U.S. Jobless Claims Fell to Lowest Level Since November The number of U.S. workers filing applications for jobless benefits declined last week to the lowest level in three months—falling 7,000 to 262,000—a sign of strength for the labor market
The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index for February remained negative at -2.8 versus -3.5 in January. It was the sixth consecutive reading below zero, although losses have moderated since December. The latest reading matched expectations in the Action Economics Forecast Survey.
The ISM-adjusted General Business Conditions Index constructed by Haver Analytics deteriorated to 44.7 from 47.5. It remained below 50 for the seventh month in the last eight. It is comparable to the ISM Composite Index. During the last ten years, there has been a 71% correlation between the adjusted Philadelphia Fed Index and real GDP growth.
Each of the components of the overall index deteriorated versus January. New orders and unfilled orders both fell sharply m/m, while shipments showed a slower rate of increase. The vendor delivery index became more negative, continuing to suggest faster delivery speeds, and inventories fell. The employment measure remained negative for a second month. During the last ten years, there has been an 81% correlation between the jobs index and the m/m change in manufacturing payrolls. The length of the average workweek shortened substantially.
On the pricing front, the prices paid index showed deflation for a sixth consecutive month. Nineteen percent of respondents paid higher prices, while 21% paid less. The prices received measure remained negative.
The Conference Board Leading Economic Index® (LEI) for the U.S. declined 0.2 percent in January to 123.2 (2010 = 100), following a 0.3 percent decrease in December and a 0.5 percent increase in November.
As we can see, the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.
And now this from Moody’s:
Ultra-wide high-yield bond spreads have offered useful insight regarding where the US economy is in the business cycle. The high-yield bond spread’s month-long average has been at least 800 bp for only 32, or 8.6%, of the 373 months since year-end 1984.
Of special importance is how a recession was either fast approaching or already present whenever the high-yield spread’s month-long average first broke above 800 bp more than two years after a business cycle bottom. Thus, the high-yield bond spread’s 848 bp average of February-to-date merits widespread attention.
The high-yield spread’s month-long average previously first broached 800 bp at least two years after a cycle trough in August 2008, November 2000, and October 1990. Only November 2000 is similar to February 2016 in that both months overlapped business cycle upturns.
Nevertheless, one major difference between November 2000 and February 2016 centers on how much higher November 2000’s average expected default (EDF) frequency metric of 11.9% for US/Canadian non-investment-grade companies was relative to February-2016-to-date’s average of 8.1%.
Mostly because of an exceptionally steep high-yield EDF metric, the high-yield spread’s multi-variable regression model predicted a high-yield spread of 869 bp for November 2000 that was wider than November 2000’s actual gap of 835 bp. By contrast, the same model currently predicts a 722 bp spread for February 2016, which is substantially less than February-to-date’s average of 848 bp.
The actual high-yield spread last exceeded the predicted spread by a comparable margin in the summer of 2012. The high-yield spread would subsequently narrow from its 634 bp average of the summer of 2012 to 481 bp by Q1-2013.
If the macro backdrop does not deteriorate and if the VIX index does not climb higher, the high-yield spread could narrow even if the high-yield EDF metric remains in a range of 8% to 8.5%. However, the latter may be asking for too much given the sluggishness of core business sales, especially relative to the now faster growth of labor costs.
In addition to the warning implicit to a wider-than-800 bp spread, the now rising trend of the high-yield spread’s moving 12-month average suggests that complacency is ill advised. Recessions were either present or less than a year away each time the high-yield bond spread’s moving 12-month average topped 600 bp two years after the cycle bottomed. Thus, the nearness of a possible downturn deserves consideration in view of how the high-yield spread’s latest yearlong average was 573 bp and rising.
The best readily available consensus forecast of the high-yield spread portends an increased likelihood of a recession. Though consensus projections for the high-yield bond spread are lacking, such projections can be inferred from the consensus outlooks for the yields of Baa-rated corporate bonds and benchmark Treasury securities. These consensus forecasts now strongly favor the arrival of a yearlong average for the high-yield spread that will ultimately top 600 bp by a very wide margin.
Both the Philadelphia Federal Reserve Bank’s Survey of Professional Forecasters and Blue Chip Financial Indicators supply consensus views on Moody’s long-term Baa corporate bond yield. Since September 1988, the long-term Baa corporate bond yield spread reveals a very strong correlation of 0.93 with the high-yield bond spread. In turn, a reasonable forecast for the high-yield spread can be inferred from consensus outlooks for the Baa corporate bond yield and the relevant benchmark Treasury yield.
As derived from the unweighted average of the latest available consensus projections, Moody’s long-term Baa corporate bond yield spread is expected to average 250 bp over the next 12 months. A 250 bp spread for the Baa corporate yield supplies an expected midpoint forecast of 781 bp for the high-yield bond spread during the next 12 months according to an ordinary least squares regression model.
Such a wide spread over a yearlong span warns of well above-trend default rate, as well as elevated recession risk. As derived from the statistical relationship between the US high-yield default rate and the high-yield bond spread’s yearlong average, a reading of 781 bp for the latter tends to be associated with a default rate of 7.7%. Thus, if the high-yield spread averages 781 bp over the next year, the high-yield default rate should rise considerably above January 2016’s 3.1%.
However, to the degree the attainment of a 7.7% default rate by Q1-2017 is viewed as being unlikely, February-to-date’s average high-yield spread of 848 bp implies that the accompanying composite speculative-grade bond yield of 9.76% now grossly overcompensates for default risk. Still, the default rate’s now rising trend and the likelihood of a recession by 2018 may limit the scope of any rally by high-yield debt. It’s much easier to make a case for high-yield bonds because of fundamentally excessive spreads when the default rate is widely expected to decline. Such is hardly the case today.
Lawrence Summers: The case for secular stagnation is more convincing than ever
(…) I would put the odds of a US recession at about one-third over the next year and more than 50 per cent over the next two years. There is a substantial chance that widening credit spreads, a strengthening dollar as Europe and Japan plunge more deeply into the world of negative rates, and lower inflation expectations will tighten financial conditions even as recession looms. And while there is certainly scope for quantitative easing, for forward guidance and possibly for negative rates it is very unlikely that the Federal Reserve can take steps that are nearly the functional equivalent of the 400 basis point cut in Fed funds that is normally necessary to respond to an incipient recession.
If I am right in these judgments, monetary policy should now be focused on avoiding an economic slowdown and preparations should be starting with respect to the rapid application of fiscal policy. The focus of global co-ordination should shift from clichés about structural reform and budget consolidation to assuring an adequate level of global demand. And policymakers should be considering the radical steps that may be necessary if the US or global economy goes into recession. (…)
Governments must act “urgently” and “collectively” to boost spending and combat flagging growth in all the world’s advanced economies, the OECD warned on Thursday.
Against a backdrop of slowing trade and market turmoil, the OECD slashed growth forecasts for the entire G7 group of industrialised nations.
The Paris-based think-tank expects the world economy to grow by 3 per cent this year, 0.3 percentage points less than it forecast only three months ago. This would mean growth stagnating at the same rate as in 2015 — itself the slowest pace in five years and well below long-run averages.
As G20 finance ministers and central bankers prepare to meet next week in Shanghai, the OECD urged policymakers not to rely solely on low interest rates and quantitative easing to boost demand, but to offer more fiscal stimulus — including infrastructure spending — to preserve the recovery.
Catherine Mann, OECD chief economist, said global growth prospects had “practically flatlined”, adding that despite the boost from the drop in oil prices and low interest rates, evidence pointed to slower growth in all major economies.
“Given the significant downside risks posed by financial sector volatility and emerging market debt, a stronger collective policy approach is urgently needed, focusing on a greater use of fiscal and pro-growth structural policies to strengthen growth and reduce financial risks,” she said.
“A commitment to raising public investment would boost demand and help support future growth,” Ms Mann added. (…)
A rising tide of protectionism — led by emerging market nations — is undermining global trade and threatening to extend the economic slowdown, data suggest.
Governments introduced 539 protectionist measures in the first 10 months of 2015, up from 407 in the same period of 2014 and just 183 in the first 10 months of 2012, according to figures from Global Trade Alert, a think-tank. (…)
Simon Evenett, professor of economics at the University of St Gallen and head of Global Trade Alert, says the world is witnessing “a resurgence of interest in industrial policy, the use of local content requirements and lots and lots of government subsidies for exporting. This stuff has crept back into the mix in a way that has got to be pretty worrying.” (…)
Prof Evenett says the emerging trend is for governments to institute measures to prop up exports, such as cheap finance and subsidised insurance, rather than to restrict imports.
“People have always talked about protectionism in terms of imports, now we are talking about it as a means of boosting exports. That is new,” he says. “The scale of the export subsidies is quite worrying. I’m not sure if we have seen anything like that before.”
Examples of this trend include Brazil’s 3 per cent tax rebate for exports, and rebates on imported inputs that are used in exported finished goods in China and India. (…)
Prof Evenett argues that the export incentives, which allow the beneficiaries to undercut their unaided rivals, are part of the reason (alongside falling commodity prices) why the unit prices of exported goods have fallen so sharply in the past 18 months.
Another perhaps unexpected finding is that China — so often held up as the bad boy of protectionism — is in fact the biggest victim, in terms of the number of trade restrictions, at least.
The GTA calculated that almost half of the protectionist measures introduced between November 2008 and October 2015, some 2,429, harmed China’s commercial interests.
In contrast, China is only the seventh largest transgressor, as the final chart shows, implementing far fewer restrictions on trade than the likes of India, Russia and the US.
However, Prof Evenett says these raw numbers understate the impact of the measures China has introduced, which tend to be broader in scale.
In particular, he says China has seen “the most aggressive expansion of export incentives of all countries”. (…)
Dalio sees ‘helicopter money’ on horizon Bridgewater boss predicts an era of more radical monetary policy
(…) “While QE will push asset prices somewhat higher, investors/savers will still want to save, lenders will still be cautious lenders, and cautious borrowers will remain cautious, so we will still have ‘pushing on a string’,” he wrote.
He therefore predicts that central banks will eventually have to usher in what he calls “monetary policy 3” — where rate cuts were the first stage and quantitative easing the second phase — which will more directly and forcefully encourage spending.
The Bridgewater founder says this third era of monetary policy will range from central banks directly financing government spending through electronic money-printing to what the famous economist Milton Friedman coined “helicopter money” in 1969, in other words central banks disbursing cash directly to households.
“To be clear, we are not describing what will happen tomorrow or what we are recommending, and we aren’t sure about what will happen over the near term,” Mr Dalio wrote.
“We are just describing a) how we believe the economic machine works, b) roughly where we believe that leaves us, and c) what these circumstances will probably drive policymakers to do — most importantly that central bankers need to put their thinking caps on.”
Radical solutions like helicopter money have been periodically discussed by economists but dismissed by policymakers, but there is a growing conviction among money managers and economists that with the ability of central banks to buttress economic growth at the very least now limited, more focus should be shifted over to fiscal policy. (…)
(…) Markets are expecting the ECB’s deposit rate to be cut another 10 basis points to minus 0.4 per cent next month, while the €60bn quantitative easing programme launched a year ago is likely to be increased in scope. (…)
Peter Praet, another member, noted that financial market conditions in the euro area “had clearly deteriorated”.
ECB board members “widely agreed” that monetary policy was having its intended impact of easing financing conditions, supporting the real economy and bolstering the eurozone’s resilience to external shocks.
But new data last week offered grounds for scepticism, as the eurozone economy expanded just 0.3 per cent in the final quarter of 2015, while inflation in the region is stuck at 0.4 per cent. It has been below 1 per cent for more than two years and missed an official inflation target of “close to but below” 2 per cent for four years.
The 2.3 percent jump in the volume of sales was almost three times the pace of growth forecast by economists in a Bloomberg survey. The Office for National Statistics said growth was helped by post-Christmas price cutting as retailers looked to clear excess stock.
The increase more than reverses the drop in sales in December, when mild weather curbed spending on clothing.
Measured by the retail deflator, prices fell an annual 2.6 percent in January, a 19th straight decline, Friday’s data from the ONS showed.
From a year earlier, retail sales rose 5.2 percent in January, the office said. On the month, food sales increased 1.1 percent and clothing and footwear sales were up 3.3 percent.
In the last three months, total sales have risen 1.4 percent, a 26th consecutive increase.
China’s Ministry of Finance said it will cut taxes on home transactions as it steps up support for the property market, after the central government eased mortgage down payment requirements to the lowest level ever earlier this month.
China will set the deed tax at 1.5 percent of the home’s value for first residences bigger than 90 square meters (969 square feet) and at 1 percent for those smaller than that size, the ministry said in a statement on its website on Friday. Homeowners that live in cities other than the four first-tier ones including Beijing, Shanghai and Shenzhen will also be exempt from paying a business tax on properties sold after two years of purchase. The new rules will be effective as of Feb. 22.
In reducing the taxes, China took another step to prop up home sales as it seeks to dissolve a glut of unsold homes. The government has pledged to reduce home inventory as one of its key tasks in 2016. The area of unsold new homes nationwide increased 12 percent from a year earlier to 441 million square meters (4.7 billion square feet) as of Nov. 30, according to the latest available data from the statistics bureau. (…)