Economy Picks Up but Stays in Its Rut Gross domestic product posts modest growth, as revisions show recovery to be weaker than thought
Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a 2.3% seasonally adjusted annual rate in the second quarter, the Commerce Department said Thursday. And the economy actually expanded at a 0.6% pace in the first three months of the year, an upward revision from a previously reported 0.2% contraction.
Yet further data revisions going back more than three years show the expansion—already the weakest since World War II—was even worse than previously thought, with GDP increasing at an average annual rate of 2% between 2012 and 2014, down 0.3 percentage point from prior estimates.
While the first half’s growth rate of 1.5% was better than expected thanks to the first-quarter revision, economic growth so far this year has been even slower than during last year’s tepid first half and well below the pace of the overall recovery. (…)
Strong job gains and accelerating wage growth supported stronger household consumption in the second quarter, contributing two percentage points to the overall quarterly GDP number. Consumer spending, which accounts for more than two-thirds of economic output, rose 2.9% in the second quarter, compared with 1.8% in the first three months of the year.
Consumers also appear to be spending some of the money they saved earlier this year on cheaper gasoline. The saving rate fell in the second quarter, to 4.8% from 5.2% in the previous quarter, while Americans spent more on long-lasting products including cars. (…)
One persistent weak spot has been business investment, which actually subtracted from GDP growth in the second quarter for the first time since 2012. Nonresidential fixed investment—which reflects spending on software, research and development, equipment and structures—retreated at a 0.6% rate, compared with a 1.6% growth rate in the first quarter.
The slowdown reflects a sharp drop in spending on structures, as energy firms have scaled back their investment plans this year following a steep drop in oil prices that began in mid-2014. Prices appeared to have stabilized, but have started to slip again in recent weeks, a sign that those pressures could continue to weigh on growth in the second half. (…)
The price index for personal consumption expenditures—the Fed’s preferred measure for inflation—rose at a 2.2% pace in the second quarter. Core prices, which exclude food and energy costs, rose 1.8%.
David Rosenberg is not among those expecting a September hike:
(…) if the Fed was intent on making a move, yesterday was the opportunity to signal something. (…) If this is the manner in which the central bank is trying to signal a September tightening, it’s actually pretty lame.
If the Fed really wants to convey a hawkish signal, why would it use the word “soft” to describe exports and capital spending as well as “moderate” with respect to consumer spending growth.
On May 4th, 2004, just before the June 30th rate hike, the Fed said “the Committee believes that policy accommodation can be removed at a pace that is likely to remain measured”.
Now, that is how you get the market prepped!
(…) But a review of Fed statements over the past 10 years indicates the risk language used by the Fed is a poor predictor of “regime change.” (Graphic: link.reuters.com/zyn35w) (…)
“Risks seem a little tilted to the downside. China, oil, Europe,” said Cornerstone Macro economist Roberto Perli, a former Fed board staffer. But the current risk language “doesn’t represent a major constraint… Policy is so accommodative, to say risks are ‘nearly balanced’ could justify a 25 basis point increase.” (…)
The quarterly increase in US wages was just 0.2% – a third of the 0.6% rise expected – and a meager 2% increase Y/Y in line with all the other depressed BLS data, which dashes the “wage growth is looming” meme and crushed the 0.7% rise in Q1 that had so many hopeful of escape velocity any day now.
Because the ECI tracks the same job over time, it removes shifts in the mix of workers across industries, which is a shortcoming of the hourly earnings figures, which makes this number even more of a diaster. This is the weakest US wage growth since records begain in 1982 and half as slow as the weakest of 57 economist estimates.
Eurozone remains on the edge of deflation Inflation steady at 0.2% but plummeting commodity prices still weigh
Looking at the main components of euro area inflation, services is expected to have the highest annual rate in July (1.2%, compared with 1.1% in June), followed by food, alcohol & tobacco (0.9%, compared with 1.1% in June), non-energy industrial goods (0.5%, compared with 0.3% in June) and energy (-5.6%, compared with -5.1% in June).
Core inflation (ex-energy, food, alcohol and tobacco) declined 0.7% MoM in July after rising 0.1% in the previous two months. It had jumped 2.3% (9.5% a.r.) in the February to April period! YtD, core inflation is down 0.1%.
Bets Rise That China’s Yuan Will Fall Investors take positions to protect against yuan weakening, a signal of waning confidence in Beijing
Activity has ramped up in the yuan options market, where investors are taking positions to protect against a potential weakening of the yuan against the U.S. dollar over the next three to six months.
Those bets have increased after Beijing last week announced measures to support China’s flagging trade sector, including allowing a more market-driven currency. (…)
Another factor adding to investor unease are the seemingly conflicting messages from policy makers. Last week, China’s State Council, or cabinet, signaled it would widen the yuan’s trading band and allow greater fluctuation in the currency. Meanwhile, the People’s Bank of China on Tuesday said it would keep the yuan stable.
The central bank sets a daily reference rate against the U.S. dollar and allows the currency to trade 2% above or below that level. (…)
The debate about the yuan’s direction comes ahead of the International Monetary Fund’s decision later this year on whether to grant the yuan elite status as a reserve currency. The IMF’s Special Drawing Rights basket, which constitutes the fund’s emergency-lending reserves, currently includes the U.S. dollar, the euro, the British pound and the Japanese yen.
That’s one reason why Beijing has kept a firm grip on its currency in recent weeks, holding the yuan traded onshore at its most stable level in almost a decade despite volatility in global currency markets. In contrast, its offshore counterpart, which is freely traded in Hong Kong by foreign investors, has weakened over the past couple months.
Danny Yong, founder of Singapore-based hedge fund Dymon Asia Capital Ltd. and one of Asia’s most closely watched currencies investors, in a letter to his investors last week said he doesn’t expect the currency to weaken with further stock declines. A depreciating currency would create a headache for China, from spurring capital flight to drawing the ire of global politicians seeking to protect trade competitiveness.
“If Chinese equities continue to fall, the Chinese government will have all the more reason to maintain a stable foreign exchange policy and will avoid unnecessary volatility caused by depreciating its currency,” Mr. Yong said in the letter. “Policy makers see more costs than benefits now to weakening the currency…Our view is that a further equity rout for now does not change China’s current foreign exchange policy.”
However, if China’s economic health worsens significantly, Mr. Yong said “the government will use all tools at their disposal including the currency.” (…)
Car companies such as PSA Peugeot Citroën, Audi and Ford have slashed growth forecasts while industrial goods groups such as Caterpillar and Siemens have all spoken out on the negative impact of China. (…)
Audi and France’s Renault both cited China as they cut their global sales targets on Thursday, with Christian Klingler, sales chief at Audi parent Volkswagen, predicting “a bumpy road” in the country this year.
Peugeot slashed its growth forecast for China from 7 per cent to 3 per cent while earlier this week Ford predicted the first full-year sales fall for the Chinese car market since 1990.
US companies have also been affected. “In Asia, the China market has clearly slowed,” said Akhil Johri, chief financial officer at United Technologies, the US industrial group at the company’s earnings call last week. “Real estate investment, new construction starts and floor space sold are all under pressure.” (…)
In the consumer goods sector, brewer Anheuser-Busch InBev said on Thursday that volumes fell 6.5 per cent in China as a result of “poor weather across the country and economic headwinds”.
Among industrial goods companies, Schneider Electric, one of the world’s largest electrical equipment makers, reported a 12 per cent fall in first-half profit and cut guidance because of “weak construction and industrial markets” in China.
Jean-Pascal Tricoire, chief executive, said there was “persistent weakness in China” which showed little sign of going away soon.
Siemens, the German industrial giant, on Thursday said sales in China fell 8 per cent in the quarter and Chinese new orders slid 2 per cent when adjusted for currency swings.
You must also have noticed that just about every one of China’s major trading partners are seeing very week exports, from Taiwan to South Korea, Vietnam, Thailand and Indonesia.
The big fear in Beijing:
China’s state planner said on Friday a slowing economy must not be allowed to morph into social risks as the volatile Chinese stock market fell again. (G&M)
But the economy is clearly weaker than official stats indicate. CEBM Research shows how Q2 GDP was heavily “lifted” by brokerage revenues (!) and that the real pace is closer to 6%, if not lower.
Cam Hui tracks a few indicators of the real activity in China:
(…) “When we put it all together, key housing indicators on balance continue to highlight the vulnerability of the Toronto and Vancouver housing markets to a significant correction in activity and prices,” they said.
“In light of its hotter price performance over the past three to five years and greater supply risk, this vulnerability appears to be comparatively high in the Toronto market,” they added.
“Still, even in Toronto, the same metrics would assign a ‘medium’ rather than ‘high’ risk to the kind of painful and disorderly price adjustment that was endured in the United States a half-decade ago.” (…)
“While the metrics provide some contrasting signals both within and across the two markets, the balance of evidence places the risk of a steep and painful price adjustment in the medium-to-moderate camp,” they said.
“Put another way, indicators are generally flashing a cautionary yellow rather than green (low risk) or red (high risk).” (…)
Overbuilding seems to be more of a threat in Toronto, they added, citing the fact that condo developers “appear to be holding onto a record number of newly completed but unsold units.”
But the Toronto rental market is tight, they said, which should provide some relief on that front.
(…) Badri said rising demand would prevent a further fall in oil prices and suggested cuts in OPEC output would have little impact on the market.
OPEC members produced around 31.25 million barrels per day (bpd) in the second quarter, about 3 million bpd more than daily demand, a Reuters survey showed this week.
Softer day yesterday.
- 341 companies (75.3% of the S&P 500’s market cap) have reported. Earnings are beating by 5.7% while revenues have positively surprised by 0.5%.
- The beat is 72% (74% Wednesday). Ex-Financials: 75% (78%)
- Expectations are for revenue, earnings, and EPS of -3.4%, 0.2%, and +1.6%. EPS growth is on pace for 3.0%, assuming the current 5.7% beat rate for the remainder of the season. This would be 7.9% (8.2% Wednesday) on a trend basis (ex-Energy and the big-5 banks). (RBC Capital)
US equity margin debt flags market top Where the echoes of the end of China’s bull run can be heard on Wall Street
(…) “Margin debt has risen 11 per cent since the start of the year to reach a record high even as the rally in stocks has become increasingly narrowly based,” note analysts at research boutique Gavekal Dragonomics.
“Although high margin debt will not trigger an equity market collapse, it could exacerbate the downside move should any external shock trigger a sell-off, especially as the ratio of margin debt to total market capitalisation is approaching historical danger levels.” Moreover, “the negative wealth effect of an abrupt decline in the stock market could tip the US economy into recession”, Gavekal suggests.
It is not exactly reassuring that the last time margin debt was at comparable levels was in 2000 and 2007, according to BofA Merrill Lynch Global Research. “We see it as a yellow flag,” Merrill’s technical analyst Steve Suttmeier notes. (…)