NEW$ & VIEW$ (9 JANUARY 2014)

Yellen Eyes Turnover as U.S. Workers Leave Jobs

More Americans are voluntarily quitting their jobs as they become increasingly confident about business conditions — a trend that Janet Yellen, the next Federal Reserve chairman, is monitoring.

Almost 2.4 million U.S. workers resigned in October, a 15 percent increase from a year earlier, based on seasonally adjusted data from the Department of Labor. These employees represent 56 percent of total separations, the 13th consecutive month above 50 percent and highest since April 2008. November figures are scheduled to be released Jan. 17. (…)

The quits ratio is highly correlated with how Americans feel about the job market and is especially helpful because it separates behavior from intentions, showing “what people are doing, not what they say they’ll do,” Colas said. “Voluntarily leaving one’s position requires a fundamental level of confidence in the economy and in one’s own personal financial story.” The ratio in November 2006, about a year before the recession began, was 58 percent.

The share of Americans who say business conditions are “good” minus the share who say they are “bad” rose in December to the highest in almost six years: minus 3 percentage points, up from minus 4.2 points the prior month, based on data from the Conference Board, a New York research group.

Job seekers also are more optimistic about the hiring environment. Sixty-three percent of callers to a job-search-advice help line Dec. 26-27 said they believed they could find new employment in less than six months, up from 55 percent a year ago, according to Challenger, Gray & Christmas Inc., a human-resources consulting company. (…)

U.S. December planned layoffs plunge to lowest since 2000: Challenger

The number of planned layoffs at U.S. firms plunged by 32 percent in December to the lowest monthly total in more than 13 years, a report on Thursday showed.

Employers announced 30,623 layoffs last month, down from 45,314 in November, according to the report from consultants Challenger, Gray & Christmas, Inc.

The last time employers announced fewer job cuts was June of 2000, when 17,241 planned layoffs were recorded.

The figures come a day ahead of the closely-watched U.S. non-farm payrolls report, which is forecast to show the economy added 196,000 jobs in December. (…)

The December figure fell 6 percent from a year earlier, when planned layoffs totaled 32,556, and marked the third straight month that announced workforce reductions dropped year over year. (…)

U.S. Consumer Credit Growth Eases

The Federal Reserve Board reported that consumer credit outstanding increased by $12.3 billion (6.1% y/y) during November following an unrevised $18.2 billion October gain. The latest monthly gain was the weakest since April.

Usage of non-revolving credit increased $11.9 billion (8.2% y/y) in November. Revolving credit outstanding gained $4.3 billion (1.0% y/y) in November.

Auto Markit Eurozone Sector PMI: Automobiles & auto parts posts its best quarterly performance since Q1 2011

Despite recent growth being high in the context of historical survey data, automobiles & auto parts still maintains some forward momentum heading into the New Year. New orders increased sharply and to the greatest degree in three years in December, leading to a substantial build-up of outstanding business. Job creation, which has until now been muted relative to the trends in output and new business, therefore looks set to pick up.

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German Industrial Output Rises First Time in Three Months

Output, adjusted for seasonal swings, increased 1.9 percent from October, when it fell 1.2 percent, the Economy Ministry in Berlin said today. Economists predicted a gain of 1.5 percent, according to the median of 32 estimates in a Bloomberg News survey. Production climbed 3.5 percent from a year earlier when adjusted for working days.

German Orders Surge Back But Domestic Orders Lag

German orders rose by 2.1% in November, rebounding from a 2.1% drop in October. The headline trend shows solid growth with three-month growth at a 12.7% annual rate, up from a 6.2% annual rate over six-months and a 6.8% annual rate over 12-months. The strength is led by foreign demand.

Foreign orders rose by 2.2% in November from a 2.2% drop in October but also logged a 6.3% increase in September. As a result, foreign orders are rising at a 27.1% annual rate over three-months, up from a 12.8% annual rate over six-months, and a 9% annual rate over 12-months.

In contrast, domestic orders rose by 1.9% in November, unwinding a 1.9% drop in October. However, domestic orders also fell by 0.9% in September. As a result, the trend for domestic orders is poor. It is not just weaker than foreign orders – it is poor. Domestic orders are falling at a 3.8% annual rate over three-months following a 1.9% annual rate drop over six-months and a 3.9% annual rate gain over 12-months. The domestic sector is in a clear deceleration and contraction.

China’s 2013 Vehicle Sales Rose 14%

The CAAM said sales of both passenger and commercial vehicles totaled a record 21.98 million units, up 14% from a year earlier, the fastest pace since 2010. Passenger vehicles led the way, with sales up 16% to 17.93 million units.

Sales gain in December quickened due in part to local consumers’ habit of spending ahead of the Lunar New Year, which falls in the end of January this year. Auto makers shipped 2.13 million vehicles to dealers, up 18% from a year earlier. Among the total, sales of passenger vehicles were 1.78 million units, up 22% on year.

Even as China’s economy displayed clear signs of a slowdown, consumers bought new vehicles, motivated by some cities’ pending restrictions on car purchases to alleviate traffic congestion and air pollution. Within hours after the northern city of Tianjin announced a cutback on new license plates last month, thousands of residents rushed to buy cars. Some used gold necklaces as collateral, said local media.

CAAM said it expects gains to continue this year, though at a slower pace. The association projected a rise of 8%-10% for the overall auto market, to about 24 million units, and as much as an 11% gain for passenger vehicles, to nearly 20 million units.

“China’s auto market is still at the period of rapid expansion and growth has gradually shifted to small-sized cities where demand is significant,” said Shi Jianhua, deputy secretary-general at the CAAM.

China Consumer Inflation Eases

The consumer-price index rose 2.5% in December from a year earlier, slower than the 3.0% year-over-year rise in November, the National Bureau of Statistics said Thursday.

In the December price data, food remained the key contributor to higher prices, rising 4.1% year on year in December. But that was down from the 5.9% rise the previous month. Nonfood prices were up 1.7% in December, compared with November’s 1.6% gain.

But in a continued sign of weak domestic demand, prices at the factory level fell once again, declining for the 22nd consecutive month. They were down 1.4% in December, falling at the same rate as in November.

Stripped of food prices, inflation edged up to 1.7% YoY from 1.6% in November.

OECD Inflation Rate Rises

The Organization for Economic Cooperation and Development said Thursday the annual rate of inflation in its 34 developed-country members rose to 1.5% from 1.3% in October, while in the Group of 20 leading industrial and developing nations it increased to 2.9% from 2.8%.

The November pickup followed three months of falling inflation rates, but there are indications that it will prove temporary. Figures already released for December showed a renewed drop in inflation in two of the world’s largest economies, with the euro zone recording a decline to 0.8% from 0.9%, and China recording a fall to 2.5% from 3.0%.

Key Passages in Fed Minutes: Consensus on QE, Focus on Bubbles

Federal Reserve officials were largely in agreement on the decision to begin winding down an $85 billion-per-month bond-buying program. As they looked to 2014, they began to focus more on the risk of bubbles and financial excess.

    • Some … expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated.
    • Several [Fed officials] commented on the rise in forward price-to-earnings ratios for some small cap stocks, the increased level of equity repurchases, or the rise in margin credit.

Pointing up Something the Fed might be facing sooner than later:

Bank dilemma Time for Carney to consider raising rates

When your predictions are confounded, do you carry on regardless? Or do you stop, think and consider changing course? Such is the remarkable recovery in the UK economy since the first quarter of last year that the Bank of England is now facing this acute dilemma.

Just five months ago, the bank’s new governor pledged that the BoE would not consider tightening monetary policy until unemployment fell to 7 per cent so long as inflationary pressures remained in check. (…)

The question is what the BoE should now do. Worst would be to show guidance was entirely a sham by redefining the unemployment threshold, reducing it to 6.5 per cent. Carrying on regardless of the data is no way to run monetary policy. Instead, the BoE should be true to its word and undertake a thorough consideration of a rate rise alongside its quarterly forecasts in its February inflation report. (…)

EARNINGS WATCH

I have been posting about swinging pension charges in recent months. Most companies determine their full year charge at year-end which impacts their Q4 results.

Pendulum Swings for Pension Charges

Rising interest rates and a banner year for stocks could lift reported earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Rising rates and a banner year for stocks could lift earnings at some large companies that have made an arcane but significant change to the way their pension plans are valued.

Companies including AT&T Inc. and Verizon Communications Inc. could show stronger results than some expect when they report fourth-quarter earnings in coming weeks. They and about 30 other companies in the past few years switched to “mark-to-market” pension accounting to make it easier for investors to gauge plan performance.

With the switch, pension gains and losses flow into earnings sooner than under the old rules, which are still in effect and allow companies to smooth out the impact over several years. Companies that switch to valuing assets at up-to-date market prices may incur more volatility in their earnings, but it offers a more current picture of a pension plan’s health and its contribution to the bottom line.

In 2011 and 2012, that change hurt the companies’ earnings, largely because interest rates were falling at the time. But for 2013, it may be a big help to them, accounting experts said, a factor of the year’s surge in interest rates and strong stock-market performance.

“It’s going to account for a huge rise in operating earnings” at the affected companies, said Dan Mahoney, director of research at accounting-research firm CFRA.

Wall Street analysts tend not to include pension results in their earnings estimates, focusing instead on a company’s underlying businesses. That makes it hard for investors to know what the impact of the change will be. Some companies may not see a big impact at all, because of variations from company to company in how they’ve applied mark-to-market changes. (…)

Some mark-to-market companies with fiscal years ended in September have reported pension gains. Chemical maker Ashland Inc. had a $498 million pretax mark-to-market pension gain in its September-end fourth quarter, versus a $493 million pension loss in its fiscal 2012 fourth quarter. That made up about 40% of the Covington, Ky., company’s $1.24 billion in operating income for fiscal 2013. (…)

Not all mark-to-market companies will see gains. Some such companies record adjustments only if their pension gains or losses exceed a minimum “corridor.” As a result, Honeywell International Inc. says it doesn’t foresee a significant mark-to-market adjustment for 2013, and United Parcel Service Inc. has made similar comments in the past.

Moody’s adds: US Corporate Pension Funded Ratios Post Massive Increase in 2013

At year-end 2013, we estimate pension funding levels for our 50 largest rated US corporate issuers increased by 19 percentage points to 94% of pension obligations, compared with a year earlier. In dollar terms, this equates to $250 billion of decreased underfundings for these same issuers. We expect this reduction to be replicated across our entire rated universe. These improved funding levels will result in lower calls on cash, a credit positive.

Big Six U.S. Banks’ 2013 Profit Thwarted by Legal Costs

Combined profit at the six largest U.S. banks jumped last year to the highest level since 2006, even as the firms allocated more than $18 billion to deal with claims they broke laws or cheated investors.

A stock-market rally, cost cuts and a decline in bad loans boosted the group’s net income 21 percent to $74.1 billion, according to analysts’ estimates compiled by Bloomberg. That’s second only to 2006, when the firms reaped $84.6 billion at the peak of the U.S. housing bubble. The record would have been topped were it not for litigation and other legal expenses. (…)

The six banks’ combined litigation and legal expenses in the nine months rose 76 percent from a year earlier to $18.7 billion, higher than any annual amount since at least 2008. The costs increased at all the firms except Wells Fargo, where they fell 1.2 percent to $413 million, and Morgan Stanley (MS), which reported a 14 percent decline to $211 million. (…)

Legal costs that averaged $500 million a quarter could be $1 billion to $2 billion for a few years, Dimon told analysts in an Oct. 11 conference call. The firm is spending also $2 billion to improve compliance by the end of 2014, he said last month. (…)

VALUATION EXPANSION?

This is one of the main narratives at present, now that earnings multiples have expanded so much. The other popular narrative is the acceleration of the U.S. economy which would result in accelerating earnings, etc., etc… Here’s Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

It’s also possible valuations could continue to expand even if earnings growth doesn’t meet expectations. There is a direct link between valuation and the yield curve. A steep curve (long rates much higher than short rates); which we have at present and are likely to maintain; suggests better growth and easy monetary policy. This environment typically co-exists with rising valuation.

Low inflation is also supportive of higher multiples. Why? Earnings are simply more valuable when inflation is low; just like our earnings as workers are worth more when inflation is taking less of a bite out of them.

Lastly, as noted in BCA’s 2014 outlook report: In a liquidity trap, where interest rates reach the zero boundary, the linkage between monetary policy and the real economy is asset markets: zero short rates act to subsidize corporate profits, drive up asset prices and encourage risk-taking. Over time, higher asset values begin to stimulate stronger consumption and investment demand—the so-called “wealth effect.” We could be at the very early stages of a broad transition from strengthening asset values to better spending power by businesses and consumers. Global capital spending has begun to show signs of a rebound; while US consumers are beginning to borrow and spend again.

A few remarks on the above arguments:

imageThe yield curve can steepen if short-term rates decline or if long-term rates rise. The impact on equities can be very different. My sense is that the curve, which by the way is presently very steep by historical norms (chart from RBC Capital), could steepen some more for a short while but only through rising long-term yields. This is not conducive to much positive valuation expansion, especially if accompanied by rising inflation expectations which, normally, follow economic acceleration.

The next chart plots 10Y Treasury yields against the S&P 500 Index earnings yield (1/P/E). The relationship between the two is pretty obvious unless you only look at the last Fed-manipulated 5 years. Rising rates are not positive for P/E ratios.

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Low inflation is indeed supportive of higher multiples as the Rule of 20 clearly shows. What is important for market dynamics is not the actual static level of inflation but the trend. Nirvana is when the economy (i.e. profits) accelerate while inflation remains stable or even declines. Can we reasonable expect nirvana in 2014?

The wealth effect was in fact Bernanke’s gambit all along. And it worked. But only for the top 20% of the U.S. population. What is needed now is employment growth. Can we get that without triggering higher inflation?

Miss Sonders reminds us that

This bull market is now the sixth longest in S&P 500 history (of 26 total bull markets). As of year end 2013, it’s run for 1,758 days, with the longest ending in 2000 at 4,494 days. It is the fourth strongest in history; up over 173% cumulatively as of year-end 2013.

Emerging Market Currencies Suffer as Dollar Rises

The South African rand sank to a fresh five-year low Thursday, as a rise in the dollar, fueled by strong U.S. jobs data, kept emerging market currencies under pressure.

The Turkish lira also suffered, closing in on its all-time low against the dollar reached earlier in the week. The rand and the lira are widely considered to be among the most vulnerable emerging market currencies, as both South Africa and Turkey are reliant on foreign investment flows to fund their wide current account deficits.

 

NEW$ & VIEW$ (11 NOVEMBER 2013)

DRIVING BLIND

 

Jobs Strength Puts Fed on Hot Seat

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

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

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

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

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

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

image  image

However,

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

And these peculiar stats:

Retail boom coming to a store near you?

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

Amazon to Hire 70,000 Workers For Holiday Selling Season

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

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

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

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

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

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

Confused smile More quirks:

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

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

From the GDP report:

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

 

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

Fingers crossed POTENTIAL SAVIOR:image

But there is also this:

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

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

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

Other notable findings:

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

Nonetheless:

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

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

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

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

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

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

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

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

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

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

Elsewhere:

S&P Cuts France’s Credit Rating

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

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

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

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

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

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

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

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

Surprise Jump in China Exports

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

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

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

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

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

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

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

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

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

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

China inflation hits eight-month high amid tightening fear

China’s Inflation Picks Up

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

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

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

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

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

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

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

INFLATION/DEFLATION

Central Banks Renew Reflation Push as Prices Weaken

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

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

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

image

The Economist agrees (tks Jean):

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

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

Race to Bottom Resumes as Central Bankers Ease Anew

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

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

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

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

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

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

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

EARNINGS WATCH

From various aggregators:

  • Bloomberg:

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

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

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

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

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


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

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

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

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

SENTIMENT WATCH

 

Stocks Regain Broad Appeal

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

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

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

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

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

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

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

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

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

 

NEW$ & VIEW$ (14 OCTOBER 2013)

Democrats in Senate Press New Front in Budget Battle

Lawmakers attempting to avoid a debt default remained at loggerheads and escalated the standoff by reopening the contentious issue of automatic spending cuts.

Capitol Hill at sea(…) Democrats made plain that one of their top priorities was to diminish the next round of across-the-board spending cuts, known as the sequester, due to take effect early next year.

Many Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), oppose retreating from those cuts. That set up a clash that seemed almost as intense as the one that caused budget talks between House Republicans and President Barack Obama to collapse Friday.

“Total federal spending has now gone down for two years in a row—the first time that’s happened since the Korean War,” Mr. McConnell said Sunday. With the additional sequestration cuts on tap for 2014, the budget limits have produced “the most significant spending reduction in modern history and Senate Republicans will not accept anything that undoes these cuts.” (…)

Confused smile  Lawmakers said they would watch Monday’s opening of financial markets to see whether investors, already jittery, show greater concern. That, in turn, could affect the climate for further negotiations. Crying face

(…) a possible compromise that sources familiar with Senate budget talks said that Mr. Reid floated to Mr. McConnell on Sunday: Continue spending at current levels until mid-December, set up a mechanism for negotiating over the across-the-board cuts and other budget matters for the rest of the year, and extend the debt limit for about six months. It wasn’t immediately clear what Mr. McConnell’s response was.

Thinking smile  Europe Stocks Slip as Stalemate Drags On

U.S. Stock Futures Fall on Debt Concerns

 

EARNINGS WATCH

In case you forgot, we are entering Q3 earnings season with some 161 companies reporting this week including 70 S&P 500 companies.

Earnings rose an estimated 1.4 percent for Standard & Poor’s 500 Index companies last quarter, trailing gains of 3.8 percent in the previous three months and an average 10 percent over 15 years. Analysts have reduced the quarterly estimate by 75 percent since June, according to data compiled by Bloomberg.

The official S&P estimates are now $26.62 for Q3, down 0.8% from the September 30 estimates. Q4 estimates have been shaved a nickel to $28.83. Here’s Zacks Research’s early read:

Total earnings for the 31 S&P 500 companies that have reported results are up +9.8% with 51.6% beating earnings expectations, while total revenues for these companies are up +1.4% and 45.2% are beating top-line expectations.

This is still early going, but the results thus far are weaker than what we have seen for this same group of companies in recent quarters. The +9.8% earnings growth in Q3 for these companies compares to +18.2% in Q2 and the 4-quarter average of +17.8%, while the +1.4% revenue growth is below Q2 and the 4-quarter’s average of +4.2%. The beat ratios are similarly tracking lower.

The weak comparisons are primarily because of the Finance sector. If we exclude results from the Finance sector, the remaining companies that have reported results are tracking better than what those same companies reported in Q2 and the last few quarters. (…)

Ghost  This good analysis should worry you:

Total earnings growth for the remaining 469 companies is barely in the positive relative to the same period last year (+0.1%) and in the negative excluding the Finance sector (-1.1%). The composite earnings growth rate, combining results from the 31 companies that have reported with the 469 still to come, is +0.9% for the S&P 500. (…)

While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.

Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector.

But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $259.5 billion in Q2, surpassing Q1’s $255 billion record. But they are expected to reach $269.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +4.9%.

Pointing up  The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn’t much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.

Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.

Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.

Punch  I suggest you also read “Myths about cash” below.

Eurozone production grows 1%
Data are latest sign of recovery in currency bloc

Industrial production in Germany, Europe’s largest economy, grew 1.8 per cent in August, lifting the entire eurozone, while in France, the second-largest economy, it rose by a much slower 0.2 per cent.

However, the most encouraging news came from Portugal and Greece, two of the countries worst affected by the sovereign debt crisis, which recorded robust growth in industrial production. In Portugal it rose 8.2 per cent while in Greece it increased 1 per cent.

I am more concerned by the facts that France’s IP rose only 0.2% after cratering 2.3% in the four months previous and that Italy’s IP declined 0.3% after falling 1.0% in July and 0.8% in the March-June period. These are two heavyweights.

The reality is that Eurozone IP rose 1.0% in August, offsetting July’s 1.0% decline. During the 4 months to June, IP rose 1.5%, thanks primarily to automobile production as IP of durable consumer goods rose 2.3% between March and June and 0.6% in July-August. A very slow grind (full Eurostat report)

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Here’s the YoY trend:

image

 

Housing Affordability Hits Four-Year Low

Housing affordability hit a four-year low in August amid steady gains in home prices during the spring and higher interest rates during the summer.

(…) At prevailing interest rates in August, the mortgage payment on the median priced home stood at $851, or around 16% of the median U.S. income. By contrast, the equivalent mortgage payment one year earlier, at $683, accounted for 13.3% of the median income. (…)

But the affordability figures show unmistakable evidence of how rising interest rates hurt housing affordability in July and August because median prices didn’t rise in those months, even as the average monthly payment went up due to rising rates. The average monthly payment rose from $787 in June to $851 in August — even though median prices fell slightly from June to August.

Monthly payments last stood above $850 in November 2008, and monthly payments as a share of income last stood at 16% in July 2009.

Mortgage rates have declined modestly since August, which means that the 16% figure could be — for this year, at least—the high watermark for the payment-as-a-share-of-income metric. (…)

Home for Sale, With Freebies Home builders, concerned by flagging sales due to rising prices and higher mortgage rates, have boosted cash incentives and materials upgrades in some markets.

cat

China’s Exports Shrink

(…) Exports fell 0.3% in September compared with the year-ago period, data from the General Administration of Customs showed Saturday. This was sharply down from August’s 7.2% growth and far below economists’ median forecast of a 5.5% expansion.

The drop in exports was broad-based, with volumes to the European Union, Hong Kong and Taiwan dropping. Exports to many developing economies also fell. (…)

The overinvoicing of exports to disguise capital inflows—which started in the second half of last year and lasted into the first half of this year but has since waned—inflated the base in September 2012, said RBS economist Louis Kuijs, adding that actual export growth for September is estimated at about 1.7% in U.S. dollar terms.

(…) Chen Weiqiang, president of Guangdong Xinyi Underwear Group Co., a garment maker in the southern Chinese city of Foshan, said the slowdown in demand for his products hit last year and hasn’t abated.

“I have no obvious feelings that exports are recovering in the garment industry,” he said. “My company can still get orders, but profits are really pathetic due to rising labor costs, and we have actively cut export volume.” (…)

Compared with a year earlier, China’s exports to Hong Kong slipped 4.1%, while exports to Taiwan decreased 8.6% and exports to the European Union fell by 1.1%. However, exports to the U.S. rose 4.2% and to Japan rose 1.3%. (…)

September imports rose 7.4% compared with a year ago, slightly up from the 7% rise in August and beating economists’ median forecast of a roughly 6.8% increase. (…)

China’s crude-oil imports in September surged to 6.27 million barrels a day, surpassing a previous record set in July of 6.17 million barrels a day. September’s crude imports were up 28% when compared with the corresponding month last year. (…)

China inflation at 7-month high, limits room for easing despite export tumble

China’s annual consumer inflation rate rose to a seven-month high of 3.1 percent in September as poor weather drove up food prices, limiting the scope for the central bank to maneuver to support the economy even as exports showed a surprise decline.

The inflation rate was higher than a median forecast of 2.9 percent in a Reuters poll and August’s 2.6 percent, but was still below the official target of 3.5 percent for 2013.

Month-on-month, consumer prices rose 0.8 percent, the National Bureau of Statistics said, bigger than a rise of 0.5 percent expected by economists.

Food prices gained 1.5 percent in September from August due to droughts and floods in some areas, pushing up the CPI by 0.51 percentage points, Yu Qiumei, a senior statistician at the bureau, said in a statement.

In annual terms, food prices jumped 6.1 percent.

Producer prices fell 1.3 percent from a year earlier, a smaller fall than the 1.4 percent expected by the market and the 1.6 percent drop in August.

However, there was some relief to manufacturers struggling to cope with profit-eating price declines, as producer prices rose 0.2 percent from August.

image

Inflation in China: veg now, pork later From Nomura via FT Alphaville:

We see a rising risk of CPI inflation sitting above 3.5% for some months in 2014, as pork prices enter the upswing phase of the cycle, given that the ratio of corn prices to pork prices was below the important level of 6x for most of H1 2013 (Figure 10). Historically, pork prices have exhibited long cycles, with upswings preceded by this ratio dropping below 6x. Concerns over inflation will make monetary policy easing unlikely in 2014, because with the benchmark deposit rate at only 3% there is little room to cut rates.

India’s headline inflation at 7-month high, another rate hike seen
 
Gulf oil production hits record
Region defies fears of impact from US shale revolution

(…) Saudi Arabia, Kuwait, the United Arab Emirates and Qatar set aggregate production records in each of the last three months, according to fresh estimates from the International Energy Agency. In September they accounted for 18 per cent of global demand – a level only matched twice in IEA data stretching back to the 1980s. (…)

As a result Gulf states are capturing more of the fast growing Asian market. India imported 44 per cent of its crude from Saudi Arabia, Kuwait, Qatar and the UAE in July, up from 36 per cent in 2011, while China relies on the countries for a quarter of its imports compared to 21 per cent in 2007.

A rapid return to production among other Opec members, for example through a resolution to Iran’s nuclear standoff with the US, could yet leave the Gulf states exposed to the US shale revolution. And some analysts argue that Opec could yet need to discuss production cuts when its oil ministers next meet in Vienna in December.

The record output has provided a windfall for the oil-dependent monarchies. The 16.4m barrels a day produced by the four states during the third quarter was worth more than $150bn at today’s prices of more than $100 a barrel.

The principal beneficiaries have been Saudi Arabia, which has increased output more than 10 per cent since the start of the year to a record of 10.19m b/d in August, and the UAE where the 2.77m b/d produced in September was a record, and 7 per cent higher than at the start of the year. Kuwait has also set a series of production records this year, but Qatar has been unable to raise production significantly.

It also means the region remains crucial to the world’s major powers. The US continues to import almost 60m barrels a month from the Gulf, a number that has actually increased in the last three years even as US imports overall have fallen.

The WSJ digs deeper:

Increasing oil output in the U.S. and Canada are already redirecting global oil flows, but those being hit the hardest are West Africa’s crude-oil producers and the refineries of Western Europe that are suddenly competing with cheap North American products.

The four Gulf kingdoms that dominate OPEC have actually increased their exports to the U.S. over the past three years, the Financial Times reports, taking advantage of Nigeria’s fragile infrastructure and Libya’s political chaos.

Instead, the rise of Asia as a consuming region is having just as big a sway on the flows of money, products and political capital. (…)

A report from the Asian Development Bank anticipates that oil-deficient Asia will have to increase net imports of crude and refined products by more than 10 million barrels a day by 2035, The Wall Street Journal’s Simon Hall reports.

The ADB’s forecast echoes that of the International Energy Agency, which forecasts Southeast Asia’s oil imports will more than double by 2035. This is a region that excludes China, which is just beginning what should be a lengthy stay at the top of the list of the world’s crude-oil importers. (…)

This great shift brings with it new factors—logistical, political and financial—for the oil markets to consider.

Singapore will become a sweet spot for the new trade flows, with the Malacca and Singapore straits joining the Strait of Hormuz as the oil market’s narrow waterways of note, the Journal’s Eric Yep writes. The New York Times pinpoints Fujairah, in the United Arab Emirates, as a products hub to rival Singapore and Rotterdam.

Economically, surging crude-oil imports will put strain on the Asian economies.

The IEA says that spending on net oil imports for the whole region is expected to reach $240 billion, from $77 billion today, and that the $51 billion the region currently spends each year on annual fossil-fuel subsidies should be reorganized to discourage wasteful consumption. (…)

Nerd smile  MYTHS ABOUT CAPEX

Conventional wisdom says that corporate America is flush with cash which it refuses to invest. Sometimes, aggregated data can be misleading. Factset just published an analysis of S&P 500 companies which reveals the true picture:

Cash & short-term investment balances (“cash”) in the S&P 500 (ex-Financials) rose by 13.5% year-over-year and settled at a balance of $1.27 trillion at the end of Q2 2013. The elevated growth in cash partially resulted from 13.3% growth in free cash flows (operating cash flows less capital expenditures) and continued net debt issuance. The $39.4 billion in cash flows represented the twelfth consecutive quarter of cash inflows from net debt issuance.

Index-level, fixed capital expenditures increased by 4.1% in Q2. This marks the second consecutive quarter of single-digit, year-over-year growth following a period when growth averaged 18.5% over eleven quarters. Though seven of the nine sectors under consideration increased year-over-year CapEx spending in Q2, the Energy sector, which represented a third of all spending, reduced CapEx by 0.1% for the second consecutive quarter. Chesapeake Energy’s prior divestments and strategic shift were again the primary reason for the decline—the company’s move to bring spending in line with cash flow continues to be compared against periods of higher investment. In addition, Hess Corp. and Occidental Petroleum also reduced capital expenditures. Hess cited the need for a balance with cash inflows, while Occidental Petroleum cited a need for cost reductions. Hess should also experience reduced capital spending expectations following its close of the multi-billion dollar divestiture of Samara-Nafta ZAO and its Russian oilfield properties in Q2.

S&P 500 companies have thus been growing capex at an 18.5% annual rate for 18 consecutive quarters until a few oil companies decided, because of their own particular situation, to strategically reduce their capex. In spite of this:

Despite a moderation in quarterly capital investment, trailing twelve-month fixed capital expenditures grew 7.5% and reached a new high over the ten-year horizon. This helped the trailing twelve-month ratio of CapEx to sales (0.068) hit an 11% premium to the ratio’s ten-year average. Overall, elevated spending has been a product of aggressive investment in the Energy sector over two and a half years, but, even when excluding the Energy sector, capital expenditures levels relative to sales are in-line with the ten-year average.

image

Low capex at the national level may thus have more to do with smaller businesses as this NFIB chart suggests:image

Nerd smile  MYTHS ABOUT CASH

S&P 500 (ex-Financials) cash and marketable securities balances grew 13.5% year-over-year to a balance of $1.27 trillion at the end Q2. In particular, the growth of 15.4% in the Information Technology sector was most significant due to the sector’s enormous cash weight in the
overall index (36.7%). The sequential growth rate for the aggregate cash balance was 3.3%.

image

However, 10 companies account for 37% of the cash pile which they have grown 20% in the past year. The remaining 490 companies’ cash grew 10% YoY. Furthermore, only 4 of the S&P’s 9 main sectors had positive free cash flow growth in Q2.

Shareholder distributions in the form of dividends and the repurchase of stock ($164.3 billion) increased 22.3% year-over-year and 23.5% sequentially. On the other hand, Cash inflows from debt issuance were positive ($39.4 billion) for the twelfth straight quarter.

As this next chart shows, average net debt has increased over the last 10 years and all sectors but one currently have higher debt levels than their 10-year average.

image

This confirms Moody’s findings shown in my N&V post of October 7: corporate America is getting more leveraged, not cash rich as some aggregated stats make us believe.

image

Ghost  The capex and cash myths having been debunked, we can now more objectively assess how the economy would fare in the event of rising interest rates. Capex would slow even more and corporate profits would feel the adverse effect of leverage. And even though the Fed controls short-term rates, it has little control on longer-term market rates it found out in recent months.

 

NEW$ & VIEW$ (9 AUGUST 2013)

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

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

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

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

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

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

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

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

China’s Credit Expansion Slows as Li Curbs Shadow Banking

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

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

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

Home Prices Rise In West, Sunbelt

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

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

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

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

U.K. Exports Rising to Record Signal Recovery Progress

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

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

French Industrial Output Unexpectedly Drops

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

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

Weak Demand Dogs Shipping Companies

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

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

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

Dutch mood shifts against austerity

Support for government plunges as protests grow

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Auto  Magna raises sales forecast after profit beats forecasts

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

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

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

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

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

EARNINGS WATCH

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

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

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

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

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

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

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

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

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

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

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

Stocks Start to Look Overvalued

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

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

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

Stock futures lower, pointing towards worst week since June

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

 

NEW$ & VIEW$ (15 JULY 2013)

THE SEQUESTER HITTING LATE?

Market watchers have marvelled at the relative ease by which the U.S. economy has been absorbing the negative impact of the Sequester so far this year. Perhaps the big test is still to come. According to the latest budget data, the federal government achieved a surplus for the second time in three months. As today’s Hot Chart shows, the balance shows an excess of $100 billion over that period – the biggest since 2007.

The big difference between the April and June surpluses, however, is how they were achieved. In June, it was all about a reduction in spending outlays. As shown, net government outlays fell precipitously to their lowest level since 2003 in June. In fact, the 49% drop between May and June was the biggest drop since at least 1954 for this time of the year. The Sequester is biting and the teeth marks will show on Q3 GDP. (NBF Financial)

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ISI’s company surveys, and particularly their diffusion index, have turned down. “Slower results at homebuilders, auto dealers, and shopping guides were the primary reasons for the deceleration.”

Goods Disinflation Reappears, but Shouldn’t Worry Fed The latest readings on producer prices and import prices show disinflation has not disappeared when it comes to goods.

The core PPI, which excludes food and energy, rose 0.2%. Yearly core inflation at the factory gate has held at just 1.7% for the past four months, compared with 2.6% in June 2012.

Meanwhile, foreign-made goods are becoming cheaper. Import prices excluding oil fell 0.3% in June, the fourth consecutive decline. Nonoil import prices are down 1.0% compared to a year ago. In June 2012, those prices were rising at a 0.6% annual rate.

Pointing up  Glitches Pump Up Gasoline Futures

August reformulated gasoline blendstock, or RBOB, settled 9.61 cents, or 3.2%, higher at $3.1175 a gallon on the New York Mercantile Exchange, the highest settlement for the contract since March 18. Analysts say the rally likely portends higher prices at the pump in the coming weeks.

Despite the recent rally, the U.S. is brimming with spare gasoline, due largely to weak demand. U.S. gasoline inventories now stand at 221 million barrels, their highest level for this time of year since 2001, according to the Energy Information Administration. However, supplies have fallen in recent weeks, whittling down the sizeable surplus.

Already, pump prices have been rising. On Friday, they rose 3.2 cents a gallon to average $3.55 a gallon nationwide, according to auto club AAA. That’s the biggest one-day rise in five months and comes on the heels of this week’s steep rise in oil prices. Mr. Lipow on Friday estimated that pump prices could rise another 10 cents a gallon over the next seven to 10 days.

Well, according to Gasbuddy.com, gas is now $3.62/g. The last time WTI was $105, gas prices nearly hit $4.00. In fact, crude is now 6% above its summer 2012 peak of $99 but gas prices are 5% lower.image

That’s because Brent remains below its year ago level. But for how long?

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Control retail sales (sales excluding autos, gasoline and building material stores, i.e. the portion of retail sales that goes directly into GDP consumption calculations) cratered last year when gas prices spiked from $3.40 to $3.85.

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Also consider these recent revisions, not incorporated in the above chart:

Nominal personal consumption expenditure increased by 0.3% m-o-m in May, in line with consensus expectations. In real terms, consumer spending inched up by a relatively healthy 0.2%. However, the 0.1% monthly rise published initially for April was revised to a 0.1% drop. And this came in addition to the sharp downward revision for Q1 that was published in late June as a part of the GDP report. (Pictet)

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The end result is quite spectacular and shows that consumption growth is on a softer trend than previously thought. Growth in consumer spending in Q1 was revised from 3.4% to 2.6% earlier this week and, with yesterday’s data in hand, we can now calculate that it settled at a soft 1.4% annualised between Q1 and April- May, whereas before the more recent data were published, the pace of increase in consumption between Q1 and April had been measured at 2.3% annualised.

Hmmm…The revised consumption data are a better reflection of the tight financial conditions of the average American following the expiry of the payroll tax cuts.

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Too bad my fishing season is over!

Embarrassed smile  Restaurants Shift to Part-Time

U.S. restaurants added jobs at a much higher pace in the spring, but many say they are replacing full-time jobs with part-time positions, concerned about the new health-care law.

Restaurants and bars have been adding an average of 50,000 jobs monthly since April—about double the rate from 2012. (…)  Overall, leisure-and-hospitality establishments hired more workers than any other industry in June, accounting for 75,000 of the 195,000 jobs added last month, according to the most recent Labor Department report (…).

Views differ on exactly what is driving the hospitality industry’s pickup. (…) But a number of restaurants and other low-wage employers say they are increasing their staffs by hiring more part-time workers to reduce reliance on full-timers before the health-care law takes effect. (…)

For the entire U.S. workforce, employers have added far more part-time employees in 2013—averaging 93,000 a month, seasonally adjusted—than full-time workers, which have averaged 22,000. Last year the reverse was true, with employers adding 31,000 part-time workers monthly, compared with 171,000 full-time ones.

The Affordable Care Act requires employers with 50 or more full-time equivalent workers to offer affordable insurance to employees working 30 or more hours a week or face fines. Some companies have said the requirement could increase their costs significantly, although others have played down the potential hit. (…)

The administration says the law ultimately will help businesses by allowing them to pool risk with other smaller businesses in order to get more competitive rates. (…)

Well, business owners are voting with there feet now, never mind the “ultimate help” from the ACA. The delay announced won’t change the trend. Companies only got a full year to learn to operate with more part-timers.

Banks Are Cautious Even as Profits Rise

J.P. Morgan and Wells Fargo, two of the nation’s largest banks reported better-than-expected profits, but warned that mortgage lending could drop if interest rates stay elevated.

[image]The results from J.P. Morgan Chase & Co. and Wells Fargo & Co. show how even the biggest banks are struggling to overcome lackluster loan demand, a sluggish U.S. economy and a slew of new regulations that are crimping profits.

[image]Both banks exceeded Wall Street estimates, largely because they are scaling back the amount of money they have set aside to cover future losses. Net interest income–the revenue generated from the bank’s loans and other assets, minus their costs–was down at both banks.

J.P. Morgan reported net income of $6.5 billion, or $1.60 a share, versus $4.96 billion, or $1.21 a share, a year earlier. Revenue on a managed basis, which excludes the impact of credit-card securitizations, jumped 13% to $26 billion, beating the estimates of analysts polled by Thomson Reuters.

Wells Fargo reported net income of $5.52 billion, compared with year-earlier income of $4.62 billion. Per-share earnings were 98 cents versus 82 cents a year earlier. Revenue was roughly flat at $21.38 billion. Analysts polled by Thomson Reuters expected per-share earnings of 93 cents on revenue of $21.22 billion. (…)

J.P. Morgan Chief Financial Officer Marianne Lake told analysts Friday that mortgage refinance volumes could drop substantially if interest rates remain unchanged or rise, saying “the market could be reduced by an estimated 30% to 40%” during the second half of the year.

For the second quarter, J.P. Morgan’s mortgage income dipped 14% compared with the same quarter a year earlier.

Wells Fargo Chief Financial Officer Timothy Sloan also warned that refinancings of existing mortgages will decline. Mortgage banking income at the San Francisco lender decreased 3% from the year-ago period. Wells Fargo has a 22% share of U.S. mortgage originations, more than any other lender. (…)

Both banks highlighted several positive signals from consumers and businesses. Average loan balances in J.P. Morgan’s commercial banking unit were $131.6 billion, up 11% from a year earlier and up about 2% from the prior quarter, indicating companies are taking on more credit to fund inventory. Commercial banking recorded a profit of $621 million, down 8% from a year earlier but up 4% from the first quarter.

At Wells Fargo total loans were up 6% amid stronger demand for certain types of loans, specifically in auto loans and credit card growth. Auto-loan originations, for example, were up 9% from the year earlier period to $7.1 billion. Credit card balances were up 9% from the year earlier period. (…)

Change That J.P. Morgan, Wells Can Believe In

Quarterly results from the two big banks show a silver lining to the shift upward in interest rates.

(…) the move higher in rates should take some pressure off net-interest margins. J.P. Morgan said its margin declined to 2.2% from 2.37% the prior quarter, driven in part by higher cash balances. The bank expects the margin to be flat in the second half, though.

And higher rates should, eventually, benefit both the margin and net-interest income. At J.P. Morgan, the rise since May in the 10-year Treasury yield to levels above 2.5% should add about $700 million to net-interest income in 2014.

The benefit would be even greater if rates on shorter-dated instruments also were to rise. But even small gains help. J.P. Morgan has seen its core net-interest income, which came in at $9.5 billion in the second quarter, fall in five of the past six quarters.

The biggest potential benefit of rising rates, albeit one that may take time to materialize, is if they are accurately reflecting an improved economic outlook that translates into loan growth.

J.P. Morgan, Wells and other banks are well-positioned to take advantage of that, given continued increases in deposits. This, coupled with the continued reluctance of companies and consumers to borrow more, has led net loan-to-deposit ratios to keep falling. At J.P. Morgan, this was 59% in the second quarter, compared with 63% a year earlier; at Wells, the ratio fell to 77% from nearly 82%.

US banks: loan strangers
Without lending more, JPMorgan has increased deposits by about 10%

(…) While loan growth has been lacklustre at JPMorgan, it and its rival have increased deposits by about 10 per cent each during the past year. If the economy continues to strengthen and consumers gain confidence, demand for loans should improve, allowing these banks to deploy some of that cash at improving rates. Even if that remains some time off, there is hope that reserve releases can continue to boost the bottom line. The risk is that a jump in interest rates throws borrowers back into duress or squelches the housing market. But if rates rise gently with the economy, it could be a pretty good time to be a bank again.

Here’s the chart courtesy of ZeroHedge:

 

SLOW AND SLOWER

Chinese economy slows to 7.5% growth
Government at risk of missing target for 2013

(…) Virtually every dimension of the Chinese economy registered weaker performance in the second quarter. Industrial output edged down to 8.9 per cent growth year on year in June, from 9.3 per cent in May. Fixed-asset investment slowed to 20.1 per cent growth in year-to-date terms, from 20.6 per cent in May. Exports fell in June for the first time in more than a year. (…)

Quarter-on-quarter growth edged up from 1.6 per cent in the first three months of the year to 1.7 per cent in the second quarter. Retail sales staged a small rebound, climbing to 13.3 per cent growth year on year in June, from 12.8 per cent in May, though they remained well below last year’s pace for the first half as a whole.

A breakdown of the overall growth numbers also showed differing fortunes for different parts of the economy. The services sector expanded 8.3 per cent, while the industrial sector grew 7.6 per cent. (…)

China GDP(FT Data)

From the WSJ:

The deceleration is particularly hard on commodities producers—the biggest beneficiaries of China’s boom. A Standard & Poor’s study of more than 90 of China’s biggest companies found they will cut total capital expenditures this year for the first time in at least a decade. Investments in factories, assembly lines, smelters and telecommunications links tend to create big demand for raw materials that China imports.

China Is Slow and Unbalanced

The payoff for slower growth in China is meant to be a more balanced economy with consumption playing a greater role. So far, though, China’s economy is stuttering without much sign of the hoped for rebalancing.

(…) But the consumption picture is less rosy than June’s data suggest. For starters, the top-line retail sales figure was mostly boosted by higher prices, not more consumption. Moreover, retail-sales growth of 12.7% in the first half of 2013 is actually down from 15.2% growth for all of last year. The National Bureau of Statistics estimates that consumption accounted for 45.2% of GDP growth in the first half of 2013, compared with 51.8% in 2012. In other words, the economy’s not only slowing, it is also getting more off-kilter.

There are good reasons for this. In particular, household-income growth is slowing along with the broader economy. Urban disposable income in China rose 6.5% in the first half, down from 9.6% in 2012.

Beijing’s efforts to get China spending will take much more time. Public pensions and health-insurance benefits remain too low to persuade people to reduce rainy-day savings. The government has promised to increase returns on bank deposits and loosen restrictions on the capacity of migrant workers to access social welfare in cities, but so far, this is mostly policy hot air rather than concrete action.

Meanwhile, China has now recorded five straight quarters of growth below the 8% level the country’s previous leaders set as their unofficial minimum acceptable growth rate for the economy. So far, the new leadership is holding firm on its plan to let growth slow if it benefits the country in the long run. But the shift to a more consumption-led economy seems some way off.

China GDP components

(FT Data)

China Real-Estate Sector Posts Strong Growth

Total property investment in China in the first half of the year rose 20.3% compared with a year earlier to 3.68 trillion yuan ($599.3 billion), according to data released on Monday by the National Bureau of Statistics. That is marginally slower than the 20.6% growth in the first five months of the year.

The statistics bureau doesn’t give data for individual months. Confused smile

Residential and commercial property sales totaled 3.34 trillion yuan in the January-June period, up 43.2% over a year earlier. Sales totaled 2.59 trillion yuan in the five months ended May, up 52.8%.

Construction starts by area in the first half rose 3.8% from a year earlier to 959.01 million square meters. They were up 1% at 736.13 million square meters in the January-May period.

Chinese export downturn accelerates

Trade data provided further signs that China’s economic slowdown gathered pace in June. Official data confirmed signals from the PMI surveys that exports are falling, while a drop in imports also indicated that domestic demand is weakening.

Official trade data showed exports down 3.1% on a year ago in June. That compared with a 1.0% rise in May and was the worst reading since October 2009. The deterioration in the official data comes after Markit’s HSBC manufacturing PMI data showed exports to have fallen for a third successive month in June, dropping at the fastest rate since March 2009.

The trade data also showed imports down 0.7% on a year ago in June after a 0.3% decline in May. These were the first back-to-back declines since October 2009. Falling imports are an indication that demand
has weakened in the domestic economy of mainland China. This corresponds with PMI data which showed the domestic-oriented services economy going through a soft-patch, with new business growth more or less stalling, registering the weakest growth since the services PMI survey was started in late-2005.

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Pointing up By the way, here’s the most reliable chart on China, courtesy of Pictet:

The Li Keqiang index, a proxy for GDP growth based on three components (railway freight, bank loans and electricity consumption) shows the Chinese economy is now running close to 6% growth compared to the official 7.5% GDP growth target for 2013.

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On today’s Q2 GDP numbers, you may want to read FT Alphaville’s post on the “numbers” (Some observations and oddities in China’s Q2 GDP). I find this part most interesting:

(…) nominal GDP growth decelerated much more sharply from 9.6% in Q1 to 8%, as the deflator increased just 0.5% yoy (1.7% yoy in Q1). We find this deflator somewhat too low given the monthly inflation data published over the quarter. In comparison, Q4 2009 had much lower CPI, similar PPI, lower export price inflation and higher import price inflation, but yet the GDP deflator was significantly higher at 1.4% yoy.

Pictet not only has good charts, it also has good wisdom:

The Chinese equity market has corrected sharply down, and is now trading at 7.8 forward P/E which corresponds to 1.5 standard deviation below the longterm average. China is now one of the cheapest markets in Asia ex Japan. The worst of the impact on corporates in the form of increased financing costs in a context of slower growth is yet to come. In this context, we do not see any significant short term catalyst for the Chinese equity market, which remains unattractive.

The Chinese authorities will remain committed to preventing defaults in the financial sector and a risky sharp deleveraging in the corporate sector which means it is unlikely the government can boost the economy. China’s economy has become more vulnerable. The unremitting slowdown in growth reveals how China’s economic model has been running out of steam just when the proliferation of ‘shadow banking’ in the country is heightening the vulnerability of the financial system as a whole.

A positive outcome for the Chinese economy is that the government may stick to its “no stimulus” approach while adopting more prudent monetary policy which would allow for an orderly deleveraging. More importantly, it could also pave the way for the structural reforms China needs to transition towards an exports-driven economic model that is less reliant on investment and more sustainable.

The FT Lex column is also not short on wisdom:

Granted Chinese companies look cheap. Three of China’s big four banks, which make up over a sixth of the weight of the Hang Seng index by market capitalisation, trade below book value. Bank of China now trades at 0.7 times book. But like China’s GDP figures, book values could be revised down many times yet.

GOOD READ: Asia Is Reaching a Turning Point by Blackstone’s Byron Wein:

I spent almost two weeks in Asia in June and in some ways it was an eye-opener.  In past years there was a sense of optimism everywhere you went.  Now you get a feeling of uncertainty touched by apprehension. (…)

E-Zone IP Dips in May

Eurozone manufacturing production in May fell by 0.4% after rising by 1% in April. The output of consumer durables fell sharply, by 2.3%, posting a second drop in a row, a drop of 1.9%. Capital goods output fell by 1.5% in May. That reversed a stronger 2.5% increase in April. Nondurables output rose by 0.6%, rising for the second month in a row. Intermediate goods output accelerated its continuing modest advance rising by 0.4% in May.

Fingers crossed  Despite the setback in May manufacturing output is on an accelerating path. After falling 1.6% over 12 months it is expanding at a 2.6% annual rate over six months and at a 3.7% annual rate over three.

Sad smile  Business Confidence Declines in Survey

Businesses around the world became more gloomy about their prospects in June, an indication that they are unlikely to increase their investment spending and hiring.

Of 11,000 manufacturers and services providers in 17 countries surveyed between June 12 and 26, the proportion expecting an increase in activity over the coming 12 months exceeded the proportion expecting a decline by 30 percentage points—down from 39 percentage points in February, data-analysis firm Markit said. (…)

Markit said the decline in business confidence was most notable in the U.S. and China, with smaller declines recorded in the euro zone and Japan.

“The deterioration in business optimism in the U.S. suggests the pace of economic growth is slowing sharply compared to that seen earlier in the year and calls into question the ability of the economy to continue generating jobs at anything like the pace seen in recent months,” said Chris Williamson, chief economist at Markit. “Any thoughts of an imminent tapering of the Fed’s stimulus are looking premature on this basis.” (…)

Within the euro zone, Markit said there were signs of rising business optimism in some countries that have been at the forefront of the currency area’s fiscal and banking crises, notably Spain and Ireland. But it said confidence was low in Germany and France, the two largest national economies to use the euro.

Red heart  GOOD READ # 2: Actually, a MUST READ: Neils Jensen’ Much Ado about Nothing

EARNINGS WATCH

Factset notes that:

Of the 30 companies that have reported earnings to date for the quarter, 73% have reported earnings above estimates. This percentage is equal to the average of 73% recorded over the past four years. However, only 47% of companies have reported sales above estimates. This percentage is well below the average of 58% recorded over the past four years. If 47% is the final percentage, it will mark the fourth time in the last five quarters that the percentage of companies reporting revenue above estimates finished below 50%.

The blended earnings growth rate for the S&P 500 overall for Q2 2013 is 0.6% this week, slightly above last week’s growth rate of 0.5%. Upside earnings surprises reported by JPMorgan Chase (+11%) and Wells Fargo (+6%) more than offset small downward revisions to estimates for companies in the Energy sector during the week.

Be aware that 70 S&P 500 companies will report this week. Based on the JPM and WFC beats, the tone should be positive:

The Financials sector will be a focus sector for the market during the upcoming week because the sector has the most companies (22) scheduled to release earnings and because the sector is reporting the highest earnings growth of all ten sectors at 18.7%. The sector is reporting a year-over-year increase in earnings of $7.5 billion ($47.8 billion for Q2 2013 compared to $40.2 billion in Q2 2012) for the quarter.

Laughing out loud  INVESTING IS GETTING SIMPLER! (Click to enlarge). Via Greed & Fear (Tks Gary).

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NEW$ & VIEW$ (9 JULY 2013)

Small Business Sentiment: A Decline After Two Months of Increase

Small-business optimism remained in tepid territory in June, as NFIB’s monthly economic Index dropped just under a point (0.9) and landed at 93.5, effectively ending any hope of a revival in confidence among job creators. Six of the ten Index components fell, two rose and two were unchanged. While job creation plans increased slightly in June, expectations for improved business conditions remained negative. The Index—which was 12 points higher in June than at its lowest reading during the Great Recession but 7 points below the pre-2008 average and 14 points below the peak for the expansion—has been teetering between modest increases and declines for months.

Click to View(Doug Short)

Completed U.S. foreclosures decline in May from year ago: CoreLogic

There were 52,000 foreclosures completed, well below the 71,000 in May last year, CoreLogic  said. Even so, that was up from 50,000 in April 2013.

Prior to the housing market’s collapse, completed foreclosures averaged 21,000 a month between 2000 and 2006. There have been approximately 4.4 million foreclosures finished since the start of the financial crisis in September 2008, the report said.

About 1 million homes were in some stage of foreclosure as of May, down from 1.4 million a year earlier. The foreclosure inventory accounts for 2.6 percent of all homes with a mortgage.

Florida had the largest number of foreclosures in the 12 months ending in May, followed by California, Michigan, Texas and Georgia. Those five states accounted for almost half of all completed foreclosures.

Apartment Rents Rise, Pace Slows

Nationwide, landlords increased rents an average of 0.7% to $1,062 in the second quarter, according to a report to be released Tuesday by Reis Inc.,  a real-estate research firm. While that is a hair above the 0.6% increase notched in the first quarter, it is well below the 1.3% rise achieved a year earlier.

“The weak labor market and income growth continue to hold rent growth in check,” Reis wrote in its report.

The vacancy rate, meanwhile, held steady at 4.3% in the second quarter, unchanged from the first quarter and marking the first time the rate didn’t decline since early 2010. (…)

Developers are expected to complete the construction of 160,000 new apartment units in the top 54 metropolitan areas this year, more than double the amount added to the market last year, according to CoStar Group. A further 350,000 could be finished by 2015. (…)

New York City remains hot: Its rental rates jumped 2.6% to $3,017—the nation’s highest—while its vacancy rate fell to 2%. “The demand is so high, we have two to three potential tenants for every available apartment,” said Ed Azrilyan, owner of brokerage Chartwell F.H. Realty. “Last summer, we were showing 10 apartments to somebody. [But] people can’t be picky right now.” (…)

Consumers Boost Borrowing

Consumer credit, a measure of borrowing that does not include home mortgages, rose by $19.6 billion in May to a seasonally adjusted $2.84 trillion, the Federal Reserve said Monday.

Revolving credit, which is mostly credit-card debt, rose at a 9.3% annual rate. It was up by $6.6 billion to $856.5 billion, which was the highest level since September 2010. Outstanding credit-card debt bottomed out two years ago and in May saw the largest jump in a year.

Nonrevolving credit, which includes student loans and auto financing, rose by $13 billion in May to $1.98 trillion on a seasonally adjusted basis, the Fed said. The figure rose at a 7.9% annual pace and also marks the 21st straight monthly increase, matching gains from late 2006 through mid-2008.

Credit-Card Delinquency Falls to Lowest Rate Since 1990 Americans are keeping up with their credit card bills better than any time in the past two decades, a reflection of both an improving economy and lingering caution among banks and consumers.

Nearly 1 in 6 Americans Receives Food Stamps

Food-stamp use rose 2.8% in the U.S. in April from a year earlier, with more than 15% of the U.S. population receiving benefits. (See an interactive map with data on use since 1990.)

Food stamp rolls increased on a year-over-year basis, but were 0.4% lower from the prior month, the U.S. Department of Agriculture reported. Though annual growth continues, the pace has slowed since the depths of the recession.

The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), is at 47.5 million, or nearly one in six Americans.

Chinese inflation rebounds in June

Credit surge adds to consumer price rise of 2.7%

Consumer prices rose 2.7 per cent year on year in June, up from 2.1 per cent in May, the highest rate since February. Higher pork prices, a major component of China’s consumer price basket, were the biggest contributor to the jump. Rental costs also edged higher, a reflection of how Chinese property inflation has accelerated this year.

But for producers, price trends left little doubt about the economy’s underlying weakness. The producer price index fell 2.7 per cent year on year in June. It was its 16th straight month in deflationary territory, dragged down by falling commodity prices as well as sluggish domestic demand.

China forecasts are being cut ahead of Q2 release

From Bloomberg Briefs’ Michael McDonough via FTAlphaville:

China Q2 GDP growth forecast revisions - Michael McDonough, Bloomberg Briefs

 

Europe Keeps Greek Aid Flowing

The decision came even though Greece’s international creditors reported that all isn’t well with the country’s mammoth bailout program.

Greek outlook bleaker than lenders think, local think tank calculates

Greece’s economy could shrink by as much as 5 percent this year, the Athens-based IOBE think tank said on Tuesday, revising down its previous projection and offering a more pessimistic forecast than the country’s foreign lenders.

Just kidding  An end to austerity will not boost Europe, writes Martin Feldstein

The eurozone periphery is on a risky path to end fiscal austerity and accept larger budget deficits. Portugal is the most recent dramatic shift in that direction; Italy, Spain and even France are also abandoning plans to cut spending and raise taxes.

This move away from budget discipline reflects a combination of popular political pressure, more accommodating bond markets and encouragement from the International Monetary Fund.

But ending fiscal austerity is not a strategy for achieving growth. It will reduce downward pressure on aggregate spending but will not lift growth and employment. Instead, it will raise interest rates and threaten a new fiscal crisis.

Europe needs three things: structural changes to boost long-run potential gross domestic product, a short-term stimulus to increase employment, and a commitment to longer-term spending reductions to shrink the national debt.

(…) governments must combine long-run deficit reductions with short-run fiscal stimulus. Slowing the growth of pensions and other transfers would reduce future debt and prevent near-term increases in interest rates. To make these changes politically acceptable, governments should combine them with an immediate programme of infrastructure investment and manpower training. This would not only raise current GDP but would also strengthen long-run productivity and real incomes.

The slower growth of transfer programmes would also permit lower payroll tax rates, cutting the cost of labour and increasing employment. Lower labour cost would also raise the competitiveness of European products in international markets.

A lower value of the euro could provide a further boost, making it possible to lift employment while shrinking the short-term fiscal deficits. Although a lower euro would not change the exchange rate within the eurozone, countries outside the eurozone account for roughly 50 per cent of the peripheral countries’ trade. (…)

The bond fund outflow, charted

(Credit Suisse via FT Alphaville)

EARNINGS WATCH

Here Is Why Alcoa Just “Beat” Earnings

Alcoa reported adjusted earnings (because the unadjusted earnings were a disaster) of $76 million, or $0.07, on consensus expectations of a $0.06 print. In other words, a beat. So just how did the company beat its forecast?

 
 
China smog cuts life expectancy by 5.5 years
Study shows health risks far greater than feared
 

NEW$ & VIEW$ (10 JUNE 2013)

MAY U.S. EMPLOYMENT

1. THE FACTS

Jobs Rise Enough to Soothe Markets

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

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

Muddling Through

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2. THE BETTER STUFF

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

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

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3. THE NOT SO GOOD STUFF

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

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And this from Bloomberg:

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

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

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

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

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

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

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

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

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

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And yet:
 

Fed on Track to Ease Up on Bond Buying

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

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

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

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

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

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

Are we heading towards another policy mistake?

Housing’s Up, but Is Foundation Sound?

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

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

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

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

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

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

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

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

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

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

 Consumers Boost Borrowing for Cars, Education

 

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

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

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

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

 Home Loan Rates Near 4% Send Buyers Scurrying

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

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

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

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

CHINA

 

China’s Export Growth Slumps

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

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

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

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

China’s CPI grows 2.1%

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

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

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

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

China’s May PPI down 2.9%

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

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

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

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

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China’s retail sales up 12.9% in May

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

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

China’s Risky Move to Slow Credit

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

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

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

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

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

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

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ELSWHERE
 
German Industrial Production Increases Most in a Year

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

Poland Warns on Further Volatility Curbs

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

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

Italian Economy Contracts as French Confidence Stalls: Economy

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

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

Sweden Industrial Output Declines as Domestic Demand Falters

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

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

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

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

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

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

Composite Leading Indicators (CLIs), OECD, June 2013

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

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

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

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

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

SENTIMENT WATCH

U.S. Expansion Poised for Longevity Without Many Excesses

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

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

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

Forecast Calls for a Summer of Swings

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

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

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

NEW$ & VIEW$ (9 APRIL 2013)

U.S. employment growth slows along with small biz mood. Participation rate influenced by social security issues. Fed’s impact on economy, markets. Gas prices decline some more. Beware Slovania. Car loans. Chinese inflation eases. Inflation warning. China wages. U.K. economy. German, Chinese exports. arnings watch.

 

Employment Index Signals Modest Gains Ahead

The Conference Board said its March employment trends index fell 0.2% to 111.20 from 111.43 in February, first reported as 111.14. The latest index is up 3.7% from a year ago.

Small Business Optimism Down in March

After three months of sustained growth, the March NFIB Index of Small
Business Optimism ended its slow climb, declining 1.3 points and landing
at 89.5. (…) Of the ten Index components, two increased, two were unchanged and six declined. Among the greatest declines were labor market indicators, inventory investment plans and sales expectations.

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Workers Stuck in Disability Stunt Economic Recovery

(…) Michael Feroli, chief U.S. economist for J.P. Morgan, estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences. (…)

[image]Payments, tied to a worker’s wage history, average $1,130 a month, which totals $13,560 a year. That is about $2,000 a year more than the federal poverty level for a single person and about $2,000 less than full-time wages at the federal minimum of $7.25 an hour. After two years, people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.

Between December 2007, when the recession started, and June 2009, when it ended, the number of Americans receiving federal disability benefits grew to 7.6 million from 7.1 million. Then the rolls swelled, reaching 8.9 million in March, about 5.4% of the civilian workforce ages 25 to 64, according to J.P. Morgan estimates. That compares with 1.7% of the U.S. workforce in 1970.

Economic growth is driven by the number of workers in an economy and by their productivity. Put simply, fewer workers usually means less growth.

Since the recession, more people have gone on disability, on net, than new workers have joined the labor force. Mr. Feroli estimated the exodus to disability costs 0.6% of national output, equal to about $95 billion a year. (…)

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Easy Money: Fed Policies Spur Corporate Spending

CFOs at 202 firms, about 45% of the survey respondents, said low interest rates had led them to increase borrowing.

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BlackRock urges Fed to rein in QE3
Money manager says ‘dull hammer’ tactics distort market

(…) “Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy,” he told the Financial Times. “It is a very large and dull hammer for markets.” (…)

BlackRock estimates that interest rates on 10-year Treasuries are about 100 basis points below where they would be normally. Mr Rieder said that as such interest rates normalise, “losses that occur to fixed-income portfolios will be more and more acute”.

Gasoline at U.S. Pumps Drops to Lowest for Season in Three Years

 

Regular, unleaded gasoline at the pump declined 3.7 cents, or 1 percent, to $3.608 a gallon, the U.S. Energy Information Administration said on its website yesterday.

Retail gasoline prices have retreated for six straight weeks and are 33.1 cents a gallon below year-earlier levels.

Gasoline “probably has another 6 or 7 cents a gallon to fall in the short-term as the decline in crude prices last week flows through from refining operations,” James Williams, president of energy consulting firm WTRG Economics in London, Arkansas, said by telephone yesterday. “The drops should continue for several days to a week.”

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Pointing up  OECD Warns on Slovenia Banks

Slovenia’s government may exceed its estimate of the €1 billion ($1.3 billion) needed to boost the capital of the country’s ailing banks because it has based its cost estimates on a “most likely already outdated” analysis, the OECD said.

“The authorities evaluate recapitalization needs at up to 3% of GDP (€1 billion),” the OECD said in its latest report on Slovenia. “Yet, capital needs are uncertain and could in fact be significantly higher.” (…)

Three state-owned Slovenian banks, which together account for about two-thirds of the country’s banking sector, are saddled with large amounts of nonperforming loans. This has added pressure to Slovenia’s economy, which shrank 2.3% last year.

Another template coming?

Introducing the 97-Month Car Loan

Rising new-car prices and competition among lenders to attract borrowers is pushing loans to lengthier terms. In part, banks see the longer terms as a way to attract buyers, by keeping monthly payments under $500 a month.

The average price of a new car is now $31,000, up $3,000 in the past four years. But at the same time, the average monthly car payment edged down, to $460 from $465—the result of longer loan terms and lower interest rates.

In the final quarter of 2012, the average term of a new car note stretched out to 65 months, the longest ever, according to Experian Information Solutions Inc. Experian said that 17% of all new car loans in the past quarter were between 73 and 84 months and there were even a few as long as 97 months. Four years ago, only 11% of loans fell into this category. (…)

Experts say there is an appetite for more risk because banks see limited downside in auto lending. The delinquency rates on car loans are near record lows, and used car values are at record highs. And if a buyer defaults, the bank can repossess and sell cars with limited losses.

Chinese Consumer Inflation Eases

China’s year-to-year consumer inflation fell to 2.1% in March, a lower-than-expected result that suggests the threat of inflation in the world’s No. 2 economy is ebbing.

Rises in food prices have been moderating, up 2.7% year to year in March after a 6% year-to-year rise in February.

The producer-price index, which measures wholesale prices, remains in negative territory, falling to 1.9% in March, against expectations of a drop of 2%.

The average increase in consumer prices in the first quarter was 2.4 per cent, up only a little from the final quarter of 2012.

The CPI fell 0.9 percent from February, the biggest drop in seven years.

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image(Charts from China Daily)

ADB Issues Inflation Warning

[image]Asian policy makers should carefully monitor inflation and beware of asset bubbles as money flows into the region and local economies grow strongly, the Asian Development Bank said. (…)

The Manila-based lender noted that production in most Asian economies is already near capacity, which raises the risk of inflation taking off. The ADB also said fuel-subsidy cuts—while beneficial from a fiscal perspective—would push up prices.

“Currently inflation remains in check, but we are concerned that pressures are building up,” ADB Chief Economist Changyong Rhee told The Wall Street Journal. “If these trends continue unchecked, then asset bubbles with rising capital inflows can be an issue in the near future.” (…)

Inflation in developing Asia should pick up to 4.0% in 2013 and 4.2% in 2014 from 3.7% last year, the ADB said, with growth also accelerating to 6.6% in 2013 and 6.7% in 2014, from 6.1% in 2012. But the ADB warned central banks they should be ready to act.

China Surging Wages Threaten Economy’s Competitiveness, ADB Says

Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the ADB said in a report published today.

The labor market is being squeezed across the nation as the pool of working-age people shrank last year.(…)

China’s labor productivity has grown quickly even as it remains less than 10 percent of the level in Singapore and the U.S., and about 20 percent of South Korea’s rate, Niny Khor, a Beijing-based economist for the ADB, said at the briefing.

Rising wages and other costs are being exacerbated by restrictions on workers’ mobility through the household registration system known as hukou, the ADB said.(…)

China’s pool of 15- to 39-year-olds, which supplies the bulk of workers for industry, construction and services, fell to 525 million last year from 557 million five years earlier, according to data compiled by Bloomberg News from the U.S. Census Bureau’s international population database. The number employed in industry rose to 147 million from 117 million in the five years through September.

U.K. Housing Market, Retail Sales Pick Up

Activity in the U.K.’s housing market and on the high street picked up in March despite unseasonably cold weather, giving the economic outlook a boost for the first quarter and suggesting the U.K. may avoid a triple-dip recession.

German Exports Fell in February Amid Euro-Area Recession

Exports, adjusted for working days and seasonal changes, dropped 1.5 percent from January, when they gained 1.3 percent, the Federal Statistics Office in Wiesbaden said today.

Shipments from Germany to the euro area dropped 4.1 percent in February from a year ago, while those to the European Union decreased 3.4 percent. Exports to non-EU members fell 1.9 percent, today’s report showed.

China Export-Data Skepticism Deepens From Goldman to Nomura

China’s unprecedented run of better- than-forecast export growth has spurred deeper skepticism of the data at banks including Goldman Sachs Group Inc., casting doubt on the strength of the recovery.

 

EARNINGS WATCH

Alcoa Net Rises 59%

Excluding special items, earnings per share came to 11 cents, up from 10 cents a year before. The result for the latest quarter exceeded the Wall Street forecast of eight cents per share, according to FactSet.

What’s the big deal? Here’s how the WSJ’s Market Beat column treats AA’s results this morning:

Studies have shown that how the aluminum maker performs relative to analysts’ expectations over the past decade has been a good gauge of the market’s short-term performance.

Consider these stats, courtesy of John Butters, senior earnings analyst at FactSet: Over the past 10 years prior to Monday’s results, Alcoa’s quarterly figures have exceeded analysts’ expectations 50% of the time (20 out of 40 quarters). When Alcoa beats, the S&P 500 has averaged a 4.4% gain over the ensuing three months and has been positive 80% of the time. When it misses, the S&P 500 has averaged a 0.9% decline and has been positive only 44% of the time.

But Factset also says:

Since 2009, Alcoa has reported earnings above the mean EPS estimate 56% of the time (9 out of 16 quarters). In the nine quarters that Alcoa reported actual EPS above the mean EPS estimate, 73.6% of companies in the S&P 500 reported earnings above EPS estimates for the quarter on average.

In the seven quarters that Alcoa reported actual EPS below the mean EPS estimate, 72.6% of companies in the S&P 500 reported actual EPS above the mean EPS estimate for the quarter on average.

While there is a slight difference in the numbers, it appears that Alcoa’s earnings performance relative to estimates has little predictive value in determining the earnings performance of the remaining companies in the index.