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If this email is reaching you, it is because you are still subscribing to I have stopped posting on NTU two weeks ago and I am now publishing on BEARNOBULL.COM. Here’s what you have missed if you did not visit BEARNOBULL.COM lately:

On top of the regular daily NEW$ & VIEW$. This morning’s N&V had a lengthy piece on employment trends.

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NEW$ & VIEW$ (28 FEBRUARY 2014)

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Yellen Sticks to Plan Amid Doubts Federal Reserve head Janet Yellen said bad weather might explain a recent patch of soft economic data, but she isn’t sure—so the Fed’s plan to reduce bond buying will likely continue unless conditions worsen.

“Asset purchases are not on a preset course, so if there’s a significant change in the outlook, certainly we would be open to reconsidering, but I wouldn’t want to jump to conclusions here,” Ms. Yellen said. Earlier in the hearing she said she expected the bond program to be ended by the fall.

Executives Face Weather-Obscured Outlook Amid ‘Winter of a Generation’

Bloomberg economist Richard Yamarone summarizes recent corporate conference calls, also blurred by the weather:

Companies continue to describe underlying macroeconomic conditions as tough and challenging, with most complaining about headwinds of higher transportation costs, currency issues and, where applicable, higher food costs. Colder-than-normal weather is obscuring the outlook because many companies say they aren’t sure the consumer will be willing to return once the storms and seemingly never ending snow piles end.

The CEO Economic Comments Sentiment Index for the week ended Feb. 28 was 49.77, higher than the Feb. 21 reading of 49.74. Sub- 50 readings suggest contractionary conditions, while above-50 is indicative of expansion.

Student NINJAs Pose Growing Threat to Frail U.S.

Commentary by Richard Yamarone, Bloomberg Economist:

Not to be confused with trainee covert agents in feudal Japan, a different type of student ninja is stalking the U.S. economy. So-called NINJA loans extended to
individuals paying for their education with “No Income, No Jobs or Assets” have the potential to be the next subprime crisis. And it doesn’t take much to push this frail
economy underwater. (…)

Today NINJA loans are helping to boost total outstanding debt levels. U.S. household debt increased by $241 billion to $11.52 trillion in the final quarter of 2013, up 2.1 percent from the previous quarter. Education lending rose approximately $53 billion in the quarter. Total household debt increased $180 billion from the fourth quarter of 2012 — student loans accounting for $114 billion of that gain.

Loans to students are essentially the only extension of credit one can get today without a job income, or asset. This form of lending is more disturbing than lending
to would-be homeowners. If a student walks away from a loan, what does the bank get? Because job prospects for newly minted graduates remain bleak — the unemployment rate for those aged 20 to 24 is 11.9 percent — the likelihood of default is elevated. (…)

image image

Yuan’s Slide Gathers Pace The yuan fell 0.9% against the U.S. dollar to a 10-month low, its biggest slide since China ended a fixed peg to the greenback in 2005.
Renminbi suffers fresh sell-off Heaviest weekly fall in years as traders report heavy PBoC activity
German Retail Sales Climb

Retail sales in January jumped 2.5% from the previous month in adjusted terms, more than erasing December’s upwardly revised 2.1% dip, initial data showed. Sales reached a high not seen since February 2007, and were far better than the 1.0% reading expected from a Wall Street Journal poll of experts. In annual terms, retail sales increased a more modest 0.9%, the data showed, helping to offset a 1.5% decline in December, which was also upwardly revised.


NEW$ & VIEW$ (27 FEBRUARY 2014)

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U.S. New Home Sales Surge in January, Led by Northeast

New single-family home sales rose 9.6% to a seasonally adjusted annual rate of 468,000 from a month earlier, reaching their highest level since July 2008, the Commerce Department said Wednesday. From a year ago, new-home sales were up 2.2%.

Last month’s increase was boosted by sales in the Northeast, where activity expanded by 73.7% and reversed the prior month’s declines. The South and West also saw gains, but new home sales in the Midwest fell.

December sales were revised to 427,000 from 414,000. (Charts from Haver Analytics)

 large image large image

Winter woes?

U.S. Durable Orders Fall in January

Click to ViewOrders for durable goods—products from kitchen appliances to bulldozers designed to last three years or more—fell a seasonally adjusted 1% from December, the Commerce Department said Thursday. That marked the second consecutive drop after overall orders fell 5.3% in December.

But excluding the volatile transportation category, orders rose 1.1% last month, the strongest rise since May. Defense spending on capital goods was up sharply. Orders for computers and electronics climbed, but demand for machinery, primary metals, and autos fell. (…)

Pointing up A closely watched measure of business spending—orders for nondefense capital goods excluding aircraft—climbed 1.7% in January, reversing December’s 1.8% fall. Orders in that category have climbed for two of the last three months, though from a year earlier they were down 1.7% in January.

Going sideways lately (Chart from Doug Short).

U.S. Jobless Claims Rose by 14,000 Last Week

The four-week moving average of claims, considered a more-reliable indicator because it smoothes out week-to-week gyrations, held steady last week at 338,250.


Very interesting post from Ed Yardeni: Consumers Seeing More Jobs

The present situation component of the Consumer Confidence Index (CCI) rose to a new cyclical high this month, exceeding the expectations component for the first time during the current economic expansion. Buoying consumers’ optimism about the here-and-now is their assessment that the labor market is improving. In some ways, the CCI survey may provide a clearer picture of this market than the cacophony of data provided each month by the Bureau of Labor Statistics in its employment report. The picture continues to get brighter:

(1) Jobs are more plentiful. I am especially fond of the survey’s series tracking the responses to questions about whether jobs are plentiful or hard to get. The former jumped to 13.9% this month from 12.5% in January. That may not seem like much, but it is the best reading since June 2008. The percentage of respondents agreeing that jobs are hard to get fell to 32.5%, the lowest since September 2008.

(2) More jobs are boosting confidence. I found that the CCI’s present situation component is highly correlated with the difference between the jobs-plentiful and the jobs-hard-to-get series. In other words, jobs drive consumers’ confidence about their current well-being.

(3) Survey response is confirming falling jobless rate. There is even a better correlation between the official unemployment rate and the jobs-hard-to-get series. We all know that the unemployment rate has dropped during the current economic expansion, mostly because of a sharp decline in the labor force participation rate. If people are dropping out because they are discouraged by the lack of jobs, then the jobs-hard-to-get series should not be falling in lock-step with the unemployment rate. But it is suggesting that labor market conditions really are improving and that other factors are behind the falling participation rate.

Hopeful Signs on New-Home Supply Crunch Lending for land development and construction is turning up after hitting a 14-year low early last year, a sign that the supply crunch for new homes could ease in coming months.

Data released Wednesday by the Federal Deposit Insurance Corp. show that the outstanding balance on loans for land acquisition, development and construction rose in the fourth quarter to $209.9 billion, compared with $206 billion in the third quarter. While that’s a relatively small gain, economists note that if the overall balance is growing it means that originations of new loans are likely rising even faster. It was the third consecutive quarter of growth.

An increase in lending would spur additional home construction and possibly put downward pressure on prices, which have been rising rapidly over the past two years and weighing on the housing recovery. Last year, the average price of a new U.S. home was $322,100, up 10.2% from 2012 and the highest annual figure since the Census Bureau began tracking new-home prices in 1963.

While the rising prices are great news for sellers, the tight supply of homes has priced many would-be buyers out of the market. (…)

Even before the FDIC issued its latest data, companies that build homes had noted a change in sentiment from lenders.

“I hadn’t gotten calls for years from banks, but now I get calls from them all the time,” said C. Pat DiFonzo, president and owner of housing developer Zena Land Development LP in Grapevine, Texas. “They’re all chasing deals now.”

Other figures underscore the rebound in lending for residential projects.

According to the FDIC, outstanding loans solely for construction of homes—excluding development, land acquisition and commercial projects—increased to $43.7 billion in the fourth quarter, up from a recent low of $40.7 billion in last year’s first quarter. The FDIC has tracked that measure only since 2007. (…)

Bankers say they are opening their doors a little wider to construction in part because borrowing by companies in other sectors has been weak. “The banks, especially the community and midsize banks here in Atlanta, can’t get all of their loan growth,” said Stephen Palmer, manager and chief financial officer of Home South Communities, a closely held builder in Atlanta. “I have today triple the commitments that I need for construction financing.”

While lenders aren’t keeping their doors tight, they aren’t wide open either. Particularly difficult to obtain are loans for land acquisition and development, which entails installing infrastructure such as roads and utilities—endeavors that lenders consider more risky than home construction. Smaller, cash-strapped builders still face a challenge in landing loans. (…)

France unemployment hits record Number of jobseekers increases 0.3% over December

The latest figure, published on Wednesday by the labour ministry, brings the total number of unemployed to a record 3.32m – about 11 per cent of the workforce. The total number of those seeking a full-time job, including those in part-time work, reached 4.92m.

One bright spot in the figures was that January’s rise was slower than the 10,200 of newly registered unemployed reported in December and the 17,800 increase in November. On Wednesday, Michel Sapin, the labour minister, seized on that fact as a sign of changing fortunes.

China Engineered Decline of Yuan China’s central bank engineered the recent decline in the country’s currency as part of its efforts to prepare the tightly tethered yuan for wider trading. The move is the clearest sign yet that leaders are pressing ahead on financial reforms.

(…) In the past week, the People’s Bank of China has been guiding the yuan lower against the dollar by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars, according to traders. That has helped further push up the price of the dollar against the yuan.

“The PBOC is testing the market as it prepares to widen the yuan’s trading band,” said one of the people familiar with the bank’s thinking. (…)

Surging inflows of capital have been complicating Beijing’s efforts to manage the economy, contributing to soaring property prices and injecting excess cash into the financial system. The central bank and commercial banks bought nearly $45 billion worth of foreign exchange in December, the fifth consecutive month of net purchases. A weaker yuan could also help exporters, whose goods would be cheaper in the U.S. and other foreign markets. (…)

The PBOC decided to tamp down expectations for one-way appreciation in the yuan and curb speculative trading during a two-day currency-policy meeting that ended Feb. 18, the people said.

At the meeting, a deputy governor, Hu Xiaolian, called for greater efforts to prevent risks from cross-border capital flows and joined other officials in expressing concern about “hot money” inflows, according to a PBOC statement issued after the meeting. The PBOC also decided to expand the yuan’s trading band this year in an “orderly” manner, the statement said, as it moves toward making the yuan a freer currency.

On Feb. 19, the day after the meeting, the yuan started its recent slide, falling to the lowest level in almost two months. (…)

PBOC officials have said in the past that the yuan is nearing its fair-market value, or “equilibrium level,” meaning the chances of any drastic movements in the currency are limited. By making the currency more of a two-way bet, officials hope to relieve the pressure for it to rise and ease the way to widen the trading band, according to the people with knowledge of the thinking. (…)

Morgan Stanley Warns Of “Real Pain” If Chinese Currency Keeps Devaluing

The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns “real pain will come if CNY stays above these levels,” leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy. (…)

Brazil’s Economy Picks Up

(…) The economy grew by 0.7% compared with the third quarter, and by 1.9% compared with the fourth quarter of 2012, according to the Brazilian Institute of Geography and Statistics, or IBGE.

For the full year, Latin America’s largest economy expanded 2.3%. According to the central bank’s latest weekly survey, growth in 2014 is expected to be 1.67%, down from a forecast of 1.79% the week before.

Industry contracted 0.2% compared with the third quarter, while agriculture was stable and services advanced 0.7%, according to IBGE.

Consumption, one of the major drivers of the economy in recent years, picked up pace in the fourth quarter. Household consumption expanded by 0.7% in the fourth quarter, while government consumption rose 0.8%.

Investment in 2013 totaled 18.4% of gross domestic product, up slightly from 18.2% in 2012 but still far below the level that economists believe is necessary to unlock faster economic growth. The country’s savings rate was equivalent to 13.9% in 2013.


“We’re definitely in a bull market and a bull psychology,” Terry Morris, a senior equity manager at National Penn Investors Trust Co., said. “Investors are inclined to buy and you don’t want to get in the way.”

“It’s very hard to be a bear on U.S. equities,” said Michael Purves, chief global strategist at Weeden & Co. His year-end target for the S&P 500 is 2,100. “U.S.
equities are the most logical place to go,” he said. “I’m a bull on equity prices but it’s going to be a rockier ride in 2014 than it was in 2013.” (BloombergBriefs)


NEW$ & VIEW$ (26 FEBRUARY 2014)

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Commenting on recent weekly chain store sales:

“Temperatures turned warmer from coast to coast over the past week, but sales remained subdued as consumers enjoyed outside activities rather than shopping,” said Michael Niemira, ICSC vice president of research and chief economist.

Home Depot: US comps were +4.9% with total comp growth driven ~4% by traffic and ~1% ticket, showing that HD drove traffic well despite the poor weather.

Hot Home Prices Due to Cool

U.S. prices rose 11.3% in the fourth quarter compared with a year earlier, according to the Standard & Poor’s/Case-Shiller price index. The Case-Shiller index that measures home prices in 20 major metro areas rose 13.4% during the same span. A separate index, released Tuesday by the Federal Housing Finance Agency, said prices had gone up 7.7%, also to an eight-year high. (…)

Prices rebounded strongly during the past two years as low prices and rates attracted brisk demand, first from investors and later from traditional buyers who competed over a shrinking supply. Higher prices have led investors to slow their purchases in more markets, while rising rates have dented affordability for owners who need a mortgage, especially first-time buyers. (…)

Prices decreased 0.1% in December from November in the 20-city index, the second straight monthly decline. Sales tend to slow in the winter, which can lead to softer prices, but the monthly declines during the fourth quarter were still the smallest for that period in eight years. (…)

Home builders during the past year have boosted profits by building more-expensive homes. Luxury builder Toll Brothers Inc. on Tuesday reported a 21% increase in its average sale price during the quarter that ended in January versus the previous-year period. But those price gains appear to be curbing sales volumes. Toll said new contracts for homes in the quarter fell 6% from a year earlier and it cut its forecast for total closings for its 2014 fiscal year by 4%.(…)

National builder Hovnanian Enterprises Inc. began increasing certain incentives in mid-January to boost sagging sales, J. Larry Sorsby, the company’s finance chief, said at an investor conference Tuesday. Incentives typically include free upgrades on home finishes or assistance with closing costs, which reduce builders’ profit margins. Hovnanian said Monday that its revenue increase for the quarter ending in January would be “meaningfully lower than anticipated.” (…)

Toll Brothers: Net Home Orders Down in Latest Quarter; Weather Only Partly to Blame

From housing economist Tom Lawler (via CalculatedRisk)

Toll Brothers, the self-proclaimed “nation’s leading builder of luxury homes,” reported that net home orders in the quarter ended January 31, 2014 totaled 916, down 5.9% from the comparable quarter of 2013. Net home orders for “traditional” homes (that is, excluding its “city-living” segment) totaled 865 last quarter, down 8.1% from a year earlier. The company’s sales cancellation rate, expressed as a % of gross orders, was 7.0% last quarter, up from 6.2% a year ago. Home deliveries last quarter totaled 928, up 24.4% from the comparable quarter of 2013, at an average sales price $694,000, up 22.0% from a year ago. The company’s order backlog at the end of January was 3,667, up 31.2% from last January, at an average order price of $733,000, up 10.2% from a year ago.
Here are a few excerpts from the conference call.

“The freezing, snowy weather of the past two months has impacted our business in the Northeast, Mid-Atlantic and Midwest markets, where about 50% of our selling communities are located. While it is still too early to draw conclusions about the Spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand and an industry still under-producing compared to both historical norms and current demographics.” “Encouragingly, our average price per home has risen dramatically, representing a combination of price increases and mix shift. Both components have helped boost our gross and operating margin.”

For “traditional” homes, net orders last quarter were down YY in the “North,” up 0.4% in the “Mid-Atlantic” up 9.4% in the “South” (which includes Texas), and off 17.4% in the “West.” The decline in the West was not weather related, but rather reflected potential buyers’ response to Toll’s unusually aggressive price increases in the region, especially California. The average net order price in the West last quarter was $944,000, up 27.9% from a year earlier. (…)

Hmmm…”solid affordability, attractive interest rates, growing pent-up demand”. If you missed it yesterday, see FACTS & TRENDS: U.S. HOUSING TO STAY COLD

Mortgage Purchase Index lowest since 1995

The Refinance Index decreased 11 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier to the lowest level since 1995. “Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s Chief Economist.

Land Investors Brace for Slowdown Texas developer H. Ross Perot Jr. and a few other big land investors are taking some chips off the table, betting that the swift increase in prices on residential land in recent years will abate in 2014.

(…) “Unless home prices go higher, I don’t see land [prices] going much higher,” says Mr. Perot, whose Hillwood Development Co. owns 9,400 residential acres in seven states. (…) “Land’s about as expensive as it can be.”

Hillwood sold 13 residential tracts totaling 4,300 acres in the past year for $125 million, nearly double the amount it had invested in them. Hillwood also bought two tracts last year totaling 1,800 acres, but 2013 was the first year in the past 10 that Hillwood was a net land seller.

It is unusual for Hillwood to sell huge tracts of raw land. Typically, the company develops tracts into dozens or hundreds of home lots—with electricity, roads and other infrastructure—and sells them piecemeal to multiple home builders.

Another Texas land investor, Stratford Land Co., intends to complete sales of at least $400 million of land early this year after selling $100 million of land last year and $150 million in 2012. To sell, Stratford looks to double the money it spent on the land. It still holds about $1 billion of assets.

“We want to take some chips off the table,” Stratford founder and CEO Phillip Wiggins said in an interview. “It seems like we’ve timed this very well. But we have the rest of the portfolio to play a little long on, because we think there’s still some wind behind our sails for a few years.”

Investment-management firm Paulson & Co. since 2009 has amassed more than 20 residential projects spanning 30,000 lots in distressed markets. Last year, Paulson for the first time since then sold tracts in a few markets, though it intends to also keep buying and holding land in markets where it thinks prices still have room to rise. (…)

Starwood Land Ventures LLC, an arm of investor Barry Sternlicht‘s Starwood Capital Group, since 2007 has amassed a portfolio spanning roughly 17,000 lots, buying mostly at the market’s nadir in 2009 and 2010. Last year, Starwood Land posted its largest year of land sales, divesting tracts totaling 2,300 lots for $150 million. Meanwhile, it bought one tract of 675 lots for $25 million.

“The market was right and the prices were very good—in some cases above what they were in the peak years,” says Mike Moser, Starwood Land’s co-CEO. “So, it’s time to start harvesting.” (…)

Lot prices in 2013 increased more than 20% on average nationally from 2012 levels, according to housing-research and analysis firm Zelman & Associates. In red-hot California, lot prices increased in Modesto by 73% in the past year, according to land brokerage Land Advisors Organization.

But the land market lost momentum late last year as home buyers began to balk at rising prices and higher interest rates. That weakening of demand tempered home builders’ appetite for top-dollar land.

A look at the sequential, quarter-to-quarter change in land prices underscores the cooling of the market. According to Zelman’s monthly surveys of builders, brokers and developers in 55 major markets, prices of finished lots receded from their biggest recent gain—6.8% in the first quarter of 2013 from the previous quarter—to a more tepid 2.9% gain in last year’s fourth quarter.(…)

Canadian consumers keep tight grip on wallets over holiday season

The average Canadian consumer’s total debt – excluding mortgage – in the fourth quarter of 2013 increased marginally to $27,368 from $27,355 in the third quarter, according to the latest analysis of credit trends by TransUnion, released Wednesday. (…)

On a year-over-year basis, the latest TransUnion report showed that total debt fell 0.42 per cent to $27,368 from $27,485 – the highest debt level on record. (…)

“The bigger story is the continued decline observed in delinquency rates for credit cards, lines of credit and instalment loans. These are significant drops, and coupled with lower debt levels in some of Canada’s major markets, this is a good story for both consumers and lenders. When both delinquencies and debt go down, we anticipate consumers may find more opportunities to gain access to better credit offers as competition for their business increases.”

EU Forecasts Weak Growth European Union economists forecast tepid growth for most of the region through 2015, while warning that lingering debt burdens and the specter of deflation could sabotage the recovery

(…) Growth in the euro area is forecast at 1.2% this year and 1.8% next, after two consecutive years of contraction. That won’t be enough to make much of a dent in euro-zone unemployment, which is seen hovering near record highs of 12% in 2014 and 11.7% in 2015. The commission report on Tuesday forecast growth in the broader EU—buoyed by strong momentum in the U.K.—at 1.5% this year and 2% next. (…)

The commission forecasts inflation in the euro zone at 1% this year and 1.3% next, well below the European Central Bank’s target of just under 2%. Eurostat on Monday said inflation in the euro area is running at 0.8%.(…)

France has pledged to bring its deficit to under 3% of GDP in 2015, yet the commission forecasts the deficit next year at 3.9% of GDP. In Spain, the government has pledged to bring its deficit to under 3% in 2016. Hitting that target will require significant new cuts, as the budget deficit is forecast to hit 6.5% of GDP in 2015. (…) Italy’s growth prospects, however, remain dim, with the commission projecting growth of 0.6% this year.

China dismisses concern on renminbi fall Central bank says market should not over-interpret sell-off

The State Administration of Foreign Exchange, an agency under the central bank, did not acknowledge its role in guiding the currency. “The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies,” it said on Wednesday.

It added that the currency’s movement was nothing unusual: “The degree of exchange rate volatility is normal by the standards of developed and emerging markets. There is no need to over-interpret it.”

GAVYN DAVIES: Watch China’s exchange rate policy

(…) The rise in China’s real exchange rate, amounting to more than 40 per cent since 2005, has been one of the forces which has helped the global economy to rebalance in recent years, encouraging a narrowing in the US trade deficit against China, and also allowing other emerging economies to absorb the effects of the devaluation in the Japanese yen without feeling too much pain.

It has also helped China to hold down inflation, and boost consumption, which is a key requirement in its own internal rebalancing. And it has reduced the danger of a severe policy confrontation between China and the US, with the latter having largely dropped its complaints about “manipulation” of China’s exchange rate. Overall, it is one of the things that has clearly gone right in the global economy in recent times.

The benign interpretation of the sudden reversal in the spot rate since mid-January is that it is all part of China’s plan to introduce greater market forces into its economic system in the years ahead. This would include more scope for the exchange rate to be determined by the market, to which end Beijing has said that it will increase the width of the daily fluctuation band from the present plus or minus 1 per cent to plus or minus 2 per cent as soon as possible.

Until the recent reversal, the spot rate had been hugging the bottom end (ie, the strong end) of the band, and some investors had become convinced that long renminbi represented a safe, low volume trade. Capital inflows therefore increased, forcing the People’s Bank of China to intervene in the markets by $500bn in 2013 (an act of quantitative easing similar in scale to the US Federal Reserve’s QE3 programme last year).

Increasing the width of the band could have caused more inflows and a more rapid strengthening in the real exchange rate. To avoid the perception that this is a one-way trade, the Chinese central bank may have decided to mount a sharp but temporary squeeze on the carry traders.

A slightly less benign interpretation is that the PBOC has decided to call a halt to the trend appreciation in the real exchange rate for the time being. This is what the bank did when it was using all available instruments to boost gross domestic product growth in 2008-10, the only prolonged period of stability in the nominal exchange rate since 2005. The reason that this interpretation seems possible is that there has been a clear shift in interest rate policy since the start of this year, with interbank rates being guided much lower than in the second half of 2013.

If the authorities have decided to take their foot off the monetary brakes for the time being, because the deflating of the credit bubble is damaging GDP growth and financial stability, it would make sense to allow the exchange rate to fall, alongside domestic interest rates.

But this would suggest that the authorities have blinked in the face of the January bailout of a high-profile trust product marketed by ICBC. It would also indicate that the process of deleveraging in the shadow banking sector is not going according to plan. Concerns from the rating agencies that China is encouraging yet more moral hazard in the financial system, making the eventual exit from the bubble even more difficult, would then look valid. (…)

China’s Corporate Debt Hits Record $12 Trillion

From Reuters:

China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year – equal to over 120 percent of GDP – according to Standard & Poor’s estimates.

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.

While a credit crisis isn’t expected anytime soon, analysts say companies in China’s most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.

More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor’s Rating Services in Hong Kong. “Borrowing costs already are going up due to tightened liquidity,” he said. “There will be a greater differentiation and discrimination of risk and lending going forward.”

Of course, there is also this:

And this:

Winking smile It’s all in the timing:

Dave Camp: How to Fix Our Appalling Tax Code

On Wednesday, I am releasing what a simpler, fairer tax code actually looks like. The guiding principle is that everyone should play by the same rules—your tax rate should be determined by what’s fair, not by who you know in Washington.

Obama to Propose Highway Program President Barack Obama will propose a $302 billion program to support rebuilding and repairing the U.S.’s roads and bridges when he travels Wednesday to a historic rail station in St. Paul, Minn.

Mr. Obama’s plan includes dedicating $150 billion in revenue to the program generated by a proposed overhaul of taxes on businesses, which would close what the White House said are “unfair” loopholes while lowering tax rates. The White House didn’t give further details on what tax loopholes it would close.

The White House said Mr. Obama will also launch a $600 million competition to get people working on transportation infrastructure projects.

Carlyle Doubts U.S. Private-Equity Tax Change Carlyle Group co-founder David Rubenstein said the U.S. is unlikely to make changes this year that could increase taxes on deal profits reaped by private-equity managers

Mr. Rubenstein, often viewed by private-equity watchers as an authority on national politics since his firm is based in Washington, said various factors would likely prevent any measures affecting buyout firms from taking hold any time soon. (…)

“It’s unlikely that will get into law,” Mr. Rubenstein said of Mr. Camp’s proposal before an audience at the SuperReturn International private-equity conference in Germany’s capital. “I don’t think there is likely to be any tax reform legislation passed by this Congress at all.”


Real world examples (see GOOD READ: THE IT THREAT), from the WSJ (J.P. Morgan Dims Its Outlook for 2014)

Another shift outlined Tuesday was a reduction in J.P. Morgan’s expansion of its branch network, which increased by more than 360 locations in the past three years. On Tuesday, executives said they don’t expect to build any net new locations in 2014 and 2015, maintaining about 5,600 branches. If any new ones are built, the branches would be smaller and staffed by fewer employees, two tellers per new branch, as compared with four previously.

Executives attributed the pullback to customer behavior as people turn to mobile and other digital means for their banking needs. Digital logins in J.P. Morgan’s consumer banking, business banking and cards business units were up 28% from 2010 to last year. Meanwhile, calls to representatives and teller transactions fell 3% and 4%, respectively, in that same period.

J.P. Morgan had previously said it planned to cut branch staff by 3,000 to 4,000 by the end of 2014. But in 2013, J.P. Morgan cut 5,500 jobs at branches, and this year the bank said it planned to cut 2,000 more jobs. J.P. Morgan expects its total branch staff to drop 20% by next year when compared with 2011 levels, up from an earlier projected decline of 13%.


NEW$ & VIEW$ (25 FEBRUARY 2014)

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There was no mention of a weather effect in today’s release showing that sales dropped 0.6% last week after the 2.5% jump the previous week. The 4-week m.a. troughed the week of Feb. 8 but it is still up only 1.5% YoY when core inflation is 1.6%.



Nearly 1 in 3 Americans Aren’t Saving Any Money Only 68% of all Americans are spending less than they earn and saving the difference. That’s down from 73% in 2010, the first full calendar year after the recession ended.

A new survey released Monday found that only 68% of all Americans are spending less than they earn and saving the difference. That’s down from 73% in 2010, the first full calendar year after the recession ended.

Some 64% of households have emergency funds, down from 71% in 2010. The survey found 76% are reducing their consumer debt, down from 79% in 2010.

A divide remains along incomes. More than 80% of households earning over $50,000 spend less than they earn. Only about 69% of households making less than $50,000 are able to save.

The pattern holds for reducing consumer debt and maintaining an emergency fund. Nearly 90% of households in the top half are reducing their debt or are debt free, and more than 80% have a “sufficient” emergency fund.

Only 78% of those making less than $50,000 are reducing their debt or debt free, while 63% are content with their emergency fund.

Median household income in the United States in 2012 was $51,017, according to Census Department data.(…)

Natural Gas Falls Most in Six Years

Natural-gas prices dropped 11%, in the biggest plunge in more than six years, as traders locked in profits from the commodity’s weather-driven rally.

Natural gas for March delivery ended down 69 cents at $5.445 a million British thermal units.

Monday’s drop, the largest one-day percentage fall since August 2007, presages a change in focus from near-term weather concerns to demand in the spring. The severe winter across much of the U.S. has eaten away at stockpiles and pushed futures up 29% for the year so far. This spring, traders will focus their wagers on whether the demand will fall enough to allow inventories to be replenished by next winter. (…)

China’s Property Market Shows Strongest Signs Yet of Cool-Down China’s red-hot property market is showing its strongest signs yet of a cool-down, as price growth eases, credit for many developers dries up and some start to cut prices at new housing projects.

(…) Average new-home prices in 70 Chinese cities rose about 9% in January from a year earlier, according to Wall Street Journal calculations based on data released on Monday by the National Bureau of Statistics. While that figure shows China’s housing market remains frothy, it also marks a drop from December’s 9.2% rise as well as November’s 9.1% rise. (…)

Industrial Bank, a midsize lender, said on Monday in a filing to the Shanghai Stock Exchange that it had halted some types of property loans until the end of March, when it will unveil new policies. The bank said the move is aimed at “adjusting its asset structure and to better serve the real economy.”

Banks have periodically tightened lending to developers; the last time was in 2010-2012 when the government worried that easy credit was helping drive up prices. Worries about a slowing economy led to a loosening in early 2013.

Now banks are growing cautious about lending to developers, especially those active in smaller cities that face an oversupply of housing, and Beijing is concerned about a buildup of debt and unoccupied housing.

In Changzhou, the developers of a 21-tower project announced discounts last week. Prices were reduced to an average of 7,000 yuan per square meter, with some units selling for 5,380 yuan per square meter, down from an 11,000-yuan price tag in December, according to data from property broker SouFun Holdings. SFUN -6.23% One of the developers, Agile Property Holdings, 3383.HK -1.23% didn’t respond to requests for comment.

New Yuan Bet: Down A sharp and sudden slide in China’s yuan is forcing investors to rethink one of the most reliable trades in financial markets over the past four years: betting on gains in the Chinese currency.

(…) China’s central bank determines a daily reference point for the yuan, also known as renminbi, then lets it trade 1% higher or lower. Since 2005, it has gradually moved the rate up, allowing the yuan to strengthen 33%. A linked currency, called the “offshore” yuan, trades freely in Hong Kong. (…)

China has halted the yuan’s rise before. It kept the exchange rate steady for two years after the financial crisis. And in 2012, the yuan was allowed to sink about 1.5% over a roughly three-month period. Since then, it has risen more or less steadily. (…)

Yuan Shifts Roil Copper Market Turbulence in the Chinese yuan is percolating in the copper market.

(…) Copper prices have been under pressure since the start of 2014, falling as much as 6.3% in early February amid signs that China’s economy was sputtering. China accounts for about 40% of global copper consumption.

“There’s a lot of fear about a slowdown in China,” said Frank Lesh, a broker and futures analyst with FuturePath Trading.

Rapid shifts in China’s currency, the yuan, have added to these concerns. Copper is traded in dollars and becomes more expensive for Chinese buyers in their home-currency terms when the yuan weakens. (…)

Yuan’s Slide Helps Fix Misaligned Currencies With other emerging-market currencies still under great pressure – see Turkey’s lira today, as well as the Ukrainian hryvnia – China’s hitherto appreciating currency had been creating an imbalance, adding an unwanted burden to its all-important export sector as its economy slowed.

(…) But now that the yuan is trading at six-month lows versus the dollar, the overvaluation is being corrected. Chinese exporters are no doubt relieved, but the question now is: What does that do to investment flows that had been for a long time bet on the conventional wisdom that the yuan would continue to rise? That inflow of funds, particularly from Hong Kong residents earning near-zero rates on their dollar-pegged savings, was an important source of liquidity, both for productive investments and for speculative purposes.

While some of the yuan’s weakness can be attributed to investors’ concerns about China’s slowing economy and latent risks in its financial system, there is also a growing perception that the Chinese central bank has been proactively undermining expectations for the yuan to relentlessly appreciate. With the yuan recently trading closer to the PBOC’s dollar-yuan reference rate, conditions are ripening for a widening of the yuan’s trading band, that by which the PBOC allows the yuan to move 1% above or below the reference exchange rate. The band was last widened in April 2012, when the permitted deviation from the reference rate was 0.5%. Analysts expect Beijing to widen the trading band further, and allow a 1.5% or 2% deviation in the next few months.

From the FT:

(…) The renminbi suffered a sustained period of depreciation in the months following the previous widening of the band. In the middle of 2012, the renminbi dropped as much as 1.4 per cent from its April level, before recovering in September.

However, “it’s still too early to say that the whole market has shifted expectations”, Ms Wang added.

She noted that the economic fundamentals this time are different. In early 2012, China was in a cycle of cutting interest rates and experiencing large capital outflows. Recent data show that China is still experiencing large inflows through its external trade, and few expect an imminent change to interest rates.

“We could run into a 2012 scenario again – that seems to be what [the authorities] want. But unless we see a big narrowing in the trade surplus, then exporters still need to sell dollars [and buy renminbi] in the onshore market,” she said.

But there is a lot more to the story. See The curious incident of the PBOC in the USDCNY market, but be warned that you will get more confused.