NEW$ & VIEW$ (17 JUNE 2013)


U.S. Wholesale Prices Rise More Than Forecast on Fuel, Food

The producer-price index rose 0.5 percent after falling 0.7 percent in April, which was the biggest drop in more than three years, according to a Labor Department report released today in Washington. So-called core wholesale inflation, which excludes often-volatile food and energy prices, increased 0.1 percent.

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(Doug Short)



The Netherlands is bracing for a new round of belt-tightening despite a growing public backlash against austerity, barely a year after similar bind caused the government to collapse.

The coalition parties are set to begin negotiations next week on how to cut the budget deficit by €6 billion, equal to $8 billion or 1% of the country’s gross domestic product, next year to satisfy European Union budget rules. (…)

With the euro-zone mired in its longest recession in decades, even the so-called core Northern countries are increasingly feeling the pain.

The Belgian government needs to find €500 million ($670 million) in budget savings this year to be sure of avoiding EU sanctions, Prime Minister Elio Di Rupo said Friday in Brussels. The country has already made budget savings of around €18 billion—equivalent to about 5% of annual economic output—since Mr. Di Rupo’s six-party coalition took office in December 2011.

Finnish Prime Minister Jyrki Katainen said on Tuesday that he could not rule out additional austerity measures to keep the budget under control if the economy didn’t turn around soon. (…)

  • France Retail Sales

French retail sales continue to be weak. In May retail sales volumes fell by 0.2% month-to-month with a rise of 5.1% in food sales blunting a drop of 2.8% in nonfood sales. Nonfood sales have fallen for four months in a row.

The overall retail sales volume change over the past 12-months ranks in the lower 17th percentile of all Yr/Yr sales changes back to 1994 (see ‘rank % Y/Y’ in the table). Food sales are relatively stronger, standing in the 37th percentile of their historic queue with nonfood sales in the 15.8 percentile of their queue. Of the categories in the table, textiles, footwear and furniture are the relative weakest according to their queue standings. (…)


Total retail volume has declined 1.1% after 5 months, –2.6% annualized. Food sales reportedly rose 4.5% (+10.8% a.r.) while non-food sales volume has cratered 3.2% after 5 months, a 7.7% annualized rate. New car sales, meanwhile, jumped 9.0% (+21.6% a.r.). I have a hard time believing these breakdowns but the overall picture fits with Markit’s retail PMI:


Nominal hourly labor costs rose 3.9 percent in Germany in the first quarter, the EU’s statistics office Eurostat said on Monday, faster than the overall euro zone rate of 1.6 percent. It was Germany’s biggest jump since the first three months of 2009. (…)

Spanish labor costs fell 0.7 percent in the first quarter, while exports rose 3 percent in the same period, Eurostat said.


From The Economist:

THE gloom in Spain is almost palpable. (…) The numbers are grim. The economy is in deep recession. In the first three months of the year GDP shrank for a seventh quarter in a row. The public finances remain stretched, with the budget deficit at 7% of GDP. Bond yields have fallen, but the credit crunch for small firms is worsening. Corporate bankruptcies are running at ten times pre-crisis levels. And unemployment is at a record 27% (see article).


Unlike France, it has made big structural reforms. Unlike Italy, it has a strong government that expects to last until the next election in late 2015. (…)

The government’s programme of restructuring and reform has also started to produce results. As many as 38 financial institutions have been merged, mainly local cajas brought down by property lending. The remaining banks have been recapitalised and some €50 billion of their worst assets transferred to a bad bank, Sareb. Provisioning against bad debts has risen sharply. Unlike many other euro-crisis countries, the public sector is shrinking: 375,000 civil-service jobs have gone.

The real economy is also showing signs of improvement. Measured by unit labour costs, Spain has done more than most to regain competitiveness. The external current account has switched from a deficit of almost 10% of GDP in 2008 to a surplus, and not only because of import compression. In 2012 exports rose faster than in any other EU country. Reforms last year made it easier to fire workers, so industry is readier to hire again. This new labour-market flexibility is one reason why many car makers are moving production from other EU countries to Spain.

Even so, three big problems could undo this limited progress. One is the credit crunch. Despite lower bond yields, credit for small and medium-sized enterprises remains scarce and expensive compared with northern Europe. (…)

The second problem is reform fatigue. Spaniards have accepted changes, including wage cuts, to restore lost competitiveness. But more is needed: welfare reforms, a lower minimum wage in some regions, encouraging mini-jobs and part-time work and reducing the burden of pensions. It is not clear that Mr Rajoy’s government has the guts to push such reforms through. (…)

Above all is the third problem, insufficient demand and a lack of sources of growth. With public spending, consumption and investment constrained, the government is relying on rising exports. Yet total exports are less than a third of GDP and almost two-thirds go to the recession-hit euro zone. (…)

  • Eurozone exports

In another positive sign, euro zone exports to the rest of the world grew 9 percent in April while imports only rose 1 percent, giving the 17 countries sharing the single currency a trade surplus of 14.9 billion euros ($20 billion).

However, April seasonally adjusted exports declined 0.8% MoM and while exports have grown since December 2012, they are merely back to their August 2012 level.image



Singapore Exports Fall More Than Estimated on Electronics Slump

Non-oil domestic exports slid 4.6 percent from a year earlier, after falling 1 percent in April, the trade promotion agency said in a statement today.  Shipments of electronics dropped 13.2 percent from a year ago, extending the slump to a 10th month.

India Holds Rates as Rupee Drop Risks Fueling Inflation

Vietnam’s Central Bank Says It Intervened to Slow Dong Decline

Vale Sees China Slowdown Blunted by Brazil Currency Depreciation

The real, the worst-performing emerging-market currency in the past three months, probably will weaken to about 2.40 from 2.15 per U.S. dollar, bolstering Brazil’s competitiveness, said Jose Carlos Martins, Vale’s executive director for ferrous and strategy. China’s iron-ore and steel demand growth is set to slow to about 5 percent from 10 percent in the first five months of the year, he said.

“The Brazilian currency will devaluate further,” Martins, 63, said in a June 14 interview at the company’s Rio de Janeiro headquarters. “The slowdown in China is negative, devaluation is positive because not only our costs in dollars will be reduced but also investments will be lower.”



Foreigners Sell Off U.S. Debt

(…) Overall, foreign investors sold a net $70 billion in Treasury securities, cutting their total portfolio of U.S. government debt by roughly 1.2%. Investors have long watched the monthly Treasury capital-flows report for insight into the global appetite for U.S. debt, as foreign demand has been perceived as a key factor in financing U.S. spending.


Treasury auctions this week drew lower-than-average demand for the third consecutive month. (ISI, with chart below)



Warning: aggregators have different ways to compile data. I use S&P as the official “data keeper”.

From S&P:

The second quarter comes to an end in a little more than two weeks, and a number of companies have already started previewing what quarterly numbers will look like. The advance peak isn’t pretty. Of the 110 companies that have provided forecasts, according to S&P Capital IQ, 79 have been “negative,” with 18 positive and 13 in-line. That works out to a ratio of 4.4 negative-to-positive, well above the 10-year average of 2.1.

Profit growth for the second-quarter is seen around 3.5%, according to S&P. Sales growth is seen contracting 1%, according to the firm. “If you are hoping for 3-4% revenue growth – the kind that allows profit margins to expand – you’ll have to wait until 2014, at least according to Wall Street analysts,” wrote Nicholas Colas, the chief market strategist at ConvergEx Group.

From Factset:

Overall, 86 companies have issued negative EPS guidance for Q2 2013, while 21 companies have issued positive EPS guidance. Thus, 80% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 62%.

If the final earnings growth rate for the quarter is 1.1%, it will mark the third consecutive quarter of growth for the index. However, only four of the ten sectors are projected to report an earnings increase for the quarter, led by the Financials (17.5%) and Telecom Services (10.1%) sectors. On the other hand, the Information Technology (-6.3%), Materials (-4.5%), and Health Care (-3.9%) sectors are predicted to see the lowest earnings growth. The estimated revenue growth rate for the index for Q2 is 1.3%, down from an estimate of 2.7% at the start of the quarter.

ISI sees hope in an improving First Call earnings revision trend, even though it remains below 50 for now. The black lines are ISI’s way to show how things seemingly got better in the second half on each of the last 3 years. The red line is my way to show that positive revisions are fewer and fewer.


DRIVING BLIND (continued)

John Mauldin’s recent Thoughts from the Frontline letter should be read by everybody who relies on economists to make any kind of decisions in their life. As the Fed is preparing to alter its monetary stance, John’s letter helps understand the recent high level of volatility in financial markets. Everybody is driving blind just as a major turn approaches. My recent note warned that the Fed was currently Driving Blind but John says that the Fed is actually truly blind, now and always before and in the future!

Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What’s worse is that they fail miserably even at understanding where the economy is today. (…)

In plain English, economists don’t have a clue about the future.

If you think the Fed or government agencies know what is going on with the economy, you’re mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn’t make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.

Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it also didn’t even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late and hike rates too soon.

Trusting central bankers now is a big bet that (1) they’ll know what to do, (2) they’ll know when to do it. Sadly, given the track record, that is not a good wager. Unfortunately, the problem is not that economists are simply bad at what they do; it’s that they’re really, really bad. They’re so bad that it cannot even be a matter of chance. (…)

If economists were merely wrong at betting on horse races, their failure would be amusing. But central bankers have the power to create money, change interest rates, and affect our lives in multiple ways – and they don’t have a clue.

And don’t think for a moment that private economists are any more useful:

In December 2007 a Businessweek survey showed that every single one of 54 economists surveyed actually predicted that the US economy would avoid a recession in 2008. The experts were unanimous that unemployment wouldn’t be a problem, leading to the consensus conclusion that 2008 would be a good year.

As Nate Silver has pointed out, the worst thing about the bad predictions isn’t that they were awful; it’s that the economists in question were so confident in them. Now, this was a very bad forecast: far from growing by 2.4%, GDP actually shrank by 3.3% once the financial crisis hit. Yet these economists assigned only a 3% chance to the economy’s shrinking by any margin at all over the whole of 2008, and they gave it only about a 1-in-500 chance of shrinking by 2 percent, as it did.

In truth, John goes too far considering that he is, in fact, one who uses economists, including his good friend Nouriel Roubini, the most successful useless economist around, extensively in his publications, conferences and other venues offered by Mauldin Economics. No doubt he must see the irony…

Another Mauldin friend is Joan McCullough, the deliciously snappy macro strategist at East Shore Partners. She is also not fond of economists, particularly the IMF crowd (via John Mauldin).

How fast was the turnip truck goin’ when the IMF fell off the back?

Right. So take the visual and allow it to linger while we make an attempt to recap this latest load of baloney from the organization which is #2 on my list of “agencies to be disbanded immediately” … right after the IRS.

I often wonder why I have long held the IMF in such low regard. Besides the obvious, there is likely a deep-seated, psychological resentment here, too. Occasioned by the fact that for a period of years, they issued a paycheck to one Timothy Geithner. On which he paid no income tax until caught. After which they let him run Treasury which oversees the IRS.
Which put me in a very bad frame of mind. (…)

Here’s how Joan qualifies the recent IMF report titled The Concluding Statement of the 2013 Article IV Mission to The United States of America”. As a bonus, we get, in a single paragraph, a complete account of the State of the Union:

Did you ever read such high-falutin’ insanity in your life? As if these
massive issues can be resolved effortless, with the wave of a wand or the push of a button. No problem. Like I said, it’s a freakin’ term paper.

So there you have it. Please note: There is not a single mention of the fact that the US has record debt and record unemployment, food stamps, disability and Medicaid enrolment. With almost half of us paying no federal income tax whatsoever. That Obamacare is s driving health insurance premiums wild. That after almost 5 years of ZIRP and 3 rounds of QE and a wildly bloated central bank balance sheet, that we
are lucky to get 2% growth. That the quality of jobs being created is piss poor and that wages are stagnant. And while CPI inflation is tame, the cost of living which is not reflected therein, is anything but. And that we also have up to 20 million illegals in this country whose welcome hangs in the balance. Right now. With talk that the State Department is considering taking Syrian refugees as well. Once we determine which ones are Al Qaeda sympathizers and which are not. And most of all, they never addressed this reality: that the FED has painted itself into a corner. And that any suggestion that the FED should carefully plan an exit while being careful not to upset the applecart. Is just plain disingenuous. Either that, or there’s been an en masse psychotic break at the IMF headquarters. Your call.

So if you wanna’ claim that they rolled stocks over because of this worthless bit of writing from a bunch of out-of-touch bureaucrats, be my guest.

This is why I write News-To-Use and use the Rule of 20 to measure the attractiveness of equities: no forecasts. “Simply” objectively measure and monitor the equity risk/reward ratio using trailing profits and inflation and meticulously follow and assess, in as an unbiased way as possible,  the trends and momentum of some of the main economic drivers. While doing that, I try to understand conventional wisdom and how it is likely to behave (i.e. veer) in the near future.

Doing that, I read much media and broker crap, but also numerous great pieces from great minds, economists or not.


NEW$ & VIEW$ (12 JUNE 2013)

Global Tumult Grips Markets

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

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

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

Shaken Global Markets

And these charts from Bespoke Investment:



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

India’s Slower Industrial Growth Adds Policy-Change Pressure

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

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

Export slowdown threatens emerging Asia’s credit-fuelled boom

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

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

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

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

Protectionism Surges to Worst Since Crisis as G-8 Nears

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

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

Eurozone Industrial production up by 0.4% in euro area

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



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

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

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

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

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

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

Auto  Auto Makers Diverge From Weakening Factory Sector


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

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


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

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

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

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

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

(Bespoke Investment)


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

Ingram Pinn illustration

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

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


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

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

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

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

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

Pointing up  Caterpillar Workers Approve Contract

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

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


NEW$ & VIEW$ (17 MAY 2013)


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


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

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


Jobless Claims Spike by 32,000

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

It was the largest one-week gain in new benefit requests since November 2012. The prior week’s level was revised up by 5,000.

The four-week moving average of claims, which smooths week-to-week volatility, increased by 1,250 to 339,250. The prior week’s average, which was revised up slightly, was the lowest level since January 2008, just after the most recent recession started.

(Bespoke Investment)

Executives upbeat on world economy
Positive trend continues from start of year

Of the more than 1,600 business people polled, 27 per cent expected conditions to improve, against 21 per cent who expected the outlook to worsen. The rest thought conditions would stay the same.

The figures continue the positive trend that began earlier this year, when executives were more upbeat on the global outlook than gloomy for the first time since mid-2011. In February, 29 per cent thought conditions would improve and 22 per cent thought they would deteriorate.

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

Maersk Warns of Subdued Demand

“Global demand for seaborne containers is expected to increase by 2% to 4% in 2013, lower on the Asia-Europe trades but supported by higher growth for imports to emerging economies,” the company said.

Indications for the first quarter of 2013 “show modest improvements in the global demand for container transport, reflecting the weak economic situation, especially in developed countries.”

“Demand is expected to stay subdued in 2013 while capacity will grow significantly. Accordingly, conditions for the container industry remain challenging and managing supply will be even more important this year,” it said.

Japanese machinery orders see monthly rise
Companies more confident about investing in equipment

Japanese core machinery orders jumped a bigger-than-expected 14.2 per cent in March, the quickest monthly pace in eight years, in a sign a weaker yen and surging stock prices are making companies more confident about investing in equipment.

High five  Manufacturers surveyed by the government expect core orders to fall 1.5 per cent in April-June from the previous quarter after flat growth in the first three months of this year, the Cabinet Office data showed.

Growth shows signs of fatigue in Mexico
Estimates suggest worst quarterly figures since 2009
Spain Posts First Trade Surplus on Record

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

Auto  Europe Car Sales Post First Gain in 19 Months on Germany

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

Car sales in the region fell 8.7 percent in January and 10 percent in February and March.

Regional car sales last month were helped by the most of the Easter holiday shifting to March this year from April in 2012. The decline may resume for the rest of this year, though at a slower rate than in the earlier months, according to estimates by IHS Automotive Research.

Auto sales in Germany, Europe’s biggest economy, rose 3.8 percent in April, ending five months of drops. Registrations surged 15 percent last month in the U.K., the only car market of Europe’s top five to grow in 2012, and 11 percent in Spain. French auto sales fell 5.3 percent and demand in Italy dropped 11 percent. (…)

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

Storm cloud  Finally, this China update from CEBM Research:

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

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

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

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

In summary (chart from ISI)


The labour department’s consumer price index edged 0.4 per cent lower, the largest decrease since December 2008 when the US was suffering some of the darkest days of its financial crisis. The decline was greater than the 0.2 per cent dip in March and economists’ expectations of a 0.3 per cent decline.

Much of April’s drop was driven by an 8.1 per cent slide in petrol prices, the most since December 2008, following a less severe 4.4 per cent fall in March. The average price for a gallon of unleaded petrol fell by about 13 cents in April, ending the month at $3.51, according to AAA.

This drove overall energy prices down 4.3 per cent in April, following a 2.6 per cent drop in the previous month. Food prices rose 0.2 per cent.

This weakness extended to the measure for core prices, which excludes the volatile food and energy segments. Core prices increased 0.1 per cent, less than projected.

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


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

There’s reason to be cautious about the PCE number. Though Fed officials favor it — because they believe it does a better job reflecting changes in the economy — there have been some quirks in it lately.

One of them is a measure known as “financial services furnished without payment.” This is the government’s way of tracking what households pay for bundled bank services like access to ATM machines or check-writing. “This would be any service provided by a bank for which there is no explicit payment,” says Brent Moulton, the associate director of the Bureau of Economic Analysis. Without a market price to go on, the Commerce Department imputes a cost to consumers for these services based on complex formulas that move as interest rates shift.

It turns out that right now interest rates are shifting in a way that drives down the imputed value of this service. In the first quarter the price of this service fell 2.2% from a year earlier and since the second quarter of 2011 it has fallen on average by 1% annually, according to the Bureau of Economic Analysis. These measures are down largely because interest rates are falling, Mr. Moulton said, not necessarily because the actual cost of the service is going down. Strip out the quirky number and the decline in core consumer prices was 0.2 percentage points less severe in the first quarter than the official figure, according to Bureau of Economic Analysis data. A measure which strips out all imputed prices in the core consumer price index was up 1.31% in March, again more than the 1.13% number.

Underlying inflation, in other words, perhaps wasn’t slowing quite as much as the Fed’s favored measure suggested.

Because the Labor Department’s consumer price index doesn’t perform these kinds of imputations, its consumer price measures warrant close monitoring right now. The CPI index has its own quirks — including the heavy weight it places on home rental costs. Still, it might be telling a meaningful story about the true underlying inflation trend. Up 1.7% from a year earlier, the core consumer price index change suggests that inflation has indeed slowed, but not to the alarmingly low levels that the PCE numbers imply.

That — along with stable inflation expectations — helps explain why Fed officials themselves haven’t yet expressed too much concern about inflation getting too low or deflation threats growing.

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

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

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


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

Housing-Permit Surge Suggests Blip

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

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

Pointing up  Building permits, which are less volatile and serve as a leading indicator of future construction, rose to the highest level since June 2008. They increased 14.3% to an annualized rate of 1.02 million in April. (…)

The pullback in housing construction comes amid reports from home builders that they are deliberately slowing their rate of expansion in order to boost prices at a time when inventories of homes for sale are already extremely low. Rising land costs in some markets, higher costs of building materials, and difficulty in finding skilled workers have also cut into their margins.

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

Tepid Earnings Season Doesn’t Sway Investors

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

Of the 458 companies in the Standard & Poor’s 500-stock index that have reported results, 70% have beaten forecasts for earnings, in line with the average for the past four years. If results continue as projected, first-quarter earnings will rise 3.4% from the previous year, according to FactSet.

Meanwhile, sales have come in below forecasts, declining 0.2%, while analysts had expected 0.5% growth. Among companies that have reported, 48% beat Wall Street’s projections for sales, below the average of 52% from the past four years, according to FactSet.


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

Average wages for employees at non-private enterprises were up 11.9% from the year before in nominal terms, to 46,769 yuan ($7,543), the National Bureau of Statistics said in a statement Friday, compared with a 14.4% pace in 2011.

Non-private enterprises include state-owned companies, listed companies and joint ventures.

Average wages for employees at private companies were up 17.1% to 28,752 yuan, compared with an 18.3% pace in 2011.

With inflation taken into account, wages of employees at nonprivate companies were up 9% in 2012 from a year earlier, exceeding 2011’s 8.5% pace. Real wages in the private sector were up 14%, accelerating from 12.3% in 2011.

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

“Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs,” he said in prepared remarks to the Peterson Institute of International Affairs Thursday afternoon.

Those currency tensions, and the policies that are fueling them, are costing the U.S. economy millions of jobs and threatening to create the kind of global problems that contributed to the Great Depression, he said.


NEW$ & VIEW$ (15 MAY 2013)

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

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

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

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

(Chart from Bloomberg via Zerohedge)

The FT adds:

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

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

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



That sighing sound you hear from China

… is strategists everywhere cutting their GDP forecasts.

China - Freight and investment to April 2013 - StanChart

China - Electricity and construction starts - StanChart

Li Signals Reluctance on Stimulus to Boost China Growth

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

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

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

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

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

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


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

While I’m at it”:


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

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

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


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

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

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


Fingers crossed  EUROPE’S BIG HOPE:

Crude Futures Down as Inventories Soar

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


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

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

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

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

HSBC Plans Cost Cuts

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


Strong U.S. Dollar Keeping Import Prices in Check

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

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

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

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

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


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

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

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

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


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

FYI from Bespoke Investment:


NEW$ & VIEW$ (9 MAY 2013)

China’s Inflation Quickens

The CPI edged up to 2.4% from a year earlier, faster than a 2.1% on-year rise in March and ahead of the median forecast of 2.2% by 13 economists surveyed by The Wall Street Journal. (…)

Food prices were up 4% in April, a cause of concern for the government. Premier Li Keqiang was quoted by the official Xinhua News Agency as saying late Wednesday that the government will put a focus on stabilizing food prices. (…)

Non-food prices increased just 1.6% YoY in April, lower than their average rise in the first quarter.


The Producer Price Index, which measures wholesale and materials prices, has been declining for more than a year. It fell further into negative territory in April, with a year-to-year decline of 2.6%, compared with a 1.9% drop the month before, data from the National Bureau of Statistics showed Thursday.

Pointing up  The deflation in the industrial sector reflects overcapacity in a number of major Chinese industries including steel, coal, glass, aluminum, solar panels and cement.


Inflation is falling everywhere

Auto  China April Passenger-Vehicle Sales Rise 13% on New Models

Wholesale deliveries of cars, multipurpose and sport-utility vehicles climbed to 1.44 million units in April, according to the state-backed China Association of Automobile Manufacturers.

Total sales of vehicles, including buses and trucks, gained 13 percent to 1.84 million units last month, the association said.

For the first four months of the year, auto sales gained 16 percent to 5.86 million units, CAAM said.

Commercial vehicle sales rose 15 percent to 400,300 units in April.

CEBM China Survey May Summary

Review of April Industrial Activity: Further Recovery Observed Among Industrial Sectors. In April, industrial demand improved further among up- and midstream sectors, slightly above respondents’ expectations. For instance, cement sales were stronger than the same period last year in general. Surveyed copper refineries reported strong M/M and Y/Y growth. Furthermore, in addition to demand recovery in construction machinery, demand for machinery tools also showed signs of bottoming. Auto sales were also above respondents’ expectations. The recovery, however, was still closely related to local infrastructure projects. For instance, cement demand was one of the strongest among industrial materials. The demand was mostly driven by infrastructure projects in a number of provinces such as Gansu and Shaanxi. This is also true for copper and construction machinery demand. In other words, demand in the real economy remains weak.

Emerging market growth slows in April

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI™ surveys, fell to 51.3 in April, from March’s 52.5. That signalled a slowdown in economic growth in global emerging markets, to the weakest for over a year-and-a-half. Data broken down by broad sector showed similarly weak growth rates for manufacturing output and services activity.

Three of the four BRIC nations registered slower output growth in April, most notably in China. The exception was Brazil, although its rate of expansion remained modest overall. Elsewhere, manufacturing output
growth slowed in the majority of economies covered.

New business growth slowed to the weakest since last August. Notably, the rate of expansion in the service sector slowed to the weakest since May 2009, the start of the current growth sequence.

Employment barely rose in April, with the rate of growth the joint-weakest in the post-crisis period. Meanwhile, the volume of outstanding business declined for the twelfth month in a row.


Asia Wrestles With a Flood of Cash

Central banks throughout Asia are ratcheting up moves to deal with an influx of capital that is keeping currencies strong and complicating efforts to manage growth.

New Zealand’s central bank said Wednesday it intervened in foreign-exchange markets to blunt the rise of its currency and would continue to do so, a day after Australia’s central bank cut interest rates to a record low and noted the stubborn strength of the Australian dollar. Elsewhere, China is moving to curb bets on the rising yuan, while Thailand is considering efforts to curb the strongest baht since the 1997 Asian financial crisis.

In a surprise move early Thursday, South Korea cut interest rates by a quarter of a percentage point, as the country grapples with a slowing economy. The cut in borrowing costs comes a day after a government official voiced concern about “one-sided” moves in foreign exchange, code for a rise in the value of the currency. (…)

A World Bank analysis of flows to emerging markets globally shows an increase through April of 42% from a year earlier, to $64 billion.

Another measure: Asia’s central banks are again scooping up capital inflows and putting them into foreign-currency reserves. World Bank data show that developing Asian economies have added $120 billion in foreign-exchange reserves this year, bringing total reserves to nearly $4.3 trillion.

While attracting investment from overseas is often a good thing, left unchecked, inflows make local currencies stronger, which causes a country’s goods to become less competitive on the global market. And government policy makers worry that money that arrives quickly can leave just as fast, destabilizing local banking, stock and currency markets.


(…) compared with 2010, when Asian central banks routinely intervened in currency markets, this year has been less dramatic.

It is too early to assess the full extent of the flows, but some analysts figure the amount of money coming to Asia is less than in 2010. And unlike then, the U.S. is performing well and is attracting money from many investors.


You really need to remember Draghi’s pledge when you read the following from Absolute Return’s Niels C. Jensen:

Many of our banks are effectively bankrupt but the ostrich principle applies – with the apparent blessing of the authorities. Bury your head in the sand and hope for the problem to go away before anyone notices.
Over the past several months there has been a rather heated debate across Europe as to how far Germany is prepared to go, and should go, to keep the eurozone afloat. I would suggest very far. Here is the reason: Only a few days ago it was revealed that Deutsche Bank’s gross notional deriatives exposure now stands at a whopping €55.6 trillion (not a misprint) – more than 20 times the size of German GDP (chart 4).


Many will argue that Deutsche’s net exposure – which is only a tiny fraction of its gross exposure – is what matters, and that is theoretically correct. However, as Zero Hedge points out, the netting out works fine only to the extent the chain is not broken. The moment there is discontinuity in the collateral chain, all bets are off (see here). As many of Deutsche Bank’s counterparties are other European banks, it – and the rest of Germany – simply cannot afford for the European banking industry to come clean.


More from Neil Jensen:

France is a prime example of Europe’s self-inflicted hardship. Here are some revealing stats borrowed with gratitude from Gurusblog:

In 1999 France represented 7% of world exports. Today the number is 3%, and the figure continues to fall.

In 2005 France ran a trade surplus amounting to +0.5% of GDP. Today the surplus has turned into a deficit equivalent to 2.7% of GDP.

The total value of French car and machinery equipment sales to China is one-seventh the value of German sales of those same products to China.

In France 42% of wage costs of a company are social charges or taxes. In Germany it is 34% and in the UK 26%.

Since 2005, the total cost of producing a car in France has risen 17%, while in Germany the cost has increased 10%, in Spain 5.8%, and in Ireland 2%.

In France a worker earns on average €35.30 per hour, while in Italy the average is €25.80 and €22.00 in the UK and Spain.

The profits of French companies have fallen to 6.5% of GDP, a level that puts them at 60% of the European average. Lower margins mean less money to invest in new plants or technology leading to a 50% drop in the R&D of French companies over the last four years.



Yields on Junk Bonds at New Low

Issuance of high-yield bonds hit records in 2012. This year has started in the same vein, with high-yield volumes rising at the fastest-ever clip. So far this year, more than $150 billion in high-yield bonds have been issued in the U.S., according to Dealogic.




Meanwhile,corporate America is getting more cautious as this BMO Capital chart shows:



NEW$ & VIEW$ (17 APRIL 2013)

[image]Tame Inflation Could Embolden Fed

U.S. consumer prices fell more than expected in March, brought down by falling energy prices and a slow economy, giving the Fed cover to continue its easy-money policies.

The Labor Department’s consumer-price index was up 1.5% in March from a year earlier, the fourth time in five months that it has been below the Fed’s 2% inflation goal. And while the core reading on consumer costs, which excludes volatile food and energy prices, was up 1.9%, it also remained below the goal for the fourth time in five months.


In March, median CPI rose 0.1%, exactly the same as the traditional core measure. But over the past year, the median CPI is up 2.1%, suggesting inflation is running a bit hotter than the core figure of 1.9% would suggest. Over time, the Cleveland researchers argue, their approach does a better job forecasting inflation than either headline or core CPI.

U.S. Industrial Production Gain Supported by Utility Output

Industrial production rose 0.4% during March following a 1.1% February increase, earlier reported as a 0.7% rise. The gain in overall output reflected a 5.4% rise (10.4% y/y) rise in utility output. Factory sector production, however, slipped 0.2% (+2.5% y/y) following its upwardly revised 0.9% February increase, revised from 0.8%.

The drop in factory sector output reflected a 1.3% decline (+3.9% y/y) in production of construction supplies. Consumer goods production jumped 1.2% paced by a 2.9% rise (10.2% y/y) in motor vehicle production. Elsewhere, output was weak. (…)

Manufacturing production declined 0.2% in March, following a 0.9% gain in February and a 0.3% drop in January. Feeble and erratic.


Weak German car sales add to EU gloom
New registrations fall 13% in Europe’s largest economy

German car sales fell 13 per cent in the first quarter, compounding the misery of Europe’s mass-market carmakers and threatening to end a three-year boom in premium car earnings.

New registrations in the EU as a whole fell 10 per cent compared with the first three months of 2012, according to Acea industry association data.

Except for the UK, all leading European car markets reported double-digit percentage declines in the first quarter, including 12 per cent in Spain and 15 per cent in France.

UK jobs boom grinds to a halt
Jobless total rises, employment falls and earnings slump
Chinese official endorses monetary easing
CIC gives cautious backing to BoJ and Fed policy

“Monetary easing might be helpful but the role is very much limited,” Mr Jin said. “It is a necessary but not sufficient condition.”

Chinese officials and commentators have previously taken harder lines on the quantitative easing unleashed by the US Federal Reserve and, more recently, the Bank of Japan.

Still travelling.


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.


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. (…)



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.


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.”



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.


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.



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.


NEW$ & VIEW$ (25 MARCH 2013)

Cyprus, Spain, money flows and other Eurozone woes. Canadian slump. South Korea, Vietnam seek stimulus. Inflation watch. Yield bubble. Sentiment watch.

Cyprus Gets New Bailout

Cyprus secured a bailout from its international creditors early Monday, ending a week of financial panic that threatened to see the small island nation become the first government to leave the euro zone.

The deal lines up €10 billion ($13 billion) in financing for the government and shuts Cyprus’s second-largest bank, Cyprus Popular Bank PCL, imposing steep losses on deposits with more than €100,000, European officials said. The country’s largest bank, Bank of Cyprus PCL, will also be downsized aggressively, with large depositors there taking a hit.

Officials said the level of losses for large depositors may not be clear for several weeks, when experts from the EU and the International Monetary Fund have had time to run their calculations.

But the deal doesn’t include any losses for smaller depositors or depositors in other Cypriot banks, a proposal that derailed an initial attempt to reach a pact last week.

Spain Brings Pain to Investors

The Spanish government will impose heavy losses on investors at nationalized banks and hire external advisers to help it manage these banks’ assets.

The restructuring terms announced by the FROB will impose losses of up to 61% at Spain’s largest nationalized banks. At Bankia SA, the largest of the institutions and the only one that is publicly traded, shareholders will be nearly wiped out and junior bondholders will lose around 30% of their original investment.

The FROB also said it would reduce the value of preferred shares in other ailing banks—Catalunya Banc’s by 61%, Banco Gallego’s by 50% and NGC Banco’s by 43%—and then convert them into ordinary shares.

Nonetheless, imposing losses on investors is one of the politically difficult steps required of Spain in exchange for just over €40 billion in EU aid because most of those who made investments in the troubled lenders were small depositors.

Many of these small savers have taken to the streets to protest their expected losses in recent months, claiming they were misled into believing that that they were buying low-risk savings products, not risky bonds or shares.

Eurozone break-up edges even closer (Wolfgang Münchau)

(…) What happened last week is a fitting example of European political leaders, in a most unprofessional pursuit of narrow national interests, failing to defend the common good.

(…)  the single biggest risk ultimately stems from the eurozone’s repeated policy errors. Their effect is slow but cumulative.

Of those, the most damaging has been the policy of asymmetric adjustment through austerity. Banks in Cyprus are falling now because the Greek state and Greek banks fell earlier, and because the eurozone forced a private-sector involvement. In Italy, it was also austerity that turned a recession into a depression. That, in turn, transformed an anti-euro, anti-establishment protest movement into the single largest political party in the Italian parliament at the last elections. There is a good chance that its leader, Beppe Grillo, could end up with an absolute majority if Italy were to hold another round of elections later this year.

If austerity in the south had at least been compensated by fiscal expansion in the north, the overall fiscal stance of the eurozone would have been macroeconomically neutral. But since the north joined the austerity, the eurozone ended up with a primary fiscal surplus in a recession. In such an environment, economic adjustment simply does not take place. Without that, there can be no solution to the crisis. (…)

JPMorgan On The Inevitability Of Europe-Wide Capital Controls  Excerpts from a ZeroHedge post on a JP Morgan analysis:

(…) The obvious risk is the impact that these capital controls will have on deposits in other peripheral countries. (…) While a modest deposit tax might be acceptable to large depositors, a freeze of deposits for an un identifiable time period would likely be unacceptable to most large depositors such as corporations and institutional investors. (…)

But it is not only bank deposits that are at risk. A broader retrenchment in funding markets is possible given the confusion and inconsistency last weekend’s decision created for investors relative to previous policy decisions:

1) In the case of Cypriot banks, depositors are hit while senior bond holders are spared, so seniority is not respected.

2) Deposits of foreign branches are protected while deposits of domestic branches are hit. This is the opposite of what happened to Iceland.

3) In the case if Ireland which also had a big banking system relative to the size of its economy, only sub debt holders, accounting for a very small portion of total creditors, were hit. No depositors were hit, in either domestic or foreign branches.

4) In the case of SNS sub debt holders were wiped out and reports suggest that the Dutch government came close to imposing losses on senior bond holders and was only prevented from doing so because of unsecured intergroup loans between SNS bank and Reaal insurance that would be subjected to the same losses as senior bond holders.

But beyond the confusion and inconsistency, all these trends and the case of Cyprus in particular, are not only showing bailout fatigue on the part of creditor nations, especially in Netherlands where economic conditions have been deteriorating rapidly, but they are also pointing to a shift towards bailing in private creditors in future sovereign bailouts or bank resolutions to avoid using taxpayers’ money.(…)

In what we view as another ill-conceived and ill-timed move, the Spanish Minister of Finance & Public Administration announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing.

This is adding to the Cypriot crisis in sparking deposit outflow risks.

The FT’s Gavyn Davies is more optimistic:

(…) After all, everyone knows that Cyprus is a special case, given the size of its banking sector relative to GDP, its exposure to foreign depositors of questionable virtue and its concentration of bank lending to the collapsed Greek economy.

No other economy has that combination of disadvantages, which has made a conventional bank rescue impossible for the Cypriot government, and unacceptable to the rest of the eurozone, especially Germany. Bank depositors in Spain and Italy will presumably be aware of these unique features, and therefore more willing to view it as a special case.

That said, four of the features of the reported deal are setting unfortunate precedents for the future.

First, the way in which the bank failures have been handled shows that the eurozone is still very far removed from a workable banking union. (…)

Second, the principle of divorcing the debt of governments from that of banks (and thus breaking the “diabolical loop” which threatened to bring down Spain last year), was very rapidly thrown out of the window in Cyprus. (…) German Finance Minister Schauble even went as far as to say that in other countries small deposits are safe “only on the proviso that the states are solvent”. Does that not drive a coach and horses through the separation of banks and governments, which was one of the principle promises made by eurozone leaders at their crucial summit of June 29, 2012?

Third, there is the possibility that investors will view any haircut on large depositors not as a special tax, or a bail in of creditors, but as a capital levy on investors. (…)

Fourth, there is the fact that direct controls over the exit of capital from a eurozone member will have occurred for the first time in Cyprus. (…) Indeed, it seems to breach one of the basic principles of a single currency in the first place. (…)

Thinking smile  Mood Sours in Northern Europe  Falling confidence among companies in the euro zone’s biggest northern economies in March suggests those nations are increasingly vulnerable to the problems afflicting the bloc’s southernmost nations.

German business confidence deteriorated unexpectedly in March, as the closely watched Ifo index dropped for the first time in five months.

The business confidence index for France’s manufacturing industry hovered at 90 in March, statistics agency Insee said Friday. The index covering export order books fell to minus-40 in March from minus-34 in February, it said.

Confidence fell among manufacturers in the Netherlands in March, to an index reading of minus-4.8 from minus-3.6 the previous month, the Dutch statistics agency also said Friday.

In Belgium, business confidence fell to its lowest level since September 2009, with the Belgian National Bank’s measure at minus-15.0, down from minus-11.0 in February.

More on Germany

imageThe average reading of the IFO expectations index in
the first quarter is consistent with a 0.5% GDP rise.
The IFO signal is therefore stronger than that of the
PMI, which is currently pointing to a 0.3% GDP
increase in the first three months of the year.

Although both surveys indicate a return to economic growth in the first quarter, the concern is that the weakening of the IFO adds confirmatory support to the message form the PMI that the German economy is losing momentum again, and could see a renewed weakening of growth in the second quarter. The composite PMI has now fallen for two consecutive months, down sharply from a peak of 54.4 in January to 51.0 in March. (Markit)

More on France

imageIneichen Research & Management AG

TNT Express cuts 6 percent of jobs to face future alone

Dutch express delivery firm TNT Express said it will cut 4,000 jobs and focus on Europe after a failed $7 billion takeover by United Parcel Service.


After ending 2012 with a thud, Canadian retailers didn’t exactly ring in the New Year. Volume sales were unchanged in January, and are now down 0.9% in the past year and a hefty -2.2% annualized in the past six months. Coupled with sagging factory shipments, GDP looks to retrace only half of December’s 0.2% decline.

Even if growth picks up moderately in February and March, it will struggle to top 1% annualized for a third consecutive quarter. The Bank of Canada expected 2.3% growth in Q1. At least its view that low rates “will likely remain appropriate for a period of time” is on the money. (BMO Capital).


Storm cloud  South Korea Minister: 2013 Growth Likely Slower

South Korea’s new finance minister said the country’s economy will likely grow at a slower pace than expected this year, requiring an economic stimulus to be announced as early as next week.

The government in December forecast the domestic economy would grow 3.0% in 2013 following a 2.1% expansion in 2012.

South Korea Escalates Concern With Japan Policies on Yen

(…) Appointed by Park on March 22, Hyun said in his inaugural speech he would use “all possible measures to speed the economic recovery,” and indicated that government support would come as early as this month.

“We need to factor in the yen problem as we think about policy measures, as exports and domestic demand are two big pillars of our economy,” Hyun said on March 23. Stabilizing foreign-exchange markets should always be an important part of government policy, since currency moves can be a source of shocks, he said.

Storm cloud  Vietnam Cuts Interest Rates to Aid Growth After Inflation Slowed

The State Bank of Vietnam lowered the refinance rate to 8 percent from 9 percent and the discount rate to 6 percent from 7 percent, according to a statement on its website. It also reduced the cap on dong deposit interest rates to 7.5 percent from 8 percent. The new rates are effective March 26.

Vietnam’s central bank lowered interest rates six times last year, with the last reductions taking effect Dec. 24.


I have begun an “Inflation Watch” feature, even though world fundamentals are not conducive to an acceleration in world inflation as Moody’s points out:

Both the recent slowing pace of Chinese industrial activity and the eurozone’s seemingly chronic malaise will limit the upside for global inflation. The year-over-year percent change of Moody’s industrial metals price index shows unexpectedly strong positive correlations with both the eurozone’s composite PMI and the yearly percent change of China’s industrial production.



Nonetheless, U.S. labor costs are creeping up, along with employment.


The U.S. has strongly benefitted from imports of deflationary Asian products between 1995 and 2005. Non-fuel import prices (chart below) have been steadily rising since in spite of the lasting severe economic crisis that reduced world demand growth.


So, conditions are in place for higher inflation should U.S. employment keeps strengthening. To be monitored, given the impact inflation has on equity valuation (see the Rule of 20)


Investors are not well paid for the level of sovereign risk in the U.K. or France.

Update On Sovereign Risks

In a recent Special Report, BCA Research’s Global Fixed Income Strategy service has updated its sovereign risk analysis. According to the results, fiscal constraints due to heavy debt loads in the U.S., Japan, and the U.K. are depressing their sovereign risk scores. Meanwhile, peripheral Europe is on the mend.

Although the sovereign ranking methodology is not intended to predict spreads, the relationship between CDS spreads and our sovereign risk score highlights that the risk fundamentals in Spain, Italy, France and the U.K. are similar. However, investors are not well-compensated for the risks in the latter two countries.

Cyprus Crisis Is Credit Negative for all Euro Area Sovereigns (Moody’s)

Euro area policymakers’ handling of the Cyprus crisis to date, the increased risk tolerance apparent in their actions, and the uncertainty that a more uncompromising and less predictable approach to crisis management creates for investors’ assessment of risk, are credit negative for euro area sovereigns.

Yet: Investors embrace big eurozone bond sales  Issuance from periphery on track for best quarter since crisis began

(…) Governments on the eurozone’s stricken rim have sold €28.2bn worth of bonds so far this year, according to Dealogic, almost double the amount over the same period last year and making it the best start to a year since the first three months of 2010. (…)

The European periphery’s companies and banks have also benefited from the buoyant bond markets, and have sold €31.9bn worth of bonds so far this year, already making it the best quarter since early 2011. (…)

Junk Bond ETF Yields May Fall Below 5% Amid Scramble for Income

Yields in junk bond ETFs are threatening to fall below 5% for the first time ever as strong demand for speculative-grade corporate debt in a low-rate environment keeps pushing yields down.

FT’s Gillian Tett had a good piece March 14:  Remember lessons of 2007 in rush for junk Warnings over high yield ‘overheating’ are growing

(…) But while those tumbling yields have sparked debate, what has received less attention is the issue of maturity transformation. In previous decades, it was taken for granted that the type of people investing in high-yield debt or bank loans were mostly medium- to long-term investors, such as pension funds or life assurance groups, if not banks themselves.

But mutual funds and exchange traded funds have increasingly started gobbling up risky corporate debt on a significant scale. By late last year, assets in high-yield funds were running at about $350bn, having almost doubled in three years. And, although those flows reversed slightly in February, money is now flooding into bank loan funds.

(…) Federal Reserve figures show that funds are now buying more than two-thirds of all corporate credit debt, up from a quarter in 2007.

(…)  And if anything causes a panic among retail investors, the money that has been backing all those corporate loans and bonds could vanish overnight – revealing another maturity mismatch, and funding gap.

Now don’t get me wrong: I am not forecasting that this flight will happen. Although there were four weeks of outflows from high-yield mutual funds in February – or after Mr Stein’s speech – some $820m flooded back in the first week of March; investors are (thankfully) not exiting this sector in panic now. So far, the short-term money that has gone into the corporate debt world does not appear to be associated with too much leverage; this makes the picture notably different from the asset-backed commercial paper market or repo sector in 2007. (…)

Tett says that

Some bankers insist that this behaviour is benign, given that default rates remain low.

Pointing up  Here’s Moody’s on default rates, just as the U.S. economy seems to be doing better:

There was a similar number of rating changes for the US over the past week, 16, compared to the week prior, 18, but there is a substantial drop in the number of positive rating changes. Only four, 25%, were upgrades this week. The changes have been leaning slightly toward the down side of 50% over the past few weeks, but the 25% this past week certainly does not move toward a positive view of corporate credit quality. (…) In Europe rating change activity has increasingly moved to speculative grade industrial companies from investment grade financial companies and only two out of 10 changes were upgrades.

Confused smile  Congress weighs corporate debt tax reform
House looking at limiting interest payments’ tax deductibility

US lawmakers are considering limiting the tax deductibility of interest payments for businesses, a measure that would dramatically transform corporate finance in America by reducing the bias towards debt in the tax code.


Nike rallied 11 percent to a record after the world’s largest sporting-goods company reported a rebound in profitability. Tiffany rose 1.9 percent after posting better- than-estimated profit amid increased demand in the Asia-Pacific region.


Schwab’s Lyz Ann Sonders, always a good read, compares some market data for 2007 and 2013 concluding that

most of the better comparisons are many of the traditional stock market barometers, including earnings, valuation, technical conditions and inflation.

Then and Now: The Good

She goes on…

The news out of Cyprus was the trigger for the slight pullback the market’s experiencing as I write this report. The story will have to play out, but we don’t feel this represents the type of exogenous shock that could undermine the US stock market for any extended period of time.

Although the eurozone crisis keeps policy uncertainty elevated, US policy uncertainty has been coming down sharply of late.

Less US Policy Uncertainty…failing to point out that U.S. policy uncertainty remains far above 2007. She then lists all the items supporting the bullish case:

  • Thanks to better economic readings lately, many economists are upping first-quarter real gross domestic product (GDP) estimates; some as high as 3%.
  • “Don’t fight the Fed” (or most other global central banks).
  • Housing is firing on nearly all cylinders
  • Unemployment claims (a fellow leading indicator with the stock market) are at a five-year low.
  • Household net worth is on track to take out its prior all-time high this quarter.
  • Industrial production and retail sales have been particularly strong (primary source of higher GDP forecasts for first quarter).
  • Small business confidence is ticking up.
  • Earnings revisions turning higher.
  • Moderate, but persistent employment gains.
  • Consumer financial obligations (mortgage/credit card payments, etc.) relative to disposable personal income are near record lows.
  • The credit-card delinquency rate is at record low by wide margin.
  • Highest year-to-date stock mutual fund inflows in seven years.
  • About 90% of S&P 500 stocks are above their 200-day moving averages.

Typical of most economists, she spends precious little time on earnings and P/Es, assuming that a growing economy will automatically lift earnings. Longer term, yes. But, remember what Keynes said…


Sonders’ only reference to earnings is a statement that earnings revisions are turning higher. This is not supported by any of the earnings aggregators that I follow. S&P’s most recent update (March 21) shows Q1’13 estimates down 6 cents in the last 5 weeks (2 cents in the last week) to $25.51. Here are S&P’s charts:

image image

Factset wrote on March 22:

The estimated earnings growth rate for Q1 2013 is -0.7% this week, slightly below last week’s growth rate of -0.6%.

Sonders continues, stating that

Shorter-term, the next worry for investors is whether we’re going to see a fourth consecutive mid-year slowdown in the economy. (…)

There are some reasons to hope for a break in that cycle given many of the factors noted in the bulleted list above. But meaningful weakness the past three years didn’t rear itself until the April-May time frame (as you can see below via the Citi Economic Surprise Index comparisons), so we’ll have to wait and see.

No Sign of Weakness Yet This Year

The problem with that is her first bullet point above. The fact that most economists, including the Fed, have become more optimistic on the economy is, in itself, a reason to worry. The jury remains out for now. ISI’s weekly company surveys diffusion index has been a reliable canary in the past.


Recently, the big surprise in the U.S. has been the resiliency of consumer spending in the face of a big fiscal drag, delayed tax refunds and higher gas prices. Americans have obviously dipped into their savings (and cut restaurant outings). Just in case you want to hang your hat on a low savings rate, here’s the long term chart: