexpectedly fell for a second month in July, signaling an uneven recovery in Europe’s largest economy.

Sales adjusted for inflation and seasonal swings dropped 1.4 percent from June, when they declined 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted an increase of 0.6 percent, according to the median of 27 estimates in a Bloomberg News survey. Sales climbed 2.3 percent from a year earlier.

These are big drops!

Fingers crossed Eurozone sales rise marginally in August

Retail sales in the eurozone rose for the first time in nearly two years in August, Markit’s retail PMI® data showed. The value of retail sales increased since July, albeit only marginally. Employment at retailers also rose slightly following a 16-month sequence of decline. National differences in sales trends remained, however, as Germany registered further strong growth, France achieved a back-to-back modest rise and Italy posted an ongoing sharp decline.

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Germany’s retail sector continued to drive the overall increase in eurozone retail sales. Sales rose on a monthly basis for the fourth successive survey, the longest sequence of growth in 17 months.
Moreover, the rate of expansion was little-changed from July’s two-and-a-half year high.

Retail sales in France rose for the second month running in August, and at the strongest rate since October 2011. Prior to July, sales had fallen for a survey-record 15-month period.

Italy remained the weak link in the eurozone retail recovery mid-way through Q3. Sales fell for the thirtieth successive month, and the rate of
contraction remained sharp despite easing since July.

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Retail sales in the eurozone continued to decline on an annual basis. That said, the rate of contraction eased to the slowest since October 2011. A further sign of the nascent recovery in the eurozone retail sector was a rise in employment in August. This mainly reflected recruitment at German retailers, while retail employment in France stabilised following a prolonged period of cuts and Italian retailers shed staff at the slowest rate since August 2010.

Pointing up imageAverage purchase prices paid by retailers for new goods rose at a sharper rate in August. By product sector, food & drink again posted the steepest rate of inflation, followed by clothing & footwear. Among the three national retail sectors covered, Germany posted the steepest increase in average input costs. Meanwhile, gross margins across the eurozone retail sector declined at the slowest rate since April 2011.

Note that the retail PMI is barely above 50 and has shown a very high volatility in recent years. The German engine remains fairly sound but the Italian and French engines remain unreliable. See below on France.

DOUCE FRANCE from BloomberBriefs:

President Francois Hollande’s pension reforms will probably fail to eliminate the pension deficit or make the French economy more
competitive. France’s government spends the most in the euro area relative to its GDP and has the third-highest labor costs.

People under the age of 40 will have to work beyond 62 to earn a full
pension. Contributions by both workers and employers will increase by
0.3 percentage point in 2017, though the government will cut other payroll charges in an effort to contain labor costs. The pension system is still likely to have a deficit of 13.6 billion euros in 2020, instead of 20.7 billion euros, even if all the announced measures are adopted, according to the French pension council.

The proportion of population over the age of 65 is forecast to climb to 18
percent next year from 17.1 percent in 2012. France has the third-highest
share of labor costs allocated to employers’ social contributions, according to Eurostat, at 34.2 percent, compared with 21 percent in Spain. The nation is ranked the 21st most competitive economy in the world, compared with sixth for Germany, according to the Global Competitiveness Index.

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The government may be forced to introduce additional spending cuts and
tax increases to meet its commitment to balance the budget by 2017. It is
likely to miss the target of narrowing the deficit to 3.7 percent of GDP this
year from 4.5 percent, having abandoned the original target of 3 percent.
France has failed to balance its budget since 1974, and the shortfall has
averaged 3.9 percent of GDP over the last decade.

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The government claims two-thirds of its austerity measures will come
from changes to the tax system this year, with 20 billion euros in tax
increases planned, compared with 10 billion euros in spending cuts. Taxes
accounted for 45.9 percent of GDP in 2011, compared with a euro-area
average of 40.8 percent. Public spending in France amounts to 57 percent
of GDP, the highest level in the euro region.

Red heart EPSILON THEORY: CENTRAL BANK COMPETENCE OR LACK THEREOF

U.S. equity markets have done well recently against flattening earnings, stable inflation rates and higher interest rates. Rising investors confidence has translated into absolute P/E ratios that are 10% above their historical mean and Rule of 20 readings that are unfavourable from a risk/reward ratio standpoint.

Earnings expectations for Q3 and Q4 look increasingly vulnerable. Can confidence stay high enough to offset “natural”, more dependable forces?

Ben Hunt’s latest note is highly relevant here:

(…) The shift in perceptions of Fed competence is being driven by opinion leaders’ public statements questioning the Fed’s communication policy. Here’s the critical point from an Epsilon Theory perspective: these public statements are not questioning the content of Fed communications; they are questioning the USE of communications as a policy instrument in and of itself. In exactly the same way that a magician immediately becomes much less impressive once you know how he does his trick, so is the Fed much less impressive once you start focusing on HOW policy is being communicated rather than WHAT policy is being implemented.

For example, this past Saturday Jean-Pierre Landau, a former Deputy Governor of the Bank of France and currently in residence at Princeton’s Woodrow Wilson School, presented a paper at Jackson Hole focused on the systemic risks of the massive liquidity sloshing around courtesy of the world’s central banks. For the most part it’s a typical academic paper in the European mold, finding a solution to systemic risks in even greater supra-national government controls over capital flows, leverage, and risk taking.  But here’s the interesting point:

Pointing upZero interest rates make risk taking cheap; forward guidance makes it free, by eliminating all roll over risk on short term funding positions. … Forward guidance brings the cost of leverage to zero, and creates strong incentives to increase and overextend exposures. This makes financial intermediaries very sensitive to “news”, whatever they are.”

Landau is saying that the very act of forward guidance, while well-intentioned, is counter-productive if your goal is long-term systemic stability. There is an inevitable shock when that forward guidance shifts, and that shock is magnified because you’ve trained the market to rely so heavily on forward guidance, both in its risk-taking behavior (more leverage) and its reaction behavior (more sensitivity to “news”). This argument was picked up by the WSJ (“Did Fed’s Forward Guidance Backfire?”) over the weekend, and it continues to get a lot of play. It’s an argument I’ve made extensively in Epsilon Theory, particularly in “2 Fast 2 Furious.”

Landau’s paper is probably the most public example of this meta-critique of the Fed, but I don’t think it’s been the most powerful. Highly influential opinion leaders such as David Zervos and John Mauldin have recently written in their inimitable styles about the Fed’s use of words and speeches as an attempt at misdirection, as an ultimately misguided effort to hide or sugarcoat actual policy. FOMC members themselves are starting to question the Fed’s reliance on communications as a policy instrument, as evidenced by the minutes released last week. Combine all this with the growing media focus on the “battle” between Yellen and Summers for the Fed Chair – a focus which will create policy disagreements between the candidates in the public’s perception even if no such disagreements exist in reality – and you have a recipe for accelerating weakness in perception of Fed competence.

The shift in perception of non-Fed central bank competence, especially of Emerging Market central banks, is even more pronounced. Actually, “competence” is the wrong word to use here. The growing Narrative is that Emerging Market central banks are powerless, not incompetent. The academic foundation here was made in a paper by Helene Rey of the London Business School, also presented at Jackson Hole, where the nutshell argument is that global financial cycles are creatures of Fed policy … period, end of story. Not only is every other country just along for the ride, but Emerging Markets are kidding themselves if they think that their plight matters one whit to the US and the Fed.

Just as malcontents with the exercise of Fed communication policy may be found within the FOMC itself, you don’t have to look any further than Emerging Market central bankers and finance ministers themselves for outspoken statements protesting their own impotence. Agustin Carstens, Mexico’s equivalent to Ben Bernanke, gave a speech on the “massive carry trade strategies” caused by ZIRP and pleaded for more Fed sensitivity to their capital flow risks. Interesting how the Fed is to blame now that the cash is flowing out, but it was Mexico’s wonderful growth profile to credit when the cash was flowing in. South Africa’s finance minister, Pravin Gordhan, gave an interview to the FT from Jackson Hole where he bemoaned the “inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment” now that the Fed is talking about a Taper. Christine Lagarde got into the act, of course, calling on the world to build “further lines of defense” even as she noted that the IMF would (gulp!) have to stand in the breach as the Fed left the field. To paraphrase Job: the Fed gave, and the Fed hath taken away; blessed be the name of the Fed.

I’ll have a LOT more to say about all this in the weeks and months to come, but I thought it would be useful to highlight these shifts in Narrative structure in real-time as I am seeing them. Informational inflection points in the market’s most powerful Narratives are happening right now, and this is what will drive markets for the foreseeable future.

Right on cue:

India’s Central Bank Governor Concedes to Missteps

It is rare for officials to admit that their policies have been less than perfect, but India’s central bank governor Duvvuri Subbarao did just that late Thursday, in his last public speech as head of the Reserve Bank of India.

Mr. Subbarao, whose five-year term as RBI governor ends Sept. 4, said the bank could have done a better job of explaining the intentions behind the various steps it has taken in the last three months to support India’s declining currency.

“There has been criticism that the Reserve Bank’s policy measures have been confusing and betray a lack of resolve to curb exchange-rate volatility,” Mr. Subbarao said at a lecture in Mumbai. He said that the RBI is unequivocally committed to curbing volatility in the rupee. “I admit that we could have communicated the rationale of our measures more effectively,” he added.

Ghost Über-bear Albert Edwards will scare you even more, courtesy of ZeroHedge:

(…) The fabulously entertaining Zero Hedge website keeps running the charts showing that the evolution of bond yields and equity markets this year resembles closely what happened in 1987 (see below). Now we should all take these comparisons with a pinch of salt, but what if…

I remember the 1987 crash well. I was working at Bank America Investment Management as an economist/strategist at the time. Of course, the immediate trigger for the equity crash was the fear of US recession caused by the fear that the US would have to hike rates sharply to defend the dollar. Those fears were triggered by Germany raising rates at a time when the G6 had recently agreed to stabilise the US dollar at the February 1987 Louvre Accord, after two years of sanctioned dollar weakness. Investors got into a tizzy about recession, jumping many steps ahead of the game. But, in the wake of a run-up in US bond yields that year, equities were richly priced and so very vulnerable to recession fears, however unfounded. And then the machines took over. That couldn’t possibly happen again, or could it?

Therein lies one of the key lessons I learnt in my 30 years in the markets. Pointing up It is not just to try to predict what will happen, but to second-guess what the markets fear might happen. Indeed a recession did not ensue and the 1987 crash turned into a tremendous buying opportunity.

Edwards then links with the EM debacle:

But another shoe will surely drop soon. China has gone off the radar in the last month, as the data have firmed, but it is set to return centre stage. Our China economist Wei Yao, thinks “this sudden turn-around is similar to that during Q4 2012, when the multi-quarter deceleration trend reversed shortly after the policy stance shifted to “cautious” easing. But that growth pick-up did not last for more than one quarter.” A continued slowdown in credit growth will strangle the current buoyancy of house price inflation (see charts below), with property sales growth having already peaked. Wei expects the Chinese data to relapse in Q4.

“Many people are writing about a Chinese credit crunch and banking crisis. I disagree. The authorities will have a choice as to whether to accept such a crunch or devalue and launch a new credit cycle to keep the balls in the air once again. Devaluation is the preferred option…..So the (recent) spike in SHIBOR was not a tremor indicating the earthquake of a banking crisis, but a tremor of a forthcoming RMB devaluation.” That will be the biggest domino of all to fall. And, as with the 1987 crash, markets will react to the fear of the devaluation and the deflation it will bring to the west, rather than the event itself. (…)

The emerging markets “story” has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000. Ghost

Indian Growth Slows to Four-Year Low as Rupee Drop Dims Outlook

Gross domestic product rose 4.4 percent in the three months through June from a year earlier, compared with 4.8 percent in the prior quarter, the Statistics Ministry said in New Delhi today. The median of 44 estimates in a Bloomberg News survey was for a 4.7 percent gain.

Emerging Markets Raise Rates

Indonesia raised its benchmark rate by half a percentage point on Thursday, one day after a half-point increase by Brazil and a week after a rate increase by Turkey. Other developing economies are under mounting pressure to tighten credit to support their weakening currencies. Brazil’s central bank hinted at further increases to come.

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(…) The value of India’s rupee has fallen by a fifth against the U.S. dollar since the beginning of May. The Reserve Bank of India’s initial response was to stop easing monetary policy, holding benchmark interest rates steady in June and July. When the rupee kept falling, the RBI limited the amount of money banks could borrow from it.

Investors saw that as effectively raising interest rates, at a time when India’s economy was growing at its slowest pace in a decade. Bonds and stocks sold off after the RBI’s steps. Yields on both short- and long-term rupee bonds jumped.

Some analysts say the incoming Indian central-bank governor may have no choice but to raise interest rates sharply, much as Fed Chairman Paul Volcker did in the U.S. in the 1980s.

South Africa is in a similar bind. Authorities want to halt declines in its currency, which has lost nearly a quarter of its value against the dollar over the past year but are reluctant to smother already weak growth.

Inflation reached an annual rate of 6.3% in July, but when South African central-bank officials meet to discuss rates again next month, they will be loath to raise rates in an economy struggling to meet forecasts for 2% growth this year, analysts say.

Some investors worry that they could see a repeat of the Asian financial crisis of 1997-98, or the stampede out of emerging-market currencies a decade later in 2008. But there are reasons to believe it won’t be that bad.

Pointing up Most emerging-market currencies today are allowed to float, so central-bank officials don’t have to defend a fixed exchange rate as they did during the Asian crisis. The government debt levels of countries like Indonesia, India and Brazil aren’t particularly high and are denominated mainly in local currency.

Not just in the U.S.: Elections Complicate Economic Decisions for India,Indonesia Upcoming elections in India and Indonesia, two of the countries hardest hit by the selloff in emerging-market assets, are making it more difficult to make the tough decisions both countries need.

Pointing up  Ft Alphaville has a great post on the EM situation:

From a recent Citi presentation, a chart stressing the potential risk of negative-feedback loops in the options available to those emerging market countries now trying to stem capital outflows and defend their currencies:

The chart makes an important point and is self-explanatory, but it isn’t comprehensive.

Notably excluded is the imposition of capital controls on outflows, which thus far have been mostly resisted with the exception of some limited measures in India. (…)

Also unmentioned is the option to lobby the central banks of developed countries, encouraging them not to tighten policy too quickly. This option appears to have been pursued with some vigour at Jackson Hole last weekend, but probably won’t carry much weight at the next FOMC meeting.

So the immediate options, at least those of a sweeping nature, are unattractive. And the possibility that emerging market central banks and governments will overreact and excessively tighten policy is a singular concern. (…)

But the broader issue is that it remains quite difficult to gauge the severity of the year’s EM currency and asset selloff — and to know whether it is more attributable to an acute market crisis versus a more fundamental economic shift.

Among the various possible causes normally cited are the Fed’s talk of tapering; the unwinding of carry trades; Chinese rebalancing; the pass-through effects of this rebalancing on commodity-exporters (Australia, South Africa, various countries in South America); the end of the commodity super-cycle generally; the limits to growth in countries that procrastinated on necessary structural changes; continued sluggishness by developed-country consumers; and dwindling investor patience with widening current account and budget deficits.

The causes aren’t mutually exclusive, of course, and some influence the others in various ways.

It’s also tough to know, at least for the inexpert or non-obsessive follower of international economics, how prepared the affected countries are to handle it.

The current situation — has it reached the level of “crisis” yet? — inevitably will have a similar feel to the crises of the 1990s given the reversal of hot money flows, the threat from speculators attacking various currencies, and even the involvement of some of the same countries. But so much is different, and most of the differences are positive.

As our colleagues David Pilling and Josh Noble wrote in Wednesday’s FT:

Back then, many countries had fixed exchange rates and their companies were heavily exposed to foreign debt. As currencies came under pressure, central banks desperately spent reserves to defend them. When the peg finally broke, currencies collapsed and companies’ foreign-denominated debts soared.

Thailand, Indonesia and South Korea had to seek help from the International Monetary Fund. Partly as a result of now largely discredited IMF austerity packages, they subsequently plunged into deep recession. Indonesia, the worst affected, lost 13.5 per cent of GDP in a single year. Suharto, the dictator, was toppled.

Today the picture is very different. Asian economies have flexible exchange rates, much higher reserves and sounder banking systems. India, for example, has reserves to cover seven months of imports compared with only about three weeks when it had its own “come-to-IMF” moment in 1991.

Nor, this time around, has India’s central bank wasted much firepower on defending the currency. Instead, it has largely allowed the rupee to slide. A weaker currency should boost exports and slow imports, closing the current account deficit automatically.

And so it might, hopefully without much lasting damage. We would also note the still-favourable growth differentials between developed and emerging market countries, which didn’t exist in the 1990s.

Admittedly this doesn’t preclude a new crisis or crises of a different flavour, and do read the full FT piece for the thoughts of more-pessimistic commentators, with careful attention to the points of Ruchir Sharma. Still, for the moment the problems seem at least endurable, if not actively manageable.

And although these countries’ immediate choices are regrettably limited, there is also a more hopeful longer-term story that can be told about this year’s events.

It’s mainly about how (some of) the lessons of the 1990s and the recent developed-world financial crisis have been heeded. In addition to the ability of emerging market currencies to respond to market forces, the relevant Asian countries also better understand the need for multi-lateral coordination and support during crises.

Furthermore, as economists from Standard Chartered explained, it’s likely that investors have become more discerning about the details of countries’ external funding problems. The economists looked at the short-term external debt situations for India, Indonesia, and Thailand — the three countries involved running a current account deficit — and found that “in all three cases the vast majority of the debt due within one year does not come with serious financing risk”.

More broadly, we’ve been especially interested in tracking the continued expansion of local-currency debt and capital markets, where tremendous progress has been made in the last decade and a half, especially in sovereign and corporate bond markets.

They’re important for a few reasons.

Companies in emerging markets find it easier to borrow in their own currencies, and are better able to hedge their debt if they rely on imports denominated in foreign currencies. Currency swings therefore become less threatening. (…)

Emerging market governments with sophisticated capital markets also have less need to build up massive stores of foreign currency reserves, a process that exacerbated the unnatural problem of global imbalances in the decade prior to the crisis of 2008 — when too much capital flowed from developing countries to developed countries rather than the other way round.

And of course, robust local-currency debt and equity markets, when accompanied by sound governance practices, reduce the dependence on foreign bank lenders and lead to a more diversified base of stakeholders. (…)

International trade and capital flows collapsed after the financial crisis of 2008. Within Europe the balkanisation of financial markets has mostly remained in place. But as both Citi’s presentation and a helpful McKinsey report explain in detail, by 2012 capital inflows to emerging markets had returned nearly to their pre-crisis levels.

These inflows returned, however, mainly in the form of foreign direct investment and investments via capital markets rather than bank lending.

Foreign direct investment is already considered to be a more stable kind of inflow. And the progress in developing local-currency capital markets also indicates that the growth in portfolio flows will be less worrying in the future, if certainly not yet.

These were favourable trends. Despite the present slowdown, in time they are likely to resume course given the disproportionately shallower financial markets in developing countries.

Investors in local-currency emerging market debt have been shellacked this year, and clearly the FX markets are spooked. Maybe the selloff will accelerate and new balance of payments crises really are imminent. We don’t know: much depends on policy still being decided, especially given the recent introduction of heightened geopolitical risks. We certainly don’t mean to dismiss the possibility of a terrible outcome, especially for an individual country.

Fingers crossed For now, however, the problems appear both different in nature and smaller in scale, and unlikely to spread uncontrollably. If we’re right about that, then a plausible explanation is that the lessons of the 1990s haven’t gone entirely ignored. And if a number of emerging market countries are about to enter a grinding period of slower growth and structural adjustments, or to experience new financial strains, at least they do so better prepared. (…)

Japan inflation highest in five years
Weaker yen pushes up cost of fuel and electricity

Consumer price inflation in Japan rose to an annual rate of 0.7 per cent in July, its highest level in almost five years, as the effects of a weaker yen pushed up the cost of fuel and electricity.

Excluding fresh food, the all-items index rose by 0.7 per cent from a year earlier and by 0.1 per cent from June.

But excluding the cost of energy from the calculation brings the yearly CPI to minus 0.1 per cent. The prices of items such as housing, furniture, medical care and culture and recreation all fell from a year earlier, while charges for fuel, light and water rose by 6.4 per cent.

Other data released on Friday morning were positive. The jobless rate dropped to 3.8 per cent, from 3.9 per cent in June, while industrial production rose by 1.6 per cent on a yearly basis and 3.2 per cent on the previous month.

Household spending edged up 0.1 per cent from a year earlier, from a 0.4 per cent fall in June.

Signs of Japanese Investment Uptick Investment by Japanese companies has been a laggard in the nation’s economic recovery. But things could be turning, data showed Friday.

Industrial production jumped 3.2% on month in July, reversing a 3.1% downturn in June.

The government was keen to point out that much of the production seems to show companies are spending more on increasing production.

The output of capital goods, which includes machinery, was at its highest level on a seasonally-adjusted basis since May 2012, a Japanese official said. The official also pointed toward big jumps in the output of goods such as steam turbines and equipment used in the plastics industry – tentative signs that companies are investing in increasing capacity. (…)

Other data today added to a sense that companies’ optimism is returning. Japan’s Purchasing Managers’ Index rebounded to 52.2 in August from 50.7 in July. That’s not far off a high of 52.3 in June. New orders, a sign of renewed corporate activity, were strong.

Have a good one!

 

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:

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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.

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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.

WHY EARNINGS GROWTH MAY REMAIN SUBDUED:

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.)

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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.

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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.

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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.  (…)

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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)

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NEW$ & VIEW$ (4 JUNE 2013)

Sad smile  Weak Signs for Output

U.S. factories in May posted their worst month since the end of the recession, as weakness overseas overwhelmed a still-shaky manufacturing recovery at home.

(…) The ISM report showed weakness across the board, with current production declining, employment remaining stagnant, and new orders falling—an especially worrisome sign because it provides little hope for improvement in the months ahead. Brad Holcomb, chairman of the ISM’s manufacturing-survey panel, flagged the decline in new orders as particularly troubling. “I don’t recall the last time” more industries saw declines in new orders than growth, he said.

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“It’s not a glitch,” John Silvia, chief economist at Wells Fargo, said of Monday’s report. “It suggests that there is a more fundamental slowdown in the U.S. economy.”

Mr. Silvia estimates economic growth, as measured by gross domestic product, has slowed to 1.2% in the second quarter, from an already tepid 2.4% rate in the first three months of the year. (…)

Surprised smile  SURPRISE ISM

That report pushed the Citigroup U.S. Economic Surprise Index to its second-lowest reading since early February. The index — which measures the degree to which economists’ consensus estimates have been too optimistic or pessimistic about data releases – fell to negative-22.6. It has been in negative territory for all but two trading days since mid-April. (…)

It’s not just manufacturing data that have been weak. Jobless claims have risen in three of the past four weeks, economic growth during the first quarter was revised lower last week and inflation has slowed to a near standstill.

Auto  U.S. Car Sales Signal Plateau

Overall, consumers and businesses bought vehicles at an annualized rate of 15.3 million vehicles, according to researcher Autodata Corp., the fourth month this year that sales have exceeded a 15 million vehicle pace. However, May’s sales pace was only slightly above the average for the first five months of 2013.

In anticipation of another strong year, U.S. car makers are limiting their traditional summer shutdown to keep cranking out cars. Ford plans to increase its third quarter U.S. production by 10% from a year ago to 740,000 vehicles. (…)

Some auto makers are paying extra rebates to push dealers to increase sales, a practice known as stair-step incentives. For example, Chrysler dealers who met certain month-end sales goals were paid a rebate of $600 a vehicle, while Nissan dealers got up to $500 a vehicle for hitting its targets, according to dealers.

The payments can amount to anywhere from $50,000 for a small dealer to several hundred thousand dollars for larger dealership groups, dealers say. Chrysler and Nissan declined to comment on their programs.

CalculatedRisk

Trend to watch:

 

Haver Analytics

Sad smile  U.S. Construction Spending Inches Higher

 

U.S. construction activity remains limited to private housing.

 

 

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Haver Analytics

Green with envy  Government to Hold Back Growth for Years

Shifting government finances are likely to take an even bigger bite out of growth over the next few years than many now expect, economists at the San Francisco Fed warned Monday.

In a research note, Brian Lucking and Daniel Wilson write fiscal policy headwinds will subtract one percentage point from growth over the next three years beyond the normal fiscal drag that usually comes during times of recovery. If not for the current and likely future stance of fiscal policy, the economy would be growing at a faster rate, which would allow for more robust job growth and, presumably, a more normal stance of monetary policy for the Federal Reserve.

“Federal fiscal policy has been a modest headwind to economic growth so far during the recovery,” the economists wrote. But due to a more rapid than expected contraction in the budget deficits, due largely to rising tax revenue, “federal budget trends will weigh on growth much more severely over the next three years.” (…)

“While our estimates show that fiscal policy has held back the recovery slightly to date, the effect over the next three years looks much bigger,” they wrote. “The excess fiscal drag on the horizon comes almost entirely from rising taxes.”

Fingers crossed  CONSUMER HOPES

American consumers always seem to come to the rescue. Weekly chain store sales jumped 1.9% last week, offering hope for a decent summer for retailers. The 4-week m.a., although still in a downtrend,  is up 2.8%, its best showing since January.

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Fingers crossed  Spanish Job Seekers Fall

[image]The number of registered job seekers in Spain fell in May by a record amount and for the second consecutive month, the latest sign that unemployment in the recession-hit economy may be close to peaking.

Spain’s labor ministry said Tuesday the number of people filing for jobless benefits fell 2% to 4.89 million in May from April, the lowest mark since December last year. The number of job seekers fell by 98,265, the largest drop in the month of May ever, the ministry said. The decline was almost double the average fall in May, traditionally a good month for employment because of strong hiring ahead of the summer holiday season.

Still, seasonally-adjusted claims, a gauge of underlying unemployment trends, were practically flat—a fall of just 265 from April—and overall jobless claims still rose 3.8% from May last year.

Spain’s Crisis Fades as Exports Transform Country

Spanish exports climbed to a record 223 billion euros ($291 billion) last year as a drought in orders at home pushed companies to upgrade products and go abroad. (…)

The European Commission forecast in May that exports will grow 4.1 percent this year, almost twice the European Union average rate. Exports of goods and services as a share of GDP, at 32 percent, was the highest last year since at least 2000, Eurostat figures show. Sales are rising at double-digit rates in fast-growing markets in Asia and Africa, according to Trade Ministry data. (…)

In the last two years, the number of companies that export has jumped by more than 10 percent each year, compared with an increase of 1.7 percent in 2010, data from government agency Icex show. (…)

Exports with high-technology content increased by 14 percent in 2011, after a 17 percent surge in 2010, according to the most recent data available, published by the statistics institute. (…)

U.K. Retail Sales Rose in May on Furniture Demand, BRC Says

Sales at stores open at least 12 months, measured by value, increased 1.8 percent from a year earlier, the London-based trade group and KPMG said in an e-mailed report today. Total sales rose 3.4 percent.

Canadians still piling on consumer debt – but at a slower pace

The good news is that – compared with the fourth quarter of last year – consumer debt in the first quarter fell 2 per cent to $26,935, the first quarterly decline since the third quarter of 2011 and the biggest one since TransUnion started tracking the variable in 2004.

Another encouraging sign is that the year-over-year increase of 3.48 per cent is lower than the increases of the previous two quarters: 5.87 per cent in the fourth quarter of 2012 and 4.60 per cent in the third quarter of last year.

Beijing Caps Home Prices to Control Demand (Pointing up This is a long BB article worth reading. Some excerpts:)

The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high, according to developer Sunac China Holdings Ltd. (1918) and realtor Centaline Group. Local officials will need further tightening as they struggle to meet this year’s target of keeping prices unchanged from last year, said Bacic & 5i5j Group, the city’s second-biggest property broker. (…)

New-home prices in Beijing rose by 3.1 percent in April from the previous month, the biggest gain among the nation’s four so-called first-tier cities, and climbed by the most after Guangzhou in May, according to SouFun Holdings Ltd. (SFUN) They rose in each of the first five months of this year. (…)

New-home price gains in April, the biggest since they reversed declines in November, came even after Beijing on April 8 raised the minimum down payment on second-home mortgages to a record 70 percent and banned single-person households from buying more than one residence, a response to former Premier Wen Jiabao’s urge to counter surging values. (…)

Japan Wages Gain in Boost for Abe’s Drive to Reflate Economy

Monthly wages including overtime and bonuses rose 0.3 percent from a year earlier to 273,427 yen ($2,746), the Labor Ministry said today in Tokyo. The index of regular earnings, excluding overtime and bonuses, for full-time employees rose to 100.9 in April, the highest since October 2008, according to today’s report.

Major Japanese companies may boost summer bonuses by 7.4 percent, the most since 1990, according to a survey published last week by Keidanren, the country’s biggest business lobby.

Sick smile  Japan’s Market Skid Has Bulls Reeling

[image]At a hedge-fund conference in Las Vegas last month, Michael Novogratz, a principal at New York’s Fortress Investment Group, called Japan “the most exciting place to invest in the world.”

The bet paid off big, at first: The benchmark Nikkei 225 index soared 83% over the seven months to late May. Foreigners fell in love again with a market they had long ago left for dead.

Then, the rally turned with a vengeance. The Nikkei sank 7.3% on Thursday, May 23. It fell 3.2% the next Monday, 5.2% the following Thursday and then 3.7% on Monday of this week. It has fallen 15% in just eight trading days. Mr. Novogratz didn’t return phone calls seeking to determine what he has done with his investments.

US funds left bruised by heavy bond losses
Sharp rise in global yields takes toll

US funds that invest in higher-rated bonds with average maturities of under 10 years lost an average 1.8 per cent in May, marking their worst performance since the depths of the financial crisis in October 2008, according to Lipper, a research group.

Such a broad decline has been rare for these funds. With more than $900bn in assets, these investment vehicles have attracted the lion’s share of inflows from savers in search of regular income and low risk since the crisis.

Ben Bernanke may have to refresh his notions of wealth effect!

 

NEW$ & VIEW$ (31 MAY 2013)

Sad smile  Consumer Spending Eases Amid Flat Wages

Personal spending, which measures purchases ranging from cars and clothes to health care and heating, fell 0.2% in April, the Commerce Department said Friday.

Americans adjusted to higher payroll taxes and smaller disposable incomes at the start of the year by cutting back on savings, rather than reducing spending. Figures out Thursday showed that personal consumption rose 3.4% in the first quarter of the year while the savings rate fell to 2.3% from 5.3% in the fourth quarter.

Savings as a percent of disposable income was 2.5% in April, Commerce said Friday.

Friday’s report said that the price index for personal consumption expenditures, the Fed’s preferred measure for inflation, was up only 0.7% year-over-year in April. The Fed targets a level of around 2%.

On a monthly basis, the index declined 0.3%.

The closely watched core PCE index, which excludes volatile food and energy prices, was up 1.1% from a year earlier.

 

 

Zerohedge

 

Housing Market Continues Climb as Pending Home Sales Rise

The number of prospective buyers signing contracts to buy previously owned homes ticked up last month to the highest level in three years, another sign the housing market’s rebound is well under way.

The National Association of Realtors on Thursday said its seasonally adjusted index for pending sales of existing homes rose to a reading of 106 in April, up 0.3% from the previous month and a gain of 10.3% from a year earlier. (Chart from Haver Analytics)

Lightning  Tough Times Ahead for Euro Zone

A selection of data published Friday shows the road to economic recovery will be long and difficult for the euro zone, and that the six quarters of contraction are likely to extend to seven in the second quarter of this year. (…)

The unemployment rate across the euro zone rose to 12.2% in April, the highest rate since records began in 1995, in line with market expectations and up from 12.1% in March, European statistical agency Eurostat said Friday.

(…) retail sales in Germany were weaker than expected in April, falling 0.4% on the month, while consumer spending in France slid 0.3% over the same period. (…)

The Eurocoin, which tracks overall economic output, fell to -0.15 in May from April’s -0.10, its first drop since August.

Data for the euro zone released Friday showed that inflation remained well below the ECB’s medium-term target of just under 2% in April, but the fact that it rebounded to an annual rate of 1.4% from a three-year low of 1.2% in March may ease the pressure on the bank to act immediately.

Italy Jobless Rate Reaches 12%, 36-Year-High Amid Recession

Joblessness rose to 12 percent after the March reading was revised up to 11.9 percent from an initial 11.5 percent, the Rome-based national statistics office Istat said in a preliminary report today.

Zerohedge

German Exporters Expect Bleak Future

German exporters are becoming more pessimistic as the spring progresses. On Thursday, the Association of German Chambers of Commerce and Industry (DIHK) released the results of a survey showing that companies dependent on exports are much less optimistic than a short time ago. While 30 percent still expect overseas turnover to rise, one in eight believe it will fall. (…)

The DIHK on Thursday also lowered its own expectations for German economic growth, sinking its prognoses for the entire year from 0.7 percent to a paltry 0.3 percent. “The German recovery has been postponed,” said DIHK head Martin Wansleben in Berlin. In addition to concern about exports, Wansleben also noted the unusually cold late-winter weather in March.

Some 41 percent of German companies that took part in the survey said that weak foreign demand was the primary risk facing their businesses. “The uncertainty hasn’t been this great since 2010,” the DIHK said.

Mug  Austerity About-Face: German Government to Gamble on Stimulus  (Der Spiegel)

(…) Wolfgang Schäuble sounded almost like a new convert extolling the wonders of heaven as he raved about his latest conclusions on the subject of saving the euro. “We need more investment, and we need more programs,” the German finance minister announced after a meeting with Vitor Gaspar, his Portuguese counterpart.

The role he was slipping into last Wednesday was new for Schäuble. The man who had persistently maintained his image as an austerity commissioner is suddenly a champion of growth. If Germany couldn’t manage to trigger an economic recovery, “our success story would not be complete,” he said. And as if to convince even the die-hard skeptics, he added: “The German government is always prepared to help.” (…)

To come to grips with the problem, Merkel and Schäuble are willing to abandon ironclad tenets of their current bailout philosophy. In the future, they intend to provide direct assistance to select crisis-ridden countries instead of waiting for other countries to join in or for the European Commission to take the lead. To do so, they are even willing to send more money from Germany to the troubled regions and incorporate new guarantees into the federal budget. “We want to show that we’re not just the world’s best savers,” says a Schäuble confidant. (…)

This is how the plan is supposed to work: First, the KfW would issue a so-called global loan to its Spanish sister bank, the ICO. These funds would then enable the Spanish development bank to offer lower-interest loans to domestic companies. As a result, Spanish companies would be able to benefit from low interest rates available in Germany.

Under the plans, Germany could also invest in a €1.2 billion ($1.6 billion) venture capital fund that could be used to support new business activities. Madrid hopes that the program will generate a total of €3.2 billion in new investment.

The agreements with Spain are intended to serve as a blueprint for similar aid to Portugal and possibly even Greece. How high the payments to these countries will be has yet to be determined. “It will be nothing to sneeze at,” say Finance Ministry officials. The German government envisions spending a total in the single-digit billions on the program. Schäuble plans to fill in the budget committee in the German parliament, the Bundestag, next week.

This is necessary because the KfW is supposed to serve as an agent of the federal government rather than act on its own account. For this reason, the federal government will back up the KfW program with guarantees, which require parliamentary approval. (…)

Princess  Merkel Tells Hollande Reform Is Price of Deficit Waiver

German Chancellor Angela Merkel pressed France to pursue an economic overhaul in return for getting more time to cut its budget deficit, a task French President Francois Hollande said nobody will dictate to him.

The leaders of Europe’s two biggest economies, speaking after talks in Paris yesterday, said they agreed that France has to make further efforts to match Germany’s higher competitiveness. They differed on how much leeway France had to go about it. (…)

Hollande said that while the commission was “doing its job” in making recommendations, “the measures we take, the modalities of how we do it, are the responsibility of the French government.”

Storm cloud  India records slowest growth in a decade
Asia’s third-largest economy expands 5%

The latest quarterly data show that what growth there is in the Indian economy is coming largely from services. The contribution of a category that includes financing, insurance, real estate and business services rose 9.1 per cent, while trade, hotels, transport and communication was up 6.2 per cent.

But manufacturing rose only 2.6 per cent, and electricity, gas and water supply increased 2.8 per cent, while mining and quarrying declined 3.1 per cent. Agriculture, forestry and fishing were up 1.4 per cent

CURRENCIES
 
IMF warns over yen weakness
Fund remains broadly supportive of Abe easing policy

(…) The IMF nonetheless gave its blessing to the ultra-loose monetary policy being pursued by the Bank of Japan, saying exchange rates would eventually adjust “in an appropriate fashion” and that the benefits of a revived Japanese economy would outweigh any loss of competitiveness that Japan’s trade partners experienced as a result of a weaker yen.

“We fully endorse the BoJ’s objective to raise inflation to 2 per cent and the sweeping enhancements to its monetary policy framework,” the IMF said after its annual review of Japan’s economic conditions and policies.

Meanwhile, emerging market currencies are being pounded:

The selloff in emerging-market currencies intensified Friday, with the South African rand slumping heavily against the dollar and the Turkish lira falling to its weakest level against the U.S. currency since January 2012 amid expectations that the Federal Reserve might tighten monetary policy sooner than previously thought.

OPEC Keeps Oil Pace

The Organization of the Petroleum Exporting Countries decided as expected to maintain its current oil-production ceiling of 30 million barrels a day, Venezuelan Oil Minister Rafael Ramirez said.

(…) OPEC’s largest member, Saudi Arabia, said ahead of the meeting that the oil market was in excellent shape. “The demand and supply are good, the inventories are good. So the market is in one of its best conditions,” said Saudi Oil Minister Ali al-Naimi.

OPEC has had a collective oil production ceiling of 30 million barrels a day since December 2011, but actual output has consistently exceeded this level. The surplus has narrowed considerably over the past year. In April 2012, OPEC production exceeded its target by 1.6 million barrels a day, but the surplus was just 460,000 barrels a day last month, according to the group’s monthly oil market report. (…)

Pointing up  Rising U.S. shale-oil production Thursday pushed U.S. crude inventories to their highest level in more than 80 years. Commercial crude-oil stockpiles rose by three million barrels to 397.6 million barrels last week, the highest level since 1931, the U.S. Department of Energy said in its weekly Petroleum Status Report. Oil stockpiles have risen 10% since the start of the year and 30% since May 2008. (…)

OPEC Secretary-General Abdalla Salem el-Badri said shale oil would prove to be a limited phenomenon. “The cost to produce shale oil is very high and I don’t think [the U.S. boom] can be replicated in Europe or anywhere else,” he said.

 

NEW$ & VIEW$ (2 APRIL 2013)

Eurozone employment keeps falling.  U.K. also looks weak. So is China’s recovery. Global eco slowdown accelerates. U.S. construction worries. Chain store sales lackluster. Earnings watch. Sentiment watch.

EUROZONE EMPLOYMENT KEEPS FALLING

The euro area1 (EA17) seasonally-adjusted unemployment rate was 12.0% in February 2013, stable compared with January. The EU27 unemployment rate was 10.9%, up from 10.8% in the previous month. In both zones, rates have risen markedly compared with February 2012, when they were 10.9% and 10.2% respectively.

Eurostat estimates that 26.338 million men and women in the EU27, of whom 19.071 million were in the euro area, were unemployed in February 2013. Compared with January 2013, the number of persons unemployed increased by 76 000 in the EU27 and by 33 000 in the euro area. Compared with February 2012, unemployment rose by 1.805 million in the EU27 and by 1.775 million in the euro area.

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Gavyn Davies has a good piece today in the FT (Preventing contagion from Cyprus). This chart illustrates the divide between the North and the South and the ECB’s challenge, especially since France’s current rate advantage may not last for very long…

U.K. Data Point to Weak Growth

Data firm Markit and the Chartered Institute of Purchasing & Supply’s monthly Purchasing managers’ index for the manufacturing sector rose to 48.3 in March from February’s 47.9, but remains below the key 50 level which separates expansion from contraction, confirming the sector continues to shrink.

New orders fell again in March, although at a slightly slower pace than in February, while output fell at a faster pace. Job cuts continued at a similar pace to that reported in the previous month (…).

Lending to nonfinancial businesses, net of repayments, declined by £2.2 billion in February, and new mortgage approvals fell. Overall consumer lending was up as households took out unsecured loans and borrowed on their credit cards.

China In A Weak And Fragile Recovery

China’s official Purchasing Managers Index, released on April 1st, rose to 50.9 in March from 50.1 in February. March’s 50.9 reading, the lowest March PMI reading in recent years, indicates that the current recovery remains weak. Based on recent economic data and our survey results, we believe the current recovery remains fragile and will need the support of neutral-to-loose liquidity conditions in order to continue along a mild-recovery path. Economic data might not reflect a strong recovery in 2Q13. Due to the base effect, investment growth in 2Q13 will be relatively low. (CEBM Research)

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Global Economic Slowdown Accelerates Again

It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe, the global economy is in Slowdown. Goldman’s Swirlogram has now seen its Global Leading Indicator in the ‘slowdown’ phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. (…)

Firms Stay Cautious on Renting

Businesses moved slowly to fill office space in the first quarter, reflecting continued caution about the recovery.

[image]An additional 4 million square feet of office space was leased during the quarter, increasing the amount of occupied space by just 0.12%, according to real-estate research service Reis Inc.  Asking rents increased 0.7% to $28.66 a square foot annually, while the national office vacancy rate fell to 17% from 17.1%.

The vacancy rate is still well above its 12.5% level at the office market’s peak in 2007. Employers today occupy about 101 million square feet less than they occupied then, according to Reis, which tracks 79 markets.

At the current rate of growth—which is about one-third the pace of the recovery that followed the dot-com bust last decade—it would take more than five years to return to that peak level.

U.S. Construction Spending Rebounds

Building activity improved in February. An expected 1.2% rise (7.9% y/y) in construction put in place followed a little-revised 2.1% January decline. December figures, however, were lowered sharply. Improvement in building activity was broad-based in February.

Private construction improved by 1.3% (12.6% y/y) led by 2.2% gain (20.1% y/y) in residential construction activity. That reflected a 4.3% rise (34.1% y/y) in new single-family building but multi-family construction fell 2.2% (+51.8% y/y). Spending on improvements ticked up 0.5% (1.1% y/y).

In the nonresidential sector, construction activity nudged up 0.7% (2.6% y/y). (…) Public sector building activity regained some momentum with a 0.9% rise but it still was down 1.5% y/y. Highways & streets construction rose 3.4% (5.1% y/y). Activity here accounts for nearly one-third of public sector building activity. (…)

Pointing up  What worries me is that the sequential trend has turned negative in the last 3 months, in all segments except residential:

image(Haver Analytics)

WEEKLY CHAIN STORE SALES LACKLUSTER

Sales surged 4.7% last week but Easter sales failed to reverse the weak trend observed since February. The 4-week moving average remains below its last 3 peaks and its Y/Y change is a slow 1.7%.

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Fingers crossedimage

EARNINGS WATCH

Investors Ignore Negativity

While the S&P 500 erased losses and strategists are raising year-end targets, the only people with legal inside information are surprisingly cautious.

[image](…) But a look at consensus earnings-per-share expectations for the companies with the 10 highest weightings in the S&P 500—making up close to a fifth of the total—shows a similar pattern. Relative to where forecasts stood at the start of the year, they have fallen for seven and risen for three.

Apple had the largest drop, with estimates down 17%. Of those companies actively lowering guidance, materials companies such as Peabody Energy were overrepresented.

Ignore corporate worrywarts at your peril. In the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007—just as that bull market was ending. Meanwhile, one of the lowest ratios of negative guidance, 0.97, came during the second quarter of 2009, when many analysts and investors still were very pessimistic and stocks hit a 13-year low.

If you have missed yesterday’s New$ & View$, you should be aware that the above deals only with quarterly guidance. However, as Factset points out, negative annual guidance has stepped up in recent weeks.

For the current fiscal year overall, 168 companies have issued negative EPS guidance and 77 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for the current fiscal year stands at 69%. This marks the third consecutive month that the percentage of negative EPS guidance has increased, as companies in the index transition to issuing annual guidance for 2013 as the new current fiscal year (instead of 2012).

The chart below, courtesy of Morgan Stanley via ZeroHedge, shows that 2013 estimates have stabilized at the $112 level, in spite of the worsening guidance. 


SENTIMENT WATCH

 

IPO Pricing Signals Surge In Demand

In the first quarter, 36% of U.S. IPOs were priced above the range originally outlined in registration documents filed with the Securities and Exchange Commission. That was the highest proportion in any year since at least 2004, according to Renaissance Capital, an IPO research and investment-management firm.

Meanwhile, less than one quarter of IPOs so far this year have priced below expectations, also the lowest rate in at least 10 years.

 

NEW$ & VIEW$ (27 MARCH 2013)

Lost deposits. Eurozone employment remains weak. U.S. soft patch watch. House prices strong. Durable goods. Vietnam GDP soft. Triple A’s shrink.

THE TEMPLATE

EU to push for losses on big savers at failed banks: lawmaker

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout. (…)

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

“You need to be able to do the bail-in as well with deposits,” said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks. (…)

“Deposits below 100,000 euros are protected … deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in,” Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line. (…)

Pretty clear!  Where do you want your money now? Ready to do a due dill on your bank? How lucky do you feel?

BTW: Call me  British Banks Have Capital Shortfall of $38 Billion, BOE Says

Depositing some calm, at least for the little guys

The first chart is from HSBC, showing how many depositors fall within the bracket of the €100k guarantee mandated by EU law. The second chart is from JP Morgan’s F&L team, and shows percentages of insured and uninsured deposits in the eurozone. Essentially, the share of large or uninsured deposits is likely to be close to half of total deposits.

Together they give something of a picture of the insured versus uninsured in the zone (health warning: the data are from 2007) and it’s worth noting that for other peripheral countries relative to Cyprus, large deposits are mostly domestic. As JPM said, “the share of non–domestic deposits in peripheral banks is rather modest at 7 per cent as of the end of 2012.”

Crying face  Cyprus Sets Bank Restructuring

Cyprus gave the first indications of the steep losses facing large deposit holders at the island’s two biggest banks.

Cyprus’s central bank chief said Tuesday that large depositors at the island’s biggest lender, Bank of Cyprus Pcl, could lose as much as 40% on their deposits. In a television interview later, the finance minister said large uninsured deposit holders at the second-biggest, Cyprus Popular Bank Pcl, might only see one-fifth of their money returned and could wait several years before being paid back.

Based on estimates from government officials, the losses would affect some 19,000 deposit-holders at the Bank of Cyprus who, combined, hold some €8.01 billion ($10.30 billion) in uninsured deposits. Uninsured savers at Cyprus Popular Bank, who hold a combined €3.2 billion, will lose most of that.

Euro’s Bears Go Back on Prowl

Wagers on a weaker euro have grown for four of the past five weeks in the futures market, according to the latest data from the U.S. Commodity Futures Trading Commission. As of March 19, investors were betting $7.2 billion that the euro would fall against the dollar, the biggest aggregate position since November.

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Red heart Broken heart Poland opens way to euro referendum
Strong public opposition to the common currency

Donald Tusk, Poland’s prime minister, took a big political gamble on Tuesday when he opened the door to a referendum on joining the euro, in the face of strong public opposition to the common currency.

Lightning  Temp Hiring Tumbling in Euro Zone  Temporary hiring through agencies is falling in the euro zone at a double-digit percentage rate in year-to-year terms.

Agency employment across Europe is falling 10% to 15% year-to-year, he estimates.

Temporary employment fell at an annual rate of 15.5% in France and 3% in the Netherlands in January, its figures show. In Belgium, the most recent figures show employment fell 6.0% in December. German agency work fell 14.8% in November.

SOFT PATCH WATCH

Yesterday’s economic releases were generally on the weak side. 

  • The Richmond Fed index lost 3 points.

In March, the seasonally adjusted composite index of manufacturing activity lost three points settling at 3 from February’s reading of 6. Among the index’s components, shipments slipped two points to 8, the gauge for new orders moved down four points to end at -4, and the jobs index added one point to end at 9.

Pointing up Note that new orders have been weak for 3 consecutive months.

Other indicators also suggested weaker activity in March. The index for capacity utilization turned negative, losing fourteen points to -3, and the index for backlogs of orders dropped two points to finish at -14.

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The neighboring Philly Fed survey also shows uninspiring new order patterns.

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  • New home sales dropped -4.6% in February and January’s gain was revised down. Bundling January and February data, new home sales are up nearly 19% Y/Y.
  • Consumer confidence dropped to 59.7 in March from 68.0 in February. 
  • Expectations for economic activity over the next six months dropped to 60.9 from a revised 72.4, originally reported as 73.8. The assessment of current economic conditions slipped to 57.9 from a revised 61.4, first put at 63.3.

Open-mouthed smile  Home Prices Post Big Rise

Prices rose by 8.1% in January from a year earlier, the largest such gain in 6½ years, according to figures from the S&P/Case-Shiller index of home prices in 20 major metropolitan cities released Tuesday. All 20 cities posted annual increases.

Prices also defied their usual winter slowdown and rose 0.1% in January from December, a period when prices often fall because sales activity is slow. After adjusting for seasonal factors, prices gained 1% from December.

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Smile  Firms Shift Spending to Higher Gear

America’s businesses stepped up investment in the first quarter, as the threat of the year-end fiscal cliff was averted and despite fresh economic risks emerging in Washington and around the world.

One closely watched gauge of business investment—new orders for nondefense capital goods, excluding aircraft—fell slightly in February after climbing in January, the government said Tuesday.(…) The gauge’s three-month moving average has risen every month since October.

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Vietnam GDP Growth Slows in First Quarter as Banks Struggle

Gross domestic product expanded 4.89 percent in the first three months of the year from the same period a year earlier, the General Statistics Office said in Hanoi today. That compares with a previously reported 5.44 percent pace in the last quarter of 2012 and the median estimate of 5.2 percent in a Bloomberg survey of 10 economists. Growth in the first quarter of 2012 was revised to 4.75 percent, the Statistics Office said.

Retail sales increased 11.7 percent in the first quarter from the same period a year earlier, slowing from a 21.8 percent pace in the same period a year earlier, the Statistics Office also said today.

Global pool of triple A status shrinks 60%
Dramatic re-drawing of world credit ratings map

(…) The expulsion of the US, the UK and France from the “nine-As” club has led to the contraction in the stock of ­government bonds deemed the safest by Fitch, Moody’s and Standard & Poor’s, from almost $11tn at the start of 2007 to just $4tn now, according to Financial Times analysis.

The shrinkage, largely a result of US’s downgrade by S&P in August 2011, is part of a dramatic redrawing of the world credit ratings map, which is encouraging investment flows into emerging markets and forcing investors and financial regulators to rethink definitions of “safe” assets.