Retail and food sales rose a seasonally adjusted 0.3% from the prior month, the Commerce Department said Thursday. That largely reflected a 1.4% jump in auto sales. Sales of other goods rose just 0.1% from April.
March and April saw stronger spending as the economy rebounded from a harsh winter. Retail sales—not adjusted for inflation—over the past three months were up 4.3% from a year earlier, on par with the 4.2% rise in sales during 2013 but lagging behind the 5.1% rise in 2012. (…)
May retail sales were lower than economists had expected, but April sales were revised up to a 0.5% gain from the initial estimate of 0.1%.
Don’t be mislead by headlines, sales are strong: +1.5%, +0.5% and +0.3% in the last 3 months. That’s +9.5% annualized. “Control” sales (ex autos-related and building supplies), last 3 months sales are up 4.9% annualized. Markit agrees:
Retailers are on course for their best calendar quarter in terms of sales for over three years, providing further evidence that the US economy is warming up from the cold spell earlier in the year. So far in the second quarter, retail sales are up 2.0% on the first quarter, which would be the strongest quarterly gain since the first quarter of 2011.
The increase follows a modest 0.2% rise over the first quarter as a whole, a weakening that had been widely linked to shoppers being deterred by extreme winter weather across many states.
Weekly chain store sales continue to show Y/Y growth rates in the 2.7% range, up from the 1.5% range during the first 4 months of the year:
WSJ Survey: Economists Optimistic Stage Is Set for Pickup in Wage Growth Economists are increasingly looking for wage growth to pick up in coming months, a long-awaited development that would put more money in the pockets of consumers and could spur accelerated growth in the broader economy.
U.S. Producer Prices Fall 0.2% in May A gauge of U.S. inflation ticked lower last month, a sign that price pressures remain tame amid subdued economic growth.
May producer prices were up 2% from a year ago.
May’s report showed inflationary pressures slackening after building in the prior two months. Producer prices in April rose 0.6% from the prior month and 2.1% from a year earlier. April’s annual pace of increase was the fastest in two years.
Weakening inflationary pressures were broad based in May, though the price declines were led by food and energy prices. Excluding food and energy, May producer prices were down 0.1% on the month.
U.S. Import Prices Up Slightly on Oil Costs U.S. import prices posted the first year-over-year gain in nearly a year last month, a sign of a slight increase in inflation pressures across the U.S. economy.
U.S. import prices increased 0.1% from the prior month, the Labor Department said Thursday. From a year earlier, prices were up 0.4%—the first annual gain since last July.
Nonpetroleum import prices declined 0.1% on the month. (…)
The small gain in consumer prices coincides with costs for products imported from China increasing 0.3% in May. That was the largest monthly increase since October 2011. Still, from a year earlier prices for Chinese goods are up only 0.5%. (…)
Non-petroleum import prices are down 0.1% in the last 3 months.
Container Exports Weak
Ocean container exports fell 1.5 percent in May after falling 8.7 percent from March to April. Exports to China ticked up 1.4 percent this month after four months of decline, but are still 31.5 percent lower than just five months ago. Domestic demand in China has been slower than predicted. Additionally, exports to the Asian
region as a whole, including Taiwan, South Korea, Japan and Singapore, experienced double‐digit declines. Exports dropped to 16 of our top 25 trading partners in May. Overall, ocean container exports have fallen 7.3 percent in 2014.
The International Longshore and Warehouse Union (ILWU) is engaged in contentious labor talks with the Pacific Maritime Association as their current contract expires at the end of June 2014. It is unlikely that these issues will be settled before the contract expires, so many shippers are accelerating orders in anticipation of service disruptions. In fact, carriers serving West Coast ports have already announced a congestion surcharges between $800 to $1,000 in the event of a work stoppage or slowdown. The last ILWU contract dispute, in 2012, resulted in a 10‐day work shutdown before the President invoked the emergency provisions of the Taft‐Hartley Act to force everyone back to work. Expect to see an uptick in containers moved in June and even early July as workers are likely to continue to work without a contract if talks are still progressing. Canadian ports are the likely benefactors in the event of a strike U.S. (Cass)
Mixed Picture for China Economy China’s economy is struggling to find equilibrium, with government stimulus measures gaining traction last month while the vital housing market continues its swoon.
(…) Value-added industrial production, which measures an economy’s manufacturing, mining, utilities and other output, rose 8.8% in May from a year earlier, compared with the 8.7% year-over-year increase in April, according to the National Bureau of Statistics. Industrial production also increased 0.71% in May from April, bureau data showed. In April, it climbed 0.82% from the preceding month. (…)
Retail sales posted a 12.5% rise from the year-earlier period, slightly better than an 11.9% year-over-year increase in April, according to the bureau.
Housing sales in the five months ended May fell 10.2% year-over-year to 1.97 trillion yuan ($317.3 billion). This compares with sales of 1.53 trillion yuan in the four months ended April–down 9.9% from the same period of 2013. The statistics bureau doesn’t issue data for individual months.(…)
Property investment in the first five months of this year rose 14.7% to 3.07 trillion yuan compared with 16.4% growth in the first four months, while construction starts in the January-May period measured by project size fell 18.6% to 599.1 million square meters. This compared with a decline of 24.5% to 311.8 million square meters in the first four months. (…)
On other fronts, fixed-asset investment in nonrural areas of China rose 17.2% in the January-May period compared with the same period a year earlier. The rise in the closely watched indicator of construction activity was a tad slower than the 17.3% increase recorded in the January-April period.
More from the WSJ:
The labor market, which is difficult to gauge because of defects in official government measures, seems to be holding up, if not robust. A quarterly survey of over 4,000 employers by Manpower Group found the hiring outlook eroded slightly, but remains above six-month ago levels. Zhaopin.com, an online recruitment firm, said job listings in May grew 41% from a year earlier.
The leveling off is thanks to a series of government measures. A slight loosening of the lending taps saw credit growth, known as total social financing, rebound in May. There was also accelerated government spending, which grew 25% last month over last year’s level, after rising just 10% through the first four months of the year. That fed into increased spending on infrastructure projects. A rebound in exports, supported by the yuan’s weakness this year also might be at play.
The crucial property market continues to suffer, though slightly less than before. New-home sales declined 11% in May compared with a 15% decline in April. Property starts dropped 7.9%, less dire than April’s 15% drop and March’s 22% drop. That said, unsold inventory of apartments rose again last month, and is now a quarter higher than a year ago. Prices have only started to drop in many cities.
Shh! As the country’s property market starts to deflate, China’s cities may be relaxing their property curbs. But it doesn’t mean they want too many people to know about it.
(…) Larger Chinese cities like Shenyang are relaxing their property policies, but want to do so quietly. Officials are loath to publicize their efforts to ease curbs for fear it would seem a tacit acknowledgement that the local economy has hit the rocks.
This week, Shenyang—an economic hub and the capital of north China’s Liaoning province—grabbed the spotlight in local news and online, after property consultants and agents said that the city had revoked restrictions on multiple home purchases. (…)
(…) As Chinese authorities tightened credit at home in the past year, local firms instead looked abroad for financing. Asian-Pacific banks alone had $1.2 trillion in loan exposure to China at the end of 2013, up two-and-a-half times from 2010, according to Fitch Ratings.
A chunk of the borrowing has been by Chinese firms taking out short-term overseas loans backed by commodities, part of an effort to lock in gains by borrowing offshore at lower rates, and investing the money at higher rates on the mainland.
This lending has complicated Chinese policy makers’ attempts to slow rapid credit growth in the nation’s so-called shadow banking sector, a network of lenders outside of formal channels. Because many of the loans are denominated in foreign currencies, the use of offshore funds could also increase borrowing costs for Chinese companies if the yuan depreciates further this year. (…)
Foreign banks have stepped up commodity-backed lending to China in recent years, a profitable business that now is looking increasingly shaky. These banks, including Standard Chartered STAN.LN -1.69% PLC and Citigroup Inc., C -1.11% have made loans worth hundreds of millions of dollars backed by collateral held in Qingdao port, according to people familiar with the matter. A portion of these loans were made to entities linked to Decheng Mining Ltd., a Qingdao trading company, the people said. The lenders are trying to determine whether Decheng Mining used the same collateral for multiple loans. (…)
Concerned by developments—and the possibility of widespread multiple pledging of collateral—foreign banks have begun to withhold new letters of credit used in commodity-backed lending, Western bankers and Chinese metal traders say. (…)
(…) it is clear that the boom in China’s “shadow banking” has raised much concern but, as HSBC reported recently, the size of this sector is still small relative to the size of the Chinese economy. Shadow banking in China is just 25.8% of GDP as compared to 165.9% in the United States, 183.7% in the Euro area and even 354.4% in the UK. Therefore, we see no reason to panic and believe that the current challenges need to be put into perspective. China’ economic conditions are certainly not ideal but they look less fragile than in the past and the risks were much higher in previous crisis than now. China is now much more able to respond to shocks: the fiscal policy could be flexible if needed, since public finances look healthy. The average budget deficit has been just 1.2% of GDP since 1980 and government revenues grew 18.6% per year between 1994 and 2013 – faster than the 15.1% nominal GDP growth. Foreign reserves have now reached almost $4.0 trillion, and even monetary policy could be loosened if necessary as the large commercial banks reserve requirement ratio stands at a 20% high level.
The government’s bottom line is employment, which for now remains strong. We know that according to current calculation, each percentage point of real GDP growth creates 1.6mn jobs. A 7% GDP growth rate remains the minimum growth rate to absorb the 7 million new graduates arriving to the labor market every year plus other new job seekers and maintain stable unemployment. Urban unemployment remains very low at around 4.3%. So this looks to be the floor under which we can expect that the growth rate of the economy for now. This also explains why the government intends to give a more decisive role to the private sector since it is estimated to generate 90% of new jobs created in the country and account for 80% of urban employment. We expect more measures in favor of the expansion of the private sector to be announced in coming months. As they will contribute to support the economy, they should be welcome by investors whose sentiment
currently looks disconnected from the reality.
In the U.K.:
Carney Sees Housing Debt Risk as Rate Increases Near Mark Carney said rising U.K. mortgage debt may threaten Britain’s recovery as he signaled interest rates might start to rise earlier than anticipated.
Although valuations are starting to look stretched following an extended period of strong returns, we continue to favour equities as the most attractive asset class for the following reasons:
- Abundant liquidity and repressed interest rates in our “muddling through” and “economic renaissance” scenarios continue to support the markets.
- Improved earnings prospects in our “economic renaissance” scenario should also boost equity prices despite the prospect of higher interest rates.
- This pattern applies particularly to the US market. It is the most overvalued region but equity prices could continue to rise if our “economic renaissance” scenario becomes increasingly likely.
Equity bulls rest case on low inflation Risks to watch for are higher oil prices and lower euro
(…) From the perspective of bulls, all the ingredients for an extended rally over the summer are blending nicely.
The improving tone of the economy, led by the jobs market, is behind much of the recent optimism for equities, with investors more confident that growth during the second half of the year will rise north of 3 per cent. Even this week’s disappointing retail sales report for May was mitigated by an upward revision for the prior month.
Helping investors look on the bright side of each data release is their faith that current valuations for the S&P look appealing once the low level of inflation is taken into account. With earnings growth still forecast to rise sharply in the second half of the year, valuations are seen having the capacity to run higher, providing a tailwind for the market.
Scott Minerd, global chief investment officer at Guggenheim Partners, says past periods of inflation running below 2 per cent have been accompanied by the average price to earnings ratio being around 19.6 times, versus the current ratio of 17 times. (…)
Sounds like somebody has heard of the Rule of 20…
Benign Fed policy entails keeping market volatility anchored near its present low level, while a current market mantra among bulls states how, in past interest rate cycles, the S&P has rallied some 20 per cent during the year before rate hikes finally begin.
The current supportive tone of central bank policy in the US, and particularly in the eurozone, matters greatly for equity sentiment. Another talking point at the moment is how bull markets usually end at the hand of rate hikes or, in the words of Sir John Templeton, “mature on optimism and die on euphoria”. (…)
The obvious question is what are the bulls missing? While the usual suspects for a hefty market correction appear dormant, what other forces could spark a bumpy summer?
For starters, rising oil prices and a sharply weaker euro could jolt equities, argues Nicholas Colas at ConvergEx Group. (…)
A dramatically weaker euro in the region of $1.20 will reduce unhedged foreign earnings for a host of large-cap S&P 500 companies. (…)
As shown in the chart below, oil has had trouble getting above the $105 level so far this year. $105 has finally broken today, though, as the situation in Iraq has traders bidding the commodity up.
Looking at oil from a longer-term perspective shows that it has a few more resistance hurdles to clear before a major breakout occurs. That being said, it has been making lower highs and higher lows for the past few years, which eventually leads to a big move in one direction or another when the channel breaks. If it breaks to the upside, watch out.