NEW$ & VIEW$ (24 JANUARY 2014)

No Recession In Sight:Conference Board Leading Economic Index Edged Up in December

The index rose to 0.1 percent to 99.4 percent from the previous month’s 99.3 (2004 = 100). This month’s gain was mostly driven by positive contributions from financial components. In the six-month period ending December 2013, the leading economic index increased 3.4 percent (about a 7.0 percent annual rate), much faster than the growth of 1.9 percent (about a 3.9 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than the weaknesses.

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Chicago Fed: Economic Growth Moderated in December

Led by declines in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to +0.16 in December from +0.69 in November. Three of the four broad categories of indicators that make up the index decreased from November, although three of the four categories also made positive contributions to the index in December.

The index’s three-month moving average, CFNAI-MA3, edged down to +0.33 in December from +0.36 in November, marking its fourth consecutive reading above zero. December’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

The CFNAI Diffusion Index ticked down to +0.38 in December from +0.40 in November. Forty-seven of the 85 individual indicators made positive contributions to the CFNAI in December, while 38 made negative contributions. Twenty-seven indicators improved from November to December, while 56 indicators deteriorated and two were unchanged. Of the indicators that improved, seven made negative contributions.

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HOUSING WATCH

Existing Home Sales Approach a New Normal

Sales increased 1.0% in December, to an annual rate of 4.87 million, below economists’ expectations, and the November sales pace was revised down to 4.82 million.

But the year-end weakness wasn’t enough to stop the year from being the best for resales in years. Sales totaled just over 5 million last year, “the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom,” said the National Association of Realtors that compiles the existing home data.

A sales pace of five million homes looks more sustainable. “We lost some momentum toward the end of 2013 from disappointing job growth and limited inventory, but we ended with a year that was close to normal given the size of our population,” said Lawrence Yun, NAR chief economist.

CalculatedRisk adds:

The key story in the NAR release this morning was that inventory was only up 1.6% year-over-year in December. The year-over-year inventory increase for November was revised down to 3.0% (from 5.0%).

 

Pointing up All-cash sales jump as “normal” buyers go on strike. RealtyTrac reports:

All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from a revised 38.1 percent in November, and up from 18.0 percent in December 2012.

States where all-cash sales accounted for more than 50 percent of all residential sales in December included Florida (62.5 percent), Wisconsin (59.8 percent), Alabama (55.7 percent), South Carolina (51.3 percent), and Georgia (51.3 percent).

Institutional investor purchases (comprised of entities that purchased at least 10 properties in a year) accounted for 7.9 percent of all U.S. residential sales in December, up from 7.2 percent the previous month and up from 7.8 percent in December 2012.

Metro areas with the highest percentages of institutional investor purchases in December included Jacksonville, Fla., (38.7 percent), Knoxville, Tenn., (31.9 percent), Atlanta (25.2 percent), Cape Coral-Fort Myers, Fla. (24.9 percent), Cincinnati (19.3 percent), and Las Vegas (18.2 percent).

For all of 2013, institutional investor purchases accounted for 7.3 percent of all U.S. residential property purchases, up from 5.8 percent in 2012 and 5.1 percent in 2011.

 

Not a sign of a healthy market, is it? Meanwhile,

Framing Lumber Prices: Moving on Up

 

 

The faith may well be strong, the means are simply not there:image image

Also: Gundlach Counting Rotting Homes Makes Subprime Bear

 

GE’s Rice Sees Global Growth

General Electric vice chairman John G. Rice said that the global economy “was getting better, not worse,” and that beneath lower growth expectations for emerging markets “there was tremendous underlying demand for infrastructure.”

Investors Flee Developing Countries

Investors dumped currencies in emerging markets, underscoring growing anxiety about the ability of developing nations to prop up their economies as they face uneven growth.

The Argentinian peso tumbled more than 15% against the dollar in early trading as the South American nation’s central bank stepped back from its efforts to protect the currency, forcing the bank to reverse course to stem the slide. The Turkish lira sank to a record low against the dollar for a ninth straight day. The Russian ruble and South African rand hit multiyear lows. (…)

Countries with similar current-account deficits considered especially fragile by investors include Brazil, South Africa, India and Indonesia. But the emerging-markets tumult hasn’t hit the “contagion” stage of across-the-board, fear-driven selling of all emerging economies. Indonesia’s rupiah and India’s rupee, for example, advanced against the dollar Thursday, benefiting from those countries’ efforts to adjust their policies to support their currencies.

And this little nugget:

Art Cashin, who runs UBS’s operations on the floor of the New York Stock Exchange, picked up on this in a mid-afternoon note to clients. “China Beige Book has a sentence that translates into English as ‘credit transmission is broken,’ ” he wrote. “That suggests the current credit squeeze may be far more complicated than Lunar New Year drawdowns.” (WSJ)

BOE’s Carney Suggests Falling Unemployment Doesn’t Mean Rates Will Rise Bank of England Gov. Carney said the U.K. central bank will look at a broad range of economic factors when assessing the need for higher interest rates, a sign that officials may be preparing to play down the link between BOE policy and falling unemployment.

imageBoE signals scrapping of forward guidance Carney flags dropping of 7% jobless threshold

(…) Mr Carney made it clear in the interview that there was “no immediate need to increase interest rates” but said the economy was now “in a different place” to the time he introduced guidance. Then, he said, the concern was that the UK economy was stagnating and might contract again: now the concern is that rapid growth might need action by the BoE to make it more sustainable. (…)

Punch If this is not clear guidance, what is? FYI, here’s the situation in the U.S.:

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Google chief warns of IT threat
Range of jobs in danger of being wiped out, says Schmidt

 

(…) Mr Schmidt’s comments follow warnings from some economists that the spread of information technology is starting to have a deeper impact than previous periods of technological change and may have a permanent impact on employment levels.

Google itself, which has 46,000 employees, has placed big bets on automation over some existing forms of human labour, with a series of acquisitions of robot start-ups late last year. Its high-profile work on driverless cars has also led to a race in the automobile industry to create vehicles that can operate without humans, adding to concerns that some classes of manual labour once thought to be beyond the reach of machines might eventually be automated.

Recent advances in artificial intelligence and mobile communications have also fuelled fears that whole classes of clerical and research jobs may also be replaced by machines. While such upheaval has been made up for in the past by new types of work created by advancing technology, some economists have warned that the current pace of change is too fast for employment levels to adapt. (…)

“There is quite a bit of research that middle class jobs that are relatively highly skilled are being automated out,” he said. The auto industry was an example of robots being able to produce higher quality products, he added.

New technologies were creating “lots of part-time work and growth in caring and creative industries . . . [but] the problem is that the middle class jobs are being replaced by service jobs,” the Google chairman said. (…)

Shale Boom Forces Pemex’s Hand

For decades, Mexico’s state oil company, Petróleos Mexicanos, had the best customer an oil company could want: the U.S. But now the U.S. energy boom is curtailing the country’s demand for imported oil, and Pemex is being forced to look farther afield.

For the first time, the company is negotiating to sell its extra-light Olmeca crude oil in Europe, according to Pemex officials. The first shipment will go out in the second half of February to the Cressier refinery in Switzerland, the company said.

The change is one of many in the North American energy landscape affecting Pemex, which also faces competition in exploration and production as Mexico prepares to allow foreign oil companies back into the country for the first time in 75 years. (…)

 

NEW$ & VIEW$ (12 NOVEMBER 2013)

THE AMERICAN PROBLEM

Job Gap Widens in Uneven Recovery

America’s jobs recovery is proceeding on two separate tracks—a pattern that is persisting far longer than after past economic rebounds and lately has been growing worse.

(…) Youth unemployment, for example, nearly always improves after recessions more slowly than that of prime-age workers, those between 25 and 54. Following the 2001 recession, it took six months for the gap between the youth and prime-age unemployment rates to return to its long-run average. After the early 1990s recession, it took 30 months. This time, it has been 52 months, and the gap has hardly narrowed.

For those with decent jobs, wages are rising, albeit slowly, and job security is the strongest it has been since before the recession. Many families have paid down debts and are seeing the value of assets, from homes to stocks, rebound strongly.

But many others—the young, the less educated and particularly the unemployed—are experiencing hardly any recovery at all. Hiring remains weak, and the jobs that are available are disproportionately low-paying and often part-time. Wage growth is nearly nonexistent, in part because with so many people still looking for jobs, workers have little bargaining power.

Wage growth has moved on two tracks

The two-track nature of the recovery helps explain why the four-year-old upturn still doesn’t feel like one to many Americans. Higher earners are spending on cars, electronics and luxury items, boosting profits for the companies that make and sell such goods. But much of the rest of the economy remains stuck: Companies won’t hire or raise pay without more demand, and consumers can’t spend more without faster hiring and fatter paychecks. (…)

‘Rural America’ slow to recover
Net job growth near zero, say data

Employment growth in the US’s sparsely populated heartland has stagnated since the economy began to recover in 2010, according to official data that underscore the weakening economic power of rural America.

The data, from this year’s US Department of Agriculture’s Rural America at a Glance report, show that while employment in both urban and rural areas fell by 5 per cent during the 2007-09 recession and recovered by a similar level in 2010, their prospects have since diverged. Since the start of 2011, net job growth in non-metropolitan areas has been near zero, while it has averaged 1.4 per cent annually in metropolitan areas.

The report notes that rural job growth stagnation has coincided with the first-ever recorded net population decline in those regions, driven by a drop in the number of new migrants moving in. This means the unemployment rate in rural regions has not risen, since fewer people are seeking work.

Population loss has meant fewer jobs as demand for goods and services falls, which in turn encourages those with higher skills to move away. (…)

In summary (chart from Doug Short):

Click to View
 

Fingers crossed About 1-in-4 U.S. Pumps Selling Gas Below $3

Americans are seeing the lowest pump prices for gasoline since February 2011, AAA says.

Gas prices dropped 6.6 cent per gallon the past week to $3.186, which is down 25.3 cents from a year earlier.

That’s a 7.4% drop YoY! Right before Christmas. Chain store sales rose 1.2% last week, boosting the 4-week moving average to +2.1% YoY.

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Expiring US jobless benefits fuel concern
The scheme launched in 2008 is due to run out

(…) Unless Congress takes action to renew it again, about 1.3m long-term unemployed would see their benefits halted at the end of the year, and a further 850,000 would be denied access to the benefits in the first three months of next year, according to a report from the National Employment Law Project, an advocacy group. (…)

Federal assistance for the long-term unemployed was launched in 2008, during the last recession, and renewed until the end of this year. Michael Feroli, a senior economist at JPMorgan Chase, has estimated that the expiry of the federal jobless benefits would trim about 0.4 percentage points off annualised gross domestic product growth in the first quarter of next year. This is roughly equivalent to estimates of the hit to US output produced by last month’s US government shutdown. (…)

Sad smile  Small Businesses Optimism Takes a Tumble

Fall arrived literally this month, as small business optimism dropped from 93.9 to 91.6, largely due to a precipitous decline in hiring plans and expectations for future smal -business conditions. Of the ten Index components, seven turned negative, falling a total of 27 percentage points. The stalemate in early October over funding the government as well as the failed “launch” of the Obamacare website left 68% of owners feeling that the current period is a bad time to expand; 37% of those owners identified the political climate in Washington as the culprit—a record high level.

Small business optimism report data through October 2013

 

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Fingers crossed OECD: Global Growth to Pick Up

Economic growth is set to pick up in the euro zone, China and the U.K., while remaining sluggish in India, Brazil and Russia.

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Punch  LE PROBLÈME FRANÇAIS (from Reuters’ AlphaNow):

COTW_1111

Rating the Euro Zone’s Progress

Many euro-zone indicators have taken on a more promising outlook in recent months. Credit ratings firms are beginning to reflect that.

The direction of travel can be more important than where on the journey you are. That’s particularly true of the euro zone and the credit ratings assigned to its member states. November’s actions—a downgrade for France and improvements in outlooks for Spain and Portugal—send some key signals. The euro zone is undergoing adjustment, although not all its members are yet on the right track.

France’s downgrade to double-A by Standard & Poor’s might look like the most important action, but isn’t. French bond yields hardly reacted; strategists at Royal Bank of Scotland told investors to “ignore” the cut. That is quite right; France faces no immediate threat that should cause bond yields to spike higher.

Still, the rationale is cause for long-term worry: France is falling behind. “French exporters appear to continue to be losing market share to those European competitors whose governments have more effectively loosened the structural rigidities in their economies,” S&P warned. The European Commission last week forecast that net exports would contribute just 0.1 percentage point to French growth of 0.9% in 2014 and be a slight drag on growth in 2015. France’s government still hasn’t found the right policy direction to regain competitiveness.

More significant was Fitch’s decision to raise Spain’s rating outlook to stable from negative, the first of the major ratings firms to do so. Spain won plaudits for its fiscal and structural reforms, and the move to surplus in its current account. That is an important turnaround: Spain was on the front line of the crisis just 18 months ago.

Most interesting of all was Moody‘s move to a stable outlook from negative on Portugal. Moody’s is becoming rapidly less bearish on the euro zone. At the start of September, it had just two euro-zone sovereigns with a stable outlook; now there are six. The big move for Moody’s would be to shift Spain back to a stable outlook. The decision on Portugal provided a glint of hope, with Moody’s highlighting the benefit of a recovery in Spain, its key trading partner.

Ratings are often dismissed as backward-looking, and downgrades or upgrades are frequently priced in long before they actually happen. But outlooks can provide new information to the market. That is where investors should look for signposts.

IEA warns of future oil supply crunch
Concerns rise as Gulf states delay investment due to US shale revolution

(…) Mr Birol was speaking as the Paris-based IEA unveiled its annual outlook for the energy market. Its 2012 forecast that the US would be a net oil exporter by 2030 helped bring shale oil production to global attention. But this year the organisation downplayed the significance of US production growth, with Mr Birol calling shale “a surge, rather than revolution”.

The IEA still expects US oil output to reduce the world’s dependence on Middle Eastern oil in the near term: it now forecasts that the US will displace Saudi Arabia as the world’s biggest oil producer in 2015, two years earlier than it had estimated just 12 months ago.

But it expects US light tight oil production, which includes shale, to peak in 2020 and decline thereafter, even as global demand continues to grow to 101m barrels a day by 2035, from around 90m b/d today.

Outside the US, light tight oil production is only expected to contribute 1.5m b/d of supplies by 2035, as countries such as Russia and China make limited progress towards unlocking their shale reserves.

That will leave the market once more dependent on crude from the Opec oil cartel, of which Gulf producers are key members. (…)

But the IEA expects domestic demand in the Middle East to hit 10m b/d by 2035 – equal to China’s current consumption – thanks to subsidies for petrol and electricity, even as foreign demand for Gulf oil increases.

Mr Birol said the Gulf states needed to invest significantly now to meet rising demand after 2020, because projects take several years to begin producing. But he said he was concerned Gulf countries were misinterpreting the impact of rising US shale production. (…)

Gulf producers have taken a cautious approach to investment in recent years, in the face of fast growing US output. Saudi Arabia does not plan to increase its oil production capacity in the next 30 years, as new sources of supply, from US shale to Canadian oil sands, fill the demand gap.

The UAE is reported to have pushed back its target for raising production capacity to 3.5m b/d to 2020 from 2017, while Kuwait is struggling to overcome rapid decline rates from its existing fields. (…)

SENTIMENT WATCH

Charles Schwab’s Liz Ann Sonders posted this good Ned Davis chart, although her bullishness dictated her to write that sentiment was “a bit” stretched.

Sentiment does look a bit stretched in the short-term, with both the Ned Davis Crowd Sentiment Poll and SentimenTrader’s Smart Money/Dumb Money Confidence Poll showing elevated (extreme) levels of optimism. Investor sentiment shoots higher

Since 1995, being in such a “bit stretched” territory has not been profitable, on average:Screen Shot 2013-11-07 at 4.21.29 PM

This next chart, posted by ZeroHedge, is nothing to help sentiment get less stretched.

Note however that the latest tally from S&P reveals that estimates for Q3 have turned up to $27.02 ($26.77 last week) while the forecast for Q4 is now $28.23 ($28.38 last week).

 

NEW$ & VIEW$ (7 NOVEMBER 2013)

U.S. LEADING ECONOMIC INDEX KEEPS RISING

The Conference Board LEI for the U.S. increased for the third consecutive month in September. Improvement in the LEI was driven by positive contributions from the financial indicators, initial claims for unemployment and new orders. In the six-month period ending September 2013, the leading economic index increased 3.0 percent (about a 6.0 percent annual rate), much faster than the growth of 1.2 percent (about a 2.4 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread than the weaknesses.

These charts from Doug Short suggest that the probability of a recession remains very low:

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ISM Services Surprises to the Upside

Following up on the heels of Friday’s stronger than expected ISM Manufacturing report, Tuesday’s release of the non-manufacturing ISM index also came in ahead of expectations.  While economists were expecting the October headline reading to come in at a level of 54.0, the actual reading came in at 55.4.  This represents a one point increase from September’s level of 54.4.  With both the manufacturing and non-manufacturing indices having been released, we can see that the combined composite PMI (bottom chart) for October also increased from 54.6 to 55.5.

Of the ten components shown, only four increased this month, while six declined.  Compared to one year ago, ‘breadth’ in the components was more positive as seven increased and just three declined. 

Credit Jobs at 10-Month Low as Borrowing Slows

The credit-intermediation industry shed 7,700 workers — including commercial bankers, credit-card issuers and mortgage and loan brokers — in September, the biggest drop since June 2011, Labor Department figures show. The total fell to about 2.6 million, the lowest since November 2012. (…)

Mortgage refinancing is the more labor-intensive segment, so a recent rise in interest rates has resulted in sluggish credit growth and fewer people needed to make such loans (…)

German Industrial Production Falls as Recovery Slows

Output (GRIPIMOM), adjusted for seasonal swings, fell 0.9 percent from August, when it rose a revised 1.6 percent, the Economy Ministry in Berlin said today. Economists forecast no change, according to the median of 36 estimates in a Bloomberg News survey. Production advanced 1 percent from a year earlier when adjusted for working days.

Another highly volatile series.. Output is up 0.6% in the last 5 months but down 0.4% in the last 4 months.

CHINA ECONOMY NOT REACCELERATING

The CEBM November Survey indicates that aggregate demand has stabilized, but remains weak. From the perspective of domestic demand, overall consumer sector demand remained sluggish. From the perspective of external demand (…) overall Y/Y growth was flat. Commercial bank feedback communicated a cautious outlook for November.

SENTIMENT WATCH

Investors Rush Back Into Europe

Equities investors are returning in droves, but the region’s recovery remains fragile and deep structural problems remain.


Maligned Markets Return to Vogue

Cash is returning to emerging markets, sparking stock rallies and a surge in fundraising. Calm in the U.S., combined with low rates, has spurred global investors to try to juice returns before year’s end.

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The availability of foreign cash is also sparking a flurry of sales of corporate debt. Emerging-market companies have sold $71 billion of bonds since June, taking this year’s total to $236 billion, almost a third more than was sold at this stage in 2012, according to Dealogic, a data provider.

Yields on emerging-market sovereign debt, which rose until September, have also fallen sharply, signaling the return of foreign investors to the market. Average yields on five-year emerging-market government debt have dropped by 0.57 percentage point. In Indonesia, where the decline has been among the most dramatic, yields fell to 7.2% from 8.1%.

TAPER WATCH

Gavyn Davies
What Fed economists are telling the FOMC

(…) The implication of these papers is that these Fed economists have largely accepted in their own minds that tapering will take place sometime fairly soon, but that they simultaneously believe that rates should be held at zero until (say) 2017. They will clearly have a problem in convincing markets of this. After the events of the summer, bond traders have drawn the conclusion that tapering is a robust signal that higher interest rates are on the way.

The FOMC will need to work very hard indeed to convince the markets, through its new thresholds and public pronouncements, that tapering and forward short rates really do need to be divorced this time. It could be a long struggle.

Russia slashes long-term growth forecast
GDP growth will fall behind global average in the next 12 years

(…) The economy ministry said it now expected the economy to grow at an annual rate of just 2.5 per cent through to 2030, down from its previous forecast of 4.3 per cent made in April. Data for gross domestic product growth in the third quarter are due next week, and are also expected to show a continued slowdown.

The sharp cut follows a drop in fixed investment which independent analysts have warned can only be reversed by decisive structural reforms of which the government has so far given little indication.

At the end of September, fixed investment showed a 1.5 per cent drop year on year, and consumer spending slowed to 3 per cent from 7 per cent in the same period in 2012. (…)

The economy ministry said it expected corporate earnings and salaries growth to slow and the wealth gap to widen further, with the share of the middle class falling from half to just one-third of society. (…) …

EARNINGS WATCH

Q3 earnings season is almost over with more than 90% of S&P 500 companies having reported.

RBC Capital calculates that the earnings surprise was 64% with a 5.7% YoY EPS growth rate (3.6% ex-Financials) on a 3.1% revenue growth rate (3.3% ex-Financials). Bespoke Investment below writes about all NYSE companies:

Earnings Season Ending with a Whimper

As shown below, the percentage of companies that have beaten earnings estimates this season has dropped below the 60% mark (59.8%).  

Early on this season, the earnings beat rate looked pretty good, but things have turned around over the past few weeks.  The blue bars in the chart below show the overall earnings beat rate as earnings season has progressed.  The green area chart represents the total number of companies that have reported this season.  As of today, nearly 1,800 companies have reported.  

On October 23rd, 63.9% of the companies that had reported had beaten earnings estimates, which was the highest reading seen this season.  Since then the beat rate has trickled lower.  On November 1st, the beat rate was down to 61.1%, but as of today, it has crossed below the 60% mark (59.8%). 

 

NEW$ & VIEW$ (10 SEPTEMBER 2013)

Poll: Support Fades
For Syria Attack

Obama’s push for military action in Syria faces headwinds from an American public that increasingly is wary of overseas entanglements and doubtful that an attack would benefit the U.S.

GLOBAL GROWTH?
 
EUROZONE
 
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Advanced economies growing again but some emerging economies slowing, says OECD

Economic growth in the major advanced economies is expected to continue at a similar pace in the second half of 2013 as in the second quarter.  In the three largest OECD economies, the US, Japan and Germany, activity is expected to expand by about 2 ½ per cent annualised in the third andfourth quarters. France is forecast to grow by about 1½ per cent annualised in the second half of the year, while in Italy growth is expected to remain mildly negative.

GDP growth in China is forecast to pick up to about 8% by the final quarter, after a slowdown in the first half of 2013. Even that would represent a slower rate than in recent years, however.

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China data point to economic rebound
Industrial output and investment both strengthening

The national statistics bureau said on Tuesday that industrial output grew 10.4 per cent year on year in August, up from a 9.7 per cent pace in July and beating market forecasts. Retail sales were up 13.4 per cent year on year, accelerating from 13.2 per cent growth in July. Fixed-asset investment, expressed in year-to-date terms, rose 20.3 per cent in August, up from 20.1 per cent in July. (…)

The good economic news is also being reflected in China’s asset markets, with property prices growing at more than 10 per cent a year and stocks rallying over the past two months. (…)

Consumer prices rose 2.6 per cent from a year earlier, just a touch below July’s 2.7 per cent pace, the statistics bureau said on Monday.

Taiwan Export Growth Quickens

Taiwan’s exports grew more quickly in August, another sign that Asian exporters are starting to feel the pull from the gradual strengthening of demand in the U.S. and other major markets.

The island’s exports rose 3.6% last month from a year earlier to $25.64 billion, picking up from July’s 1.6% rise, Taiwan’s Ministry of Finance said Monday.

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In August, Taiwan’s exports to China, its biggest export destination, rose 3.6% from a year earlier, accelerating from 1.1% on-year growth in July.

Exports to the U.S., another major export market, grew 0.9% from the same period last year, tapering from the 1.4% on-year growth in the previous month, while those to Europe were up 4%, slowing from 6% growth in July.

Taiwan’s imports in August unexpectedly fell 1.2% to $21.06 billion, compared with 2.89% growth forecast by economists in the survey but improving from July’s 7.6% decline.

The ministry said imports of capital-generating equipment fell 7.7%, while that of consumer goods such as smartphones also dropped 9.1%.

In addition, Taiwan’s industrial production rose 2.1% on-year in July, following five straight months of decline, propelled by basic metals and chemicals.

Asia’s more export-oriented economies have seen some reason for optimism lately. July industrial production numbers from South Korea, Singapore and Thailand—all countries that depend heavily on trade—suggested that export-oriented sectors such as high-tech performed solidly, despite disappointing headline numbers, according to J.P. Morgan.

Americans’ Credit-Card Debt Declines

Consumers’ revolving credit, which primarily reflects money owed on credit cards, fell by $1.84 billion, or at a 2.6% annual rate, in July from a month earlier, the Federal Reserve reported Monday. That came after a 5.2% drop in revolving credit in June.

The report showed that Americans stepped up other types of borrowing, namely to buy cars and go to school. Nonrevolving credit, which reflects mostly auto and student loans, rose by $12.28 billion, or 7.4%, in July. That caused overall consumer debt, excluding mortgages, to grow at a 4.4% annual rate in July from June.

BANKS

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NEW$ & VIEW$ (8 AUGUST 2013)

Jobless Claims in U.S. Fall Over Month to Lowest Since 2007

The number of claims in the four weeks ended Aug. 3 declined to 335,500 on average, the least since November 2007, a Labor Department report showed today in Washington. They rose to 333,000 last week, in line with the median forecast of 50 economists surveyed by Bloomberg, from 328,000 the prior week.

Auto Loans Drive Consumer Lending Increase

Nonrevolving credit, which consists primarily of student loans and auto financing, rose by $12.6 billion in June to a nonseasonally adjusted $1.987 trillion, according to Federal Reserve data released Wednesday.

Within this category, student loans from the federal government rose $3.3 billion, indicating that auto loans were responsible for the bulk of the $12.6 billion overall increase. The Fed doesn’t break out precise data on auto financing.

The Fed data also showed that revolving credit, primarily credit cards, rose by $300 million in June to $816.7 billion. Growth of revolving credit, which is usually used for smaller discretionary purchases and carries higher interest rates than nonrevolving credit, has been largely flat in the aftermath of the Great Recession.

Total consumer credit, defined as household borrowing excluding mortgages, rose by $13 billion in June to $2.803 trillion. On a seasonally adjusted basis, consumer credit rose by $13.82 billion in June to $2.848 trillion.

But these Haver Analytics charts show a topping pattern:

 

Million-Dollar Home Sales Jump in U.S. as Wealthy Return

Sales of homes priced at more than $1 million jumped an average 37 percent in 2013’s first half from a year earlier to the highest level since 2007, according to DataQuick. Transactions priced at less than $1 million rose 11 percent in the same period to the highest since 2009, data from the National Association of Realtors show.

Homes priced at more than $1 million lost about 46 percent of their value during the housing crash, according to a Bloomberg survey of sales in the top four cities, based on valuation data from Zillow.com. Since then, their value has more than doubled. Home prices in the broader market fell to $154,600 in early 2012 and increased to $214,200 in June, according to the Realtor’s group.

This Haver chart also reveals a topping, sorry, a negative trend in mortgage demand.

Cass Freight Index Report™ ‐ July 2013

In addition to falling from June, shipment volume was also lower than in the same month last year, as it has been in five of the first seven months of 2013 (volumes were 3.1 percent lower than July 2012). Both June and July shipment volumes were lower than in the same months in both 2011 and 2012. Despite this, cumulative shipment volume year‐to‐date through July is still 3.4 percent above the same seven‐month period last year. (But the July decrease hurt: at the end of June, year‐to‐date shipments were up 5.8 percent from the year before.)

Railroads led the way in declines with drops in both carloadings and intermodal shipments in the last four weeks. Carloadings were up two weeks and down the other two, resulting in a 3.6 percent decline, while
intermodal loadings fell sharply for the first two weeks and surged in the third, ending with a 2.5 percent drop.

The decrease in intermodal rail is consistent with the decline in imports and weak exports, which limited the number of trailers to be moved. The trucking sector showed some signs of capacity constriction, but it is too
early to determine if or to what extent this is being caused by the new Hours of Service Rules. At this point, most shippers are still reporting adequate capacity. The American Trucking Association’s Truck Tonnage Index rose only 0.1 percent in June after posting a revised 2.1 percent increase in May.

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OECD Points to Growth Shift

The Paris-based think tank said its leading indicator of economic activity in its 34 developed-country members rose to 100.7 in June from 100.6 in May.

Released Thursday, the composite leading indicators for June suggest Germany will lead the euro zone out of its longest postwar contraction, with Italy poised for a pickup in growth after almost two years of declining activity. The leading indicator for the U.K. also points to a rise in growth following a number of years of near-stagnation.

The leading indicators continue to point to firming growth in the U.S. and Japan, the two largest developed economies.

However, just as the euro zone appears set to return to modest growth, there are signs expansion in a number of large developing economies is set to weaken, with the leading indicators for June pointing to continued slowdowns in China, Brazil and Russia.

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French government hails signs of recovery Unemployment remains a challenge after rising towards 11%

A welcome new indicator appeared on Wednesday with figures showing that the trade deficit shrank by a third in June to €4.4bn compared with the same period last year, reducing the deficit in the first half below €30bn for the first time since 2010.

Much of the improvement was due to a drop in imports as French consumers tightened their belts. But there was a small uptick in exports in June that signalled some hope for recovery from an alarming slide in competitiveness in recent years. (…)

A survey for Les Echos, the financial newspaper, of 31 of the top 40 companies in the CAC 40 stock market index to have reported first-half results so far, showed that although profits were down overall by 1.4 per cent on the same period last year, almost 70 per cent exceeded analysts’ expectations and many had seen improved performance in the second quarter. The CAC 40 itself has surged recently above 4,000 from a low of 3,341 last November.

CHINA: SLOW AND SLOWER

China Shows More Signs of Stabilizing

China’s economy is showing signs of stabilizing after a six-month slowdown, a prospect that could boost the outlook for world growth as the U.S. steadily improves and Europe edges out of recession

Exports beat expectations, rising 5.1% year-over-year in July after a 3.1% fall in June. Imports were also strong, up 10.9% year-over-year compared with a fall of 0.7% the previous month.

Unlike previous figures this year, China’s trade data didn’t appear to be affected by companies attempting to channel funds illegally into the country. Exports to Hong Kong, the main channel for exaggerating sales, were up just 2.3% year-over-year. Chinese authorities cracked down on over-invoicing earlier this year.

Behind the improvement in exports: stronger demand from the U.S. and Europe. Shipments to the U.S. rose 5.3% year-over-year, while sales to the European Union managed a 2.8% increase—a turnaround after several months of contraction.

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High five  From FT Alphaville:

SocGen’s Wei Yao has some interesting observations. The year-on-year export growth rate, she says, benefits from a base effect — the July 2012 data displayed an unusual decline from the previous month.

The import data, however, has no such obvious issues (apart from the little matter of Taiwan). Emphasis ours:

In comparison, the bounce of import growth from -0.9% yoy to +10.9% yoy without any base effect was much more surprising and difficult to explain. By origin, there was improvement across the board and the major contributors were the euro area, Taiwan, Korea and Australia. Imports from the euro area rose 8.3% yoy in July, improving for two months in a row. However, we noticed that the difference between China’s data and Taiwan’s diverged again. Chinese imports from Taiwan grew 16.6% yoy in July (vs. 6.7% in June) using the mainland’s data, but increased only 1.1% yoy (vs. 8.6% in June) using Taiwan’s data.

(…) However, the import strength is not necessarily a good indicator for the Q3 GDP growth numbers. Yao points out that the stronger relative performance of imports vs exports means the trade surplus is narrowing — something that is likely continue in the coming months due to the base effect, she says. And this shows up on national accounts as a negative for GDP growth. (…)

One last point: remember how the HSBC/Markit manufacturing PMI diverged rather sharply (again) from the official one? Both of them showed growth in new export orders continuing to contract, albeit at a reduced pace from June.

And From Zerohedge:

What better way to capture the data discrepancy – as in someone here is lying – than the following chart showing the reported China trade surplus to the US and the reported US trade deficit with China. Just a $10 billion/month recurring “difference”…

Pointing up Also consider this: CEBM Research surveys reveal that

(…)  industrial demand remained weak among most sectors. (…) weak demand has not significantly changed, it also suggests that enterprises do not expect fundamentals will deteriorate further in the next month.

Exports Outlook Worsened in July. Container exports remained weak in July, weaker than respondents’ expectations. 

Sales in the consumer sector remained weak in July.  New property sales were in-line with developers’ expectations, but the inventory-to-sales ratio has increased and developers have become more cautious in their view towards 2H13. Property prices continued rising in July, and property developers remained concerned about the possibility of further tightening measures in the property sector in the second half. Banks have continued to raise lending rates, particularly rates offered to small and medium-size enterprises.

 

NEW$ & VIEW$ (19 JULY 2013)

Conference Board Leading Economic Index: Unchanged in June

The Conference Board LEI for the U.S. was unchanged in June. The improving indicators were yield spread, the Leading Credit Index™ (inverted), initial claims for unemployment insurance (inverted) and consumer expectations for business conditions. Negative contributions came from building permits, ISM® new orders and declining stock prices.

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Philly Fed Survey: Manufacturing Conditions Improved

 

The latest gauge of General Activity rose to 19.8 from the previous month’s 12.5. The 3-month moving average came in at 5.0, up from 2.9 last month. Today’s headline number is the highest since March 2011, and the 3-month MA trend is well above its interim low set in July of last year.

 

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 12.5 in June to 19.8, its highest reading since March 2011. The percentage firms reporting increased activity this month (37 percent) was greater than the percentage reporting decreased activity (17 percent).

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Other current indicators suggest continued growth this month. The shipments index increased notably, from 4.1 in June to 14.3. The demand for manufactured goods as measured by the current new orders index
remained positive, although it fell back 6 points to 10.2. Firms reported a drawdown of inventories this month: The inventory index fell 15 points, from -6.6 to -21.6.image

Labor market conditions showed a notable improvement this month. The current employment index, at 7.7, registered its first positive reading in four months. The percentage of firms reporting increases in employment
(18 percent) exceeded the percentage reporting decreases (10 percent). Firms also indicated an increase in the average workweek compared with June.

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Baring teeth smile  Bernanke: Recent Tightening Unwelcome

During his testimony Wednesday before a House panel, Mr. Bernanke stressed that the Fed would be watching for any adverse impact to the housing market from recent rate moves. He said the Fed would act if necessary to ensure the housing recovery doesn’t falter. (…)

Mr. Bernanke said Thursday that at least part of the interest-rate spike in recent weeks happened because investors misinterpreted what he was trying to say at that news conference.

“We’ve not changed policy. We are not talking about tightening monetary policy,” Mr. Bernanke said, repeating the message he delivered repeatedly throughout the two days of testimony before Congress as well as at an economics conference last week.

(…)  “I want to emphasize that none of that implies that monetary policy will be tighter at any time in the foreseeable future,” he said.

Mr. Bernanke also cautioned that “it’s way too early to make any judgment” about exactly when the first reduction to the bond program will happen. He demurred when asked about market speculation that the first reduction will happen at the Fed’s Sept. 17-18 policy meeting, saying it will depend on economic data.

Pointing up There hasn’t been enough data since the June policy meeting to make such a determination, and the data that has come in has been “mixed,” he said. (…)

He’s getting clearer: they just don’t know what’s going to happen. Another truth: Bernanke: Nobody Really Understands Gold Prices

Fed Surveys Highlight Job Risk in Healthcare Reform  Surveys released this week by two regional Federal Reserve banks highlight how the Affordable Care Act may have the unintended consequence of keeping the labor market’s share of part-time workers historically high.

In New York state, 7.6% plan to fire or refrain from hiring in order to stay under the mandate, and 6.5% plan to shift from full time to part-time workers.

In Philly the answers are 5.6% and 8.3%, respectively. Many also planned to outsource work. (…)

During the 2000s expansion, the percentage of workers who had part-time jobs because of economic reasons hovered around 3%. Then in the last recession, the share jumped to 6.6%. It has come down, but stood at a historically high 5.7% in June. If the two Fed surveys prove correct, the percentage will remain elevated.

These surveys were done with manufacturers. Retailers, restaurants and other service providers are the most likely to change their hiring practices.

Electrolux Sees Higher U.S. Demand

Electrolux said the worst of Europe’s recent economic doldrums may finally be in the rearview mirror, potentially allowing the Swedish company to lessen its reliance on American appliance buyers.

Electrolux, the world’s No. 2 maker of home appliances after Whirlpool Corp. of the U.S., said its operations in Europe continued to suffer in the second quarter with demand remaining weak, albeit slightly higher than a year earlier. But while the company expects overall market demand in Europe to decline by 1% to 2% for the full year, it says it sees some signs of a turnaround.

“There are some signs that we are at or near the bottom,” Chief Executive Keith McLoughlin said, adding that market conditions are improving in most of Northern Europe, but that the market remains weak in Spain, France and Italy.

In North America, where the company makes nearly a third of its sales, Electrolux maintained strong sales and earnings growth, supported by a recovering housing market, which it expects to continue throughout the year. It raised its guidance for North American demand for appliances in 2013 to 5%-7% from 3%-5% previously. The company’s North American operating margin reached a record level of 7.8%.

BEWARE:

US crude oil rallies to 16-month high
WTI discount to Brent narrows to near three-year low

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EARNINGS WATCH

First Reading on EPS and Revenue Beat Rates

Roughly 150 companies have reported earnings since the second quarter reporting period began on July 8th.  While this is less than a tenth of the total amount of companies set to report throughout earnings season, it’s enough to get an initial reading on the percentage of companies beating earnings and revenue estimates.

As shown in the first chart below, 69% of companies have beaten earnings estimates so far this season. It’s still very early, but compared to the final quarterly readings over the past few years, the earnings beat rate has gotten off to a great start.  The revenue beat rate, on the other hand, has been below average at just 50%.  Top line numbers have struggled in three of the last four quarters, and it’s looking like the same could be in store this quarter as well.

Morning MoneyBeat: What’s That You Said About a Strong Earnings Season? Almost a fifth of companies in the Standard & Poor’s 500-stock index have reported earnings for the second quarter, and things are already looking grim.

Earnings for S&P 500 companies are on track to grow 1.5% from the previous year. That isn’t exactly screaming growth—and is solidly below the 4.1% of growth analysts expected at the beginning of the quarter—but it’s not a decline, either. Of the 82 companies that have reported so far, 74% have beaten analyst estimates for their earnings. Sales are on track to grow a relatively meager 0.9% this quarter, but that marks a sequential improvement from their 0.1% first-quarter decline.

High five  But the results look different when you leave out bank stocks. You know, the group with the exceptionally easy comparisons from last year? When financial shares are excluded, S&P 500 companies would actually see earnings shrink 2.7% from last year, according to FactSet. That’s worse than Wall Street expected at the beginning of the quarter, when analysts were aiming for a decline of 2.3% in earnings without financial stocks.

Sales are on track to grow just 0.1% if banks are excluded, according to FactSet. Any growth still seems like a good thing, right? But there’s one big asterisk on that growth. Kinder Morgan Inc. alone has contributed that much to sales expectations in the S&P 500, after a quarter in which its revenue grew 56% from the previous year.

Even when banks and Kinder Morgan are included, the top line still looks shaky. Companies are missing analyst estimates for their sales figures, with just 48% of firms beating expectations for the second quarter.

Pointing up  The pain probably isn’t over yet, either. A flurry of companies have announced that their second-quarter profit would be lower than expected. United Parcel Service said last week that its earnings would be worse than expected. Other companies that have recently warned about lower-than-expected profits include E.I. DuPont de Nemours & Co., Ingredion Inc., Valero Energy Corp., and Nabors Industries Ltd.

As of last Friday, 97 companies in the S&P 500 had projected that their second-quarter earnings will be lower than Wall Street’s forecasts, compared to 16 that had said their results would be better than expected, according to Thomson Reuters.

That is the highest rate of lower-than-expected guidance since the first quarter of 2001–making it pretty tough to be optimistic on earnings.

Meanwhile, the crowd is moving back in…

Wall of money shifts into US equity funds
Weekly inflows at highest since June 2008

Some $19.7bn was invested in global equity funds in the past week, the most for six months, while $700m was pulled from bond funds, according to Bank of America Merrill Lynch citing EPFR figures. The amount put in US equity funds was the most since June 2008, the bank said.

China, U.S. companies’ great hope, now a drag

It’s official. China’s slowdown is starting to hurt corporate America.

The slowing has occurred as major U.S. names garner more revenue from Asia. Among 18 S&P companies with large exposure to China, 12 of them were underperforming the broader S&P 500 .INX index year-to-date, including Yum Brands Inc and Intel, which noted the slower growth in China as a headwind.

“The China impact is becoming more and more significant because the (U.S.) companies’ exposure has grown so much over the years,” said Robbert van Batenburg, director of market strategy at Newedge in New York.

G-20 Poised to Back Global Tax Overhaul

The G-20 is set to back a major reform of international taxation designed to eliminate loopholes that enable many companies to keep their tax bills low.

The 15-point action plan has been developed by the Organization for Economic Cooperation and Development, and is being discussed by finance ministers from the G-20. They are likely to endorse the plan in a communiqué to be issued at the end of their two-day meeting Saturday.

The action plan aims to plug the gaps created by a complex web of bilateral tax treaties that has expanded since the 1920s, and which now allow for “aggressive” tax planning, where companies adopt legal structures designed to shift their profits to the lowest tax jurisdictions, regardless of where those profits are earned.

More fundamentally, it seeks to modernize the international tax system to match the increasingly globalized operations of companies, and move away from a system in which tax administrations are largely focused on what happens within their national borders.

The plan aims to do that by updating rules on how services and goods transferred between units of a company located in different countries are priced to reflect the fact that many are now “intangible,” and take the form of licenses and the use of branding.

The action plan also includes steps to widen legislation that allows governments to tax profits that have been shifted to low-tax jurisdictions, eliminate opportunities for avoiding tax through the use of complex financing structures, and the use of contracts to avoid having a taxable presence in a country in which a company operates. (…)

Clock  Tax experts warned that the OECD’s action plan will be difficult to implement, and may not have the full support of all G-20 members.

“Notwithstanding the fact that the G-20 leaders are far from united on how to proceed, any global reforms will have to be brought in through changes between countries on a bilateral basis…and also amend existing domestic laws,” said Sandy Bhogal, head of tax at international law firm Mayer Brown “This process will take a considerable amount of time, even with the cooperation of all the relevant parties.”

The drive is on and we should all keep in mind that corporate profits, at least as measured by the S&P 500, are currently taxed at low rates which may not prevail a few years hence.

 

NEW$ & VIEW$ (21 JUNE 2013)

CLARITY IS IN THE EARS OF THE BEHOLDER

ISI’s Ed Hyman:

Bernanke gave a surprisingly explicit but appropriate roadmap that should be applauded.  However, he probably should have waited until after the summer to give a specific timeline. 

Bloomberg’s Clive Cook:

Bernanke’s Forward Guidance Is Transparent as Mud

(…) Bernanke triggered the recent rise in long-term bond yields when he said last month that “in the next few meetings, we could take a step down in our pace of purchases.” You could argue that he was merely stating the obvious, but the markets took it as important new information. In itself, that needn’t have been troubling. The problem for the Fed is that investors didn’t interpret it as good news about the economy but as bad news about the Fed’s reliability.

As the economy strengthens, you’d expect long-term interest rates to rise. But the recent rise in bond yields coincided with unexciting jobs data and very low inflation — inconsistent with the “strong economy” story. The implication is that investors thought the Fed was bringing forward its plans not just to taper QE but also, crucially, to start raising short-term interest rates.

Bernanke tried to address this confusion this week. He emphasized for the umpteenth time that the decision on tapering QE is separate from the decision on starting to raise short-term rates. All being well, tapering would probably start later this year, he said, with asset purchases continuing in 2014 until unemployment falls to 7 percent.

Interest rates won’t rise, the Fed has previously said, until unemployment has fallen to 6.5 percent. And, Bernanke added with fresh emphasis, perhaps not even then: These numbers are “thresholds” not “triggers.” So the Fed will merely start thinking about raising interest rates once unemployment falls to 6.5 percent, and might well choose not to act at that point. Oh, and it’s always possible, the chairman told another questioner, that the unemployment threshold for interest rates (and presumably therefore also for QE) will be revised — more likely down than up.

Is that now clear? (…)

Bernanke’s commitment to transparency and forward guidance has made his job harder. If he wants discretion under fire and the luxury of vigorous internal dissent, he can’t expect forward guidance to work as he envisaged. That’s why we’ll be debating what he really meant until he gives his next speech — and that, if you’re wondering, is a threshold not a trigger.

Bernanke said on Wednesday that the economy was a little better. However, as the St. Louis Fed noted yesterday, the FOMC was, in fact, a little less optimistic:

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.  The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.  President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In Bernanke’s defense, the FOMC did say that the downside risks to the economy had diminished. But, as Moody’s says

to the extent that expected changes in Fed policy deflate financial asset prices, the downside risks facing a still slack economy will increase.

Go figure!

As I recently wrote, everybody is currently Driving Blind. Hot smile

U.S. HOUSING

 

Brisk Home Sales Spur a Price Warning

Sales of previously owned homes surged in May to the highest level since late 2009, pushing prices up so quickly that a major real-estate trade group warned about unsustainable gains.

Home sales rose 4.2% in May from a month earlier to a seasonally adjusted annual rate of 5.2 million, the first time the pace crossed 5 million since November 2009, the National Association of Realtors said Thursday. Existing-home sales peaked in September 2005 at an annual pace of about 7.3 million. (Chart above from Haver Analytics)

The figures, showing rising home prices and contracts closing at a brisk pace, boosted optimism for the housing market and its ability to support the broader economic recovery. Median prices rose 15.4% from a year earlier to $208,000, the highest level since July 2008.

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The number of homes listed for sale rose for the fourth straight month as the spring selling season got under way. And fewer sales are being forced by banks or homeowners under pressure: The percentage of sales that were distressed properties stood at 18%, the lowest level since the group began tracking the data in October 2008.

Pointing up Note, however, the sharp drop in affordability from higher prices and mortgage rates. Affordability is still statistically high but disposable income is restrained and credit remains tight. Mortgage rates have risen another 50 bps since the last point on this chart.

(Haver Analytics)

Philly Fed Notes Rebound in Manufacturing

The Philadelphia Fed’s index of general business activity within the factory sector jumped to 12.5, from -5.2 in May.

(Bespoke Investment)

Fingers crossed  The new orders index bounced to 16.6 this month from -7.9 in May. The shipments index also returned to positive territory, up 13 points to 4.1.

Signs of weakness lingered in the labor-market readings, however, with the employment index rising just 3 points to -5.4, marking its third-straight month of negative results. The Philadelphia Fed said 20% of firms reported employment decreases, compared with 15% reporting increases. (Chart and table from Haver Analytics)

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Conference Board Leading Economic Index: A Slight Rise in May

The Conference Board LEI for the U.S. rose slightly in May. Only the financial indicators contributed positively to the index, offsetting negative contributions from the ISM® new orders index, building permits and initial unemployment claims (inverted).

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FED BASHING (Continued)

Did I start a campaign against the Fed when I wrote Driving Blind on June 5? Unlikely, but I nevertheless have been followed by many high profile pundits. John Mauldin’s recent Thoughts from the Frontline is a good read. It now looks like just about every observer feels the need to warn people against Fed forecasts.

  • Dylan Matthews’ Washington Post piece was short but “unsweet”:

(…) I went back through every June forecast the Fed has released from 2009 to this year. Each of those forecasts included projected growth, unemployment and inflation rates for the year in question and the two years after. So the 2009 projection forecast 2009, 2010, and 2011, the 2010 projection forecast 2010, 2011, and 2012, and so forth. And those forecasts just kept getting less and less optimistic as the years wore on:

fed_projections_record

(…) When it comes to the economy the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011 the Fed was predicting GDP growth for 2012 at 3.95%. Actual real GDP (inflation adjusted) was 2.2% or a negative 44% difference. The estimate at that time for 2013 was almost 4% versus current estimates of 2.3% currently.

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Bernanke’s outlook to come under scrutiny
Fed watchers ask whether shift in sentiment has come too suddenly

“Underneath the hood the economy still has a lot of weakness,” says Paul Edelstein, director of financial economics at IHS Global Insight. “I don’t think that we’re going to get the declines in unemployment that they’re expecting,” he adds.

Fed’s Bullard says Bernanke bond announcement was poorly timed

CHINA

Markit’s flash PMI for China was weak but few people seem to have noticed this troubling data:

A good deal of the weakness was apparently driven by external developments as the new export orders index plunged 4.9pt to 44.0, the lowest reading since the middle of the Great Recession. This collapse is quite difficult to fully believe, given developments in the region and the global economy, where there are no signs of such a collapse of demand.

Nobody believed the strong export numbers of a few months ago. Now, we should not believe the weak ones. Hot smile

China’s Cash Squeeze Eases

China’s cash crunch appeared to ease amid speculation the central bank stepped in, though the situation could deteriorate as banks’ quarter-end demand for funds picks up.

Traders said Friday the People’s Bank of China may have asked major state lenders to refrain from hoarding cash and release more funds to ease the liquidity squeeze. The central bank hasn’t responded to repeated requests for comment, while Bank of China, one of the country’s biggest lenders, denied reports it had defaulted on a loan Thursday. (…)

Some banks may also be confronting an inability to pay back in full and on time maturing wealth-management products, Fitch Ratings said today, estimating 1.5 trillion yuan ($245 billion) worth will come due before the end of the month. (…)

Analysts say China’s new leaders are appearing to show more interest in cutting long-term financial risks at the expense of short-term pain, as part of a broader effort to make future growth more balanced and sustainable. (…)

  A gold margin call

CME Group, which operates the New York Comex exchange on which gold futures are traded, announced yesterday it is increasing margin requirements on gold trading by 25% to $8800 per 100-ounce contract. The new initial margin requirement will come into effect after close of trading today.

 

NEW$ & VIEW$ (10 JUNE 2013)

MAY U.S. EMPLOYMENT

1. THE FACTS

Jobs Rise Enough to Soothe Markets

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

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

Muddling Through

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2. THE BETTER STUFF

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

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

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3. THE NOT SO GOOD STUFF

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

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And this from Bloomberg:

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

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

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

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

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

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

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

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

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

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And yet:
 

Fed on Track to Ease Up on Bond Buying

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

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

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

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

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

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

Are we heading towards another policy mistake?

Housing’s Up, but Is Foundation Sound?

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

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

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

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

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

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

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

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

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

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

 Consumers Boost Borrowing for Cars, Education

 

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

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

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

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

 Home Loan Rates Near 4% Send Buyers Scurrying

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

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

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

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

CHINA

 

China’s Export Growth Slumps

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

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

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

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

China’s CPI grows 2.1%

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

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

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

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

China’s May PPI down 2.9%

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

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

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

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

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China’s retail sales up 12.9% in May

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

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

China’s Risky Move to Slow Credit

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

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

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

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

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

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

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ELSWHERE
 
German Industrial Production Increases Most in a Year

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

Poland Warns on Further Volatility Curbs

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

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

Italian Economy Contracts as French Confidence Stalls: Economy

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

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

Sweden Industrial Output Declines as Domestic Demand Falters

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

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

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

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

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

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

Composite Leading Indicators (CLIs), OECD, June 2013

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

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

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

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

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

SENTIMENT WATCH

U.S. Expansion Poised for Longevity Without Many Excesses

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

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

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

Forecast Calls for a Summer of Swings

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

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

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