March Nonfarm Payrolls: +192K vs. consensus +200K, +197K previous (revised from 175K).
U.S. Trade Gap Widens, Spurring Downshift in GDP Projections Fall in Exports Suggests Weak Overseas Economies Could Be Restraining U.S. Growth
The nation’s exports declined 1.1% to $190.43 billion, while imports rose 0.4% to $232.73 billion, the Commerce Department said Thursday. As a result, the nation’s trade gap widened 7.7% to $42.3 billion, more than the $38.6 billion gap forecast by economists. It was the largest trade deficit since September.
February’s export decline followed a 0.6% gain in January. That suggests the surge in overseas sales that helped boost economic growth late last year was likely unsustainable. Growth in China is slowing while Europe’s recovery remains fragile, tempering demand for U.S. exports. (…)
Macroeconomic Advisers lowered its first-quarter growth forecast to a 0.9% annual growth rate from 1.4% previously. Morgan Stanley lowered its forecast to a 1.2% pace from 1.5%. Economists at Royal Bank of Scotland lowered their forecast to a 0.6% annual growth rate from 1.2% previously. (…)
February’s meager import growth provided new evidence of weak spending by U.S. consumers and businesses in the early part of the year. Domestic demand looks even weaker after adjusting the import data for inflation. Stripping out the effect of higher prices for petroleum and other products, imports fell slightly. Imports of capital goods, industrial supplies and petroleum products all declined. Imports of crude oil fell to $19.5 billion, the lowest level since late 2010, a reflection of expanded domestic energy production. (…)
U.S. exports to the European Union in February were down 2.5% from January, while exports to China were 4.6% lower. (…)
Note that U.S. exports had dropped 1.7% in December. Last 3 months: –2.2% or –9.1% annualized. Let’s hope Goldman is right:
GOLDMAN: The Global Economy Is No Longer Decelerating
Goldman Sachs analysts track a proprietary index used as a proxy for global growth called the “Global Leading Indicator,” or GLI. After a few months of deceleration, the GLI was unchanged in March.
“This ends six months of slowing and locates the global industrial cycle on the cusp of the ‘Expansion’ phase,” says a team of Goldman analysts led by George Cole in a note to the firm’s clients. The GLI is made up of 10 components, half of which improved last month, while the other half deteriorated.
“Korean exports improved and U.S. Initial Jobless Claims also trended lower. The Belgian and Netherlands Manufacturing Survey and the Baltic Dry Index showed some strength as well. On the negative side, the S&P GSCI Industrial Metals Index® continued to drop sharply, while the AUD & CAD TWI aggregate was only marginally lower. The Global PMI and the Global New Orders less Inventories (NOIN) aggregates were also softer (primarily on account of still soft EM activity) and the Japan Inventory/Sales ratio, while still at strong levels, deteriorated slightly.” (Tks Gary)
About that European bull market. Enthusiasm is there, but the earnings not so much yet.
With little support from earnings, European equities continue to be re-rated in P/E and price/book terms. From 10x in late 2011 to 17x now, European equities trade above both post-1980 and post-1990 average P/Es.
Citi strategist Jonathan Stubbs finds that it’s not just the average, value stocks no longer offer great value either. So, look for places where corporate earnings are actually, y’know, growing.
The slightly strange thing about this bull market though is just how lackluster earnings growth has actually been. Note the transition from optimism to reality in each of the past three years – companies actually have to deliver in 2014.
Cheap ain’t never been this pricey (for the last 25 years at least when you look at the average valuation for the bottom quintile of European stocks on a forward price to earnings basis, yo).
In the U.S., the Q1 earnings season begins next week. Expect a lot of weather-related comments even though ChangeWave’s recent survey of 2,341 corporate respondents suggests that only a few biz were significantly impacted:
When we asked U.S. corporate respondents whether the recent severe weather has affected their business, 42% reported their company has been negatively impacted – 8% Significant Negative Effect and 34% Slight Negative Effect. Only 8% report a “general loss of sales/productivity”.
Moody’s: Tight Credit Spreads atop Extremely Low Yields Dispute Consensus on Rates
The current combination of exceptionally narrow bond yield spreads and extraordinarily low corporate bond yields betrays a good deal of investor confidence in a limited upside for Treasury bond yields. Such confidence is at odds with the consensus call for significantly higher Treasury yields.
Barclays Capital’s yield spread over US Treasuries for US investment grade (IG) industrial company bonds recently dipped to 105 bp, which was less than its 106 bp average of the four-years-ended June 2007. The return of the IG industrial bond spread to its lowest range of the previous economic recovery is extraordinary in view of how it occurred in the context of a 3.24% average for the IG industrial company bond yield. Apparently, corporate bond investors are confident that the spread’s recent benchmark Treasury yield of 2.12% will not soon soar to its 4.28% average of the four-years-ended June 2007.
Thus, the corporate bond market is effectively very much at odds with the recent prediction by 10 members of the FOMC that the federal funds rate will be at least 4% over the longer run. Such a forecast seems bold given that the fed funds rate averaged a significantly lower 3.2% during the four-years-ended June 2007, which was the liveliest segment of an economic recovery that compares favorably with the current upturn. (…)
Thin Spreads Coexist with Record Low Yields in High-Yield Space
The US’s recent high yield bond spread of 350 bp shows an even more noticeable shortfall relative to its 365 bp average of the four-years-ended June 2007. Nevertheless, the latest high yield bond spread is still well above its lowest six-month average of that span, which was the 286 bp of 2007’s first half.
However, very thin spreads offer no assurance of a healthy credit market going forward. By 2008’s first half, the high yield spread had ballooned to 700 bp, and the rest is history. Razor thin credit spreads can warn of an excessive complacency toward default risk that practically begs for trouble. (Figure 3.)
Though the current outlook for defaults is benign, it is not favorable enough to warrant a high-yield spread of 350 bp, especially in the context of a subpar business cycle upturn that still might deliver deflationary surprises here and there. All of these qualifications beg the question as to why investors will accept such narrow high-yield bond spreads given the consensus view of significantly higher benchmark Treasury yields over the next 12 months. Again, the best answer to this conundrum is that the corporate bond market senses the continuation of a slack, uninspiring recovery that limits the upside for benchmark borrowing costs.
In other words, the corporate bond market’s focus is on business sales, whose sluggish growth betrays a lack of pricing power that will help to contain inflation and bond yields. By contrast, the Treasury bond market may be focusing too intently on jobs growth that because of the possibly diminished quality of new jobs and the reality of shorter hours now overstates the upside potential for consumer spending, household borrowing, and consumer price inflation.
Investors Return to Emerging Market Bond, Equity Funds Emerging market bond and equity funds both experienced inflows for the first time this year in the week ending April 2, a further sign that optimism is growing toward developing world assets.
Investors plowed $2.44 billion into emerging market equity funds in this latest week, the highest amount since October 2013, Barclays said, citing data from fund-tracker EPFR Global.
Meanwhile in emerging market bond funds, investors poured $1.06 billion in, compared with outflows of $1.11 billion in the previous week. (…)
After a tumultuous start to the year, emerging market assets have made a strong comeback in recent weeks, encouraging investors to return. Currencies such as the Indian rupee and Indonesia rupiah have hit multi-month highs against the dollar.
In stock markets, the MSCI emerging market index is up 4.6% in the past month.
The crisis in Ukraine has receded and relative weakness in U.S. data has meant U.S. Treasury yields haven’t risen as expected. That takes away a factor that caused a significant selloff in emerging markets in 2013. (…)