THE U.S. ECONOMY KEEPS ON TRUCKING
North American freight shipments and expenditures continued to buck the historic trend and increased again in May. The first five months of 2014 were the
strongest since the end of the great recession. While this seems counter to the dismal GDP reading for the first quarter, which shows a one percent drop or a
contraction in the economy, much of the decrease in GDP can be attributed to declining inventories, slowing exports and weather‐related issues. Many other
economic signs, especially growth in the manufacturing sector, point to an uptick in the five‐year recovery and a continued increase in freight movements.
May shipment volumes rose 1.0 percent to the highest level since October 2011. This was the fourth month in a row that the number of shipments increased. May shipments were 3.6 percent higher than a year ago and 26.4 percent higher than shipment levels at the end of the 2009 recession.
Capacity problems are being experienced in both the trucking and the rail industries as volumes grow. The impact of productivity‐reducing truck regulations has exacerbated the driver shortage, further limiting capacity despite the strong growth in the size of the truck fleet in 2014.
Freight expenditures climbed up 1.1 percent in May, setting another record high. Spending was 11.2 percent higher than a year ago and 77.7 percent higher than at the recession’s end in 2009. While freight rates are not showing the full effect of tightening capacity (yet), it is unlikely that this situation will continue.
New equipment and drivers have been added to the trucking fleet, and both are increasing costs substantially (the driver shortage is pushing up the cost of recruiting, training and retaining drivers). Freight expenditures are up 11.0 percent since the beginning of the year, which is lower than the 13.1 percent increase in the number of shipments. This indicates that rates are very competitive. Spot market prices have seesawed for the last couple of months ‐ a good indicator of the still somewhat sporadic nature of the capacity problems. (…)
The health of the freight market is a very good indicator of the direction in which the economy is moving. All indications point to moderate growth in freight over the next couple of months, which will bode well for the economy in general. (Cass)
The net worth of U.S. households and nonprofit organizations—the value of homes, stocks and other assets minus debts and other liabilities—rose roughly 2%, or about $1.5 trillion, between January and March to $81.8 trillion, the highest on record, according to a report by the Federal Reserve released Thursday. The figures aren’t adjusted for inflation or population growth.
German Central Bank Lifts GDP Forecast The Bundesbank raised its 2014 growth forecast for Europe’s largest economy, citing stronger domestic demand, but lowered its forecast for inflation amid ultralow rates in the euro zone.
In its semiannual economic projections, the Bundesbank boosted its growth forecast for the German economy in 2014 to 1.9% from a previous estimate of 1.7% in December. The economy will likely expand a further 2.0% in 2015, or 1.8% in calendar-adjusted terms, and then 1.8%, or 1.7% in calendar-adjusted terms, in 2016, the central bank said.
Consumer price inflation in Germany, as measured by the Harmonized Index of Consumer Prices, will only reach 1.1% this year, a downward revision from an earlier forecast of 1.3% in December, the Bundesbank said. Inflation should still pick up again to 1.5% in 2015 and will be 1.9% in 2016, it added.
THE DRAGHI SHOW!
David Tepper: My Fears Have Been ‘Alleviated’ David Tepper, the hedge-fund manager who spooked some investors last month when he said he was “nervous” about the markets, said many of his concerns have been “alleviated” thanks to the ECB’s unorthodox moves.
David Tepper, the hedge-fund manager who spooked some investors last month when he said he was “nervous” about the markets, said many of his concerns have been “alleviated” thanks to the ECB’s unorthodox moves.
Mr. Tepper, who runs $20 billion Appaloosa Management in Short Hills, N.J., struck a cautious note at an investor conference last month. He said he was worried about slow U.S. growth and the risk of a worsening global economy unless the European Central Bank took aggressive action.
Sure enough, the ECB on Thursday reduced interest rates, pushing the deposit rate into negative territory, and announced a series of other measures designed to boost bank lending and keep ultralow inflation from gaining traction.
It all appears to be good enough for Mr. Tepper.
“Bottom line is all of those things alleviated, one by one by one to a certain extent,” Mr. Tepper told CNBC. (…)
The comments mark an about-face for Mr. Tepper, who last month stressed how nervous he was about the markets. “The market is kind of dangerous right now,” he said in May at the annual SALT conference in Las Vegas. “It’s a tough market.”
Mr. Tepper at that time offered a bearish and blunt stance on Europe, describing the ECB as being “really, really behind the curve.”
“They’re waiting, waiting, waiting,” he said. “The ECB better ease in June, I’m nervous.”
The Dow dropped 167 points on May 15, the day after Mr. Tepper made his cautious comments in Las Vegas.
Investors cheer ECB rate cut Stock markets across Europe continued to rise after the central bank took introduced negative rates
Will all of this work? Count us skeptical. Mr. Draghi may stimulate more bank lending, but a lack of cheap money isn’t Europe’s main economic problem. What Europe really needs is broad and liberalizing economic reform.
Bloomberg: Mario Draghi’s Latest Flop
(…) Granted, the move to a negative interest rate on deposits is historic, as no other big central bank has done this. The cut is so small, however, that its effects are likely to be imperceptible once the drama of the initial announcement has faded. Same goes for the cut in the main policy rate — except in that case the announcement effect was minimal to begin with. The new refinancing operation is worth a try, but it’s small.
The announcement on asset-backed securities was potentially the most valuable — but, as always with the ECB, the key word is “potentially.” The idea here isn’t to embark on Fed-style QE: The European ABS market is too small for that, even if the ECB intended to hold the securities on its balance sheet, which it doesn’t. Rather, the idea is to encourage banks to lend to the euro area’s small and medium-size companies, which are still feeling a severe credit squeeze. By supporting a larger market in asset-backed securities, the ECB can make loans to such borrowers more attractive for banks, thus expanding credit.
To be sure, it’s a good idea — but it isn’t new, and a promise to “intensify preparatory work” doesn’t exactly convey a sense of urgency. At any rate, the preparations aren’t that easy: They require input from other regulators, to ensure that the securities in question would be simple and transparent, rather than becoming a cloak for reckless lending. Draghi said today that the ECB would work with “other relevant institutions” to this effect. Translation: This will take awhile.
Meanwhile, as the euro area flirts with deflation, the ECB continues to revise its inflation forecasts downward. Prices rose just 0.5 percent in the year to May — less than expected. The central bank’s new forecast shows inflation of 0.7 percent this year, 1.1 percent in 2015 and 1.4 percent in 2016. Two years from now, according to these projections, inflation will still be far below the central bank’s benchmark of 2 percent.
This isn’t good enough. The ECB’s new measures, cleverly packaged as they were, fall short of what’s required. Before these announcements were made, Europe needed stronger monetary stimulus. It still does.
FT’s Lex column: Banks and the ECB: everything it takes But how far can banks be pushed to lend?
(…) Lenders hold €120bn of excess liquidity on deposit at the ECB already, at zero rates of interest. Thursday’s 10 bps cut imposes a modest charge of €120m. The brunt will probably be borne by core banks, which have the most cash – the policy is designed to force them to lend it to peripheral peers for higher rates. This may have little impact. But it may deaden fixed-income trading – and thus earnings – as other assets go negative.
Investors in the periphery may applaud the strong-arming, should it lead to rehabilitation of banks’ weakened balance sheets. Another ECB policy announced on Thursday, an offer of €400bn in long-term funding, is aimed at the same target. It is punitive, too: banks must agree to lend more to access funds. But Italian banks pay about 1.9 per cent on average to attract depositors, Morgan Stanley says. A German bank pays 0.7 per cent. Reducing funding costs boosts equity.
That still leaves the stock of bad loans in the eurozone. That is why Italian banks pay up to borrow: they have €160bn in non-performing loans (10 per cent of all loans), and have taken more than their share of the €45bn capital being raised this year amid the Asset Quality Review. Hard to lend more here, even with cheap funds. What is the ECB to do? Buy the bad assets directly, giving banks’ balance sheets room to lend. To paraphrase the Fantastic Four’s Thing, it’s (QE) clobberin’ time.
Although Draghi came up with many rabbits from his hat, the market has focused on his reluctance to threaten a QE bazooka if inflation was to remain so low. The revised ECB inflation projections suggest that they cannot afford another inflation disappointment and that QE is a real possibility this year. Indeed, Draghi did talk about preparations to buy ABS if needed. However, it seems that the markets want to hear QE from the ECB to believe it, while Draghi’s reluctance to discuss QE that will include sovereign bonds suggest that there is no consensus within the ECB on large asset purchases yet. Moreover, many of the new measures to support credit will take time to be effective and will be bullish for European assets when they do, which in turn will be positive for the Euro.
But the last word is from Il Maestro himself: Don’t worry, “we aren’t finished here“.
Meanwhile in China:
China Regulator Pledges to Expand Credit as Economy Slows China’s banking regulator vowed to expand loans and cap borrowing costs, seeking to boost the supply of funds to the real economy as growth slows amid a clampdown on shadow financing.
Lending to small businesses, major infrastructure projects and first-home buyers will be a priority, the China Banking Regulatory Commission said in a statement today. To give banks more capacity to lend, the regulator may ease the ratio of loans to deposits by including some stable sources of deposits in the calculation, CBRC Vice Chairman Wang Zhaoxing said. (Chart from CEBM Research)
Investors Close Golden Parachutes Shareholders at four companies have voted recently to prevent executives from cashing in on certain stock bonuses if their companies are sold.
The nonbinding votes at oil refiner Valero Energy Corp. VLO +2.00% , media companyGannett Co. GCI +1.10% , commercial landlord Boston Properties Inc. BXP +1.36% andDean Foods Co. DF +2.85% come as shareholders have pressured companies to curb severance perks over the past few years, experts say. Regulators, too, have forced companies to disclose more about these payouts. (…)
Since 2011, shareholders have had a say in how much executives are paid, including golden-parachute payments. “Say on pay” votes are now required by the Securities and Exchange Commission. While they aren’t binding, boards are under pressure from regulators and shareholder-advisory firms to consider investor views when crafting executive-pay packages. (…)
The proposals at Valero, Gannett, Boston Properties and Dean Foods, submitted by organized-labor groups, would prevent unvested stock awards tied to future performance from automatically vesting in a merger. They each received a majority of votes cast but aren’t binding on the companies.