NEW$ & VIEW$ (29 AUGUST 2013)

U.S. Pending Home Sales Decline Further

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

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

BMO Capital:

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

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

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

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

German Jobless Figures Unexpectedly Rise in Summer Lull

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

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

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

Indonesia Raises Rates in Unplanned Move to Shore Up Rupiah

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

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

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

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

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

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

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

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

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

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

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

The “War” Effect

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

Via Citi,

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

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

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

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

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

WHY EARNINGS GROWTH MAY REMAIN SUBDUED:

Links Between Capacity Utilization, Profits and Credit Spreads

From Moody’s:

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

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

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

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

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

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

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

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

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

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

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

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

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

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NEW$ & VIEW$ (22 AUGUST 2013)

Driving Blind (continued)

Fed Stays Course on Bond Buying Federal Reserve officials reaffirmed their plan to try winding down an easy-money program that has charged up markets but left investors on tenderhooks about when or how they would move.

(…) Reflecting the cautiousness shown in the minutes and their own uncertainty about how the economy will perform in the months ahead, some Fed officials have begun talking about making a small move when they do start pulling back on bond buying. (…)

Wednesday’s market movements mirrored the broader turmoil and investor confusion. U.S. stocks initially dropped after the minutes were released at 2 p.m. New York time, then moved higher and tumbled again as investors tried to make sense of the report. (…)

“A number” of Fed officials “were somewhat less confident about a near-term pickup in economic growth than they had been in June,” the minutes of the July meeting said. “Factors cited in this regard included recent increases in mortgage rates, higher oil prices, slow growth in key U.S. export markets, and the possibility that fiscal restraint might not lessen.”

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Forget all the headlines. The reality is that the Fed is very much prepared to taper but only if conditions are right and it has no clues when that will be.

Lessons from the Fed
Three things we learnt from the minutes

1) The Fed has not settled on a September taper but it is still on the table

2) The Fed is not thrilled with the progress of the US economy

3) The Fed is flirting with recalibrating its forward guidance to mitigate tapering fears

Fed officials support tapering this year
Minutes provide no clarity on when process will begin Confused smile

 

FT Alphaville sums it up clearly:

Thus the ever-so-slightly more dovish tone in the July meeting statement, we suppose. Then again, long-term interest rates climbed in reaction to the minutes, so who knows if this carries any weight.

– There appeared to be little progress about the possibility of changing the forward guidance on rates policy by lowering (raising) the unemployment (inflation) threshold, though it was debated.

– Not much agreement on whether below-target inflation reflected transitory factors or persistently weak demand, either.

– Bottom line: we didn’t learn much from the minutes about the eventual start of tapering, which the market consensus believes is September (with December a non-trivial possibility). Mainly the minutes reinforced the point that there is much disagreement within the FOMC about current economic conditions and about what to do next.

But yesterday, we got this positive news:

U.S. Home Sales Near Four-Year High

Sales of previously owned homes rose to their highest level in close to four years, possibly reflecting a spike in activity as buyers look to close deals before mortgage rates rise further.

Existing-home sales rose 6.5% in July from a month earlier to an annual rate of 5.39 million, the National Association of Realtors said Wednesday, and were 17.2% higher than a year ago. The increase was the best month of sales since November 2009, when a home-buyer tax credit spurred activity. Prices also continued to climb, notching a year-over-year gain for 17 consecutive months.

The median price of homes sold in July was $213,500, up 13.7% from a year earlier. And the number of homes listed for sale, at 2.28 million in July, rose by 5.6% from June but stood 5% below the level of one year ago, suggesting that home prices should continue to go up, though perhaps more slowly. At the current pace of sales, it would take 5.1 months to sell the existing stock of homes for sale, down from 6.3 months one year earlier. 

      (Charts from CalculatedRisk)

But, wait a minute:

The initial rise in interest rates provided strong incentive for closing deals.  However, further rate increases will diminish the pool of eligible buyers.” 

(Haver Analytics)

And from the ever bearish ZeroHedge (Someone Is Lying)

BTW:  Wells Fargo Cutting 2,300 Mortgage-Related Jobs

Wells Fargo & Co. said Wednesday it is cutting 2,300 mortgage-related jobs across the country, a sign that a refinancing boom that helped boost the U.S. home-loan market and bank earnings continues to fade. (…)

As the largest mortgage lender in the country, Wells Fargo also is considered a bellwether for the U.S. housing market. The job cuts highlight the bank’s belief that the mortgage market is headed for a dive.

The bank spent much of 2012 ramping up its mortgage operations to accommodate a rise in refinancing activity spurred by historically low interest rates. Some 70% of the country’s market for originating mortgages the first half of 2013 was made up of refinancing, according to a Wells Fargo spokesman. He added that the bank has refinanced 3 million home loans since 2011.

But a sudden and swift spike in long-term interest rates in June is putting a damper on refinancing activity. Already, refinancing activity has fallen by nearly half across the industry, he said.

(Haver Analytics)

But do higher rates really impact housing demand? More from the FOMC minutes:

MIXED VIEWS ON THE DAMAGE OF RATE BACKUP: Some participants felt that, as a result of recent financial market developments, overall financial market conditions had tightened significantly, importantly reflecting larger term premiums, and they expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.

Several others, however, judged that the rise in rates was likely to exert relatively little restraint, or that the increase in equity prices and easing in bank lending standards would largely offset the effects of the rise in longer-term interest rates. Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels

Go figure! Too many economists in the same room.

FYI: ISI’s homebuilders survey is now at its lowest level since January. Hmmm.

U.S. Jobless Claims Stay Near 5-Year Low

Initial jobless claims, a proxy for layoffs, increased by 13,000 to a seasonally adjusted 336,000 in the week ended Aug. 17, the Labor Department said Thursday.

The prior week’s figure was revised up by 3,000 to 323,000, a five-year low. The four-week moving average of claims fell by 2,250 to 330,500, the lowest level since November, 2007.

Weak Demand Hits Beer Makers

Brewers are continuing to struggle with weak demand in Europe and an improvement isn’t expected this year, Heineken NV HEINY -4.17% and Carlsberg CARL-A.KO -0.08% said Wednesday, with both adding that they will pursue further cost cuts and look to emerging markets to boost their businesses. (…)

Heineken’s volumes were down 1% during the second quarter and 2% for the first half of the year, with declines in the U.S., Brazil and Mexico offsetting increases in the Caribbean and Canada.

Heineken’s second-quarter beer volume declined 7% in Western Europe and 6% in Central and Eastern Europe. For Carlsberg, quarterly beer volume fell 6% in Western Europe and 6% in Russia, while Eastern Europe as a whole improved slightly, up 0.7%.

Now, that’s a real world indicator! Mug

 

NEW$ & VIEW$ (20 AUGUST 2013)

Fear of Easy Money Retreat Roils India

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

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

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

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

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

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

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

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

 

Brazil’s Currency Slides to New Low

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

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

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

Bond Market Bear Markets

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

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

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

Ghost  This a.m.:

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

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

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

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

Stocks are Tapering Themselves (Barron’s)

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

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

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

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BUT HOW ABOUT THE ECONOMY?

The Philly Fed ADS Business Conditions Index

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

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

The index is based on six underlying data series:

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

Hmmm…

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

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

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

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

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

CHINA: SLOW AND SLOWER

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

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

Work or Welfare: What Pays More?

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

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

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

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

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

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

Follow up on The Coming Arctic Boom:

From China to Europe, Via Arctic

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

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

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

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

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

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

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

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

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

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

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

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

 

NEW$ & VIEW$ (19 AUGUST 2013)

EARNINGS WATCH

We now have Q2 reports from 446 of the S&P 500 companies. Based on S&P data, the beat rate slipped again to 65.2% while the miss rate rose to 27.3%. Interestingly and worryingly, only 3 sectors had a higher beat rate than the average: Health Care (76.9%), Financials (70.4%) and IT (71.9%). The other 7 sectors had a beat rate of 59.7%, down from 62.3% in Q1 and an average of 61.7% in the 3 previous quarters.

Factset notes that 92 companies have preannounced Q3, 81.5% negative. That compares with 94 preannouncements at the same time after Q1 with 79.8% negative and 95 preannouncements after Q4’12 with 75.8% negative. Of the 92 recent preannouncements, 49 were in the 3 sectors with the highest beat rates in Q2 and 40 (81.6%) were negative.

Q2’13 earnings are now estimated at $26.38, up 3.7% YoY. Trailing 12-month operating earnings would thus reach $99.30, up 1.0% from their level after Q1 and barely exceeding the last 18 months tight range of $97.40-$98.69.

Q3 estimates are $27.14, up 13% YoY while Q4 is seen jumping a whopping 26% YoY. Analysts are not meaningfully reducing their second half forecasts even though revenues are up a slow 3.4% YoY and trailing 4-quarter margins have plateaued during the last 12 months. They are obviously counting (hoping?) on a recovery from the weak Q3 and Q4’12 margins but even a return to 2011 margins would not boost earnings anywhere near their forecasts unless revenues really take off. I calculate that assuming quarterly margins return to their 2012 peak levels on a 5% increase in revenues, operating profits would rise 12% in Q3 and 13.5% in Q4. These apparently optimum conditions would take full year EPS to $105.30, nearly 3% lower than current expectations of $108.41.

Adding to the risk, it should be noted that only Financials recorded a meaningful increase in margins in Q2 (14.8% vs 12.4% last year). Ex-Financials, S&P calculates that earnings grew only 1.1% as margins declined from 9.2% last year to 8.9%. Trailing 4Q margins ex-Financials have been in a downtrend since Q3’11, dropping steadily from 9% to 8.6% during this 2-year period.

Hmmm…

And here’s something that won’t help:

Productivity Growth Comes To A Halt

Cape crusader
Ratio is too negative, says Jeremy Siegel

Jeremy Siegel adds his support to my views on the Shiller P/E and profit margins in today’s FT:

(…) I believe the Cape ratio’s overly pessimistic predictions are based on biased earnings data. Changes in the accounting standards in the 1990s forced companies to charge large write-offs when assets they hold fall in price, but when assets rise in price they do not boost earnings unless the asset is sold. This change in earnings patterns is evident when comparing the cyclical behaviour of Standard and Poor’s earnings series with the after-tax profit series published in the National Income and Product Accounts (NIPA). (…)

Downward biased S&P earnings send average 10-year earnings down and bias the Cape ratio upward. In fact, when NIPA profits are substituted for S&P reported earnings in the Cape model, the current market shows no overvaluation.

On the above, Prof. Siegel omits another important flaw of the current CAPE reading: most of the companies that recorded humongous losses in 2008-09 are no longer in the index. As I wrote in The Shiller P/E: Alas, A Useless Friend:

This is like assessing a baseball team’s current batting line-up using 10-year data that includes the dismal stats of now deceased players. How useful is that?

On profit margins:

A second argument used by bears is that the profit margins (the ratio of earnings to sales) of US companies are at unsustainably high levels and are likely to fall. Indeed, in 2012 profit margins of S&P 500 companies (based on operating income) reached 8.9 per cent, well above the long-term average of 7.2 per cent.

But David Bianco, chief equity strategist at Deutsche Bank, has shown that most of the margin expansion over the past 15 years has come from two factors: the increased proportion of foreign profits, which have higher margins because of lower corporate tax rates; and the increased weight of the technology sector in the S&P 500 index, a sector that usually carries the highest profit margins.

Higher profit margins also result from stronger balance sheets. The Federal Reserve reports that since 1996, the ratio of corporate liquid assets to short-term liabilities has nearly doubled, and the proportion of credit market debt that is long term has increased to almost 80 per cent from about 50 per cent. This means many companies have locked in the recent record low interest rates and will be much less sensitive to any future increase in rates, keeping margins high. (…)

Economists Trim 2013 GDP Growth Forecasts

The third-quarter survey of 41 forecasters done by the Federal Reserve Bank of Philadelphia shows the consensus view on gross domestic product expects growth of 1.5% for all of this year, down significantly from 2.0% expected when the survey was last done in May.

Part of the downward revision reflects the refiguring of historical GDP reported last month by the Commerce Department. But the economists in the Philadelphia Fed survey also expect the second half of 2013 will be less robust than they expected three months ago. The median forecast thinks real GDP will grow 2.2% this quarter and 2.3% in the fourth quarter, down from 2.3% and 2.7%, respectively.

For 2014, forecasters expect real GDP to grow 2.6%, down from 2.8% projected in May.

Asia Faces Higher Borrowing Costs

Low rates have been a significant motor of Asia’s developing economies. Now, rising U.S. rates are making it harder for Asian issuers to raise funds cheaply.

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Debt loads in emerging Asia—measured as total public and private borrowing as a percentage of gross domestic product—rose to 155% in mid-2012 from 133% in 2008, according to McKinsey Global Institute, a unit of consulting firm McKinsey & Co.

Thai Economy Slows Sharply

Thailand’s economy entered a technical recession in the three months through June as China’s slowing growth and weak demand in the U.S. continued to weigh on exports, adding to signs of woes across Asia.

Thai gross domestic product, the broadest measure of economic activity, contracted 0.3% on a seasonally adjusted basis from the first quarter. GDP was 1.7% lower in the first three months of 2013 compared with the previous period.

The planning agency downgraded its full-year growth forecast to between 3.8% and 4.3% from a previous range of 4.2% t0 5.2%.

Thai exports fell 1.4% on quarter, driven lower by weak overseas sales to China, Thailand’s largest market, as well as the U.S. and Europe. Private consumption was 1.9% lower on quarter as the government phased out a tax-rebate program. The nation’s current account swung from a $1.3 billion surplus in the first quarter to a $5.1 billion deficit in the second quarter as exports slumped.

India fails to prevent fresh falls for the rupee

Currency hits new record low despite government measures

 

India and Indonesia appeared trapped in a race to the bottom on Monday, as both the rupee and the rupiah fell sharply against the US dollar, prompting a sell-off in equities.

The Indian rupee continued its relentless decline, hitting the latest in a series of all-time lows against the US dollar and dashing hopes the government had succeeded in calming the country’s unsettled financial markets. (…)

Like India, Indonesia relies on foreign capital to fund its deficits. But global investors have been pulling back from emerging markets since May, amid expectations the US could soon start reversing its ultra-loose monetary policy. (…)

The fresh currency falls also increased pressure on the debt markets. Yields on India’s 10-year debt spiked above 9 per cent for the first time since late 2011, while Jakarta’s cost of borrowing jumped 18 basis points to the highest level since March 2011. (…)

From FT Alphaville:

That’s the Jakarta Composite down more than 5.5 per cent at pixel time on Monday, anyway.

U.S. Manufacturers Regain Footing

After a decade of losing ground to China and other export powerhouses, U.S. manufacturers are finally showing signs of regaining their competitive edge.

(…) In a report for release Tuesday, BCG says rising exports and “reshoring” of production to the U.S. from China “could create 2.5 million to five million American factory and service jobs associated with increased manufacturing” by 2020. That, BCG says, could reduce the unemployment rate, currently 7.4%, by as much as two to three percentage points.

The overall U.S. trade deficit, meanwhile, narrowed recently, as new shale-drilling technologies have sharply boosted domestic energy production.

At present, about 12 million Americans are directly employed by manufacturers, down from nearly 17 million two decades ago. (…)

The U.S. accounted for 11% of global exports of manufactured goods in 2011, down from 19% in 2000, Mr. Preeg said. During the same period, China’s share rocketed to nearly 21% from 7%, and the European Union slipped to 20% from 22%.

China’s performance has cooled recently. U.S. exports of manufacturing goods to China surged 19% to $19.9 billion in the second quarter, Mr. Preeg said, but that is about one-fifth of China’s manufacturing exports to the U.S. (…)

Meanwhile, China no longer relies heavily on labor-cost advantages to get a leg up on other countries. As wages rise, China has shifted to more exports of higher-tech items, including telecommunications equipment, computers and scientific instruments, Mr. Preeg said. Only about 15% of China’s manufacturing exports are in labor-intensive industries, such as textiles or shoes, he said.

Value of US fuel exports soars
Petroleum and coal top growth rankings at $110.2bn

(…) According to Census bureau export data reviewed by the FT, the value of petroleum and coal exports more than doubled from $51.5bn in the year to June 2010 to $110.2bn in the year to June 2013. This placed it at the top of the rankings of export growth.

Oil and gas exports were second, with a 68.3 per cent increase over the same period but based on smaller nominal values. Primary metals and livestock exports have also experienced strong export growth under Mr Obama, well above the average 32.7 per cent for all commodities. (…)

China’s House Prices Spark Concern

[image](…) Prices rose an average 6.7% year-over-year in July, up from 6.1% in June, calculations by The Wall Street Journal based on official data released Sunday showed. On a month-to-month basis, the increase in prices moderated slightly. (…)

New home prices in major cities like Beijing, Shanghai and Guangzhou showed the largest gains in July. Export hub Guangzhou in China’s southeast recorded the largest year-over-year gain among the 70 cities tracked—a 17.2% increase. On a sequential basis, the increase in prices moderated—up 0.68% month-to-month in July, down from 0.78% in June, calculations showed.

Pointing up  China’s Xi Embraces Mao as He Tightens Grip

 

(…) It isn’t just Mr. Xi’s rhetoric that has taken on a Maoist tinge in recent months. He has borrowed from Mao’s tactical playbook, launching a “rectification” campaign to purify the Communist Party, while tightening limits on discussion of ideas such as democracy, rule of law and enforcement of the constitution.

Mr. Xi’s apparent lurch to the left comes as Chinese authorities prepare for the coming trial of Bo Xilai, the former party rising star who led a Maoist revival movement until his dramatic downfall last year. Two of Mr. Bo’s lawyers said they expected the trial where he faces corruption charges to take place next week. Before he was detained, Mr. Bo rejected allegations of corruption.

The Chinese president’s Maoist leanings have dismayed many advocates of political reform, who hoped that Mr. Bo’s downfall signaled a repudiation of his autocratic leadership style and might lead to a strengthening of the rule of law and other limits on party power.

But Mr. Xi’s recent record has delighted and emboldened many former Bo supporters who advocate stronger, centralized leadership as the solution to the country’s problems. (…)

Mr. Xi’s use of Maoist imagery, rhetoric and strategy sets him apart from his two predecessors—who both emphasized collective leadership—and suggests to many party insiders that he won’t pursue meaningful political reform during the 10 years he is expected to stay in power. (…)

The new Chinese leadership has also ordered officials to combat the spread of “seven serious problems” including universal values, press freedom, civil society and judicial independence.

At the same time, state media have published a series of attacks on civil society and “constitutionalism”—the idea that the party’s power be limited by China’s existing constitution. (…)

Mr. Xi’s attitude toward political reform is a critical issue in China today because the country may be entering a prolonged period of slower economic growth and mounting public discontent over environmental problems, patchy public services and widespread corruption. (…)

On the political front, however, Mr. Xi has shown no sign of considering even limited liberalization, party insiders say. “Xi is really starting to show his true colors,” said one childhood friend who recalls Mr. Xi spending hours reading books on Marxist and Maoist theory as a teenager. “I think this is just the beginning.” (…)

Yet rather than losing faith in one-party rule, both Mr. Xi and Mr. Bo had worked harder than many contemporaries to prove their allegiance to Mao as young men, and had been left with a heightened sense of how to get ahead in Chinese politics.

“Their thinking is quite similar: They have the same Maoist education, the same red family background, and the same experiences growing up,” said Zhang Lifan, a historian whose father was a senior official. “When they face a problem, they revert quickly to Maoist thinking.” (…)

Ninja  Russia Moves to Restrict Imports if Ukraine Signs EU Deal

Russia is moving to clamp down on imports from Ukraine if its ex-Soviet neighbor signs a landmark free-trade and political-association deal with the European Union, a senior adviser to President Vladimir Putin said.

The comments Sunday by Sergei Glazyev, a senior economic advisor to Mr. Putin, signal a more forceful approach by the Kremlin to the potential deal, which could anchor Ukraine, for centuries ruled from Moscow, more firmly in the West. Moscow is urging Ukraine, a Texas-sized country sandwiched between Russia and the EU, to join a rival trade bloc that it is forming with other former Soviet republics.

Russia last week began tougher checks at the border that Ukrainian exporters said stalled shipments and caused serious financial losses.

Mr. Glazyev said Sunday that those checks were “preventative measures” in preparation for changes in customs procedures if Ukraine signs the EU pact. (…)

A post on Swedish Foreign Minister Carl Bildt’s Twitter blog Thursday said it would be “very serious” if Russia was starting a “silent trade war against Ukraine to block its relations with the EU.”

SENTIMENT WATCH

U.S. Stocks Beat BRICs by Most Ever on Emerging Flight

Almost $95 billion was poured into exchange-traded funds of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index (SPX) trades at 16 times profit, 70 percent more than the MSCI Emerging Markets Index. A measure of historical price swings indicates the U.S. market is the calmest in more than six years compared with shares from China, Brazil, India and Russia.

Cash is draining from emerging-market ETFs and flowing into U.S. stock funds at the fastest rate on record as bulls say an unprecedented third year of higher earnings growth will support the S&P 500 even as the Federal Reserve begins to remove stimulus. Developing-nation investors say the ETFs will lure more cash after equity valuations reached a four-year low. (…)

The last time U.S. shares traded at such a premium and volatility versus emerging-markets was similar to now, was in June 2004, when the Fed started to raise interest rates from a 45-year low of 1 percent. Emerging markets rallied 29 percentage points more than the S&P 500 in the next 12 months, according to Bloomberg data. (…)

 

NEW$ & VIEW$ (24 JUNE 2013)

FED TRIES DAMMAGE CONTROL

  • Fed Toils in Vain to Calm Markets  The financial markets’ violent movements this week underscore the immense challenge the Fed faces as it eyes an eventual end to its $85 billion-a-month bond-buying program.

The market reaction presents the Fed with new questions that will only be answered in the months ahead: Are the economy and markets really healthy enough now to stand on their own? Might the prospect of withdrawing stimulus undermine the recovery the Fed has been struggling for years to engineer? Are its efforts to clarify its thinking helping or hurting? (…)

Mr. Bernanke likens the two levers to driving a car: When it reduces its bond purchases, that will be like lightening the pressure on the accelerator; when it starts raising rates, it will be akin to tapping the brake.

Many investors appear to have missed Mr. Bernanke’s signals that the Fed might wait longer than expected before raising short-term rates. He said on Wednesday that the 6.5% unemployment rate threshold might be too high and that the Fed might decide to keep rates low for long after the rate drops below that level, especially if inflation remains low.

But it is the Fed’s bond purchases that have driven mid and long term rates 200-300 bps below normal. The Fed may well keep short term rates low, but it does not set longer term rates, including mortgage rates, simply by diktat. This is what QE3 was all about. Bernanke won his bet. He himself closed the debate on flows vs stock.

(…) However, a close look at Mr. Bernanke’s press conference comments and Fed official’s interest-rate projections released after the meeting show the Fed took several steps aimed at sending the opposite signal.

–Mr. Bernanke emphasized that even though the Fed might pull back on bond-buying later this year — which is akin to easing your foot off the gas pedal of a car — it would be a long time before it took the more aggressive step of raising short-term interest rates — which is akin to pressing the brake. He also emphasized in his prepared statement that when rate increases come, they “are likely to be gradual,” a hint of future caution about rate increases he hasn’t given before.

–Mr. Bernanke suggested the Fed could keep short-term interest rates near zero even longer than previously planned. Since December, the Fed has said it would keep short-term rates near zero at least as long as the jobless rate is above 6.5%. In his prepared statement, Mr. Bernanke emphasized that rates could stay low for a while even after unemployment falls below 6.5%, particularly if inflation stays low. “The more subdued the outlook for inflation,” he said, “the more patient the [Fed] would likely be,” he said. In the question-and-answer session he went even further and said for the first time that the Fed might even lower that 6.5% threshold.

–Fifteen Fed officials expect the central bank won’t need to raise short-term interest rates until 2015 or 2016 and just four said it would need to do so before then. That was a slight move away from early tightening: Previously five anticipated tightening before 2015. The average short-term benchmark rate expected at the end of 2015 among Fed officials didn’t change much – it was 1.34%, compared to 1.30% in March. The median expected rate – meaning half saw one higher and half saw one lower – remained unchanged at 1%.

–Mr. Bernanke said “a strong majority” of Fed officials had concluded the Fed won’t ever sell its growing portfolio of mortgage-backed securities, and instead will let it shrink as mortgages are paid off. In the past the Fed had said it might someday sell these bonds, a threat to any investor who held the bonds. He was more emphatic than ever Wednesday about not selling.

–A hawk became a very vocal dove. St. Louis Fed president James Bullard dissented from the Fed’s policy statement, saying he thought the central bank should be leaning toward even easier money policies. In the past, Mr. Bullard has tended to side with Fed “hawks” opposed to easy money policies. In a statement his office released Friday morning, he argued that the Fed’s decision to lay out a plan for pulling back easy money was “inappropriately timed” because inflation and economic output have been soft.

–Mr. Bernanke emphasized the conditional nature of the Fed’s plan to withdraw bond-buying. “If you draw the conclusion that I’ve said that our policies, that our purchases, will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy … we have no deterministic or fixed plan.”

Winking smile  Maybe Bernanke should do the “read my lips” trick. Still, he should at least remember what the FOMC wrote just the month before as Barron’s Randall Forsyth points out:

NOW, HOWEVER, THE FED sees things sunny side-up. The FOMC last week declared “downside risks to the outlook for the economy and the labor market as having diminished since the fall,” a darned sight better than the assessment in May, when the panel “continued to see downside risks to the economic outlook.”  (…)

What positives the FOMC saw during the last 4 weeks seem to have been totally missed by investors! For his part,

David P. Goldman, the head of the Macrostrategy advisory and the former head of bond research at Bank of America, writes in a note to clients, the conventional wisdom of a pickup in the second half of 2013 is contradicted by the lack of sources for growth: Real incomes are falling; exports are stagnant and are likely to be hampered by a higher dollar; corporate profits began to slide in the first quarter, and guidance from S&P 500 companies is negative; government spending is constrained, and there is “not a flicker of improvement” in corporate investment. Housing is the sole bright spot, and that will be restrained by the jump in mortgage rates.

Speaking of the sole bright spot, has anybody at the Fed noticed that housing starts have actually declined since last December and building permits have increased a mere 3%?

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And despite all the bullish talk from house builders, they are not hiring any more workers:

FRED Graph
 
Sarcastic smile  Hmmm…
 

And now, by the Fed’s own making:

Bond selling hits US homebuyer costs  Yields on US Treasuries reach highest level in two years

The average rate on a new 30-year fixed rate mortgage has jumped to 4.24 per cent, according to bankrate.com. The average 30-year fixed rate was 3.40 per cent as recently as early May. Wholesale mortgage rates rose by 15 basis points on Friday, an indicator that new loans could rise still further.

The WSJ did the real numbers for us:

Economists say there would not be much impact until rates reach 6%. How many people who can only afford a $208k house have $200 or $250 of spare cash per month, let alone having the $40k cash down? By the way, the median sales price is now $270k, 30% higher!

But don’t worry, economists and banks have solutions to everything:

Housing Rebound Shrugs Off Higher Rates as Banks Loosen Loan Purse Strings

While rising costs make purchasing real estate more expensive, the upshot for homebuyers is that banks will need to respond by improving credit availability that has been holding back the market for the past five years.

“If people believe house prices are going up, credit availability will evolve,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston. “There is too much money to be made lending to homebuyers. Lenders will find a way.” (…)

Bank of America Corp. is doing more lower-down-payment originations because mortgage insurers are getting more comfortable with them as home prices rise, he said. The company is considering lowering its down-payment requirement for jumbo loans to 15 percent from 20 percent, he said.

“We would never change credit conditions due to market pressures,” he said. “Any changes would be based on economic factors.”  Winking smile (…)

Zillow Mortgage Marketplace, an online comparison shopping site for home loans, saw a 570 percent increase in the number of lenders offering conforming loan quotes with down payments of 3.5 percent to 5 percent in March 2013 compared with two years earlier, said Erin Lantz, director of the site, which received 15 million loan requests during the past 12 months.

“More lenders are willing to lend to borrowers with lower down payments — it’s an indication that they are able to extend credit more broadly,” Lantz said.

HIGHER RATES COULD ALSO HIT CAR SALES

(…) the auto industry accounts for about 4% of U.S. gross domestic product, and directly employs 2.5 million people. In the first quarter, vehicle production accounted for about half of the U.S. economy’s growth, according to data from the Bureau of Economic Analysis.

image(…) In recent months, auto sales have continued to rise but at more moderate rates than the 13% growth the industry saw in 2012. And those lower growth rates have required increased efforts by auto makers. The percentage of loans and leases going to subprime customers are increasing. Subsidized interest rates of 0% or close to 0% are widely available, even on new models. If the Federal Reserve begins to taper off its bond-buying efforts later this year, as it said it might, offering such rates would likely become more costly for auto makers.

And, by the way,

Increased housing activity also spurs contractors, plumbers and electricians to go out and buy new pickup trucks—which are big profit-makers for Detroit.

Surprised smile  US Treasuries to feel more heat
Benchmark government yields face upward pressure

 

Dealers will underwrite $99bn of new Treasury debt spread across the two, five and seven-year sectors in what shapes as a test of investor appetite for government paper.

Thumbs down  HIGHER RATES ALSO HAVE A WEALTH EFFECT:

 

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MEANWHILE, CHINA CONTINUES TO WORRY PEOPLE

 

China Central Bank Warns Banks on Liquidity

The funding squeeze, which sent overnight funds soaring as high as 30% in intraday trade last week, began in late May, but only Monday did the People’s Bank of China make its position clear: “All financial institutions must…continue to strengthen their liquidity management to promote stability in the monetary environment,” it said in a statement on its website.

“Commercial banks need to closely follow the liquidity conditions and boost their ability to analyze and make predictions on the factors that influence liquidity,” it said. (…)

China’s benchmark Shanghai Composite index fell 5.3% to its lowest point in nearly seven months, and China Development Bank, one of the country’s three policy banks, canceled a planned Tuesday sale of 20 billion yuan ($3.26 billion) in floating-rate bonds. (…)

On Monday, concerns over the funding problems led to a wave of selling in shares of midsize banks, many of them heavily reliant on the interbank market for their funds. China Minsheng Banking, Industrial Bank and Ping An Bank all fell by the market limit of 10%.

The People’s Bank of China also said Monday that banks need to maintain “stable and appropriate” credit growth and adhere to its prudent monetary policy, adding that liquidity in the banking system overall was reasonable. (…)

China’s liquidity crunch, and what it means for everyone

(…) It’s hard to know exactly what degree of control the PBoC has over the events unfolding in China’s interbank markets.

On the one hand, making the smaller banks and shadow finance entities sweat fits with the central bank’s new high-priority goal, introduced late last year, of containing ‘financial risks’, and also with a broader government theme of clamping down on excess.

On the other hand, Chinese liquidity is also being affected by external forces (shrinking capital inflows) and the shadow financing calendar (WMP end-of-quarter maturities). Michael Pettis says he suspects the PBoC was “caught flat-footed” by this combination of events, and it certainly isn’t hard to imagine. He also points out that this is a central bank which has almost no experience of any market conditions other than credit creation and expansion.

About those mid-tier Weapons of Mass Ponzi in China

First a chart from Fitch’s China shadow banking guru, Charlene Chu:

That shows the issuance of Wealth Management Products by Chinese banks slowing down in 2013, driven says Chu by a tightening in regulation and a strong pick-up in credit growth that has propelled a rebound in deposits. But she also estimates that more than Y1.5tn in WMPs – substitutes for time deposits – will mature in the last 10 days of June.

All of which provides a pretty sturdy clue as to why this squeeze by the PBoC might be happening now. 

As Chu says, “issuance of new products, and borrowing from the interbank market, are among the most common sources of repayment for maturing WMPs, and the recent interbank liquidity shortage complicates both. China’s mid-tier banks, also known as joint-stock, are likely to face the most difficulty, with an average of 20%-30% of total deposits in WMPs. This compares with 10%-20% for state-owned and city/rural banks.” (…)

Distress Signs Test Beijing’s Resolve

Increasing economic and financial stresses are testing Beijing’s resolve to ride out a slowdown without resorting to its usual interventions.

(…) With funding pressures threatening to spread to other parts of the economy, the costs of the central bank’s decision to stand pat are becoming increasingly evident.

“Because of the PBOC’s refusal to inject liquidity, interbank funding costs will likely continue to rise in the short run,” said Li Zhiqiang, chief economist at China Minsheng Banking Corp. (…)

Those surging rates are also causing problems for companies, with one senior executive at a copper cable maker saying his borrowing costs set by the banks had risen to as high as 8%, from about 4% normally, adding that “if it keeps going up, we’ll be in big trouble.”

image

 

Pointing up  Excerpts from a good Barron’s piece: Where Will It End?  China’s credit growth to back lavish construction and infrastructure projects is similar to that of the U.S. and Japan before they faced financial calamities.

(…) THE PRIMARY FAULT LINE in the Chinese economy that worries many has been the explosion in the credit-to-GDP ratio since the onset of the 2008 global financial crisis and economic slowdown, as China sought to stimulate its economy in the face of a lag in its longtime growth engine, exports.  This total societal debt load has followed a similar growth trajectory to that of the U.S. and British economies in the six years leading up to the 2008 crisis; Japan’s credit orgy from 1985 to 1990, a prelude to two decades of stagnant growth punctuated by bouts of deflation, or Korea prior to the Asian financial crisis (see charts below).

According to a report from analysts at Fitch, China’s recent credit bubble has topped them all with total debt (a broad measure which includes business, household and local government debt but not central government debt) rising from 130% of GDP in 2007 to 210% in the first quarter of this year. In Japan, by comparison, during the fateful six-year credit bubble, the jump in the ratio was just 45 percentage points, from about 150% to just over 195%.  (…)

image

 

The Chinese credit explosion, however, has sluiced funds into sectors that hold much peril. For example, money has been lavished on giant state-owned enterprises that dominate such key basic industries as steel, cement, electrolytic aluminum, plate glass, coking coal, solar panels, and wind-turbine production. This has created severe overcapacity in these industries that, ominously, has sent China’s producer price index into negative territory in the last 12 months, slipping another 2.9% in May, and sharply curtailed corporate profitability.

[image]There has also been a huge surge in infrastructure spending since 2008, primarily on the part of local-government financial vehicles, which are special investment platforms. Many of the projects — roads, bridges, international ports, and airports — don’t seem to have a good economic rationale.

(…) many recent, debt-financed projects won’t generate cash flow for years, if ever. They were merely big, splashy projects that temporarily boosted employment and economic growth during their construction phase before sinking into a moribund state. The New South China Mall, twice the size of the U.S.’s Mall of America in Minnesota, has been 99% vacant since its 2005 opening.

Surprised smile  In fact, a recent working paper by the International Monetary Fund concluded after a cross-country survey that excessive investment on infrastructure and industrial projects, amounting to about 10% of GDP, or about CNY5 trillion, would have “little impact on future growth” or long-term “favorable spillover into household income or consumer spending.”

BUT NO CHINA CREDIT STORY would be complete without mention of the real-estate construction boom that has pumped up perhaps the biggest bubble of all. For example, nine times the commercial space sold last year is under construction now. Residential construction has been in a white heat for some time and has attracted much notice in the financial press and elsewhere. Stories about the “ghost city” of Ordos in Inner Mongolia have become a staple, showing the eerie empty streets and deserted modern, high-rise apartment buildings, stores, and public buildings of a megapolis expected to attract more than one million people. It has been empty for the six years since its construction.

Stories abound about similar projects in other cities either still under construction or sitting vacant. (…)

A credit crisis would likely begin somewhere in the shadow banking system with a large credit default or the bankruptcy of a major player, observes Charlene Chu, Fitch’s senior banking analyst in Beijing. “In China, trouble starts on the fringes of the system and then moves into the core,” she says. (…)

How much debt will go bad is anybody’s guess, but the total is much higher than the 1% that Beijing officially reports in the Chinese banking system. Some estimate the eventual total, including sources outside the banks, could be as high as 20% of 2012 year-end total debt of about CNY100 trillion. Losses of just CNY6-7 trillion would wipe out the capital of the state banking system. (…)

More on that from the WSJ today:

Chinese Industrial Subsidies Grow

Companies listed on China’s stock exchanges received 85.68 billion yuan ($13.83 billion) in government subsidies last year, up 23% from a year earlier, while corporate profits rose less than 1%, according to a Chinese data provider. The subsidies were equivalent to more than 4% of the companies’ total profits last year, up from around 3% between 2009 and 2011.

The subsidies—largely from local authorities but also from the national government—took the form of cheap land, tax rebates, support for loan repayments and straight-up cash. There were a range of reasons, including research and development and support for government environment priorities.

(…) But the overall health of China’s corporate sector—and, in particular, the country’s industrial realm—increasingly has relied on subsidies as many industries struggle with overcapacity and weak demand for exports. That is adding to the financial pressures on local governments that provide much of the cash—many of which already carry heavy debt from funding development projects—and to tension with foreign trading partners. (…)

About 90% of the 2,400 companies listed in mainland China received government support last year, according to Hithink’s analysis of earnings reports. More than half the companies listed in China are state-owned. (…)

Copper Hits 2013 Low on China’s Cash Crunch

Copper prices started the week on the same trajectory they’ve been on since the start of the month, slipping to their lowest levels of the year, tracking other industrial metals as well as share markets, which have been rattled by China’s cash crunch.

Three-month copper changed hands as low as $6,640.50 a metric ton Monday, down 2.6% since Friday and 9.1% so far this month.

China demand, accounting for around 40% of global copper consumption, provides essential support for futures on the London Metal Exchange, and signs of a sluggish manufacturing sector in the world’s biggest buyer have contributed to a more than 16% price drop in the benchmark three-month contract since the start of 2013.

BEN IS NOT THE ONLY ONE WITH POOR TIMING:

 
Central banks told to head for exit
BIS tells members to get back to inflation focus

The BIS, which counts the world’s leading monetary authorities as members, said cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health. It used its influential annual report to call on members to re-emphasise their focus on inflation and press governments to do more to spearhead a return to growth. (…)

“Alas, central banks cannot do more without compounding the risks they have already created,” the BIS said, adding that delivering more “extraordinary” stimulus was “becoming increasingly perilous”.

“How can central banks encourage those responsible for structural adjustment to implement those reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back … [and] how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions,” the report said.

Mario Draghi’s rallying cry, uttered last summer at the height of the eurozone turmoil, that the European Central Bank would do “whatever it takes” to preserve the currency bloc was now being misconstrued, it warned.

“Can central banks now really do ‘whatever it takes’?” the BIS asked. “It seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions.”

Ghost  Increasing Bond Yields Risk Debt Spiral in U.S., Japan, BIS Says

Japan’s public debt would swell to 600 percent of gross domestic product by 2050 on a 2 percentage-point increase in funding costs, should its age-related government spending continue unchecked, the Basel-based BIS said in its 83rd annual report. In the U.S., the debt-to-GDP ratio would almost double to 200 percent under the same circumstances, it said.

“Governments in several major economies currently benefit from historically low funding costs,” the BIS said. “At the same time, rising debt levels have increased their exposure to higher interest rates. The consolidation needs of countries experiencing low interest rates would be greater if their growth-adjusted interest rates were to rise.” (…)

Government liabilities related to health care and pensions as a proportion of GDP will rise by 9 percentage points in the U.S. between 2013 and 2040, the biggest increase among developed economies, it estimated. (…)

U.S. debt as a percentage of GDP will be 108.1 percent this year and 109.2 percent next year, the according to an International Monetary Fund forecast in April. Debt will reach 245.4 percent of GDP in Japan and 93.6 percent in the U.K. in 2013, it said.

Of the three, the U.K. would be least affected by an increase in borrowing costs because the average maturity of its debt, at around 14 years, is the longest, the BIS said. U.S. bonds mature in 64.5 months on average, according to data compiled by Bloomberg.

OTHER BRICS HAVE PROBLEMS OF THEIR OWN

 

Brazil’s New Middle Class Takes to Streets

Over the last decade, Brazil capitalized on a global commodity boom to lift millions out of poverty and create a new middle class. Politicians from all political stripes now find themselves under siege from the very same group.

(…) Some say much of the explanation for why hundreds of thousands of Brazilians are on the streets right now can be found in (..)  a school of thought in development economics about why seemingly better-off middle class populations have taken to the streets across the emerging world from Turkey to Chile.

The idea is that populations begin to demand more of their leaders as their own economic conditions improve. Citizens who are better off have the luxury to focus on social grievances that seem less pressing to impoverished people whose biggest concern are earning enough to feed themselves. (…)

Much of the ire is directed at a political system that critics say affords broad impunity to engage in corruption while mostly ignoring the demands of ordinary Brazilians. (…)

The FT adds:

(…) So fast and unexpected has been the emergence of the biggest street protest movement in Brazil since the impeachment of President Fernando Collor in 1992, and so diffuse are its demands, that it has caught the nation’s politicians flat-footed. (…)

On Monday, hundreds of thousands of people appeared on the streets of São Paulo, Rio de Janeiro and other cities to protest. They were not only students but also architects, businessmen, trade unionists, workers and families. The protests continued through the week. On Thursday night, an estimated 1m people staged mostly peaceful protests across the country, from the capital cities to interior towns. (…)

As Ms Rousseff said on Tuesday, Brazil – from its students to its workers to its football stars – has “awakened”. So too now must its politicians.

No doubt that China’s leaders are watching with interest.

Gillard Says Aussie Drop Would Be ‘Very Good Thing’ for Economy

“A sustained depreciation of the Australian dollar in those circumstances would be a very good thing, to stimulate further growth in the non-mining sector — while the firms that have adjusted to the historically high dollar stand to benefit from its fall,” Gillard said in a speech in Canberra today.

SOME THINGS WILL JUST NEVER CHANGE

EU Leaders Try to Stave Off Bond Slump as Bank Talks Fail

Euro-area bonds slumped, led by Spain and Italy, after negotiations among the 27-member bloc’s finance ministers stalled over the weekend in Luxembourg. They failed to agree on assigning losses at failing banks as part of proposed rules on bank resolution and recovery. (…)

The banking-union talks collapsed early Saturday after 19 hours of negotiations on the question of which creditors face writedowns when banks fail, compounded by differences between euro-area countries and EU states outside the euro.

“There are still core issues outstanding,” Irish Finance Minister Michael Noonan told reporters as he left the meeting. “We have another meeting next week, and there’s no guarantee it’ll reach a conclusion.”

 

NEW$ & VIEW$ (20 JUNE 2013)

Fed Roils Markets

Fresh signs that the Fed is considering pulling back on efforts to support the U.S. economy rattled markets. The dollar rose, while stocks in Europe and Asia, emerging-markets currencies and bonds all fell

imageSpeaking on Wednesday, Fed Chairman Ben Bernanke stressed that the Fed isn’t poised to raise interest rates any time soon. But assuming economic data keep improving in the world’s biggest economy, it will look to trim its monthly bond purchases from the current level of $85 billion a month by the end of this year. (…)

“What the Fed’s action did last night was to confirm that unless things in the U.S. get worse then the music is going to be turned down at the party and the dancing is about to end,” said Paul Lambert, head of currency at Insight Investment in London, which managed £255.3 billion ($395.33 billion) as of late March. “This adjustment is likely to be a volatile one.” (…)

Behind the Fed’s strategy for unwinding its bond-buying program were its optimistic new economic forecasts for next year, including a projection that the jobless rate, which was 7.6% in May, will fall to between 6.5% and 6.8% by the end of 2014. (…)

“The fundamentals look a little better to us,” Mr. Bernanke said. “In particular, the housing sector, which has been a drag on growth since the crisis, is now obviously a support to growth.” Rising home prices are increasing household wealth and strengthening consumer confidence and spending, he noted. (…)

Pointing up  Moreover, the Fed said in its postmeeting statement that risks to the economy were diminishing. (…)

Fed officials are now a bit more optimistic than private forecasters. The Fed projects growth of 3.0% to 3.5% growth in 2014, faster than the 2.8% growth rate projected by forecasters surveyed by The Wall Street Journal earlier this month. Its projection of an unemployment rate of 6.5% to 6.8% at the end of 2014 is in line with private forecasters’ projection of 6.7%.

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Fed officials sought to reassure investors in other ways that they weren’t going to slam on the brakes of monetary policy. Ending the bond-buying program would be a first step toward unwinding easy-money policies, but other steps, such as raising short-term interest rates from near zero, aren’t likely until much later.

High five  But is employment so much better now than 6 months ago? Gavyn Davies agrees with me that this is not so:

Fed’s smoking gun
Supertanker is turning, says Gavyn Davies

(…) In the graph, the black circle represents the normal position of each indicator when the labour market is in a healthy state, while the origin represents the worst levels reached during the recession. The red line shows where the indicators were at the launch of QE3, and the blue line shows where they are today:

Two conclusions are immediately apparent. First, with the exception of job loss data, all of the other indicators remain a very long way from being consistent with a healthy labour market. Second, the changes since last September have not been very meaningful in any of the data series, except possibly non-farm payrolls, which of course capture much of the public attention.

If the Fed viewed the labour market as a major national problem late last year, it is not clear from the bulk of this information why it should have changed its minds since then. It seems from the new unemployment thresholds introduced on Wednesday that it basically agrees with this.

So the exit has started, and risks to all asset classes have risen as a result. But the Fed is working very hard to persuade the market that it really will be different this time, and the labour market data certainly suggest the process will be a long one. The response of the bond market shows that investors are aware that the supertanker is turning, but I suspect that the conditions required for a major bear market in bonds are not yet in place.

Two charts from my June 10 New$ & View$

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We learned this morning that the China flash PMI is in contraction mode with falling new export orders. Same with Europe. Somebody, somewhere, is not importing. Might that be the U.S.?

Also this a.m.: U.S. Jobless Claims Rise by 18,000  The four-week moving average climbed to 348,250 from 345,750 in the prior week.

And this chart from ISI:

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Yet, the Fed says the risks to the economy are diminishing!

Bill Gross: Bernanke might be driving in a fog

He blames lower growth on fiscal austerity and expects towards the end of the year once that is gone, all of the sudden the economy will be growing at 3%. He blames housing prices moving up on homeowners that simply like higher home prices as opposed to emphasizing the mortgage rate, which is really what has provided the lift in the first place. To certain extent his driving analogy, which he talked about pulling back on the accelerator, I think he might be driving in a fog. I think the Fed itself may be driving in a fog. To think that is a cyclical as opposed to a structural problem in terms of our economy. I simply think and PIMCO thinks that real growth to lower unemployment below 7% is a long shot over the next 6, 12, 18 months.

Gross is more polite than I am (see DRIVING BLIND)…

Lone Dissenter No More: Fed Officials Have Divergent Objections Dissenting votes on the Federal Open Market Committee usually don’t have much impact on the actual direction of monetary policy, but what happened Wednesday may be different.

INFLATION/DEFLATION

In his post FOMC press conference, Fed Chairman Ben Bernanke said “inflation that’s too low is a problem,” and he noted central bankers are “concerned” about the present level of prices. “We would like to get inflation up to our target,” he said, noting that will be a factor in how officials think about monetary policy over coming months.

China Banks Warn of Loan Woes  A cash squeeze gripping China’s financial markets is beginning to trickle into the broader economy, as bank executives warn of higher interest rates and more-cautious lending.

An executive with a midsize national bank based in northern China also said tighter liquidity could result in higher lending rates. “Funding is really tight right now, and we will have to jack up rates soon,” the executive said.

China tightening just as China’s economy continues to slow and the ROW is already slow. Policy mistake underway?

EARNINGS WATCH

  • FedEx Reins In Expectations 

    FedEx’s earnings were weighed down by restructuring charges in the latest quarter, and the shipping company reined in expectations amid weakness in its international priority business.

FedEx forecast a rise of 7% to 13% in per-share adjusted earnings for its current fiscal year, well below the 21% growth expected by analysts.

New trend? FedEx will no longer provide quarterly guidance.

  • Caterpillar’s global retail sales of machines -7% Y/Y in three months to May vs -9% in three months to April, with AsiaPacific -14% in March-May, North America -16%, EMEA -2%, Latin America +22%. (SA)
 

NEW$ & VIEW$ (10 MAY 2013)

Housing Rebound Grows as Prices Climb Sharply

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

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

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

Poor Weather Pressures Retailers

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

The retail industry has now marked its fiscal first quarter—February, March and April—weighed down by temperatures that kept shoppers away from malls, forcing steep discounts.

The showing doesn’t bode well for the first-quarter results retailers will release later this month.

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

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

(Bespoke Investment)

Midwest leads US manufacturing revival
Jobs increase fuelled by resurgent car industry

The bulk of US manufacturing jobs gained since the labour market troughed three years ago have been concentrated in a handful of rust belt states, a positive sign for a region that has long seen employers flee for far-flung markets with lower labour costs.

Fuelled by a resurgent car industry, states such as Michigan, Illinois, Indiana, Ohio and Wisconsin, along with Tennessee and Kentucky, account for more than half of the more than 500,000 manufacturing jobs the US gained between March 2010 and March 2013, labour department statistics show. (…)

Mr Syverson estimates that 123,000 of the half million net new manufacturing jobs gained since early 2010 are directly attributable to the recovery of the auto industry, boosted by a government bailout and renegotiated labour contracts between the industry and the United Automobile Workers union. The rest have predominantly come from the machinery and fabricated metals sectors, producing for the domestic market as well as for export.

Fuelled by the car industry

Pointing up  Nice, but:

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

 

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

Just over a month after Japan’s central bank vowed to reignite economic growth by flooding markets with yen, the currency fell to ¥100 to the dollar for the first time in four years, a milestone in efforts to end nearly two decades of economic stagnation.

The weaker yen’s impact—the dollar has climbed 16% against the currency this year—is already trickling through the Japanese economy, pushing up prices of imported food and gas and drawing a flood of tourists whose currencies now buy more goods in Japan. It is bolstering sales and profit at exporters whose goods can be produced at lower prices for global markets. Early Friday in Tokyo, the dollar bought ¥101.12, compared with ¥100.60 late Thursday in New York and ¥99.02 late Wednesday. (…)

In new signs of the impact of Abenomics, Japanese domestic institutional money started flowing overseas in pursuit of higher yields while bank lending rose at the fastest pace in four years, data released Friday showed.

Japanese investors bought Y514.3 billion more foreign bonds than they sold for the two weeks through May 4, government data showed. Such flows could weaken the yen further, and are a key part of the Bank of Japan’s strategy for beating deflation by getting some of the trillions of yen Japanese investors have stashed in low-yielding government bonds put to better use.

In a sign that domestic economic activity may also be picking up, Japanese bank lending rose 2.1% in April from a year earlier as big banks extended loans to utilities, and for mergers and real-estate related transactions, the BOJ said. (…)

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

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

Japan investors switch into foreign bonds
Yen extends slide against dollar beyond Y100

 

Japan Data Suggest Strengthening

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

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

India Car Sales Fall for 6th Month

In April, sales fell 10% from a year earlier to 150,789 cars, according to data issued Friday by the Society of Indian Automobile Manufacturers.

The decline is due partly to high ownership costs, SIAM Deputy Director General Sugato Sen said, referring to high interest rates and fuel prices.

India Factory Output Growth Accelerates

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

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

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

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

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

China April New Yuan Loans, Money Supply Exceed Estimates

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

Lightning  Portugal and Greece joblessness hits highs
Greek unemployment among 16- to 24-year-olds reaches 64%

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

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

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

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

Storm cloud  U.K. Construction Output Declines to Lowest Since 1998

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

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

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

EARNINGS WATCH

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

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

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

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

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

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

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

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

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

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Punch  Martin Feldstein: The Federal Reserve’s Policy Dead End

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

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

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

Thumbs down  Loonie to sink to 90 cents by early 2014: TD

Another major bank is forecasting a big drop in the Canadian dollar.

Toronto-Dominion Bank says the loonie, now at near par, will tumble to 90 cents by early next year, before recovering to 93 cents by the end of 2014.

The bank blames the loss of Canada’s “growth advantage,” lower commodity prices and the rebounding might of the U.S. dollar for the reversal.

(…) the report points to harder evidence: An economy that is expected to grow more slowly than the U.S. this year and next, lower prices for oil, base metals and precious metals, and a further rise of 4 to 5 per cent in the trade-weighted value of the U.S. dollar.

 

NEW$ & VIEW$ (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.

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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.

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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.

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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.

But

(…) 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.

WHATEVER IT TAKES

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).

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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.

Note DOUCE FRANCE Note

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.

AMERICANS SHOULD NOT RIDICULE THE FRENCH (chart from SoGen):

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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.

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EARNINGS WATCH

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

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