Various quotes on the Q4 GDP report:
- The sluggish headline GDP reading masks the fact that consumer spending held up better than expected in the fourth quarter.
- Growth in consumer spending for all of 2015: +3.1%. Consumers carried the economy last year, boosting spending at the quickest pace since 2005.
- (…) robust growth in durable goods purchases bolsters our confidence that the US consumer sector remains solid. Furthermore, residential investment growth surprised to the upside at 8.1%, well above our forecast. Together, better-than-expected growth in big-ticket purchases should allay concerns of a retrenchment in US consumer spending.
The other way of looking at things:
- Consumers during the all-important holiday season cut their spending from what it was even mid-2015
- One of the largest drags on the economy was consumer spending which accounts for about 70% of gross domestic product. They had every reason to spend including healthy employment gains, cheaper gasoline and lower import prices. Instead, consumers remained cautious about spending, boosting the savings rate instead. The unseasonably warm weather contributed to the softness, especially for apparel and utilities…
- To weakness in energy, exports, and too much inventory we can now add to the softer side of GDP data the auto sector—motor vehicle output took 58 basis points away from overall growth.
Real world stuff: credit card companies are doing quite well:
- Visa CEO: “Macro weakness not evident in U.S. Consumer Spending.”
- Mastercard US processed volumes up 13% (versus 9% last quarter) including 100bps from lower gasoline prices (200bps last quarter).
Moreover: retail gasoline prices are now down to $1.81, and mortgage rates are 3.73%.
Consumer spending grew last year by the most since 2005, in spite of a slight slackening in the fourth quarter. Nonresidential business investment, meanwhile, rose at its slowest pace since 2010 as oil and gas companies sharply curtailed spending. (…)
That same dichotomy was evident in the fourth quarter, as personal consumption expenditures rose while business investment in equipment and structures dropped for the first time since the third quarter of 2012. (…)
Will the strength in consumer outlays encourage companies to step up spending and keep on hiring? Or will businesses, battered by slow global growth and a rising dollar, turn more risk averse and start to prune payrolls, undermining household spending in the process? (…)
The economy is growing, albeit below par. Viewed through the prism of employment, the economy looks surprisingly strong. Yet, it looks weak because the nature of the economy is changing. The GDP numbers are modest because productivity is in trouble. The crucial cause is that nowadays, manufacturing and energy sectors have been hard hit, where productivity is often found. A vast array of service industries, which are labor intensive, are doing most of the employing. It’s pretty hard to get productivity increases out of restaurants, healthcare, accountants, bankers and lawyers. What you get there are price increases! (H. Marleau, Palos Management)
FYI: U.S. vehicle production trends (annualized rates): Q4’15: –19.3%, Q1’16e: –6.0%.
(…) The US has turned out to be vulnerable to the fall in crude prices. The boost from cheap energy to consumer spending has not met expectations while the associated drop in investment in the sector hurts growth. (…)
Confirming concerns about the impact of the high dollar and oil price plunge on US industry, the first reading for fourth-quarter US gross domestic product yesterday showed a slowdown in growth to an annualised pace of 0.7 per cent, compared with an expansion of 2 per cent in the previous three months.
As growth in the US economy slows, inflation has stuck below the Fed target of 2 per cent. Narayana Kocherlakota, who was president of the Minneapolis Fed until December, is calling for a “hard U-turn” in monetary policy. He thinks the central bank is underestimating the risks of sinking inflation expectations and says the credibility of its target is under threat.
The dovish former policymaker says the world faces a “global demand shortfall” and tighter US monetary policy could exacerbate uncertainties outside the country.
“It is hard to know how much feedback from international weakness there will be to the US economy; as the Fed tightens, that tightens economic conditions throughout the world,” Mr Kocherlakota says. (…)
The main reason for optimism is the labour market. In the face of chatter among analysts about the risk of a US recession, job growth has exceeded expectations, with payrolls growing by nearly 300,000 in December.
Ms Yellen placed the employment trend — which has seen 13.2m jobs added over 67 straight months — at the heart of her case for raising rates, arguing that it would be unwise to wait too long before responding to the erosion of spare capacity. (…)
Tim Duy, a professor at the University of Oregon and close Fed watcher, says that December’s rise was not of the magnitude to “make or break the economy” and that talk in markets of a policy mistake was unhelpful.
He says the important aim now was for the Fed to avoid sending signals that it was hell-bent on tightening policy further. That meant downplaying last month’s forecasts from policymakers suggesting that there will be four rate increases in 2016, a bullish outlook that traders now see as divorced from reality.
The Fed has insisted it will be guided by the data and has made no commitment to tighten. Ms Yellen will give further clues in February when she addresses Congress in testimony on Capitol Hill. (…)
The Morgan Stanley analysts argue that the industrial side, which constitutes about 10% of the U.S. economy, is in recession. They point out that growth in some service-side indicators has slowed. Citing their own proprietary risk model – the MSRISK — the analysts point out that though the recession risk is low currently, there is a rising risk broadly within the next six months:
BCA Research has another view on recession risks:
For now, the FOMC seems content to ignore the lengthening list of economic red flags, including deflation, profit contraction, trade contraction, ISM manufacturing contraction etc. In fact, BCA’s Recession Warning Indicator is now at levels that preceded the Great Recession. (…) 32 out of 60 industries we track are cutting selling prices. Six other industries can’t raise prices by more than 0.5% per annum, while another seven are stuck below 2%, which is near the rate of overall core consumer price inflation. In other words, 2/3 of the industries cannot keep pace with core inflation rates.
So does J.P. Morgan:
Going back to 1954, we have had nine circumstances when the spread between 10-year treasury yields and 3-month treasury yields goes negative (i.e. yield curve inverts). Only once, in 1967, did the US not fall into a recession within the next 12 months. Fortunately today, the 10-year – 3-month spread sits at a very healthy 175 basis points. As the chart below shows, the yield curve tends to flatten right before a recession occurs and then it actually steepens during the recession. For example, the 30-year to 3-month spread went from 313 basis points in 1972 to -186 basis points in 1973 and then the economy fell into a recession from 12/1973 to 4/1975. In 5/2004, the 30-year to 3-month spread was at 382 basis points. By 3/2007, it had fallen to -66 basis points and then the US fell into a recession officially starting in 1/2008. Granted, we have seen the 30-year to 3-month spread flatten over the past several years as the current level of 175 basis is 122 basis points from the 2013 high and 208 basis points off the 2011 high. However, as long as this spread remains well above the zero line, a US recession will hopefully not be on the immediate horizon.
The problem with the above is that interest rates are currently managed throughout the curve…
It doesn’t take a genius to know we are at the late stages of the cycle. Moody’s adds some credit cycle evidence:
During the early stages of an upturn by M&A, M&A-linked credit rating revisions show more upgrades than downgrades. For example, M&A-linked rating changes showed more upgrades than downgrades during 2010 through 2012, or after M&A activity had bottomed in 2009. However, M&A figured in more downgrades than upgrades once new record highs were set for M&A in 2000, 2007 and 2014.
Net downgrades linked to M&A rose from 2014’s 33 to 2015’s 36 as the increase in the number of relevant downgrades (from 89 to 114) eclipsed the rise in the number of related upgrades (from 56 to 78). In 2016, upgrades stemming from M&A are likely to decline, while downgrades hold steady or rise. A further decline by upgrades relative to downgrades for M&A-linked rating revisions would be consistent with an aging business cycle upturn.
M&A’s record pace for 2015 stemmed from comparatively low borrowing costs, a relatively stable equity market and diminished prospects for organic revenue growth. The importance of the latter helps to explain why record highs for M&A tend to occur close to the end of a business cycle upturn. The urge to merge will be greater the more convinced corporations are of the imperative to meet long-term earnings targets via mergers, acquisitions or divestitures. (…)
Sometimes, efforts to enhance shareholder returns trigger credit rating downgrades. Typically, strategies which benefit shareholders at the expense of creditors employ cash- or debt-funded equity buybacks and dividends. The number of US credit rating downgrades stemming from shareholder compensation increased for 2014’s 40 to 2015’s 48. However, the latter was less than 2013’s current cycle high of 59 and was well under 2007’s record high of 78. (…)
Experts see 20% chance of US recession FT survey shows lessening expectations of Fed rate rises
The BOJ says it will cut the interest rate, set at minus 0.1%, further into negative territory if necessary. That compares with minus 0.75% in Switzerland, minus 1.1% in Sweden and minus 0.65% in Denmark.
(…) In theory, negative rates at a central bank trickle down to consumers or businesses by encouraging lending. That makes cash a sort of stimulative hot potato: Everyone should want to use it, not hold it.
So far, the record has been patchy. Bank lending has risen modestly in the eurozone, aiding a slow and steady economic recovery. But inflation hasn’t returned. Prices rose just 0.1% in November. Sweden, too, has been stuck with inflation close to zero since 2013, despite joining the negative-rate club in February. The ECB has an inflation target of just under 2%.
In Switzerland, the central bank had long tried to keep the Swiss franc from rising too much against the euro by creating new francs and using them to buy the common currency. But early this year , uneasy with the volume of foreign assets it had acquired, it stopped.
To help soften the blow of a stronger franc, which stifles Swiss exporters, the central bank turned to negative rates, which typically would make a currency less attractive to hold. But the franc surged against the euro and has since settled into a steady range about 11% stronger than where it was.
Denmark, by contrast, has had better success using negative rates to stabilize its currency. The rates helped beat back a flurry of speculative bets on an appreciating Danish krone, themselves spurred by the ECB’s rate-cutting moves. Growth in Denmark is comparatively robust. The economy is expected to expand 1.6% this year.
Still, subzero rates in Denmark and Sweden have helped fuel a surge in house prices, prompting fears of a bubble in major cities. The average price of a Danish apartment climbed 8% in the first half of 2015. The cost of Swedish apartments is 16% higher than a year ago.
And the negative rates come with a cost: Since it is difficult for banks to pass negative rates on to many of their customers, the margin between what they earn from lending and what they pay to depositors gets shrunk. To be sure, Japan has introduced a tiered system so that only a part of the banking system’s huge central-bank reserves will be subject to negative rates. Denmark, too, exempts some of its banks’ deposits from its minus 0.65% rate, and its banks are still hurting.
Negative rates have cost Danish banks more than 1 billion kroner ($145 million) this year, according to a lobbying group for Denmark’s banking sector.
“It’s the banks that are paying for this,” said Erik Gadeberg, managing director for capital markets at Jyske Bank JYSK.KO +3.33%. If it worsens, Jyske might charge smaller corporate depositors, he said, then maybe ordinary customers. “One way or another, we would have to pass it on to the market,” Mr. Gadeberg said.
These economies have seen a range of other odd consequences, from Danish companies paying taxes early to rid themselves of cash, to one Swiss bank charging its customers to hold their deposits. Still, the experiment with negative rates hasn’t spawned more drastic consequences—like mass hoarding of cash or runaway inflation—in Europe, so far at least. (…)
(…) Our view is that the decision was mostly driven by a desire to weaken the currency in an attempt to offset renewed weakness in oil prices and their consequent negative impact on inflation. The BoJ’s December decision to mildly expand ETF purchases was largely ignored by investors who until recent days had bid up the yen on a flight to quality. It is questionable whether the BoJ will be successful in this effort given market positioning and the yen’s undervaluation (see Don’t Buy The BoJ Bluster).
But to the extent that the BoJ can weaken the yen, such a move will hurt other trading economies, exacerbating disinflationary forces. It seems reasonably likely that European central banks will respond to further yen weakness, causing a growing perception that a cycle of competitive devaluations is under way. In such an environment the US dollar seems sure to take another leg upward. (…)
One day’s price action is insufficient to determine a trend, but we tend to see further easing as a rather desperate roll of the dice that risks destabilizing the still weak Japanese economy (see The Dangers Of Further BoJ Easing). The bigger concern is that BoJ has sounded the bugle on an escalated currency war that could yet come back to bite Japan.
By adopting a negative-interest rate strategy, Bank of Japan Governor Haruhiko Kuroda managed to reverse China’s effort to devalue the yuan against one of its biggest trading partners — in minutes. A global demand slump has pushed officials around the world to ease monetary policies that result in competitive currency devaluations. As Douglas Borthwick of Chapdelaine & Co. put it, “Japan is basically saying ‘You know what China, we’ve seen what you did and we’re going to match that.’ Now the ball is back in China’s court.”
China: Dealing with the impossible trinity
China is learning, the hard way, about the impossible trinity. You just cannot have free capital flows, a fixed exchange rate and independent monetary policy all at same time. By opening its borders to foreign investment and keeping a currency peg with the US dollar, China effectively surrendered monetary policy independence. The massive amounts of capital inflows during the boom years propped up asset prices including real estate. With the latter, and more generally the economy as a whole now treading water those flows are reversing fast.
To prevent the yuan from depreciating in synch with those outflows, the People’s Bank of China has two options. Either it sells USD on the market to support the yuan (i.e. run down its currency reserves) or impose capital controls. Neither of those options are sustainable. While China’s reserves are large, they are coming down fast ─ as today’s Hot Chart shows, they dropped about half a trillion dollars last year alone. As for capital controls, they are the exact opposite of what China is trying to achieve, i.e. integration with global financial markets. A third option is to allow the yuan to float freely (i.e. allow a sharp depreciation) which would give back control of monetary policy to the central bank and eliminate the need to run down reserves to support the currency.
The concern, however, is that left to markets there is a possibility the yuan could sink too much too fast, thereby hurting confidence in the currency and creating a death spiral. So, what’s the PBoC to do? Perhaps it could impose capital controls but make clear that those measures are temporary. Not only would that stem the yuan’s descent and hence severely punish those shorting the currency, but it would also allow Beijing some time to come up with a strategy to address underlying weakness in its economy. In other words, the PBoC could buy the central government some time until at least March when the 5-year plan is made public. (NBF)
Yuan Flew Over the Cuckoo’s Nest
This is excerpted from John Mauldin’s Thoughts From The Frontline of Jan.24. which deserves a complete read. You will see that China is actually beginning to control capital in a Chinese subtle way.
(…) does Beijing think it can boost exports by manipulating its currency lower? I don’t think so. Remember how their business model works. Unlike, say, Saudi Arabia, China doesn’t simply extract resources from the ground and export them. China imports raw materials, transforms them into finished goods in its factories, and then exports those goods. Their gain lies in the value added in the manufacturing process.
That means that China can’t grow exports without also growing imports. Pushing the yuan lower helps, but it’s a relatively inefficient tool for reducing the trade surplus.
Cheapening the currency has another consequence China doesn’t want. It makes imported products more expensive for Chinese consumers. The country’s abilities are growing fast, but it still depends on outside sources for many important goods. Making them cost more doesn’t help build the consumer-driven economy Beijing says it wants.
For those reasons and more, China Beige Book has a contrarian view on the Chinese currency. They believe Beijing wants the yuan to rise, not fall. So what is happening with all these interventions the Chinese authorities are making in the currency market?
The first point to remember is that the adjustments have all been quite small – far smaller than the hoopla suggests. For all the clamor that erupted last year, the yuan fell just over 4.5% against the dollar. That’s quite a lot if you are leveraged 10x, as currency traders often are, but for most merchants and consumers the change was hardly noticeable.
Recall all that happened in 2015. Aside from the stock market fireworks, China won acceptance of the yuan into the IMF’s reserve currency basket. It also watched the Federal Reserve finally make a first, tentative move toward higher rates and a correspondingly stronger dollar. If all that couldn’t crush the yuan, it’s not clear to me that anything will.
Nevertheless, periodic adjustments make headlines because they happen so unpredictably. I think the surprises are intentional. The People’s Bank of China wants to keep markets guessing about its intentions. This tactic allows them to gradually nudge their currency in the desired direction. And by gradually, I mean over years or even decades.
Let’s go back to the two Chinese sages I quoted at the beginning of the letter. You have to know the Chinese leadership is steeped in such philosophies:
“It does not matter how slowly you go as long as you do not stop.”
“Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.”
– Sun Tzu
The second point is critical: China controls its currency by both central bank action and subtler tools. They have immense power to nudge the currency up or down. Tightening and loosening the controls is like turning a volume knob. They can crank the yuan up or turn it down.
Presently they are clamping down harder than usual in order to deter speculation. Much of this is happening under the radar, one business and industry at a time. Nevertheless, people are starting to feel the consequences.
China Law Blog (what, it’s not on your regular reading list?) is a great resource from Harris & Moure, a Seattle law firm that helps companies navigate the Chinese import-export maze. I like it because they write in language that can be understood by anyone. They said this on Jan. 14:
Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow[ed] all of China’s laws, it ought to be no problem. Not true lately.
In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.
So what has been going on lately?
Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars.
I heard similar rumblings when I was in Hong Kong earlier this month. China is making it very, very difficult to move capital outside the country. They do this in many different ways, as you’ll see if you read the article above. Banks and bureaucrats all over China are clearly responding to some kind of central edict.
We don’t know exactly why Beijing is doing this. If, hypothetically, they wanted to make it difficult for foreigners to take short positions against the yuan, what they are doing would help. And we know they are restricting access and bringing regulatory oversight to bear on those who want to short the yuan.
Leland Miller is very confident – and I concur – that China will not impose any major overnight devaluations, as so many people fear they will. Doing so wouldn’t move them toward their goals and would send them backwards in some respects. I have talked with other veteran Chinese watchers who also agree. The Chinese will continue to do whatever they do in very deliberate, often confusing, and sometimes downright mysterious ways.
If we do see a huge devaluation, it will mean something is very, very wrong in China. It will be an indication that the wheels are coming off. The Xi Jinping government will do all it can to avoid getting stuck in that position.
Leland reminded me that China is scheduled to host this year’s G-20 summit meeting in September. The last thing the Chinese will want is negative economic headlines while the leaders of the world’s top economies gather in Hangzhou.
On the other hand, the Chinese can’t control the headlines or the rumor mill on the trading floors. This limitation might explain their vigorous resistance to speculators who want to provoke a devaluation. Beijing wants to squelch that trade before it attracts more attention. It is very easy to believe that their concern is as much about maintaining the appearance of control as it is about the actual currency valuation.
Understanding all this is hard because we want there to be a binary choice: i.e., the yuan must go up or must go down. Beijing doesn’t see it that way. They have very long-term goals and don’t mind taking a circuitous path toward achieving them. What they can’t countenance is anything that makes the Chinese public lose faith in the government.
In other words, the exchange rate can do whatever it will so long as the public believes Beijing is either in charge or at least neutral. The authorities intervene when necessary to preserve that perception. Otherwise, they seemingly take a hands-off approach.
The macro traders who think they can provoke Beijing into a major one-off devaluation aren’t likely to get one, in my view. To paraphrase Keynes, Beijing can stay stubborn longer than traders can stay solvent. (…)
U.S. Hedge Funds Mount New Attacks on China’s Yuan Some of the biggest names in the hedge-fund industry are piling up bets against China’s currency, setting up a showdown between Wall Street and the leaders of the world’s second-largest economy
And here is the one chart which in our opinion virtually assures that the Fed will follow in the footsteps of Sweden, Denmark, Europe, Switzerland and now Japan.
Since the middle of 2015, US investors have bought a big fat net zero of either bonds or equities (in fact, they have been net sellers of risk) and have parked all incremental cash in money-market funds instead, precisely the inert non-investment that is almost as hated by central banks as gold.
Bank Lending Data Likely to Boost Calls for Looser ECB Monetary Policy Lending to eurozone firms rose only 0.3% on the year in December, after rising 0.7% in November
The ECB reported Friday that lending to eurozone firms rose only 0.3% on the year in December, after a 0.7% rise in November. Lending to households rose 1.4%, matching November’s figure.
Monthly data showed business loans fell by €21 billion ($22.9 billion) at the end of the year, after rising by €9 billion in November and €11 billion in October.
The data follow publication of the ECB’s quarterly bank lending survey, which said that financing conditions for eurozone firms were expected to improve in the current quarter.
Opec wary of Russia oil overtures Decades of mistrust likely to colour any negotiations on output
(…) “Co-ordination between Russia and Opec has been discussed in the past and has always come to nothing, and it would be a shock if any different outcome occurred this time,” says James Henderson at the Oxford Institute for Energy Studies.
Russia has long argued that the structure of its oil industry, with many different private companies rather than a single state group, and its harsh weather conditions make a government-mandated output cut unfeasible.
However, the continued plunge in oil prices has refocused minds in Moscow. While many in the oil sector and the government still see a cut as unworkable, several senior figures are now calling for talks in Opec.
Alexander Novak, Russia’s energy minister, on Thursday said Russia was ready to participate in a meeting with Opec countries. “We had these sorts of consultations before, when the situation was somewhat different. As we see, prices have fallen,” he said. (…)
“You can’t just write off these latest comments,” says Gary Ross, chairman of consultancy Pira Energy, who was a member of the advisory group that worked to convince Russia to join Mexico and Norway in co-ordinated production cuts in the early 2000s.
“Low prices have a way of concentrating the mind. For the first time in a long time this is seriously being considered,” he says. “It’s a tough one, and there is no guarantee, but there is a process that is in motion.”
Another factor for a push towards cuts is opportunistic. Some Russian oil companies — including Lukoil and Rosneft — are struggling to maintain production because of ageing oilfields in western Siberia and western sanctions that have squeezed investment.
“If there was an order to cut production, it would suit Lukoil very well,” says Valery Nesterov, energy analyst at Sberbank CIB. As production falls “they could say, ‘We are carrying out the decision of Opec’”.
Nonetheless, analysts and oil executives say a cut remains unlikely.
Many Russian oil sector executives and those in the government still see a cut as unworkable, citing economic, mechanical, legal and geological reasons.
The combination of cold weather and the high water content of Russia’s mature Siberian oilfields — many wells pump 90 per cent water — makes it tricky to manage any shutdown.
Moreover, the government’s precarious finances could be even harder hit by a production cut if oil prices fail to rise sufficiently.
Further, the Russian government has no legal power to control production levels, meaning it would need to do so through the blunt tool of tax changes or through unofficial channels — a fact that has stymied Moscow’s promises to cut production in the past.
And with many analysts predicting a rebound in oil prices in the second half of the year, Moscow is also loath to lose market share to other producers — most notably from US shale companies.
Igor Sechin, chief executive of Rosneft who is in President Vladimir Putin’s inner circle, has for much of the last year led the charge against calls for a co-ordinated production cut.
Mikhail Leontyev, Rosneft spokesman, told the Financial Times: “All positions are well known, they have not changed in any way.”
From Saudi Arabia’s perspective, Russia’s record of keeping its word is not good and decades of mistrust are likely to colour any negotiations on co-ordinated output cuts.
Comments from Khalid al-Falih, chairman of state oil company, suggest the kingdom is preparing for the long haul. “If prices stay low we will be able to withstand [it] for a long time,” said Mr Falih.
While Russia agreed to join efforts in 1998 and 2001 to cut production they never stuck to their side of the bargain — something that has never been forgotten by senior figures in the Saudi oil ministry. It made no commitments in 2008 and refused to curb output 2014.
“Anything Russia says now I doubt they will be taken seriously. Saudi Arabia has been there, done that, got the T-shirt and been ripped off in the past,” said Paul Stevens, a Senior Research Fellow at think-tank Chatham House.
But Russia — which like Saudi Arabia increased its own production in 2015 — is not the only hurdle that needs to be overcome before co-ordinated supply cuts can become a reality.
Saudi Arabia has said it would only consider lowering output if it was joined by other members of the cartel as well as other large producers such as Russia.
Yet several Opec members — Iran and Libya — are demanding the right to produce as much as they can to make up for years of lower production because of war and sanctions.
For the kingdom, production cuts whether it be from Russia or Opec members is difficult to monitor and enforce. “There is a lot of mistrust,” said one person familiar with the matter.
(…) “We’re ready to discuss the issue of cutting oil output volumes” but not ready for a decision, Novak said Friday in an interview with Bloomberg Television. “We’re ready to consider the possibility; this should be a consensus. If there’s a consensus, it makes sense.” (…)
“There’s no set date” for a meeting, Novak said. “As far as I understand they are discussing it with other possible participants.” Russia has taken part in such consultations before and “nothing new happened,” he said. (…)
(…) Russia is holding weak cards and the Saudis know it.
That doesn’t necessarily leave the game at a permanent impasse, though. (…)
For now, politics, if not economics, suggests the Saudis will remain all-in. That alone could keep a lid on an immediate oil-price recovery.
As of Friday night, we have 40% of the S&P 500 company reports, representing 55% of the market cap.
With 40% of the companies in the S&P 500 reporting actual results for Q4 to date, more companies are reporting actual EPS above estimates (72%) compared to the 5-year average, while fewer companies are reporting sales above estimates (50%) relative to the 5-year average. In aggregate, companies are reporting earnings that 1.7% above the estimates. This surprise percentage is below both the 1-year (+4.9%) average and the 5-year (+4.7%) average.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q4 2015 is now -5.8%, which is slightly lower than the blended earnings decline of -6.1% last week. If the Energy sector is excluded, the blended earnings decline for the S&P 500 would improve to 0.5% from -5.8%..
The blended revenue decline for Q4 2015 is now -3.5%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 0.9% from -3.5%.
Six of the ten sectors are now expected to show better EPS than one month ago, including the important consumer related sectors. Given the different methods used by the various aggregators, I am showing both Facset’s and Thomson Reuters’ compilation:
Factset also reports that , at this point in time, 39 companies in the index have issued EPS guidance for Q1 2016. Of these 39 companies, 33 have issued negative EPS guidance and 6 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 85%. This percentage is above the 5-year average of 72%. At the same time last year, 37 companies had issued negative EPS guidance for Q1’15 and 9 companies had issued positive EPS guidance.
However, fewer Consumer Discretionary companies have negatively warned this year (3) than last (6) for Q1.
Fitch Ratings says the prospects for ratings in 2016 are bleaker than a year ago with the number of sectors with negative rating outlooks outweighing positives by almost six to one based on the agency’s 213 outlook reports. The increasing headwinds in many regions and segments pose further downside risk, as illustrated by sector outlooks showing an even greater negative bias at 10 to one. Collectively, the coming year is likely to see an increasing number of negative rating actions.
Rating outlooks indicate the direction in which a rating is likely to move over a one- to two-year period. The sector outlook indicates the underlying fundamental trend of asset prices in the industry as a whole, capturing the operating environment.
Overall, 66% of sector outlooks are stable but 27% are negative, up from 14% at the start of 2015. The drag from emerging markets is evident in the higher share of negative sector outlooks for this region at 32%. Sectors under pressure include:
-most oil and gas and related industries
-retail in Europe and China
-banking systems in many countries in Asia-Pacific, CIS, the Gulf countries as well as Canada
-UK, German and French life insurance
The Rating Outlook is Stable on 81% of sectors, unchanged on last year, reflecting the stability of Issuer Default Ratings. Negative Rating Outlooks apply to a wide range of corporate sectors, especially in EM regions, including oil and gas, basic materials, pharmaceuticals and tobacco. Sovereign regions with Negative Rating Outlooks include the Middle East and Africa.
Sectors with a more positive bias are:
– North American airlines
– US REITs and China homebuilding
– Irish and Philippine banks
– Spanish, Nordic and Hungarian banks
– Residential mortgages in the UK, Netherlands, Ireland, Spain and Portugal
– Peripheral eurozone SME loans
– Prime commercial real estate in some continental countries.