Q2 BOUNCE WATCH
Manufacturing activity remained soft this month, with several components flattening. The composite index for manufacturing moved to 1 following April’s reading of -3, while the shipments index leveled off to -1 from -6. In addition, the index for new orders gained eight points, reaching a nearly flat reading of 2. Manufacturing hiring continued to grow at a modest pace this month. The May indicator slipped four points to a reading of 3.
Manufacturing employment continued to grow at a modest pace in May. The index ended the survey period at 3 compared to last month’s reading of 7. The average workweek increased; the index moved up two points to end at 6. Additionally, the index for average wages advanced 11 points to finish at a reading of 20.
Manufacturers planned to increase hiring in the months ahead, with the expected employment index edging up three points to a reading of 18. The index for expected average wages remained strong, adding five points to finish at 33, while the expected average workweek gauge remained at a reading of 12.
Prices of finished goods rose at a 0.38 annualized rate, slightly below April’s 0.51 percent pace.
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Weak Dallas Fed Index Implies ISM PMI Disappointment
The slump in the Dallas Fed’s manufacturing survey to a six-year low bodes ill for the next ISM manufacturing Purchasing Manager’s Index release on June 1. The Dallas Fed’s General Business Activity Index fell to minus 20.8 in May from minus 16.0 during April, the lowest since it hit minus 21.9 in June 2009. Based on the correlation between the Dallas data and the PMI, we could see a sub-50 posting in the May ISM release, versus a consensus forecast of 51.9.
U.S. Banks Boost Business Lending Commercial and industrial loans are on pace to overtake residential mortgages for the first time since the 1980s.
Commercial and industrial loans rose 8.5% in the first quarter from the year-ago period and accounted for about 21% of outstanding loan balances at U.S. banks, the highest level in 13 years, according to Federal Deposit Insurance Corp. data released Wednesday.
If they continue increasing at this pace over the next year, business loans would overtake residential mortgages at banks for the first time since 1988, the data showed. In the first quarter, residential mortgage loans outstanding at U.S. banks increased 1.7%. (…)
In 2006 at the height of the housing boom, mortgages accounted for about 31% of industrywide loans, or nearly double the holdings of commercial loans, according to FDIC data. By the first quarter of 2015, mortgages fell to about 22% of overall loans, while the share of commercial loans had risen by roughly five percentage points, to 21%. (…)
Banks held $8.362 trillion of loans on their balance sheets at the end of March, a 5.4% increase from the same period a year ago, the FDIC said. That rise was due in large part to a continued boom in outstanding commercial and industrial loans, which increased to a record $1.749 trillion.
By contrast, outstanding residential mortgages rose to $1.855 trillion. Loans tied to real-estate construction and development shot up 15%, while home-equity loans, a product more popular with consumers, fell 3.6% from the first quarter of 2014. (…)
VOLATILITY IS BACK!
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Dollar Hits 12-Year High Against Yen The U.S. dollar surged to its strongest level against the Japanese yen in more than 12 years Thursday, reflecting fresh expectations of higher U.S. interest rates this year.
Following on overnight momentum, the greenback hit ¥124.30 midday in Tokyo, its highest since Dec. 5, 2002. The dollar started the week around the midpoint between ¥121 and ¥122, and its rise since then puts the yen on track for its biggest weekly loss in since late 2014. (…)
But data over the past month showing renewed potential for a U.S. recovery, along with remarks by Federal Reserve Chairwoman Janet Yellen, have persuaded investors that the Fed could well raise rates long before other major central banks. This renewed focus on the dollar’s upside potential helped lift it to unexpected levels against the yen, breaching thresholds that sent investors chasing the move. (…)
Here’s one explanation if you read beyond the headline:
Retail sales in April rose 5.0 percent from a year earlier, trade ministry data showed on Thursday, slightly below a median market forecast for a 5.4 percent increase. It followed a 9.7 percent drop in March.
The year-on-year numbers have been distorted by a surge in consumption leading up to last April’s sales tax hike and a subsequent downturn after the higher levy nudged the economy into mild recession last year.
On a seasonally-adjusted month-on-month basis, retail sales rose just 0.4 percent in April after sliding 1.8 percent in March, underscoring the fragile nature of the recovery. (…)
Rebound? 
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Shanghai Stocks Fall to Earth Chinese stocks were rocked by a sharp selloff late Thursday afternoon that left Shanghai 6.5% lower, a sudden reversal of fortune for one of the world’s top-performing markets this year.
This was the market’s biggest daily drop since Jan. 19, when it fell 7.7%.
A trio of factors combined to send investors racing for the exits: China’s sovereign-wealth fund said earlier this week it had sold stakes in two state-owned banks; brokerages were tightening restrictions on giving out credit to individual stock investors; and the central bank soaked up cash from commercial banks, a sign that the government is trying to contain excess liquidity in the financial market. (…)
Stocks in Shenzhen, the smaller of China’s two mainland exchanges where many tech startups trade, finished down 5.5%. (…)
Europe has been at the center of the global bond-market turmoil that began in mid-April. About €344 billion ($374 billion) was wiped off the value of eurozone government bonds when prices fell abruptly after rising for several months to record levels, according to Bloomberg’s eurozone sovereign bond index, which tracks the value of the bonds outstanding in the currency bloc. (…)
Investors say it is not clear exactly what triggered the selloff in government bonds. (…)
“We have lost everything, in absolute terms. But in relative terms, it’s been positive.”
But the absolute losses have proved too much for some investors, who traditionally see government bonds as the steadier part of their portfolios, providing a counterweight to riskier assets such as stocks. More than €2 billion was pulled from eurozone bond funds over the past six weeks, the first significant period of outflows after a year of broadly stable assets, according to fund-data provider EPFR Global.
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Star managers battered by rocky ride in yields, currencies Some of the biggest names in the investment world have been whipsawed by the recent rise in global yields and the strength in the euro against the dollar, with investors bracing for more sharp moves later this year stemming from central bank actions.
Yet, even with this liquidity
Banks aren’t likely to see earnings get a lift from rising trading tides this spring.
Speaking separately at a Bernstein Research conference Wednesday, Brian Moynihan and James Dimon, chiefs of Bank of America Corp. and J.P. Morgan Chase & Co., respectively, indicated that trading revenues for the second quarter were likely to come in near or slightly below where they did a year ago.
“I’d say flattish to down a little bit,” Mr. Moynihan said. He added that if trading revenue doesn’t improve down the road, further cuts in this business may be needed.
Such remarks seem to confirm earlier indications that the surge in trading that boosted bank earnings in the first quarter was an anomaly rather than a shift in the tides.
There is, of course, a good amount of seasonality to trading revenue, with the first quarter usually the strongest. Last year, trading revenues at bank holding companies were 13.1% lower in the second quarter compared with the first, according to the Office of the Comptroller of the Currency.
Must mean they lost money on bonds.
OIL
A sudden surge in demand for supertankers drove benchmark charter rates 57 percent higher in the two weeks through May 20. OPEC will have almost half a billion barrels of oil in transit to buyers at the start of June, the most this year, while analysts say about 20 million barrels is being stored on ships in another indication the glut has yet to dissipate.
The Organization of Petroleum Exporting Countries is pumping the most oil in more than two years, determined to defend market share rather than prices. A record cut to the number of active U.S. drilling rigs and billions of dollars of spending reductions by companies since last year’s price plunge has yet to translate into a slump in barrels produced. The world is pumping about 1.9 million barrels a day more crude than it needs, according to Goldman Sachs Group Inc.
“Supply of oil continues to build,” said Paddy Rodgers, the chief executive officer of Antwerp, Belgium-based Euronav NV, whose supertanker fleet can haul 56 million barrels of crude. “All of this oil needs to go somewhere,” he wrote in an e-mail May 19.
Daily rates for supertankers on the industry’s benchmark route reached $83,412 on May 20, from $52,987 on May 6, according to the Baltic Exchange in London. While rates since retreated to $65,784, they’re still the highest for this time of year since at least 2008.
OPEC’s 12 members will have 485 million barrels of oil in transit to buyers in the four weeks to June 6, the most since November, Roy Mason, founder of Oil Movements, a Halifax, England-based company monitoring the flows, said by e-mail Wednesday.
Iraq, the group’s second-largest producer, plans to boost exports to a record 3.75 million barrels a day next month, according to shipping programs.
Spare tanker capacity in the Middle East has seldom been tighter. The combined excess of ships competing for the region’s exports stood at 6 percent last week, the lowest for the time of year in Bloomberg surveys of shipbrokers that started in 2009. While that expanded to 12 percent this week, the monthly average was still the lowest on record for May.
Bullish oil traders may get some comfort from the U.S. Recent drops in oil inventories there are signaling a gradual easing of the glut, Paul Horsnell and other Standard Chartered Plc analysts wrote in a report May 26. It may take at least another quarter for the surplus to disappear, they wrote. (…)
Supertankers able to haul about 2 million barrels each will earn an average of $45,000 a day this year, 69 percent more than in 2014, according to the average of 10 analyst estimates for global rates compiled by Bloomberg. (…)
OPEC pumped about 31.3 million barrels a day last month, and will probably maintain its official output target of 30 million barrels a day when members meet in Vienna on June 5, according to a Bloomberg survey of analysts and traders. (…)
The capacity of the global tanker fleet has been further constricted by investors storing oil at sea, seeking to profit from longer-dated futures contracts costing more than near-term supply. About 20 million barrels is being stored, according to the average of three estimates from analysts. (…)
A draft report of OPEC’s long-term strategy, seen by Reuters ahead of the cartel’s policy meeting in Vienna next week, forecast crude supply from rival non-OPEC producers would grow at least until 2017.
Sluggish global demand for oil means the call on OPEC’s crude will fall from 30 million barrels per day (b/d) in 2014 to 28.2 million in 2017, effectively leaving the group with two options – cut output from current levels of 31 million b/d or be prepared to tolerate depressed oil prices for much longer. (…)
“Generally speaking, for non-OPEC fields already in production, even a severe low price environment will not result in production cuts, since high-cost producers will always seek to cover a part of their operating costs,” the OPEC report said.
“For future non-OPEC production, only expectations of an oil price environment in the long-term below the marginal cost of production may deter substantial non-OPEC developments. Over the very long term, the economic threshold at which oil companies invest in upstream projects likely reflects their long-term oil price expectations.”
It also said that since 1990, most of the forecasts concerning future non-OPEC oil supply have been pessimistic and often erroneous: “For example, non-OPEC production was once projected to peak in the early 1990s and decline thereafter.”
OPEC publishes long-term strategy reports every five years. Its 2010 report did not mention shale oil as a serious competitor, highlighting the dramatic change the oil markets have undergone in the past few years.
The long-term report is prepared by OPEC’s research team in Vienna and traditionally cautions that it does not articulate the final position of OPEC or any member country on any proposed conclusions it contains.
OPEC’s ability to cut and raise production over the past decades to balance demand has earned it a reputation of being a swing producer. But the long-term report suggested it is tight shale oil that is now playing this role.
“Recent structural changes in the growth patterns of non-OPEC supply as a result of the substantial contributions from North American shale plays might prove to be a turning point (e.g. short lead times of the projects and higher short-term price elasticity),” the report noted.
It said new and cheaper technologies in extraction of tight crude, shale gas, and oil sands would guarantee aggregate growth at 6 per cent per year and contribute 45 per cent of the growth in energy production to 2035.
“Improved technology, successful exploration and enhanced recovery from existing fields have enabled the world to increase its resource base to levels well above the expectations of the past… The world’s liquids resources are sufficient to meet any expected increase in demand over the next few decades,” it said.
“With plenty of oil still left in familiar locations, forecasts that the world’s reserves are drying out have given way to predictions that more oil than ever before can be found,” the report said.
By 2019, OPEC crude supply at 28.7 million bpd will still be lower than in 2014, the report said, and demand for its oil will start rising only after 2018-2019, reaching almost 40 million b/d by 2040.
E.G:
(…) A variety of different improvements in production are starting to show up at all levels across the industry from small firms to oil majors. Statoil for example recently noted that it is experimenting with different types of sand and chemicals to improve production. And a number of companies have noted that they are moving from drilling wells one at a time, on an ad hoc basis, to drilling multiple wells at once. GE Oil & Gas has produced variable-use pumps that can be turned on and off in order to save energy versus the previous 24-hour a day operation cycle.
The end result of these actions is that per-barrel costs of oil have fallen to around $60 today versus $75 a year ago according to Citi analysts. And executives from oil companies are now forecasting that per barrel prices could fall to $50 or less before long. America has not yet lost the price war.
Now, one small Denver-based oil company has come up with a whole new model for producing in order to further drive down costs. Described as an “oil factory,” Liberty Resources LLC and its CEO Chris Wright have developed a novel method for extracting oil. The firm is starting out by doing everything it can to eliminate the need for trucks traveling to and from its site. The company notes that trucks are often an irritant with local residents and more importantly, they add significantly to the cost of producing oil.
To do that Liberty will build a series of pipelines to its massive 10,000 acre Bakken site. The firm has pipelines that carry water and gas produced by wells, as well as other pipelines to carry oil. This technique is called ‘centralized resources’ and while other firms like Continental have explored it to some extent, Liberty is pioneering the process. In essence, the firm is trying to bring the efficiency focus of industrial engineering to the production focus of petroleum engineering.
Liberty is also focused on creating a production process than can be stopped and started based on optimal production times, costs, and oil prices. (…)
Moreover, Liberty is developing the entire 10,000-acre site to be fracked at once with nearly a 100 oil wells operating simultaneously. By drilling multiple wells at once and controlling inputs and output supply, the firm has significant cost advantages versus traditional ad hoc production methods. Even employee costs are lower, with Liberty citing the use of a third less workers than a conventional production process.
So what is the combined result of all these efficiency improvements? Liberty says it will still make money even with oil at $50 a barrel. And the firm expects costs to keep falling as oil service companies become more efficient and lower their own prices. At these prices and efficiency levels, US production becomes competitive with virtually any other oil source. And if efficiency gains continue at this pace, the US may weather the onslaught of Saudi oil much better than many expected.
Separately, Germany’s statistics office reported that retail sales exceeded expectations in April, rising by 1.7% versus March. Forward-looking surveys bode well for German consumption, which has been supported by low unemployment and rising wages.
By contrast, French consumer spending rose only 0.1% last month from March, and growth in March was revised lower. Data earlier this week showed French consumer confidence slipped in May for the first time since October.
“The yen has created a lot of handbag sellers,†says Mr Ishihara, “because they realise that the currency is pushing Komehyo’s buying prices up and the bags are worth significantly more than they were before. Many of them are deciding to use the extra windfall to buy a better second-hand bag, but also they are using the money to go to restaurants or travel.†(…)
