NEW$ & VIEW$ (17 MAY 2013)

Posted on May 17, 2013 by Denis Ouellet

PHILLY FED SURVEY: ANOTHER WEAK REGIONAL PMI

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings. The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

The demand for manufactured goods remained weak, with the current new orders index declining from -1.0 to -7.9. The shipments index also indicated weakness, decreasing more sharply from 9.1 to -8.5. Firms reported a notable increase in inventories this month: The current inventories index increased from -22.2 to 4.1.

Labor market conditions showed continued weakness, with indexes suggesting lower employment overall. The employment index decreased 2 points to -8.7, its second consecutive negative reading. The percentage
of firms reporting employment decreases (22 percent) exceeded the percentage reporting increases (14 percent). The workweek index declined 10 points to -12.4, remaining negative for the fifth consecutive
month.

Jobless Claims Spike by 32,000

The number of U.S. workers seeking new unemployment benefits jumped last week after trending down much of the spring, showing the uneven nature of the job market’s recovery.

It was the largest one-week gain in new benefit requests since November 2012. The prior week’s level was revised up by 5,000.
The four-week moving average of claims, which smooths week-to-week volatility, increased by 1,250 to 339,250. The prior week’s average, which was revised up slightly, was the lowest level since January 2008, just after the most recent recession started.

(Bespoke Investment)

Executives upbeat on world economy

Positive trend continues from start of year

Of the more than 1,600 business people polled, 27 per cent expected conditions to improve, against 21 per cent who expected the outlook to worsen. The rest thought conditions would stay the same.
The figures continue the positive trend that began earlier this year, when executives were more upbeat on the global outlook than gloomy for the first time since mid-2011. In February, 29 per cent thought conditions would improve and 22 per cent thought they would deteriorate.

Strangely, I don’t read the story with quite the same “upbeat” suggested by the title. Given that current world conditions are nowhere near good, the fact that only 27% expect them to improve is nothing to write home about. It also seems to me that the ratios have deteriorated some since February. World shippers were likely not among the upbeat folks in this survey. Read on:

Maersk Warns of Subdued Demand

“Global demand for seaborne containers is expected to increase by 2% to 4% in 2013, lower on the Asia-Europe trades but supported by higher growth for imports to emerging economies,” the company said.
Indications for the first quarter of 2013 “show modest improvements in the global demand for container transport, reflecting the weak economic situation, especially in developed countries.”
“Demand is expected to stay subdued in 2013 while capacity will grow significantly. Accordingly, conditions for the container industry remain challenging and managing supply will be even more important this year,” it said.

Japanese machinery orders see monthly rise

Companies more confident about investing in equipment

Japanese core machinery orders jumped a bigger-than-expected 14.2 per cent in March, the quickest monthly pace in eight years, in a sign a weaker yen and surging stock prices are making companies more confident about investing in equipment.
Manufacturers surveyed by the government expect core orders to fall 1.5 per cent in April-June from the previous quarter after flat growth in the first three months of this year, the Cabinet Office data showed.

Growth shows signs of fatigue in Mexico

Estimates suggest worst quarterly figures since 2009

Spain Posts First Trade Surplus on Record

Imports dropped 15 percent in March from the same month a year ago while exports rose 2 percent.

Europe Car Sales Post First Gain in 19 Months on Germany

Registrations in April increased 1.8 percent to 1.08 million vehicles from 1.06 million cars a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Four-month sales fell 7 percent to 4.18 million vehicles. (…)

Car sales in the region fell 8.7 percent in January and 10 percent in February and March.
Regional car sales last month were helped by the most of the Easter holiday shifting to March this year from April in 2012. The decline may resume for the rest of this year, though at a slower rate than in the earlier months, according to estimates by IHS Automotive Research.
Auto sales in Germany, Europe’s biggest economy, rose 3.8 percent in April, ending five months of drops. Registrations surged 15 percent last month in the U.K., the only car market of Europe’s top five to grow in 2012, and 11 percent in Spain. French auto sales fell 5.3 percent and demand in Italy dropped 11 percent. (…)

S&P affirms negative outlook on India; warns of downgrade risk

Storm cloud Finally, this China update from CEBM Research:

The conclusion from our mid-month steel trader survey is that actual sales remained weak and the traditional peak season was almost non-existent this year. Furthermore, nearly all respondents do not expect a strong rebound in the steel market next month. (…)

The cement market has continued to recover over the past two months.

Most construction machinery dealers surveyed mentioned that sales in the first half of May were lower than their expectations. It is likely that construction machinery sales in May will achieve only modest Y/Y growth. In general, the peak season for construction machinery sales has passed, and the market in May has become tepid.

Bank credit has been tightened. Respondents from Shanghai mentioned that since a contract scandal involving false inventories was revealed recently, banks have tightened mortgages and some have even raised lending rates by 30% to 40%.

In summary (chart from ISI)

U.S. INFLATION

US consumer prices drop most in four years

The labour department’s consumer price index edged 0.4 per cent lower, the largest decrease since December 2008 when the US was suffering some of the darkest days of its financial crisis. The decline was greater than the 0.2 per cent dip in March and economists’ expectations of a 0.3 per cent decline.
Much of April’s drop was driven by an 8.1 per cent slide in petrol prices, the most since December 2008, following a less severe 4.4 per cent fall in March. The average price for a gallon of unleaded petrol fell by about 13 cents in April, ending the month at $3.51, according to AAA.
This drove overall energy prices down 4.3 per cent in April, following a 2.6 per cent drop in the previous month. Food prices rose 0.2 per cent.
This weakness extended to the measure for core prices, which excludes the volatile food and energy segments. Core prices increased 0.1 per cent, less than projected.

Data Quirks May Ease Fed’s Mind on Inflation Slowdown

One set of inflation measures, which Fed watches very closely, is down a lot more than another set of inflation measures, which the public watches closely.

The disparity between core PCE (1.13%) and core CPI (1.70%) is especially striking. (…)

There’s reason to be cautious about the PCE number. Though Fed officials favor it — because they believe it does a better job reflecting changes in the economy — there have been some quirks in it lately.
One of them is a measure known as “financial services furnished without payment.” This is the government’s way of tracking what households pay for bundled bank services like access to ATM machines or check-writing. “This would be any service provided by a bank for which there is no explicit payment,” says Brent Moulton, the associate director of the Bureau of Economic Analysis. Without a market price to go on, the Commerce Department imputes a cost to consumers for these services based on complex formulas that move as interest rates shift.
It turns out that right now interest rates are shifting in a way that drives down the imputed value of this service. In the first quarter the price of this service fell 2.2% from a year earlier and since the second quarter of 2011 it has fallen on average by 1% annually, according to the Bureau of Economic Analysis. These measures are down largely because interest rates are falling, Mr. Moulton said, not necessarily because the actual cost of the service is going down. Strip out the quirky number and the decline in core consumer prices was 0.2 percentage points less severe in the first quarter than the official figure, according to Bureau of Economic Analysis data. A measure which strips out all imputed prices in the core consumer price index was up 1.31% in March, again more than the 1.13% number.
Underlying inflation, in other words, perhaps wasn’t slowing quite as much as the Fed’s favored measure suggested.
Because the Labor Department’s consumer price index doesn’t perform these kinds of imputations, its consumer price measures warrant close monitoring right now. The CPI index has its own quirks — including the heavy weight it places on home rental costs. Still, it might be telling a meaningful story about the true underlying inflation trend. Up 1.7% from a year earlier, the core consumer price index change suggests that inflation has indeed slowed, but not to the alarmingly low levels that the PCE numbers imply.
That — along with stable inflation expectations — helps explain why Fed officials themselves haven’t yet expressed too much concern about inflation getting too low or deflation threats growing.

There’s more: US INFLATION IS ACTUALLY STUCK AT 2.0%

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.8% annualized rate) in April. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.0% annualized rate) during the month. The BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.4% (-4.3% annualized rate) in April. The CPI less food and energy increased 0.1% (0.6% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.1%, and the CPI less food and energy rose 1.7%

Pointing up However you slice it, U.S. inflation is 2.0% so far in 2013. Core CPI, median CPI and the 16% trimmed-mean CPI have all rise at a 2.0% annualized rate since December 2012. The 0.5% jump in core CPI in Jan-Feb has not been followed by a decline. Rather, core prices have kept rising by 0.1% per month. The median CPI has gained 0.2% monthly in all of the last 6 months but one. All this to say that, in spite of strong desinflationary trends across the world, U.S. core inflation is showing no signs of slowing below 2.0%.

Housing-Permit Surge Suggests Blip

Housing starts fell 16.5% in April to a seasonally adjusted annual rate of 853,000 units, the lowest level since last November but still up 36% from the level of a year earlier.

Multifamily homes with at least five units plunged 37.8%. Single-family home construction dropped by 2.1% to an annual rate of 610,000 units in April, the second straight monthly drop and the lowest level reported this year. Housing starts can be volatile, due in part to weather, and can be subject to large revisions.

Building permits, which are less volatile and serve as a leading indicator of future construction, rose to the highest level since June 2008. They increased 14.3% to an annualized rate of 1.02 million in April. (…)
The pullback in housing construction comes amid reports from home builders that they are deliberately slowing their rate of expansion in order to boost prices at a time when inventories of homes for sale are already extremely low. Rising land costs in some markets, higher costs of building materials, and difficulty in finding skilled workers have also cut into their margins.

Nearly 60% of builders in April said that they had slowed their sales pace in at least one new-home community by limiting the release of new homes or boosting prices, according to a survey released earlier this week by research firm Zelman & Associates. That dynamic isn’t limited to solely California and other Western markets that have witnessed the strongest price growth, according to the Zelman report. Builders in less-heated markets from Texas to the Carolinas to Detroit have also been managing sales.

Tepid Earnings Season Doesn’t Sway Investors

A so-so first-quarter earnings season hasn’t dented investors’ enthusiasm for stocks.

Of the 458 companies in the Standard & Poor’s 500-stock index that have reported results, 70% have beaten forecasts for earnings, in line with the average for the past four years. If results continue as projected, first-quarter earnings will rise 3.4% from the previous year, according to FactSet.
Meanwhile, sales have come in below forecasts, declining 0.2%, while analysts had expected 0.5% growth. Among companies that have reported, 48% beat Wall Street’s projections for sales, below the average of 52% from the past four years, according to FactSet.

China Wages Rose Sharply in 2012 Wages in China continued to climb at a double-digit pace last year despite a slowing economy, with inflation-adjusted wage growth actually accelerating from 2011.

Average wages for employees at non-private enterprises were up 11.9% from the year before in nominal terms, to 46,769 yuan ($7,543), the National Bureau of Statistics said in a statement Friday, compared with a 14.4% pace in 2011.
Non-private enterprises include state-owned companies, listed companies and joint ventures.
Average wages for employees at private companies were up 17.1% to 28,752 yuan, compared with an 18.3% pace in 2011.
With inflation taken into account, wages of employees at nonprivate companies were up 9% in 2012 from a year earlier, exceeding 2011′s 8.5% pace. Real wages in the private sector were up 14%, accelerating from 12.3% in 2011.

Bergsten Warns of Currency Wars in Peterson Valedictory Speech In his valedictory speech as the head of one of the most respected economic think tanks in the world, Fred Bergsten issued a clarion call about “a clear and present danger” that continuing “currency wars” represent to the U.S. economy, global trade and the international monetary system.

“Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs,” he said in prepared remarks to the Peterson Institute of International Affairs Thursday afternoon.
Those currency tensions, and the policies that are fueling them, are costing the U.S. economy millions of jobs and threatening to create the kind of global problems that contributed to the Great Depression, he said.

NEW$ & VIEW$ (16 MAY 2013)

Posted on May 16, 2013 by Denis Ouellet

U.S. Industrial Production Moves Lower

Activity in the factory sector is weakening. Industrial production fell 0.6% during April following a 0.3% March increase, earlier reported as 0.4%. Declines in activity were broad-based amongst industries last month. Factory sector production fell 0.4% (+1.4% y/y) following its unrevised 0.2% March slip. Utility output reversed course and fell 3.7% (+3.4% y/y) following a 6.4% March owing to warmer-than-normal temperatures.
The drop in factory sector output reflected across-the-board industry weakness. Consumer goods production fell 0.6% (+2.3% y/y) as motor vehicle output dropped 1.2% (+5.2% y/y). Elsewhere, appliance, furniture & related goods production fell 0.8% and was unchanged y/y. In the nondurables area, apparel output fell 1.6% (-2.9% y/y) while paper production dropped 0.6% (-1.9% y/y). For business equipment, output fell 0.5% (+3.5% y/y). Output of information processing and related equipment fell 0.5% (+3.2% y/y) and transit equipment production fell 0.5% (+5.9% y/y). Excluding the output of high tech products & motor vehicles, production fell 0.5% (+1.8% y/y) during April.
The capacity utilization rate fell to 77.8% from a downwardly revised 78.3% in March.

Pointing up Everything is slowing! Might it be because of the following?

Currencies react to Bank of Japan’s recent monetary moves

These are big, big moves!

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

EMPIRE STATE MANUFACTURING TURNS SOUTH

The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. Employment
indexes were mixed, showing both a modest increase in the number of
employees and a slight decline in the length of the average workweek.

New orders have been weakening for 3 months before crossing below the zero line (-1.17)in May.

Interesting:

After Prices Paid, the next largest decline came in the Average Workweek, which fell from 5.7 in April to negative 1.1 in May. The decline in the average workweek comes on the heels of the Non-Farm Payrolls report two weeks ago, where the average workweek also showed a sizable decline. It is still early, but this could be an early indication that employers are cutting hours in an effort to stay below the thresholds that would require providing health coverage under the Affordable Care Act. (Bespoke Investment)

Home-Sales Expectations Hit 5-Year High

The National Association of Home Builders said Wednesday that its housing-market index was 44 in May, up three points from April. All three components of the index rose, with builders’ expectations of sales for the next few months hitting the highest level since February 2007.

High five Curb your enthusiasm:

A reading above 50 in the NAHB index means that more builders view conditions as good rather than poor. The overall gauge hasn’t been in positive territory since April 2006. At the height of the building bubble, readings were in the high 60s and low 70s.

(Charts from Haver Analytics)

Look at this next chart from BMO Capital remembering that Canada is the U.S. main trading partner.

JAPAN, the only growth game in town:

Japan Reports Growth Surge

The country’s gross domestic product, the broadest measure of goods and services produced across the economy, grew at an annualized pace of 3.5% in the first three months of the year, as consumers loosened their purse strings and exports to the U.S. picked up, lifted by a weaker yen.
The figures reported by the government early Thursday marked a sharp improvement from the tepid 1% growth rate at the end of last year, which followed six months of contraction.

A government official said the GDP data showed consumers spent more overall, particularly on recreation, cars and dining out, and exports were lifted by stronger car exports to the U.S.

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

Baring teeth smile It will not take much more before U.S. manufacturers start complaining about the weak Yen.

Of course, quite a lot happened after the end of Q1 as well.
It was just in early April that the BoJ announced open-ended QE and promised to double the monetary base, while prime minister Shinzo Abe pledged to boost competition in the quasi-monopolistic power sector. Since then the yen broke 100, the stock market continued soaring, and in recent days Japanese government bond yields have sold off. Even activist investors from the US are taking notice.
But it is early days yet. The unexpectedly strong first quarter growth numbers were driven mainly by exports — to be expected given the yen’s continued decline. (FT Alphaville)

How long will the ROW allow Japan to poach?

CHINA

Foreign Investment in China Lags

Foreign direct investment in China sputtered in the first four months of the year, despite renewed signs of strength from the U.S. and the European Union, showing only a modest 1.21% rise from a year ago.

Foreign direct investment in China was $38.3 billion in the January to April period, including $8.4 billion in April, for a feeble 0.4% rise from April 2012. (…)
Investment from the U.S. was up 33.2% over last year in the four-month period, inflows from the EU rose 29.7%, while Japanese investment climbed 9.2%. But investment from the rest of Asia was very weak, rising just 0.21% from a year earlier.

More signs of weakness: China’s freight traffic was unchanged MoM in April, +7.8% YoY, same as in March. YTD to April: +8.7% YoY, down from +12% in 2012. Looks slower to me. April coastal container throughput was up 8.6% YoY, +8.4% YTD.

China Signals Concern at Yen Weakness as Japan Growth Quickens

Japan’s policy of monetary easing “makes it hard for China to increase exports to Japan,” Shen Danyang, a ministry spokesman, said at a briefing in Beijing today. The rising yuan is eroding profit margins of Chinese exporters, he said. (…)

A survey by the ministry found that the profit margins of 78 percent of exporters are narrowing, and 73 percent will report flat or lower profits for 2013, Shen said. Exporters at the Canton Trade Fair in April and May didn’t want to accept long-term orders because of concerns that the yuan will gain, he said.

Beijing signals concern at rising jobless

Li warns on challenge of finding work for graduates

(…) In a nationwide teleconference on Monday that was widely reported in state media on Wednesday, Mr Li said that nearly 7m tertiary students would enter the job market in July in China, the largest number in the country’s history.
He said it was an “important task” to find jobs for all these graduates, who make up a demographic considered potentially threatening to Communist Party rule if they become disaffected in large numbers.
“In the first few months of the year, as economic growth has slowed the employment trend has remained stable but employment pressures remain and the problem of employment for tertiary students is particularly prominent,” Mr Li said, according to a transcript of his speech.
But Mr Li also disappointed many investors by ruling out a large government-directed stimulus or investment boom this year.
“To achieve this year’s development targets the room to rely on stimulatory policies and direct government investment is not big and we will need to rely on market mechanisms,” Mr Li said. Relying on government efforts to boost growth “is not only difficult to sustain but also creates new problems and risks”. (…)
Disgruntled students have played a powerful destabilising role throughout modern Chinese history, leading enormous social movements in 1919, in the 1966-1976 Cultural Revolution and in the Tiananmen Square movement in 1989. (…)
Of the nearly 7m students who graduate in July most of them have not yet found jobs and the employment rate for these people is lower than in the past, according to state media reports.
By late last month, just 28 per cent of graduating students in Beijing had been hired while the rate was 29 per cent in Shanghai and 47 per cent in southern Guangdong Province.
The official urban unemployment rate in China was just 4.1 per cent by the end of March but the figure is regarded as deeply unreliable because it does not capture many demographic groups such as fresh graduates.

EUROPE

European Recession Is Longest Since War

The euro-zone debt crisis has mutated into Europe’s longest slump of the postwar era, with no recovery in sight for a broad swath of the continent.

(…) Depression-like conditions in Southern Europe, combined with slowing global growth, are dragging down the core economies: Germany is barely growing and France is steadily contracting.

The 17-nation euro zone, which accounts for 17% of world GDP, remains the weakest link in the global economy, mired well below its level of economic activity before the 2008 financial crisis. Social strains, political paralysis and rising debt burdens are reigniting doubts about its economic future. (…)
Business surveys for April suggest the euro-zone economy could well shrink again in the second quarter. (…)

Sustained Pain

Italy airs pessimistic view on recovery

Government has little room for stimulating growth

(…) “I don’t see any signs of recovery at the moment,” commented Emma Marcegaglia, president-elect of Business Europe.
“The credit crunch is strong, internal demand and the construction sector are very bad, exports are slowing and investments have stopped. The recession is very severe,” she told the Financial Times.
At best, she said, the eurozone’s third-largest economy might see a bottoming out of its longest postwar recession in the final quarter of 2013. On the bright side, analysts noted the pace of contraction was declining more slowly than in the final quarter of 2012 when GDP shrank 0.9 per cent. (…)
By July the government needs to find a further €2bn to avoid a scheduled increase in sales tax although declining tax revenues put that goal in doubt, with Rome promising Brussels that it will stick to its budget targets in order to escape from the European Commission’s excessive deficit procedure. (…)
Bankers are starting to sound rather more upbeat however. Reporting quarterly results in recent days, the heads of Italy’s largest banks share the view that the recession is bottoming out.
The strongest indicator came from loan loss provisions which fell in the first three months of the year from the end of 2012 at UniCredit, Italy’s largest bank by assets. Intesa Sanpaolo, its largest retail bank, said inflows of bad loans were down by a third, quarter on quarter.

Euro Zone Runs Record Trade Surplus

Adjusting for seasonal effects, exports grew 2.8% from February, while imports fell 1.0%, to give a surplus of €18.7 billion, up from €12.7 billion in February.

March is really the first solid month in a while. Let’s see a couple more months, given that the EZ export markets all seem to be slowing now, perhaps because their own exports to the EZ are collapsing.

Slovenia Premier Bratusek Defies Markets With No-Aid Vow

(…) Bratusek says time is what she needs to fix the banks — by deploying a rescue package she opposed before she came to office — and that her nation won’t need an international rescue. By next month, she promises, her coalition government will begin swapping as much as 4 billion euros ($5.2 billion) in bad bank loans for government-guaranteed debt. After eight weeks in office, investors are questioning whether she can deliver.

“Talk is cheap,” Egon Zakrajsek, a Slovenian-born Federal Reserve economist in Washington, said in an e-mail. Slovenia needs “fundamental economic and social reforms” to restore market confidence and “neither the current government nor any of its predecessors has been able to deliver.” Zakrajsek said he was commenting in a private capacity. (…)
Slovenia’s overhaul drive has “failed to deliver on transparency and thus credibility, consistent with our concerns about implementation risks,” Mai Doan, an emerging-markets economist at Bank of America Merrill Lynch in London said in a note to clients today. The program could “disappoint the European Commission, which would probably prefer more rigorous measures and transparency.”
Opening the door to a bailout would expose Bratusek to the risk of having to impose Greece-like austerity measures in return for aid.

EARNINGS WATCH

Wal-Mart Second-Quarter Forecast Trails Estimates

Wal-Mart Stores Inc., the world’s largest retailer, forecast second-quarter profit that was less than analysts estimated as shoppers struggle amid the slow U.S. economy and higher taxes.
Earnings per share will be $1.22 to $1.27, the Bentonville, Arkansas-based company said today in a statement. Analysts had projected $1.29, the average of 24 estimates compiled by Bloomberg.
Sales at U.S. Wal-Mart stores open at least 12 months excluding fuel fell 1.4 percent, the first decline after six straight gains. Analysts estimated a 0.1 percent decline.

Look at the rare long flattening in earnings. The tail wind to equities from rising profits has disappeared. Hmmm….

NEW$ & VIEW$ (10 MAY 2013)

Posted on May 10, 2013 by Denis Ouellet

Housing Rebound Grows as Prices Climb Sharply

Home prices in metropolitan areas saw their biggest year-over-year gains in more than seven years in the first quarter, evidence that the housing recovery is spreading across the nation.

The National Association of Realtors said Thursday that the national median closing price for an existing single-family house was $176,600 in the first quarter, up 11.3% from the first quarter of 2012. That was the largest year-over-year gain since the end of 2005. Of the 150 metro areas tracked by the NAR, sale prices rose in 133 and declined in 17.

“The supply/demand balance is clearly tilted toward sellers in a good portion of the country,” said NAR chief economist Lawrence Yun.

Poor Weather Pressures Retailers

U.S. retailers continued to be stymied by cool weather, leading to generally lukewarm same-store sales for April.

The retail industry has now marked its fiscal first quarter—February, March and April—weighed down by temperatures that kept shoppers away from malls, forcing steep discounts.
The showing doesn’t bode well for the first-quarter results retailers will release later this month.

Jobless Claims in U.S. Unexpectedly Fall to Five-Year Low

Applications for unemployment insurance payments decreased by 4,000 to 323,000 in the week ended May 4, the fewest since January 2008, Labor Department figures showed today. The four-week average declined to 336,750, the lowest since November 2007, the month before the start of the worst economic slump since the Great Depression.

(Bespoke Investment)

Midwest leads US manufacturing revival

Jobs increase fuelled by resurgent car industry

The bulk of US manufacturing jobs gained since the labour market troughed three years ago have been concentrated in a handful of rust belt states, a positive sign for a region that has long seen employers flee for far-flung markets with lower labour costs.
Fuelled by a resurgent car industry, states such as Michigan, Illinois, Indiana, Ohio and Wisconsin, along with Tennessee and Kentucky, account for more than half of the more than 500,000 manufacturing jobs the US gained between March 2010 and March 2013, labour department statistics show. (…)
Mr Syverson estimates that 123,000 of the half million net new manufacturing jobs gained since early 2010 are directly attributable to the recovery of the auto industry, boosted by a government bailout and renegotiated labour contracts between the industry and the United Automobile Workers union. The rest have predominantly come from the machinery and fabricated metals sectors, producing for the domestic market as well as for export.

Fuelled by the car industry

Pointing up Nice, but:

Car sales seem to have stalled;
Import share may be bottoming (read on Yen below)

Yen’s Slide Percolates Japanese Economy The yen’s fall fuels hopes for a more ground breaking shift in Japan: the reversal of nearly two decades of stagnation, weak demand and declining prices.

Just over a month after Japan’s central bank vowed to reignite economic growth by flooding markets with yen, the currency fell to ¥100 to the dollar for the first time in four years, a milestone in efforts to end nearly two decades of economic stagnation.
The weaker yen’s impact—the dollar has climbed 16% against the currency this year—is already trickling through the Japanese economy, pushing up prices of imported food and gas and drawing a flood of tourists whose currencies now buy more goods in Japan. It is bolstering sales and profit at exporters whose goods can be produced at lower prices for global markets. Early Friday in Tokyo, the dollar bought ¥101.12, compared with ¥100.60 late Thursday in New York and ¥99.02 late Wednesday. (…)
In new signs of the impact of Abenomics, Japanese domestic institutional money started flowing overseas in pursuit of higher yields while bank lending rose at the fastest pace in four years, data released Friday showed.
Japanese investors bought Y514.3 billion more foreign bonds than they sold for the two weeks through May 4, government data showed. Such flows could weaken the yen further, and are a key part of the Bank of Japan’s strategy for beating deflation by getting some of the trillions of yen Japanese investors have stashed in low-yielding government bonds put to better use.
In a sign that domestic economic activity may also be picking up, Japanese bank lending rose 2.1% in April from a year earlier as big banks extended loans to utilities, and for mergers and real-estate related transactions, the BOJ said. (…)

But there are many “buts”. Is this a zero sum game or not?

Yen weakens past 100 to dollar, may fan talk of currency war

Kittiratt Urges Thai Rate Cut Exceeding Quarter Percentage Point

Sri Lanka Lowers Key Interest Rates to Spur Economic Growth

Vietnam Cuts Interest Rates as Global Monetary Easing Spreads

Japan investors switch into foreign bonds

Yen extends slide against dollar beyond Y100

Japan Data Suggest Strengthening

Official figures released Friday showed bank lending in April up 2.1% from a year earlier, the largest percentage gain since July 2009. Separate data showed the country’s current account, the broadest measure of trade with the rest of the world, stood at ¥1.25 trillion ($12.4 billion) in March before seasonal adjustment, the largest surplus in the last 12 months, despite a sharply wider trade-deficit component.

The BOJ said Friday that outstanding loans at Japanese banks, excluding locally operated credit unions, rose to ¥405 trillion in April as mergers and real-estate transactions increased.

India Car Sales Fall for 6th Month

In April, sales fell 10% from a year earlier to 150,789 cars, according to data issued Friday by the Society of Indian Automobile Manufacturers.
The decline is due partly to high ownership costs, SIAM Deputy Director General Sugato Sen said, referring to high interest rates and fuel prices.

India Factory Output Growth Accelerates

India’s industrial output rose for the third straight month in March, raising hopes that the economic slowdown may have ended and a gradual recovery could be under way.

The index of industrial production rose 2.5% from a year earlier, benefiting from a stronger expansion in manufacturing output, government data showed Friday. This followed a 0.5% expansion in February, as interest rate cuts from the central bank and government reforms so far this year have improved business confidence.

High five India’s composite PMI fell from 51.4 in March to 50.5 in April…

Hong Kong Economy Grows Less-Than-Forecast 0.2% as China Slows

The increase from the previous three months compared with a revised 1.4 percent gain in the fourth quarter, the government said today.

China April New Yuan Loans, Money Supply Exceed Estimates

Lending was 792.9 billion yuan ($129 billion) in April, the People’s Bank of China said in Beijing. That compares with the median estimate of 755 billion yuan in a Bloomberg News survey and 1.06 trillion yuan in March. M2 money supply rose 16.1 percent from a year earlier, compared with the median economist forecast of 15.5 percent. Aggregate financing, a broader measure of credit, was 1.75 trillion yuan compared with a record 2.54 trillion yuan in March.

Portugal and Greece joblessness hits highs

Greek unemployment among 16- to 24-year-olds reaches 64%

In Greece, the jobless rate hit 27 per cent in February, up from 26.7 per cent the month before, while the rate among 16-24 year-olds climbed to 64.2 per cent.

In Portugal, whose economy has been contracting sharply for three years, the jobless rate rose to 17.7 per cent in the first quarter of 2013, up from 16.9 per cent in the final three months of last year.

Italy’s One-Year Borrowing Costs Fall to Record Low at Auction

In Italy industrial production fell more than economists expected in March, indicating there is little sign the country’s longest recession in two decades is easing. Output decreased 0.8 percent from February, when it fell a revised 0.9 percent, national statistics office Istat said.

U.K. Construction Output Declines to Lowest Since 1998

Output dropped 2.4 percent from the previous three months to its lowest since the fourth quarter of 1998, the Office for National Statistics in London said today.

Construction, which accounts for 6.8 percent of the economy, has been hit hard by government budget cuts and the credit famine. Output has fallen by about a fifth from its pre-recession peak five years ago, double the decline in manufacturing.

The fall in U.K. construction in the first quarter was led by a 3.2 percent drop in new work, with all sectors posting declines with the exception of private housing and repair and maintenance, the ONS said.

EARNINGS WATCH

Fed Bridges Gap to Earnings Pickup in Modest U.S. Growth

(…) With modest economic growth weighing on results, revenue for companies in the Standard & Poor’s 500 Index has missed the aggregate analysts’ estimate by about 0.7 percent, according to data compiled by Bloomberg, even though earnings have been better than projected. Through yesterday, 452 of the benchmark-index members have reported for quarters ending between Feb. 16 and May 15. (…)

High Yield Rally Is Running Low on Fuel (Moody’s Capital Markets Research)

Our preferred measure of core business sales ― which equals the sales of retailers, manufacturers and wholesalers less sales of identifiable energy products ― rose by merely 3.0% yearly in Q1-2013, which was down from Q4-2012’s 3.5% and Q1-2012’s 6.2%.

The yearly increase previously ebbed to 3.0% in Q2-2008, Q4-2000, and Q3-1998, where each earlier deceleration was associated with a high yield bond spread significantly above its latest 410 bp. Thus, if expenditures do not quicken, what is now the narrowest high yield bond spread since October 16, 2007 could widen substantially. (Figure 2.)

The lackluster state of the world economy has curbed the growth of business sales. The US high yield bond spread has shown a strong inverse correlation with the JPMorgan/Markit global composite PMI index of world economic activity. Ordinarily, the high yield bond spread widens as the global composite PMI falls.

Nevertheless, despite how April 2013’s global composite PMI of 51.9 is well under its long-term median of 54.6, May 7’s high yield bond spread of 411 bp was well under its comparably measured median of 583 bp. Moreover, the statistical record suggests that the high yield spread ought to be closer to 700 bp, as opposed to approaching 400 bp. In fact, when the high yield spread last narrowed to 411 bp in December 2003, the global composite PMI approximated 60.0.

Notwithstanding both lackluster sales growth and the subpar pace of global activity, the recent high yield bond spread of 411 bp is very much consistent with the benign outlook for the US high yield default rate. (…)

Notwithstanding the subpar pace of business activity both domestically and globally, an abundant supply of financial liquidity will help to rein in defaults. Furthermore, until stocks are viewed as being significantly overvalued, the latest equity rally ought to enhance the business sector’s access to funds.

Martin Feldstein: The Federal Reserve’s Policy Dead End

(…) despite the Fed’s current purchases of $85 billion a month and an accumulation of more than $2 trillion of long-term assets, the economy is limping along with per capita gross domestic product rising at less than 1% a year. Although it is impossible to know what would happen without the central bank’s asset purchases, the data imply that very little increase in GDP can be attributed to the so-called portfolio-balance effect of the Fed’s actions. (…)

In short, it isn’t at all clear that the Fed’s long-term asset purchases have raised equity values as the portfolio balance theory predicted. Even if it did account for the entire rise in equity values, the increase in household equity wealth would have only a relatively small effect on consumer spending and GDP growth. (…)

Mr. Bernanke has emphasized that the use of unconventional monetary policy requires a cost-benefit analysis that compares the gains that quantitative easing can achieve with the risks of asset-price bubbles, future inflation, and the other potential effects of a rapidly growing Fed balance sheet. I think the risks are now clear and the benefits are doubtful. The time has come for the Fed to recognize that it cannot stimulate growth and that a stronger recovery must depend on fiscal actions and tax reform by the White House and Congress.

Loonie to sink to 90 cents by early 2014: TD

Another major bank is forecasting a big drop in the Canadian dollar.
Toronto-Dominion Bank says the loonie, now at near par, will tumble to 90 cents by early next year, before recovering to 93 cents by the end of 2014.
The bank blames the loss of Canada’s “growth advantage,” lower commodity prices and the rebounding might of the U.S. dollar for the reversal.
(…) the report points to harder evidence: An economy that is expected to grow more slowly than the U.S. this year and next, lower prices for oil, base metals and precious metals, and a further rise of 4 to 5 per cent in the trade-weighted value of the U.S. dollar.

NEW$ & VIEW$ (2 MAY 2013)

Posted on May 2, 2013 by Denis Ouellet

Initial Jobless Claims: -18K to 324K vs. 345K consensus, 342K prior (revised).

U.S. Vehicle Sales Move Lower

After several months at the highs for the economic recovery, U.S. vehicle sales have begun to decline. Unit sales of light motor vehicles during April fell 2.3% m/m (+5.7% y/y) to 14.92M (SAAR) according to the Autodata Corporation. These sales compare to the recovery peak of 15.54M in November. Sales disappointed expectations for 15.3M according to Bloomberg.

U.S. Construction Spending Reverses Earlier Rebound

Reversals and revisions can change the picture of an economic series. Such was the case with the latest construction put in place numbers. Building activity fell 1.7% (+4.8% y/y) in March and reversed a 1.5% February rise. Moreover, it added to a 4.0% January decline which was double the last estimated drop. As a result, the level of construction activity was 4.1% lower than at yearend 2012.

Fed Steps on Gas as Inflation Slows

The Federal Reserve said it would press forward with an $85 billion-a-month bond-buying program and hinted it might even dial it up. The move comes amid a U.S. and global inflation slowdown.

(…) the Fed, in a statement released after Wednesday’s meeting, evinced no sign it is leaning toward pulling back. Instead, it struck a more neutral tone and emphasized it could “increase or reduce” the size of its monthly bond purchases, depending on inflation and job growth in the months ahead. (…)
“Fiscal policy is restraining economic growth,” the Fed said bluntly about U.S. tax and spending policies aimed at short-term budget-deficit reduction. Fed Chairman Ben Bernanke has called on the Obama administration and Congress to agree to a budget plan that reduces deficits in the long run without cutting much right away while the economy is weak.
The global inflation slowdown is one of the more surprising developments confronting the Fed and other central banks, and has become more apparent in recent few weeks. (…)
The U.S. Commerce Department reported Monday that consumer prices rose just 1% in the 12 months ending in March, well below the Fed’s 2% target. In the 17-member euro zone, inflation hit 1.2% in April, the lowest rate in more than three years and also well below the ECB’s target of just under 2%. (…)
Several indicators suggest inflation pressures have receded in recent weeks. Futures prices for commodities, including oil, cotton, sugar and gold, are all down from a year earlier.

U.S. ISM Composite Factory Sector Index & Prices Weaken Further

The April composite index of manufacturing activity from the Institute for Supply Management slipped to 50.7 from an unrevised 51.3 in March. During the last ten years, there has been a 69% correlation between the ISM index and the q/q change in real GDP.
Leading the overall index down was a lower employment reading. The sharp decline to 50.2 brought it to nearly the lowest level of the economic expansion. During the last ten years there has been an 88% correlation between the employment index and the m/m change in factory payrolls.
Also down sharply last month was the inventories series (46.5). Offsetting these declines were gains in supplier deliveries (50.9), a rise which indicated slower delivery speeds, production (53.5) and new orders (52.3). The new export orders index (54.0) also fell m/m but remained much higher than the November low of 47.0.

Alcoa Battling Aluminum Surplus

Alcoa Inc. said it will consider cutting up to 11% of its current smelting capacity as the U.S. aluminum giant tries to weather low prices for the industrial metal.
Aluminum prices have fallen by more than one third since 2011 due to a prolonged slump in the raw-aluminum market.
Russia’s United Co. Rusal PLC, the world’s largest producer of aluminum by volume, has already announced plans to reduce output by 300,000 tons, or 7% of production, in 2013, and permanently close 275,000 tons of capacity by the end of 2015.
(…) it is up to big aluminum makers outside China to cut production and aim for a total reduction of 1.5 million tons over the next three years, he said. “Industrywide, it should be a common agenda,” he said. Global production of raw aluminum reached 45.2 million tons in 2012, up 33% from 33.9 million tons in 2006.
Those cuts would be in addition to 568,000 metric tons, or 13%, of smelting capacity that the company currently has idle.

U.S. Case-Shiller Home Price Index Posts Stronger Increase

Home prices are generating improved upward momentum throughout the country. The seasonally adjusted Case-Shiller 20 City Home Price Index increased 1.2% (9.4% y/y) during February and built on a 1.0% January rise. The 3-month annualized rate of increase of 13.4% was the strongest since late-2005. Home prices in the narrower 10 city group rose 1.2% (8.6% y/y) in February.

Six Months After Sandy, Small Firms Struggle

Six months after Hurricane Sandy slammed into the Eastern Seaboard, thousands of entrepreneurs and small-business owners up and down the coast are struggling to get back on their feet.

SENTIMENT WATCH

Russell 2000 Back Below 50-DMA

The Russell 2000 is having an especially bad day today with a decline of just under 2%. This puts the index on pace for its worst day since April 15th’s 3.78% decline. Today’s decline has put the Russell 2000 back below its 50-day moving average as well. More importantly, though, while the S&P 500 closed at an all-time high yesterday, the Russell 2000 made its second lower high since March 15th. Not a good sign for smallcaps and the broad economy.

Is it time to sell in May and go away?

This is from Zacks Research which clear shows its bias (my emphasis), before yesterday’s drop:

For starters, each May is different. And there have been some VERY profitable summers in years past. So it’s never wise to just take this saying at face value and truly walk away from the markets. (In fact, if things looked really bad, then it’s best to short the market).

The resilience of stocks to be pressing all-time highs after 3 straight weeks of soft economic reports (including a scary showing for Chicago PMI in contraction territory) is making it hard to say what exactly would make stocks go lower at this stage. Meaning that investors seem quite comfortable with the ebb and flow of Muddle Through Economic growth. And as long as the Fed is on the side of investors, with all that QE, then no reason to walk away.

Doug Short remains objective:

Market lore is full of monthly associations: The January Effect, Sell in May and Go Away, Summer Rallies, the September Slump, Manic-Depressive October, December Rallies, etc.
The first chart shows the average monthly gains/losses, excluding dividends, since 1928 for all twelve months. May is one of the three months with a negative average. Incidentally, the monthly average of all months lumped together is 0.59%. So May has underperformed the mean by 0.73%.

The next three charts divvy up our 85-year period into three parts: 1928-1949, 1950-1981, and 1982-present. The rationale is that the first chart includes the Crash of 1929, Great Depression, WWII, and ends around the time of the secular market bottom in 1949. The second chart covers the cycle from the beginnings of the post-war rally through the Decade of Stagflation and market bottom in 1982. The third chart begins with the great Boomer market that followed and runs to the present.

May has been a performance laggard in two of the three timeframes and the worst performer in one of the three (1950-1981).

Lest the charts above give the false impression that May is a consistently poor performer, let’s close with a distribution of performance over the past 85 years.

Across the entire 85-year timeframe, May has an average of -0.14%. But if we exclude the three negative outliers, the average jumps to 0.59%, which is spot on the overall monthly mean. Pretty amazing!

Let’s hope May 2013 behaves more like it did in 1933 and not like one of those naughty negative outliers (or any of the red markers, for that matter).

NEW$ & VIEW$ (1 MAY 2013)

Posted on May 1, 2013 by Denis Ouellet

It seems that U.S. housing is the only area offering fresh positive stuff these days. That is if you are not in the market for a new house.

Housing Market Heating Up

Home prices are rising at the fastest rate in seven years, as buyers return to a market where property is in short supply.

Prices increased 9.3% in February from a year earlier while mortgage-interest rates hovered near record lows, according to the Standard & Poor’s/Case-Shiller index that tracks home prices in 20 major metropolitan areas. All 20 cities posted year-over-year gains for the second consecutive month, which hasn’t happened since 2005, before the crash.

In some of the hardest-hit markets, the gains have been particularly heady. Home prices rose 23% from one year ago in Phoenix and 18.9% in San Francisco. Nationally, the median home price in March stood at $184,300, well below the peak of $230,400 in 2006 but up from $154,600 in January 2012. (…)
For now, recent data suggest home-price gains are likely to continue. Sales of previously owned homes rose by 10.3% from one year ago in March, even as supplies of homes for sale fell by 16.8%. The Wall Street Journal’s quarterly survey of market conditions in 28 metropolitan areas showed very low supplies of homes available in a rising number of markets, including a less-than-three-month supply in a dozen markets, including the two hottest—Phoenix and San Francisco. (…)
At current mortgage rates near 3.5%, home values would need to rise by 32% nationally—and by as much as 48% in markets across the Midwest and north Florida—for affordability to return to its long-run average, according to an analysis by John Burns Real Estate Consulting in Irvine, Calif.

Krueger: Sequester Hits Harder, Earlier Than Expected

The economic fallout from deep federal government spending cuts has come sooner than expected, White House chief economist Alan Krueger said Tuesday.

ADP Says U.S. Companies Employed Fewer Workers Than Forecast

Companies added 119,000 workers to payrolls in April, figures from Roseland, New Jersey-based ADP Research Institute showed today.

China Manufacturing Weakens

A gauge of China’s manufacturing activity showed fresh signs of weakness in April, undercutting hopes of a stronger upturn in demand from the world’s second-largest economy.

The official Purchasing Managers’ Index came in at 50.6 in April, below expectations of a reading in line with the 50.9 recorded in March.

Note that the seasonally adjusted (by ISI) number is 49.1 vs 49.6 in March.

All but one of the official PMI subindexes—with the exception of a steady measure of raw material stockpiles—were down in April from the previous month.

The official PMI sub-index for new orders fell to 51.7 in April from 52.3 in March while the measure of new export orders slid into contraction territory with a reading of 48.6 in April, compared with 50.9 in March.
The sub-index for purchasing prices of raw materials tumbled 10.5 percentage points to 40.1 percent, the first reading below 50 after the sub-index stayed above the demarcation level for seven consecutive months.
The sub-index for finished goods inventories moved down 2.5 percentage points from the previous month to 47.7 percent, while the sub-index for production shrank slightly by 0.1percentage points to 52.6 percent.
The CFLP data also showed that the employment sub-index for April declined 0.8 percentage points to 49.0 percent, indicating job cuts, while the sub-index for supplier delivery times fell slightly to 50.8 percent.

Eurozone retail sales continue to fall sharply in April

Markit’s retail PMI® data signalled little respite for the Eurozone’s retailers at the start of the second quarter. Sales fell on a monthly basis for a survey record eighteenth consecutive month, and the rate of
decline remained sharp despite easing slightly since March. Retailers subsequently cut more staff and lowered their purchasing activity.

Retail PMI data by country signalled steep falls in sales in both France and Italy, and an ongoing flat trend in Germany. The month-on-month rate of decline in France eased from March’s record pace, but remained severe.

(…) Retailers across the Eurozone continued to cut workforces in April, extending the current sequence of job shedding to over a year. Moreover,
the rate of decline was little-changed from March’s 43-month record. Retail employment rose in Germany for the thirty-fifth successive month, but at only a marginal rate, while job shedding at French and Italian retailers remained sharp in the context of historic survey data.

(…) retailers’ gross margins continued to fall sharply, and they cut the value of purchases for the twenty-first successive month. Subsequently, stocks of goods for resale declined for the eight consecutive month, the
second-longest sequence in the survey history.

Denmark Exhausts Stimulus Avenues as Housing Losses Persist

Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started.
“We’ve used whatever leeway there is,” Economy Minister Margrethe Vestager said in a telephone interview from Copenhagen late yesterday. “There’s no more space to stimulate the Danish economy.”

Seoul offers exporters $10bn of help

Companies dealing with sluggish global demand and weaker yen

South Korea exported goods and services worth $46.3bn in April, the government said on Wednesday. This was a 0.4 per cent year-on-year rise, but down by 2.4 per cent from March’s figure.

Seoul said it would seek to revive export growth by increasing from Won71tn ($64.5bn) to Won82.1tn the value of public loan programmes aimed at small and midsized exporters. (…)

However, he cautioned that Seoul would closely monitor the weakening Japanese yen, a source of growing concern for South Korean policy makers. This follows a warning last month from finance minister Hyun Oh-seok that the yen’s slide was already having an impact on the South Korean economy.
Despite a recent fall in the US dollar value of the South Korean won, it has strengthened by 21 per cent against the yen over the past seven months, as markets anticipate expansionary fiscal and monetary policy under Japan’s new government. (…)
On Monday, data showed that South Korea’s industrial production suffered a month-on-month fall of 2.6 per cent in March: the third successive decline.

Solid rises in output and new orders support continued expansion of Japanese manufacturing economy

The headline seasonally adjusted Markit/JMMA Purchasing Managers’ Index™ (PMI™) rose to 51.1 in April, up from March’s 50.4 and a 13-month high. The PMI has shown steady improvement since the start of 2013 and has posted readings above the 50.0 no-change mark in each of the past two survey periods.

April’s survey data indicated a further rise in manufacturing output. Growth was modest, but still the sharpest in over a year as a particularly strong performance from the investment goods category offset ongoing weakness in the consumer and intermediate sectors.

Similar market group trends were observed for new orders data, with investment goods producers supporting a solid increase in sales for the sector as a whole. There was evidence of improved domestic and overseas demand, with clients reportedly investing in plant equipment and raising inventory holdings. A depreciation of the yen helped to support a solid rise in new export sales.

SENTIMENT WATCH: BAD SURPRISES? SO WHAT!

The chart below shows the 26-week rolling correlation of the Economic Surprise Index and changes in the S&P 500. A declining line represents periods where economic data and the S&P are becoming less correlated, or even moving inversely to each other. The most recent correlation below -0.7 indicates that stocks and negative economic data are moving in almost perfectly opposite directions. (Bill Hester via John Hussman)

Slovenia Junks Its Bond Sale After Downgrade

Slovenia stunned investors when it halted a bond sale just before Moody’s downgraded the country’s debt to “junk.”

The government said it would proceed with the bond issue. However, Slovenia will likely see higher borrowing costs, some investors said. Now that its bonds are rated junk, they will be off limits to investors that buy only investment-grade debt. Slovenia’s 10-year bond yielded 5.847% on Tuesday, compared with 5.69% a day earlier. (…)
Moody’s said it was concerned about Slovenia’s undercapitalized banking sector and deteriorating government balance sheet.

Rift Emerges Over Saudi Oil Policy

A rare public dispute over oil policy in Saudi Arabia emerged as the kingdom’s oil minister and a senior member of its royal family disagreed over long-term production targets for the world’s largest crude exporter.

The Middle Eastern kingdom, which produces around 10% of the world’s oil, needs to increase its crude production capacity by a fifth to 15 million barrels a day by 2020 in order to meet rising domestic consumption and maintain its current export capacity, said Prince Turki al-Faisal, a former intelligence chief and ambassador for the kingdom. (…)
The comments from the prince, who has no formal government position, but is a prominent member of the kingdom’s royal family, were contradicted by Saudi Oil Minister, Ali al-Naimi. There is currently no need to increase crude production capacity beyond 12.5 million barrels a day, Mr. Naimi said.
Saudi Arabia currently produces around 9 million barrels a day of oil, leaving 3.5 million barrels a day as spare capacity. (…)
Prince Faisal’s comments also run counter to the official position of the state-controlled Saudi Arabian Oil Co., also known as Aramco. Aramco declined to comment Tuesday, but its top executive has previously ruled out increasing capacity to 15 million barrels a day despite acknowledging that domestic use of crude would rise and thus limit exports.
Aramco’s Chief Executive Khalid al-Falih ruled out increasing Saudi production capacity to 15 million barrels a day in 2011, despite acknowledging that domestic use of crude would rise and thus limit exports, because he said expansion plans in other producing countries such as Iraq and Brazil should be enough to satisfy world markets. (…)
Saudi Arabia last year consumed around 3 million barrels per day of oil, according to the U.S. Energy Information Administration, almost double its 2000 level and putting it on track to use more than 5 million barrels a day if a 7% annual growth rate were to continue.
Aramco’s Mr. al-Falih acknowledged in 2011 that, if left unchecked, domestic energy consumption would rise to 8.2 million barrels of oil a day by 2030. (…)

Remember: the Saudis need $100 oil to balance their budget.

NEW$ & VIEW$ (25 APRIL 2013)

Posted on April 25, 2013 by Denis Ouellet

SOFT PATCH WATCH

Spring Slowdown Hits Factories No matter how you slice it, the durable goods report was miserable.

New orders for all durable goods plunged 5.7% in March, about double the 2.9% drop expected. Falling demand for aircraft and defense goods contributed much of the weakness, but not all of it. Of the major categories, only computer makers reported an increase in new orders.

For the first quarter, new orders and the backlog of unfilled demand were pretty much flat compared to year-earlier levels. Shipments held up. But orders are the lifeblood for future production. Unless order books fatten up, gains in production and shipments will slow soon.
Businesses have joined consumers in the spring siesta. New orders for core capital goods — which excludes aircraft and defense equipment — edged up 0.2% in March, but are no higher than they were a year ago.

How miserable? NBF Economics explains:

To say that US durable goods orders were weak in March is an understatement. The 5.7% drop is the worst monthly performance since last August. And with orders being outpaced once again by shipments, unfilled orders fell. That extended the declining trend in the year-on-year growth rate of unfilled orders.

As today’s Hot Charts show, such a decline is typically associated with soft patches, if not recessions. Note the year-on-year contraction in unfilled orders for non-defense capital goods excluding aircrafts, a proxy for business investment spending.

The uncertainty brought by the fiscal cliff and subsequently by the sequester are possible explanations for this atypical drop. That already
seems to be capping employment growth in the manufacturing sector and if orders continue to disappoint, things could get worse on that front.

Weaker PMI data hit markets on global growth worries

Weaker than expected flash PMI surveys from Markit for China, the US and the euro area have increased worries about the global economy.

(…) the fact that the weakness of the China PMI was driven by slower new order growth, reflecting a renewed decline in new export work, led to growing fears about global demand (…).

The downbeat news was followed by some brighter news as an upturn in the Markit flash PMI for France indicated a marked easing in the pace of economic contraction for April. The manufacturing PMI came in broadly as forecast (44.4 against a consensus of 44.1), but the service sector PMI jumped to 44.1 against a consensus of 42.0. However, the rally was short-lived, as German flash PMI data fell well short of expectations. The manufacturing PMI for Germany slipped to 47.9 (consensus: 49.0), while activity in the service sector contracted slightly with the respective index down to 49.2 and confounding expectations of a rise to 51.0.

U.K. Economy Avoids Further Contraction

In its preliminary estimate, the Office for National Statistics said gross domestic product grew 0.3% in the first three months of the year compared with the fourth quarter. Economic output was 0.6% higher compared with the first quarter of 2012.

But: Retailers gloomiest for 15 months in April

UK retailers reported a drop in sales on average for the first time in eight months in April, and the outlook for sales in the coming month darkened to the gloomiest for 15 months, according to the CBI.

Letta calls for easing of austerity policies

Italian bond yields close to recent record lows

“Europe’s policy of austerity is no longer sufficient,” he said, echoing similar remarks this week by Jose Manuel Barroso, European Commission president.

Italy Led by Letta Brings Berlusconi Back as Winner

Silvio Berlusconi, the three-time prime minister and two-time convicted lawbreaker, won a path back to power in Italy by outmaneuvering rivals during an eight- week political stalemate.

Spanish unemployment tops 6m

Record figure piles pressure on Madrid to ease austerity

Almost 240,000 people lost their jobs in the first three months of the year, according to Spain’s national statistics office, taking the overall number of jobless to 6.2m. The unemployment rate rose by more than 1 point to 27.16 per cent – worse than predicted by most economic forecasters.
The statistics office also revealed that almost 2m out of 17.4m Spanish households are now without a single person holding a job. (…)
The drop in employment in the first quarter was broadly similar to the falls seen in the past three quarters, and higher than in the corresponding period last year.
Job losses were particularly heavy in the services sector, but also in industry and farming. Employment dropped further in the construction sector, which has already shed more than 1.6m jobs since 2008 as a result of the bursting of Spain’s housing bubble. (Chart from El Pais via Ft Alphaville)

South Korea growth at two-year high

First-quarter GDP of 0.9% boosted by export recovery

Why Housing Won’t Save the U.S. Economy

In a new essay, University of Chicago’s Amir Sufi says we should “temper our optimism on what a housing recovery can do for the U.S. economy.”

(…) The crux of his argument is that a key way that housing stimulates growth — the so-called “wealth effect” in which people spend more because they feel richer as the value of their home increases — is likely to be muted because many of the borrowers who spent most liberally during the housing boom aren’t getting mortgages today. (…)
Mr. Sufi has done research suggesting that homeowners borrowed about $1.25 trillion out of their homes from 2002 to 2006. He finds that this spending wasn’t uniform. Homeowners with the lowest credit scores were very aggressive, he says, borrowing $0.40 against every dollar of increased housing equity, while those with the best credit “were almost completely passive,” pulling almost no equity out of their homes when house prices increased.
The inverse was true when households cut back on spending after the bust. Borrowers with weaker credit were more constrained and cut back much more dramatically on spending. (…)
“The only people getting mortgages at this point are those with pristine credit histories, which are exactly the group least likely to consume out of their housing wealth,” says Mr. Sufi. (…)

EARNINGS WATCH

Mediocre Earnings and Revenues

Below is an updated look at the earnings and revenue beat rates for stocks that have reported so far this earnings season. Last Friday we noted that the earnings beat rate stood at 58%, while the revenue beat rate was much lower at 43.9%. Another 250 companies have already reported this week, which is more than double the amount that had reported all season from April 8th through April 19th. As shown below, the earnings beat rate has taken a hit with this week’s reports added into the mix. As it stands now, 56.9% of the 458 US companies that have reported have beaten earnings estimates. This would be the lowest reading seen since the bull market began, so the remaining companies that still have to report have some work to do!

NEW$ & VIEW$ (24 APRIL 2013)

Posted on April 24, 2013 by Denis Ouellet

Orders for U.S. Durable Goods Decline by Most Since August

Bookings for goods meant to last at least three years decreased 5.7 percent after a revised 4.3 percent gain the prior month that was smaller than previously estimated, the Commerce Department reported today in Washington. The median forecast of 78 economists surveyed by Bloomberg called for a 3 percent decline. Orders excluding transportation equipment, which is volatile month to month, unexpectedly fell for a second month.

(Chart from Zerohedge)

Home Builders Gain Leverage

What’s bad news for home buyers is good news for builders: The low inventory of previously owned houses for sale is driving up new-home sales—and prices.

New-home sales jumped 1.5% in March to an annual pace of 417,000, the second-highest monthly sales pace in three years, according to data released Tuesday by the Commerce Department. Year-over-year March sales were up 18.5%.
Builders, meanwhile, are increasing the number of new homes they are putting on the market. Tuesday’s figures showed that there were 153,000 newly built homes listed for sale, adjusted for seasonal factors, which is the most since November 2011. That supply would take 4.4 months to deplete at the current sales pace, unchanged from February. (…)
Michael Izo, who works in marketing for AAA, and his wife, Monica, had been renting in Dublin, Calif.—about a half-hour drive from San Francisco—before they decided to take advantage of low mortgage rates and buy a home early this year. They made offers on four existing homes, and were outbid by upward of 30 other buyers on each.

In March, Mr. Izo, 32 years old, noticed signs during a weekend drive for a lottery at a new community built by Shea Homes, in Livermore, Calif.. He and his wife attended two Saturday-morning lotteries where they put down their names, then waited, shoulder-to-shoulder with dozens of other couples, for their number to be drawn from a tote bag. Last Saturday, at their second lottery, the Izos’ number was finally drawn. This coming weekend they plan to sign a contract for a three-story, two-bedroom townhome, for $518,000. (…)
Builders have also taken advantage of heightened demand to raise prices. The median sale price of a new home sold in March was $247,000, up 3% from a year ago. The median price of a new home was $247,900 at the tail of the housing boom in 2007.
A typical strategy is for a builder to release just five or six homes for sale at a time, and raise prices between releases after demand has been stoked. (…)

Immigrants boost US housing recovery Attractive investments for foreign settlers spur price rises

(…) Although they represent close to 13 per cent of the US population, immigrants accounted for nearly 36 per cent of growth in home ownership between 2000 and 2010, according to a report by the Research Institute for Housing America and the Mortgage Bankers Association. While this has been driven mainly by the Hispanic community, other minority populations have also boosted gains.
The number of homeowning immigrant households is projected to rise by 2.8m in the decade ending 2020, compared with a 2.4m gain in the previous 10 years. They will account for more than 50 per cent of the rise in homebuying in six gateway states, such as California and New York, the report adds.

Pressure mounts on ECB to cut rates

German business confidence falls in April

The Ifo Institute’s April business climate survey of German businesses fell to 104.4 from 106.7, a substantially bigger fall than predicted by analysts. Pessimism about the outlook rather than current conditions weighed on the 7,000 companies surveyed, with wholesalers expressing the greatest gloom.
(…) Daimler cut a full-year forecast that it issued barely two months ago as profits fell due to weaker-than-expected European car and truck sales. And Volkswagen said its operating profit tumbled 26 per cent in the first quarter, partly due to slumping demand in Europe.

Spain poised to ease austerity push

Madrid to focus on structural reforms in policy switch

Portugal unveils measures to boost growth

Plan to lower company tax rates ‘significantly’

Letta Named Italian Prime Minister as Political Impasse Ends

The Democratic Party, or PD, and People of Liberty demonstrated a willingness to work together after Bersani’s departure. The two parties united on April 20 in a parliamentary vote that gave Napolitano a second seven-year term as head of state. Beppe Grillo’s Five Star Movement, the third-biggest group in parliament, has reiterated its refusal to enter into an alliance.

NEW$ & VIEW$ (19 APRIL 2013)

Posted on April 19, 2013 by Denis Ouellet

Still travelling…almost there…

Conference Board Leading Economic Index: ’Declined Slightly in March’

The Conference Board Leading Economic Index (LEI) for March was released this morning. The index declined 0.1 percent to 94.7 (2004 = 100), following a 0.5 increase in each of the two previous months.

Philly Fed Business Outlook: Essentially Flat Growth

Today’s gauge of General Activity remains positive at 1.3 but is fractionally lower than last month’s 2.0. However, the 3-month moving average came in at -3.1, the tenth negative reading in eleven months. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion.

The demand for manufactured goods remained weak, with the current new orders index declining from 0.5 to -1.0. The shipments index showed continued improvement, however: The index remained positive and edged six points higher, to 9.1, its highest reading in four months. Nearly 28 percent of the firms reported an increase in shipments; 19 percent reported a decrease. Firms reported a notable decrease in inventories this month: The current inventories index fell from zero to -22.2.

Jobless Claims Rise by 4,000

Initial jobless claims, an indication of layoffs, increased by 4,000 to a seasonally adjusted 352,000 in the week ended April 13, the Labor Department said Thursday.
A broader measure of claims continued to climb. The four-week moving average of claims, which smooths out week-to-week volatility, grew by 2,750 to 361,250, the highest level since mid-February.
Meanwhile, claims for the week ending April 6 were revised up to 348,000 from an initially reported 346,000.

Yen falls after G20 backs Abenomics

Finance minister says group not resistant to Japanese policies

Credit Crunch Widens Europe Business Rifts

The ECB has flooded the euro zone with cheap loans over the past three years, but large swaths of small and midsize businesses have received precious little of this liquidity.

(…) The root of the problem is that most European companies depend disproportionately on bank lending for their funding—more than 70% of funding comes from loans. This reliance means that the continuing credit crunch might squelch any chance that the euro-zone economy will recover later this year after contracting for five straight quarters. (…)

Total corporate loans fell 2.7% in the euro zone in February compared with a year earlier, the biggest drop in two years, according to Morgan Stanley. They sank 8% in Spain and 4% in Ireland, also in February. (…)

The percentage of Italian companies citing access to financing as their most significant problem is the highest since 2009, according to ECB surveys. (…)

And the ECB’s latest survey in January showed banks are tightening lending standards further. Indeed, as banks have slashed branches and centralized the loan-application process, it has become more difficult for small-business people to rely on long-standing relationships with local bank managers to secure a loan, as was the practice in Southern Europe.
“Given the rise in bad loans, it’s obvious that lending policies have to change,” said Giovanni Sabatini, head of the Italian Banking Association.
The pain is even being felt in parts of the North. At CeFip, a Belgian agency that helps businesses appeal rejected loan applications, requests for help have doubled since November. French companies, which enjoy some of the lowest rates in Europe, are complaining too; according to a survey by France’s association of smaller businesses, 59% failed to get funding for at least one project last year. (…)

France Hits Brakes on Austerity

The French government presented its plan to avoid austerity and let its debt keep rising an extra year as the economy struggles to grow.

In Germany, Chancellor Angela Merkel, who faces general elections in the fall, says euro-zone countries must live within their means and reduce their budget deficits to restore sound public finances.
The chancellor, who let Germany’s budget discipline slip in 2009 during the global financial crisis, has also rejected calls from France and the U.S. to help finance growth-boosting measures.
“We don’t have the muscle to put in place for the second time a large stimulus program without losing international confidence,” Ms. Merkel said on Monday. (…)
The French president said last month he wouldn’t accept European countries being put “in a house of correction,” when they try to protect themselves from plunging into recession.
In Germany, Ms. Merkel said Wednesday that she would closely watch France’s efforts to improve its economy, without being overbearing.
“We will follow these reforms, which France will introduce or which are already in progress, in a very friendly manner,” she said.

Dutch unemployment jumps in March

Jobless rate rises to 6.4 per cent from 6.2 per cent

The unexpectedly large bump in the rate to 6.4 per cent from 6.2 per cent a month earlier comes as the Dutch government encounters increasing political resistance to the austerity policies it has pursued for the past two years, with further cuts needed to meet European budget deficit targets. (…)
The Netherlands’ Central Bureau for Statistics said the increase in unemployment had been sharpest among 25 to 45-year-olds. Job losses have been concentrated in domestic industries, including the building trade, which has been hit hard by a falling housing market.
Unemployment claims also rose, particularly in retail and the healthcare sector, which has faced sharp government budget cuts.

Brazil’s Central Bank Raises Base Rate

Brazil’s central bank Wednesday raised its base interest rate for the first time in nearly two years, but economists say the modest increase could be only the beginning of a longer tightening cycle to combat inflation.

Toyota to Make Lexuses in U.S.

Toyota will move part of its production of the Lexus ES, currently built at a plant in Kyushu in southern Japan, the person said.
The ES model isn’t sold in Japan, and all of the ones made in Kyushu are shipped to North America, the Middle East and Asia. The person said the shift to the U.S. is aimed at making ES production more cost-effective, as North America is the top destination for the vehicle.
Japanese media reported earlier in the day that Toyota will start producing Lexus-brand cars at its Kentucky plant as early as in 2015.

Nestlé Expects Volatility to Stay

Nestlé said it expects the food market to remain volatile this year, as it reported a worse-than-expected rise in sales on weak consumer confidence in Europe and slowing demand in emerging markets.

Carrefour Hit by Currency Effects (and weak sales)

In Europe, excluding France, Carrefour reported a 3.5% drop in revenue to €5.46 billion. Sales also dipped in France as the retailer struggled to maintain recent improvements in trends, which had given encouraging signs on the progress of the strategy under new Chief Executive Georges Plassat, who was appointed in spring last year. Domestic first-quarter revenue declined 0.7% on year to €9.29 billion, but the company underlined the resilient performance of its stores under unfavorable weather conditions.

Copper Inventories Rising

(…) It was understandable that copper inventories would rise back in 2008, when the economy was grinding to a halt, and when copper prices plummeted from above $4/pound in July 2008 to $1.25/pound in December 2008. And shortly after copper bottomed at the end of December 2008, copper inventory levels started coming back down again.
Now we are seeing an even more rapid rise in inventory levels, and it comes on just a small amount of drop in copper prices. The first message to take from this is that copper producers don’t think that $3.60 is a fair price.
That’s where copper was hovering just as the big run up started in inventory levels. The inventory rise makes a pretty emphatic statement that the producers think they can get a better price by waiting.

Copper Inventories Copper Inventories Rising

Tom McLellan is too generous with mining companies. They are not as smart as he suggests. Rising inventories are almost always involuntary, a result of unexpected falling demand.

American Dream of Owning Home Lives On, Even for Young

Americans’ dream of owning a home is alive and well, evidenced by the fact that most Americans own a home and plan to continue to do so (56%), or don’t own a home but plan on buying one in the next 10 years (25%). Eleven percent of Americans don’t own a home and have no plans to buy one, and 3% own a home but plan on selling it and renting in the next 10 years.

SENTIMENT WATCH

Dow Finishes With Triple-Digit Drop

For Stocks, Fed Stimulus Wearing Thin

The bond market isn’t the only thing going against stocks these days. Apart from large-cap U.S. stocks, a lot of asset classes are waving red flags (or white flags, as the case may be). Consider this:

- The Russell 2000, one of the best measures of U.S. small-cap stocks, is down about 5% from its mid-March high.
- The STOXX Europe 600, the broadest measure of corporate Europe, is down about 4.5% since its April high; further, apart from Germany and the U.K., European stock markets are having a bad year.
- The iShares MSCI Emerging Markets Index Fund is down about 9.4% this year.
- China’s Shanghai Composite is down about 10% from its February high.
- Crude oil prices (West Texas Intermediate) are down about 12% from their 2013 high.
- Copper prices are down about 16% since their early February high.
- Gold prices are down…well, don’t even both asking about gold right now.

The markets, it seems, are more focused on the IMF’s gloomy assessment of the global economy than the Fed’s relatively upbeat assessment of the U.S. economy. We’ve seen such a burst of central bank intervention this year, and the biggest, the DJIA, the S&P 500, the Nikkei 225, have been so strong, that a lot of this underlying weakness has been papered over. With the Dow and S&P 500 showing their own warning signs, that paper’s wearing thin. It’s almost see-through at this point. (…)

(Bespoke Investment)

54% of S&P 500 Stocks Yield More Than the 10-Yr Treasury

As of today (4/17), there are 278 stocks in the S&P 500 (55.6% of the index) that currently yield more than the 10-year US Treasury. Additionally, more than a quarter of all stocks in the index (132) yield more than the 30-year US Treasury.
While the large percentage of stocks yielding more than US Treasuries is more a result of historically low interest rates than historically high dividend yields, it is hard to argue that the market is overvalued when earnings multiples are merely inline with historical averages while the ‘coupon’ is greater than the payout on Treasuries.

And how`s that to boost sentiment?

Central bankers say they are flying blind

Monetary policy experts fear side-effects of excessive easing

Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board, captured the mood at the IMF’s spring meeting, saying: “We don’t fully understand what is happening in advanced economies.”

The rise of rail oil

Pipeline or oil? Pick your risk.

Smaller Share of High School Grads Going to College

The college enrollment rate — the share of recent U.S. high-school graduates enrolling in college or a university in the same year — dropped in 2012 to 66.2%, the lowest level since 2006, the Labor Departmentsaid in a report on Wednesday. For 2012 graduates, the rate dropped for both men and women, to 61.3% from 64.6% in 2011, and 71.3% from 72.3%, respectively.

The findings suggest some high-school graduates are becoming more confident about their job prospects after years of hiding out by going to college. When the economy sank into recession between 2007 and 2009, the college enrollment rate rose steadily to a record high of 70.1%. The implosion of America’s construction industry, for example, meant fewer jobs for young men looking for work right out of high school. Now it appears some of these young graduates are going on the job market again.

The unusually high number of high-school graduates going to school instead of looking for work has also kept the nation’s overall unemployment rate artificially low, since going to school takes you out of the labor force. If more freshly-minted grads now look for jobs and enter the work force, that will push unemployment higher.
There were other gloomy signals in the government’s latest report. The share of recent black American high-school graduates enrolling in college dropped precipitously to 58.2% from 67.5% in October 2011 — a much bigger drop than for whites, Asians and Hispanics. Last October—when the Labor Department gathered its data — the unemployment rate for high-school grads who didn’t enroll in school was 34.4%, up from 33.6% a year earlier.
Meanwhile, the unemployment rate for people age 16 to 24 without a high school diploma was 28.8% for men — a big jump from 19.7% a year earlier. The “labor-force participation rate” for all Americans who dropped out of high school last year — those who were working or looking for work — tumbled to 47.2% from 55.5%, a sign that those without even high-school diplomas are struggling to find their way.