Today: Consumers earn more, save more. BOJ shock and awe. Weaker China. Weaker Europe.
U.S. consumer spending weakest in eight months, savings jump
The Commerce Department said on Friday consumer spending declined 0.2 percent last month as demand for goods tumbled and services barely rose. Spending had increased by an unrevised 0.5 percent in August.
Income rose 0.2 percent in September after increasing 0.3 percent in the prior month. With income growth outpacing consumption, savings jumped to $732.2 billion, the highest level since December 2012, from $702 billion in August. That lifted the saving rate to 5.6 percent from 5.4 percent in August.
Weak consumption kept a lid on inflation last month. A price index for consumer spending edged up 0.1 percent after slipping 0.1 percent in August. In the 12 months through September, the personal consumption expenditures (PCE) price index rose 1.4 percent for a second straight month. Excluding food and energy, prices rose 0.1 percent for a third consecutive month. The so-called core PCE price index increased 1.5 percent in the 12 months through September.
U.S. third-quarter wage gains largest since 2008
The Employment Cost Index, the broadest measure of labor costs, increased 0.7 percent after advancing by the same margin in the second quarter, the Labor Department said on Friday. Economists polled by Reuters had forecast the employment cost index increasing 0.5 percent in the July-September period.
Wages and salaries, which account for 70 percent of employment costs, rose 0.8 percent in the third quarter, the largest increase since the second quarter of 2008. They had gained 0.6 percent in the second quarter.
In the 12 months through September, labor costs increased 2.2 percent, the largest increase since the second quarter of 2011. They had increased 2.0 percent in the 12 months through June. Wages and salaries were up 2.1 percent in the 12 months through September, the biggest rise since the first quarter of 2009, after increasing 1.8 percent in the 12 months through June.
Benefit costs increased 0.6 percent in the July-September period. That followed a 1.0 percent gain in the second quarter. They increased 2.4 percent in the 12 months through September after rising 2.5 percent in the 12 months through June.
Wal-Mart to expand discounts as retail price war heats up Wal-Mart Stores Inc said it will expand its offering of discounted products during the holiday season and may broaden a price-matching scheme to include online rivals, in the latest sign of an escalating price war among big U.S. retailers.
Wal-Mart said it was bracing for competition to be as tough or tougher than in 2013, when heavy discounting depressed earnings across the industry. Wal-Mart’s profits dropped in the holiday quarter last year and it has posted six straight quarters of flat or declining same-store sales.
“It is starting to heat up right now, and I would expect it to be at least as competitive as last year,” Steve Bratspies, executive vice president of general merchandise for Wal-Mart’s U.S. operations, said on a call with media on Thursday, referring to competition during the holiday season.
Wal-Mart said it plans to have 20,000 “rollbacks”, or a product discounted for at least 90 days, on offer starting on Saturday. While it did not disclose a comparable number, it said the program was bigger and included a wider line-up of products, with a focus on toys and electronics, than last year.
Other retailers have been stepping up promotions, with a focus on attracting more customers online.
Target Corp said earlier this month that it would drop shipping fees for online purchases from Oct. 22 to Dec. 22.
Wal-Mart said it would provide free shipping for online orders of a selected list of 100 gift items. It normally waves shipping for purchases above $50.
Wal-Mart is also considering expanding a price-matching program for local bricks-and-mortar rivals to include online comparisons, Bratspies said, although he stressed a final decision on the strategy had not been made. It would mean Wal-Mart matching prices with Amazon.com in addition to local retailers and grocery stores. (…)
Wal-Mart said it planned to hire 60,000 additional workers for the holidays, up 10 percent from last year, and would aim to have all of its cash registers open during peak hours.
U.S. Extends Solid Growth, Despite Global Tumult Economy shows sustained growth fueled by government spending and a narrower trade deficit despite mounting concerns about overseas economies.
Gross domestic product, the broadest measure of goods and services produced across the economy, expanded at a 3.5% annual rate from July through September, the Commerce Department said Thursday.
The quarter showed broad-based improvement in the U.S. economy. Business investment grew steadily. Exports showed resilience against a backdrop of slowing global growth. Government outlays, which had dragged on growth for four years, enjoyed a large boost from military spending alongside a brightening budget picture in cities and states. (…)
On a year-over-year basis, inflation-adjusted GDP rose 2.3%, a pace that has remained remarkably constant over the past three years despite ups and downs in the quarterly data. )…)
The report showed few signs of a breakout for consumer spending, which was up 2.3% from a year earlier, little-changed from the pace of the past two years. (…)
The price index for personal consumption expenditures—the Federal Reserve’s preferred measure for inflation—rose at a 1.2% annual rate in the third quarter, down from the 2.3% annualized increase during the second quarter and below the Fed’s 2% inflation target. (…)
Inventories fell in the third quarter, subtracting from growth. But real final sales, a measurement of GDP that excludes changes to inventories, expanded at a 4.2% pace, the largest such gain since 2006. (…) (Chart from Doug Short)
BOJ Unexpectedly Eases Policy The Bank of Japan on Friday unexpectedly announced additional stimulus measures, bolstering its asset purchases for the first time in over a year and a half, as its 2% inflation target looks increasingly untenable.
(…) Moving in the opposite direction from the Federal Reserve, the BOJ policy could have broad implications for markets, such as by benefiting Japanese exporters by knocking the yen further down against the dollar.
While the BOJ maintained its view that the economy is recovering and is expected to do so, it showed concerns that the recent weakness in the economy may endanger its efforts to overcome deflation.
“If the current downward pressure on prices remains, albeit in the short term, there is a risk that conversion of deflationary mind-set, which has so far been progressing steadily, might be delayed,” the policy board said in a statement.
The announcement took markets by surprise, and was in line with Gov. Haruhiko Kuroda ’s penchant for getting the maximum bang for his policy buck by shocking markets. (…)
The news sent the benchmark Nikkei Stock Average to a seven-year intraday high in the afternoon session and the dollar also climbed above the ¥110 mark—hitting levels it hasn’t seen in over six years.
Specifically, the BOJ said it would expand its annual asset purchases—its main tool to spur higher inflation—to ¥80 trillion from the previous target range of ¥60 trillion to ¥70 trillion. The central bank aims to achieve the new target mostly by buying more Japanese government bonds, cementing its status as the single largest investor in JGBs. The BOJ also said it would triple the pace of its purchases of stock and property funds.
The decision by the central bank’s nine policy board members was split with five members in favor and four members opposed. It was the first split vote on policy since Mr. Kuroda took helm of the central bank in March last year.
(…) A big reason, Mr. Kuroda said repeatedly during his press conference, has been the sharp drop in oil prices While lower costs for a widely used commodity are generally good for the economy, they were undercutting his goal, not just of raising prices, but of breaking the “deflationary mindset” that he often says ails Japan, creating a vicious cycle of price, wage, spending and investment cuts.
Friday’s fresh action may well help further break that psychology, and lift the credibility of Mr. Kuroda’s vow to do whatever is necessary to end deflation. But the divided vote — a stark contrast with the unanimous 9-0 decision he won for his initial radical easing — raises questions about his ability to go any further.
Some BOJ-watchers are also suggesting that Mr. Kuroda’s forecasts — which, until Friday, had stayed relentlessly upbeat, even while private forecasters were turning pessimistic — may have been affected by his desire to project optimism, and to maximize Friday’s surprise. Three days earlier, Mr. Kuroda gave parliament a more bullish inflation forecast.
“We find it truly difficult to assess how the BOJ will assess the economy and prices going forward,” Barclays economists wrote following the move. If economists, investors, executives and consumers stop finding Mr. Kuroda’s statements plausible, that could make it harder for him to change the mindset.
- Yen Declines to Six-Year Low on BOJ Monetary Easing; Ruble Drops
- Brazil’s Real Drops on Deepest Budget Deficit Since at Least ’97
- Canadian Dollar Weakens as Economy Shrinks First Time in 2014
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Gold Tumbles With Silver to Lowest Since 2010 as Dollar Advances
Russia Raises Interest Rates The Bank of Russia raised interest rates by 1.5 percentage points, the largest rise since March, highlighting the deepening economic cost of sanctions and falling oil prices.
The Bank of Russia on Friday raised interest rates by 1.5 percentage points, the largest rise since March, highlighting the deepening economic cost of sanctions and falling oil prices.
(…) Friday’s move wasn’t enough to provide support for the ruble, which after a short-lived 1% rally against the U.S. dollar in response to the rate rise, eased back to 42.18, roughly in line with where it was trading before the announcement.
The central bank, which raised rates for the fourth time so far this year, said it expected annual inflation to remain above 8% through the first quarter of 2015, and for economic growth to stay close to zero in the fourth quarter of this year and in the beginning of the next year. Initially the central bank was targeting 2014 inflation at no higher than 6.5%.
The central bank raised its key rate to 9.5% from 8%. The deposit rate was increased to 8.5% from 7%, while a one-week repo rate, which serves as a ceiling for money market rates, was moved to 10.5% from 9%. (…)
China’s GDP Growth: Less Than Meets the Eye?
Capital Economics, a research group in London, maintains its own index of economic activity in China, based on five indicators of industrial and service sector activity. Its China Activity Proxy registered third-quarter growth at just 5.7%. The measure historically has matched up fairly well with official GDP results, but it has been consistently weaker than the government numbers for the past two-and-a-half year years.
“The main factor pulling the CAP down over the past couple of years has been the weakness in the property sector, “said Capital Economics analyst Mark Williams. “The official GDP series has been more stable, which implies either that the National Bureau of Statistics believes that the property slowdown is not having a major impact on the overall GDP numbers, or that there is offsetting strength elsewhere.” He doesn’t find evidence for either possibility.
An important part of GDP is export growth—and that too was surprisingly strong in the third quarter, especially September. (…)
There has long been suspicion about the accuracy of Chinese stats, especially GDP numbers. The latter move up or down in very modest increments, which is counter to other economic gauges as well as the volatility found in GDP measures in most other countries. The statistics bureau also doesn’t explain how it adjusts GDP numbers for the effects of inflation – and the inflation-adjusted numbers are the one that draw the headlines. (…)
Falling Bank Deposits Add to China Economy Warning Sign
Chinese bank deposits dropped following a crackdown on lenders manipulating their numbers and “illicit” means of attracting money, threatening to weigh on credit growth and hinder efforts to reignite the economy.
Four of the five biggest banks, led by Industrial & Commercial Bank of China Ltd. (601398), posted a drop in deposits as they reported third-quarter earnings this week. Central bank data showed it was the first quarterly decline for the nation’s banking industry since at least 1999.
The lower deposit levels are likely to curtail credit as banks are prohibited from lending more than 75 percent of their quarter-end holdings, while a sustained drop could hamper government efforts to rejuvenate an economy forecast to expand this year at the weakest pace since 1990. The lenders may also come under pressure to tap more expensive financing. (…)
ICBC, the world’s largest lender by assets, posted the biggest decline in funds during the third quarter, with its deposits dropping by 388 billion yuan ($63 billion) from June to 15.3 trillion yuan. Bank of China Ltd. (3988), Agricultural Bank of China Ltd., and Bank of Communications Co. also reported declines. Only China Construction Bank Corp., the nation’s second-largest, had an increase.
Industrywide data show it’s unusual for yuan-denominated deposits to decline on a quarterly basis. A 950 billion yuan fall in the third quarter to 112.7 trillion yuan was the first since at least 1999, according to data from the People’s Bank of China. (…)
The government is trying to support lending and limit funding costs for companies, with steps such as injecting money into some banks while avoiding cutting benchmark interest rates. (…)
Eurozone Inflation Picks Up in October
Figures released by the European Union’s statistics agency on Friday showed how entrenched the problem of low inflation has become. Eurostat said consumer prices were just 0.4% higher than in October 2013, as the inflation rate rose from 0.3% in September.
However, the core rate of inflation fell to 0.7% from 0.8%, an indication that the weakness in prices that had been concentrated in energy and food has spread to other goods and services. Indeed, prices of manufactured goods fell by 0.1% from October 2013.
German, French Retail Sales Slump
(…) German retail sales in September suffered their biggest monthly slump since May 2007, falling 3.2% in inflation-adjusted terms, compared with August, the Federal Statistics Office said Friday.
That was a significantly bigger drop than the 0.8% decline economists had forecast in a Wall Street Journal survey. Also, retail sales growth for August was reduced to 1.5% from a first estimate of 2.5%. Retail sales are prone to large revisions.
On an annual basis, retail sales were up 2.3%, the statistics office said. In the first nine months of the year retail sales increased 1.3% in real terms compared with a year earlier. The annual figures showed a 4.2% rise in food, beverages and tobacco sales. Elsewhere, however, sales in textiles, clothing, shoes and leather goods plunged 7.3%, Destatis said.
“Clothes sales were the key culprit,” said Christian Schulz, senior economist at Berenberg, adding that the weakness “was probably caused by mild weather in the beginning of autumn, which discouraged households from splashing out on autumn and winter collections.”
With these figures, the third-quarter average level of retail sales was down 0.4% versus the previous quarter, said Barclays ’ economist Thomas Harjes in a research note. He added that lower retail figures add “considerable downside risk” to Barclays’ current forecast for 0.3% quarterly German growth in the third and fourth quarters.
In France, consumer spending fell a sharper-than-expected 0.8% in September from August, marking a weak end to the third quarter, French statistics agency Insee said Friday. As in Germany, French households spent less on clothing and leather goods, which showed the sharpest drop in spending since May 2012.
On the year, consumer spending in September was up 0.2%. (…)
Russia and Ukraine reach gas deal Agreement forestalls potential winter energy crisis for Europe
(…) after 30 hours of negotiations in Brussels, Moscow signed a deal with Kiev to guarantee supplies until March. (…)
According to the terms of the accord, Kiev will make prepayments of $1.5bn for 4bn cubic metres over the winter. It will also pay off $3.1bn of debt owed to Gazprom, Russia’s gas export monopoly. (…)
Much of the negotiation had focused on the price that Kiev would pay. Ultimately, Ukraine agreed to pay $378 per thousand cubic metres until the end of the year, then $365 until March. Russia dropped its demanded price from an original $485. (…)
Any disruption of Russian gas into Ukraine this winter would have raised the prospect of supplies failing to reach the EU, as happened in 2006 and 2009. About 30 per cent of Europe’s gas comes from Gazprom, half of it flowing through Ukraine. (…)
Oil Market Deafened by Saudi Silence Sometimes silence can be deafening. In a month where oil prices have plunged below $90 a barrel, perhaps the most glaring surprise of all has been the lack of a Saudi Arabian response.
(…) Significantly, Saudi Arabia’s de facto spokesman, the normally talkative oil minister Ali al-Naimi, has been keeping an unusually low profile.
As The Wall Street Journal’s Summer Said, Benoît Faucon and Sarah Kent report, Mr. al-Naimi’s absence is a symptom of the unusually high level of dissent within the secretive kingdom that has left it uncertain over how to respond to oil’s downturn.
According to the WSJ report, some in Saudi Arabia’s top ranks think the 25% slide in prices since June is a revenue decline it can’t afford. Others believe guarding market share is more important and that cutting production now risks putting the country in a position that will be difficult to escape further down the line.
Some analysts say that Saudi Arabia is bowing to the reality that U.S. shale oil production is now the most important factor in global oil markets.
“Cutting production would accommodate the further expansion of U.S. shale, as well as reduce Saudi profits,” Goldman Sachs analysts said in a note earlier this week. “OPEC will no longer act as the first-mover swing producer…U.S. shale oil output will be called upon to fill this role.”
Hmmm…how can anybody really think that private U.S. producers will willingly adjust their production to keep prices within a certain politically acceptable range. Private producers simply keep producing as long as it is economical to do so.
Goldman: Global Slowdown to Take Bite Out of S&P 500 Earnings The global growth slowdown is giving the bulls at Goldman Sachs pause.
The bank’s team of equity strategists say they now expect earnings of $122 per share for the S&P 500 next year, down from $125 previously. For 2016, they cut their outlook to $131 per share from $132.
The forecast is below consensus estimates. Wall Street broadly expects S&P earnings of $130.05 per share next year, according to estimates by company-level analysts compiled by FactSet. The figure comes in at $145.53 per share for 2016.
Foreign sales accounted for 33% of S&P 500 revenue last year, they say. They expect global GDP to grow 3.3% in 2015 and 3.8% in 2016.
The bank says it expects the S&P 500 to finish the year at 2050. Recently, the broad-market index gained 0.4% to 1989.
The Goldman team says its new forecasts incorporate the stronger dollar and falling oil prices. While a stronger dollar tends to curb corporate revenues of multinational companies that do business in countries with weaker currencies, the impact is dampened by the recent slide in crude, which tends to boost consumer spending and confidence, they write.
“A stronger dollar combined with falling oil prices have less impact on earnings than many investors expect, as they offset each other in their effect on GDP growth,” they write.
The bank expects oil prices to decline through 2015 but to stabilize in 2016. Brent crude should average $84 a barrel next year and $90 the following.
(…) “There has been a substantial improvement in the outlook for the labor market since the inception of [the] current asset-purchase program,” the Fed said in its policy statement, released Wednesday after a two-day policy meeting. “Moreover, the [Fed] continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.” (…)
ECB’s Lending Survey Is Cause for Cautious Optimism
Now that the EU bank stress test is past, EU banks may be more willing to let the denominator (i.e. loans) grow. Bankers are not completely stupid. Why would they risk failing the 2014 stress test by allowing loans to rise just before the test? The big question now is not whether loans rise but rather how fast.
Wait, wait: 
“If you didn’t overpay for acreage, you will get by just fine,” said Ken Morgan, director of the TCU Energy Institute at Texas Christian University in Fort Worth. “But if you paid an arm and a leg to get in the game, banking on $95 oil, there could be trouble and significant belt-tightening ahead.” 
Lower commodity prices always result in supply curbs. It is always the marginal producer who is forced to cut as margins and financing quickly disappear.
Poloz says Canada’s economic growth at risk if low oil price persists
Nato jets intercept Russian aircraft