U.S.: Food price indexes are surging so far in Q2
As of last week, U.S. authorities declared that 100% of California – which grows 50% of all U.S. fruits and vegetables – is in a state of “severe drought”. At this time last year, “only” 46% of the State was in that condition. This development coupled with rising global demand for food and supply constraints in other parts of the world has led to a surge in the CRB foodstuff index (a relatively good gauge of global food price inflation).
As today’s Hot Charts show, the CRB is already up an annualized 61% QTD in Q2, the biggest increase in three years. As shown, the livestock component of the CRB index is up a whopping 96% annualized QTD, on track for the largest increase in a generation (1980 Q2). Interestingly, however, it is not just food inflation that is creeping higher. Rental and medical costs have also showed robust increases in recent months. With all three of the larger components of the U.S. CPI now growing at 2% or more for the first time since the onset of the recession, wage inflation could be poised to surprise on the upside. Stay tuned for the upcoming employment report. (NBF)
Americans’ reports of daily spending spiked in May, averaging a six-year high of $98 — $10 higher than the April average. This is also up from May 2013 ($90), and is the best figure for the month of May since 2008.
The May spending estimate comes as good news for the economy, in which Americans’ confidence has been largely stagnant so far in 2014. Spending estimates in May have generally climbed each year since May 2009’s $63 average. Before this year, the highest May average since 2008 was last year’s $90.
In the previous five years, April-to-May gains in consumer spending were moderate and predictable, ranging from $3 to $6. The exception was 2012, which saw no increase. Thus, the $10 spike in average daily spending between April and May this year is the largest between those two months since 2008, when spending jumped $28.
One reason average spending in May was so high is the extraordinarily high spending levels seen around Memorial Day. The three-day spending average for May 27-29 reached $134 — the highest three-day average since 2008. The three-day average closest to this figure was $129, during the pre-Christmas days of Dec. 21-23, 2013.
Today’s Goldman ICSC weekly chain store sales report confirms May’s stronger sales. Weekly sales surged 2.9% last week bringing the 4-week m.a. up 2.9% Y/Y, the best showing in the last 12 months. Has the downtrend been broken for good?
In a move to boost a sluggish economy, China’s State Council, or cabinet, said Friday that it would lower the proportion of deposits that some banks are required to hold in reserve. Banks that provide a certain proportion of their total lending to the agricultural sector and small businesses would qualify for a lower reserve requirement ratio, the State Council said.
At a meeting responding to the State Council’s statement, China’s central bank and the banking regulator said they would step up their support to the agricultural sector and small businesses as well as assist in financing for slum clearance and construction of affordable housing, according to the report Monday in the China Securities Journal.
Central bank officials were reported to have said that the People’s Bank of China would step up relending operations to support small business, expanding a 50 billion yuan ($8.1 billion) relending plan announced in March, the report said. Relending operations are a monetary-policy tool unique to China whereby the central bank lends to commercial banks, which then lend the money to targeted customers.
Zhang Xiaopu, a deputy director of the banking regulator’s research institute, also said at the meeting that China needs to tighten its regulation of interbank lending and company-to-company lending, known as entrusted loans, as well as trust and wealth management products to help reduce funding costs for enterprises, the China Securities Journal reported.
The European Union’s statistics agency said consumer prices rose by just 0.5% in the 12 months to May, down from 0.7% in the 12 months to April. The rate of inflation was 0.5% in March, but before that month was last as low in November 2009.
The slowdown in inflation was largely due to prices for services, which rose 1.1% in the 12 months to May, compared with 1.6% in the 12 months to April. The core rate of inflation—excluding volatile items such as food and energy—fell to 0.7% from 1.0%.
The bull is back on steroids, especially for transportation stocks. The S&P 500 Transportation stock price index is up 9.9% ytd to a new record high, outpacing the 4.1% increase in the S&P 500. Flying high and barreling along are Airlines (43.5%), Trucking (17.6), and Railroads (10.5). Lagging behind is Air Freight & Logistics (-0.2). This suggests that the US economy is growing at a solid pace, while the global economy is doing so more slowly.
The strength of the S&P 500 Transportation index also confirms my secular bull market thesis. This index is now 66% above its previous record high on June 5, 2008. As I noted last week, the S&P 500 is 23% above its previous record high on October 9, 2007. This is a bullish development according to Dow Theory, which posits that as the DJIT goes, so go the economy and the DJIA. The former is up 9.5% ytd, while the latter is up 0.8%.
Industry analysts recently have been raising their 2014 and 2015 earnings estimates for the S&P 500 Transportation Composite. Its forward earnings rose to a record high last week, up 16.4% y/y. Its forward P/E is up to 16.3 from a recent low of 12.0 during September 29, 2011. That’s not frothy, but it isn’t cheap either. In any event, the fundamentals remain bullish. (Ed Yardeni)
CHECK YOUR P/Es
This is very important and could (will) impact companies with very low tax rates. Stocks of companies with high P/Es and low tax rates could (will) suffer from this global tax review.
US multinationals face a threat of “unprecedented taxes on trade and investment” from efforts to close gaps in the international tax rules, according to the Business Roundtable, a US business lobby group. (…)
In the letter, Louis Chênevert, chairman and chief executive of United Technologies, the industrial group, raised “serious concerns” that the global project aimed at tackling base erosion and profit shifting (BEPS) would end up with governments attempting to tax income arising outside their borders.
Mr Chênevert, chair of the Business Roundtable’s tax committee, urged the US Treasury to oppose “extraterritorial taxes on US business income”, warning that at a minimum it would increase business uncertainty and, at worse, it would lead to new taxes on cross-border trade and investment that would “freeze business investment and slow economic growth”.
The Roundtable also said it was “gravely concerned” about new information reporting proposals which could result in the harmful disclosure of confidential details to competitors. The plans to require multinationals to give certain country-by-country details of their operations to tax authorities are meant to be treated confidentially but many businesses think they will end up in the public domain.
The Roundtable suggested that US companies would be put at a disadvantage to their foreign competitors, if companies holding valuable trade names, trademarks, patents and other forms of intellectual property were targeted abroad.
Companies rich in intellectual property, such as technology, pharmaceutical and some consumer products businesses, are among the most likely to be affected by changes in the international tax rules. Companies including LinkedIn, Facebook, Amazon and eBay have alerted shareholders to the risks of new tax laws that could push up their tax rates and harm their businesses.
The proposed changes to the international tax rules are expected to stop companies routing profits to tax havens, while making it easier for governments to claim that companies have established a taxable presence in their countries. Businesses fear that some governments would exploit the potential rule changes to levy excessive taxes, which would also reduce the share of the profits that would ultimately be taxed by the US government. (…)