(…) Nearly half of CEOs surveyed by the Washington trade group said they expect to boost U.S. capital spending in the next six months, compared with only 39% eyeing higher spending three months ago. But while 72% of CEOs see an increase in sales in the next six months, only 37% expect to boost U.S. employment, according to the survey released Tuesday. Forty-four percent see their U.S. payrolls unchanged. (…)
Business investment and economic growth would likely rise noticeably if Congress were to rewrite the tax system in ways that cut corporate rates and narrowed loopholes, Mr. Stephenson said. “We don’t believe there’s anything that will drive economic growth like tax reform would,” he said. (…)
Events in Russia and Ukraine also appear to be influencing sentiment. The group conducted the survey between Feb. 21 and March 7, as events unfolded in the Eastern European nation. (…)
“We’re all watching this like a hawk,” Mr. Stephenson said. “We have a lot of business at stake in Europe.”
Mortgage applications decreased 1.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 14, 2014. …
The Refinance Index decreased 1 percent from the previous week. The seasonally adjusted Purchase Index also decreased 1 percent from one week earlier.…
The 4-week average of the purchase index is now down about 18% from a year ago.
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also increased 0.2% (1.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.
Median CPI is continuing to rise by 0.2% per month, double the rate of the weighted CPI and core CPI. Total CPI is currently +1.1% YoY compared with +2.0% for Median CPI. This -0.9% spread is slightly more than the 0.83 standard deviation since 1990. Over the last 25 years, Total CPI and Median CPI have been identical, on average, with median CPI being much less volatile and a more stable indicator of inflation. The probabilities are thus that Total CPI will soon rise towards the 2.0% YoY level. If you missed my March 17 piece on producer prices, it is here.
CHINA RETAIL SALES SLOW DOWN
Total retail sales of consumer goods increased only 11.8% Y/Y in January and February, significantly lower than government targets in 2014. In 2013, both retail and restaurant sales Y/Y deceased significantly due to the anti-corruption campaign. Restaurant sales suffered the most but stabilized after an adjustment in 2013; however, retail sales are still decreasing. The anti-corruption campaign continues to impact sales while personal income Y/Y remains low. Therefore, retail Y/Y is likely to fall short of the government target in 2014. (CEBM Research) (Chart from Ed Yardeni)
China Slowdown Adds to U.S. Firms’ Challenges China’s broad economic slowdown is adding another worry for U.S. companies already dealing with rising wages, formidable competition for workers and selective regulation.
A survey of U.S. companies operating in China released Wednesday shows that 50% cite the falloff in growth—to 7.7% last year from a peak of 14% in 2007—as among the biggest risks they face. That is a tick higher than the 47% the American Chamber of Commerce survey received last year. (…)
The 365 companies that responded to the AmCham survey listed rising labor costs and the difficulties of finding and keeping skilled employees as among their biggest challenges. Then there is a regulatory system that often seems to come down harder on foreign companies than Chinese ones. (…)
Two out of five of the companies polled in the survey said foreign businesses are less welcome in China than in the past, while only one in 10 said they felt more welcome. Seventy percent are profitable, though.
Among the other problems of doing business in China, U.S. companies cited Internet censorship, the struggle to protect patents and copyright, and a new, lengthier system for visas. (…)
Troubles recruiting and retaining skilled employees seems incongruous with universities producing 7 million graduates a year. But companies and experts said that those students aren’t entering the labor market with the right qualifications.
“The problem is the education system hasn’t quite caught up,” said Andrew Polk, an economist at the Conference Board, a U.S. business research outfit. “You’ve got more people in the so-called skilled labor pool who aren’t quite as skilled as companies need them to be.” (…)
On the other hand, China’s well-publicized, health-threatening air pollution problem is making it harder to attract senior executives from abroad. This is now a problem for half of the companies that responded to the survey, up from a third last year, according to the AmCham report.
Yuan Falls Against U.S. Dollar China’s yuan has erased most of the gains made in the past year, as it fell sharply for the third consecutive day against the U.S. dollar after the central bank doubled the currency’s trading band over the weekend.
At 6.2009, the yuan weakened 1.1% from the 6.1351 central parity, the level set by the People’s Bank of China each day around which the currency can fluctuate.
(…) The incidence of financial distress is rising and becoming more visible. The recent drop in the renminbi, and the sharp fall in copper and iron ore prices are the latest high-profile manifestations of China’s changing outlook. These are not random developments or bad luck, but connected parts of a complex economic transformation with deflationary consequences for the world economy and skittish financial markets. (…)
Slowing economic growth, chronic overcapacity and rising debt service problems in key industries are becoming more common, raising the risk of chain defaults involving suppliers and purchasers. Overcapacity recently prompted a senior executive in the Chinese Iron and Steel Association, Li Xinchuang, to say the problem was so severe it was “probably beyond anyone’s imagination”.
In an industry survey by the State Council, 71 per cent of respondents said overcapacity in iron and steel, aluminium, cement, coal, solar panels and shipbuilding was “relatively or very” serious.
Last week’s market scare, however, was focused on copper, which has fallen nearly 15 per cent this year, and by more than a third from its 2011 peak. Falling prices have embraced a swath of both ferrous and non-ferrous metals, sending ripples from Perth to Peru. (…)
Large swings in market prices are happening also for murkier – and largely speculative – reasons that hinge on the use of copper and ore as collateral for loans, and as a means of raising finance abroad and bringing it onshore to spend or lend. As the authorities clamp down on credit creation and shadow financing, falling prices, including that of collateral, will expose participants to losses, and markets to the risk of distress selling.
The transmission effects of lower prices into emerging markets and the global economy are most likely to prove disruptive, even if the positive real income effects for consumers eventually win out.
China’s economic transformation is happening regardless. Its leaders have choices only about how to manage it, and when to accommodate what is likely to be a painful adjustment. Sage advice would be to grin and bear it now, so as to avoid harsher outcomes later. But the political willingness and capacity to do so is unpredictable.
It is still possible that China will blink, raise infrastructure and housing spending and new credit creation, and lower bank reserve requirements and the renminbi. This would introduce a sharp twist to the underlying plot, but lead to a more dramatic conclusion. (Chart from Ed Yardeni)
‘Technical’ Recession in Russia Likely in 2Q-3Q on Shock to Investment, Demand
(…) The investment plans of private companies, especially foreign-owned, are likely to be scaled down until there is more geopolitical visibility. This grants an
adjustment to our expectations of private sector capital expenditure growth from moderation to outright contraction. This, together with a less optimistic outlook for
residential investment — on the back of tighter monetary conditions — implies a downward revision to our expectation of overall investment this year from 2 percent
growth to a 3 percent contraction.
Capex cutbacks are likely also to affect consumers via hiring and wage intentions. The household savings ratio is likely to grind higher this year, which might shave
an additional 0.5 percentage points off consumption growth. We have lowered our consumer spending outlook to 1.6 percent. Domestic demand is likely to be brought to an almost complete halt this year, following 2.5 percent growth last year and a 6.8 percent gain in 2012. A persistent slowdown in domestic demand and continuous downward revisions to company sales expectations are in turn likely to keep the pace of destocking elevated through most of the year.
Altogether, we cut our GDP growth out-look for this year to zero percent from the 1.3 percent we previously expected, which essentially implies a technical recession over the second and third quarters. (…) (Vladimir Kolychev and Daria Isakova are economists at VTB Capital in Moscow. Via BloombergBriefs)
The U.S. only exports some $40B worth of goods to Russia. Europe, some $400B.
- Chile: Gross domestic product in the fourth quarter missed forecasts, with the economy shrinking 0.1 per cent, compared with consensus forecasts for a 0.3 per cent rise. Year on year, the economy expanded 2.7 per cent compared with forecasts for a 2.8 per cent increase. For the whole of 2013, the economy expanded 4.1 per cent.
- Germany: The wholesale price index dropped at the fastest rate in four months in February, recording a 1.8 per cent decline, a faster drop than both January and December. The Zew economic sentiment indicator decreased again in March, falling by 9.1 points in March to 46.6. However, it remains much higher than the historical average of 24.6 points.
- Italy: The trade balance showed that exports dropped 1.5 per cent overall in January seasonally adjusted from December, while imports dropped 1.6 per cent. To the EU, exports dropped 1.7 per cent, while imports rose 1.4 per cent, and to non-EU countries, exports dropped 1.2 per cent and imports dropped 5.3 per cent. However, the November-January three-month period paints a slightly better picture, seasonally adjusted from August-October, with exports overall rising 1.1 per cent and imports falling 2.1 per cent.
“In this month’s survey the Crimea crisis is weighing on experts’ economic expectations for Germany. Nevertheless, the indicator’s level suggests that the economic upswing is currently not at risk,” said Zew president Clemens Fuest.
U.S SHALE RESOURCES
Remember when shale gas took off, naysayers were all over predicting that costs would be too high and/or the decline rates would be too swift? BloombergBriefs updates us, offering another example of what happens when the American entrepreneur spirit is let loose:
Since the North American shale-a-thon began, the producing industry has steadily improved drilling, production and well completion practices, dramatically lowering costs and expanding the economically recoverable resource. In the early days of the Barnett, for example, it took 25 to 30 days to drill and complete a horizontal gas well. Now, it takes 10 days. The trend is similar across more recent oil and gas shale plays in the Lower 48.
Besides drilling rigs now being three times faster, peak production rates on new shale wells keep improving, alongside average monthly U.S. production additions (Figure 4). These trends reflect both enhanced completion techniques and the fact that drilling targets are high-graded as the industry’s understanding of specific plays ripens over time.
MORE ON U.S. SMALL CAPS
Scotiabank Equity Research adds to yesterday’s piece on small caps:
U.S. small caps are expensive on all metrics we track (P/E, P/B, P/S, P/CF). On a forward P/E basis, the S&P 600 is trading at 19.9x forward earnings, which is
close to one standard deviation above average. U.S. small caps also appear pricey relative to other small cap benchmarks and relative to large caps.
Our Combined Valuation Score (CVS) stands at the high-end of its historical range (blue bar in Exhibit 8). Our CVS is an aggregate of four valuation metrics and it highlights how these metrics deviate from their historical averages. We also overlay the S&P 600 performance 12-month out (red line). When the CVS hits elevated levels, the S&P 600 tends to have a more muted performance 12-M later.
Of course, not all is rosy, as sentiment indicators are again reaching concerning levels of optimism, with the Ned Davis Research Crowd Sentiment Poll moving into extremely optimistic territory, which is typically a contrarian/bearish indication. And as we’ve noted, the last 13 midterm election years have experienced a substantial (typically first-half) pullback, with the average decline for the S&P 500 being 18.7% (thanks to Strategas Research Partners).
The good news is that equally consistent has been the rallies that have followed those corrections; averaging 32% for the 12 months after the correction’s finale. Our belief is that 2014 could also bring another decent-sized pullback, perhaps in the second quarter if history holds, but that we’ll end the year higher than we are now as economic growth accelerates in the United States and stabilizes globally. (Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.)
A real treat (tks David): Watch as 1000 years of European borders change