EUROZONE RETAIL SALES EXPLODE
I have not seen this in any mainstream media. Yet it could be the most important economic news this year given that it comes along the same strong trend in U.S. retail sales between November and January. The volume of retail sales in the Euro Area rose 0.4% MoM in January following a 0.6% jump in December. Last 2 months annualized: +6.2% in real terms, during the two most important months of the year (Eurostat).
Core retail sales were even stronger rising 0.5% and 0.7% MoM in December and January respectively, a 7.4% annualized rate, in volume.
It seems that consumers are finally reacting to the oil windfall. If this continues, we’re in for many surprises…
U.S. Productivity Fell in Fourth Quarter of 2015 The U.S. economy experienced one of its worst productivity declines in more than two decades at the end of last year, extending a sluggish trend that threatens to constrain worker pay and economic growth in the coming years.
(…) The productivity of nonfarm workers, measured as output per hour worked, decreased at a 2.2% seasonally adjusted annual rate in the fourth quarter, the Labor Department said Thursday. Output rose at a 1% pace and hours worked rose at a 3.2% pace.
That was an upgrade from the agency’s initial estimate last month that productivitydeclined at a 3% annual rate in the final three months of the year. (…)
Still, it was the weakest productivity reading since the first quarter of 2014. Since the end of 1994, only four quarters have seen a larger decline. (…)
Unit labor costs at nonfarm businesses rose at a 3.3% pace in the fourth quarter, the agency said, revised down from an earlier estimate of 4.5% growth. (…)
Productivity in the fourth quarter rose a mere 0.5% from a year earlier. For all of 2015, productivity growth averaged 0.7% compared with 0.8% in 2014. Since 2007, productivity growth has averaged 1.2%.
Quarterly productivity data are volatile and undergo frequent revisions. Still, a broad and persistent slowdown in productivity gains has haunted the U.S. and other advanced economies for years. (…) (Charts from Haver Analytics)
The narrowing of margins stems from the more rapid climb of labor costs relative to labor productivity. This is important because recessions occurred each time unit labor costs outpaced corporate gross value added over a yearlong span.
In 2015’s third quarter, unit labor costs accelerated to a 2.7% yearly increase that outran the accompanying 2.4% rise by net revenues, or corporate gross value added. Whether or not unit labor costs grew more rapidly than net revenues in 2015’s final quarter is problematic.
Mostly because the yearly increase of hourly compensation slowed from the 3.4% of the previous two quarters to Q4-2015’s 2.6%, the annual increase of unit labor costs slowed from the 2.6% of 2015’s middle two quarters to the 2.1% of 2015’s final quarter. Though it may now be easier for Q4-2015’s net revenues to at least match the growth of unit labor costs, the yearly increase of core revenues (which exclude energy product sales) slowed from Q3-2015’s 2.5% to Q4-2015’s 1.4%.
Thus, the unexpected slowing of Q4-2015’s unit labor costs offers no assurance that unit labor costs did not outpace net revenues for a second straight quarter.
However, an incomplete and preliminary estimate suggests that the yearly increase of core revenues may have improved to 2.5% in January. But, even that may not be enough to offset the possibly relentless acceleration of labor costs in a tightening labor market.
All Clear on Recession Risk? Not Yet The market turmoil has subsided, but its repercussions have yet to be felt
(…) Nerves have calmed considerably since. Blue chip indexes are up nicely from their Feb. 11 low. Junk bond yield spreads have narrowed. Oil has stopped going down and the dollar has stopped going up, so expected inflation has risen. Especially important for everyone’s blood pressure, volatility has receded. Vix, the options price-based stock market fear gauge, is back down to December levels. A model developed by Cornerstone Macro put the odds of recession, as signaled by the markets, at 64% on Feb. 11. That has since fallen to 47%.
But no one, including the Fed, should take much comfort from this. The risk of recession hasn’t declined. In fact, it may have edged up. (…)
However, unlike the odds based on financial indicators, those macro probabilities have not since declined. Some indicators, such as surveys of factory purchasing managers, remain in recession territory. (…)
The dollar is still much stronger, stock prices lower and corporate bond yields higher than just a few months ago. Indeed, over the last year and a half, these have collectively tightened financial conditions by the equivalent of 0.75 to one percentage point in the federal-funds rate, notes Lael Brainard, a Fed governor, on top of the actual 0.25 point increase the Fed delivered in December.
Tighter financial conditions always operate with a lag, so it could be a few more months before it’s clear what toll the latest tightening in financial conditions has had on growth. It may turn out to be zero, as with last August’s bout of turmoil.
While a recession is still not the economy’s base case, it’s too soon to sound the all clear.
Recovery by Base Metals Price Index improves outlook
Moody’s industrial metals price index has been recovering since bottoming on January 12, 2016. Since year-end 2015, the +5.6% climb by the base metals price index differs considerably from the accompanying -6.4% slide by the price of oil.
The latest firming of base metals prices is important because it hints of an improving world economy despite the still relatively depressed price of crude oil. In fact, compared to the price of oil, the base metals price index has been a more powerful coincident indicator of world economic activity.
Regarding the annual percent changes of calendar-year averages, the IMF’s measure of the world economy shows a much stronger correlation of 0.74 with Moody’s industrial metals price index than to the world economy’s 0.40 correlation with the price of crude oil. The correlations were obtained from a 37-year sample that began with 1979 and ended in 2015. For a 30-year sample that begins in 1986 and ends in 2015, world economic growth generates correlations of 0.82 with the industrial metals price index and 0.59 with the price of crude oil.
By the way, the correlations between world growth and US real GDP growth are 0.59 and 0.52 for the 37- and 30-years-ended 2015, respectively. Thus, in terms of calendar-year percent changes, the correlation between the industrial metals price index and world economic growth is stronger than the correlation between US real GDP growth and world economic growth.
Credit: Aging Business Cycle to Limit Rally
Since peaking at February 11’s 10.17%, the composite speculative-grade bond yield plunged by a stunning -129 bp to a recent 8.88%, where the latter was its lowest reading since the 8.88% of December 31, 2015. Coincidentally, March 2’s close for the market value of US common equity was the highest since January 6. If spec-grade yields ease further, the market value of common stock may recover all of its 2016-to-date losses.
The combination of a sharply lower spec-grade bond yield and a significantly higher benchmark Treasury yield slashed the high-yield bond spread by -150 bp from February 11’s six and a half-year high of 899 bp to a recent 749 bp. The latter was its narrowest band since the 744 bp of January 11.
A further narrowing by the high-yield spread is possible according to recent readings on the average high-yield EDFTM (Expected Default Frequency) metric, the Chicago Fed’s national activity index, and the VIX index. In fact, these three variables now suggest a range of 625 bp to 650 bp for the high-yield spread. Apparently, high-yield bonds have priced in both a deterioration of the economy and another frightening sell-off of equities.
(…) if business activity firms and equities stabilize, a -100 bp narrowing of the high-yield bond spread is well within reach.
(…) The reasons traders are unruffled about a possible President Trump tell us a lot about how markets assess political risk.
Start with the odds of Mr. Trump upgrading from what rival Marco Rubio has called “Hair Force One” to the real presidential jet: According to online bookies Betfair, Mr. Trump has a 24% chance of securing the White House. That is close to the 27% likelihood punters put on Britain voting to leave the European Union in June, so-called Brexit.
While the U.K. referendum has electrified markets and hammered sterling, similar odds of a Trump victory have had no effect at all.
Why not? A simplistic answer is that few big fund managers—international types who mainly live in coastal cities or abroad—believe Mr. Trump has any chance. The problem is these are the same type of people who play on political-betting sites in their spare time, while Betfair’s odds come exclusively from people outside America because of U.S. gambling rules.
A better answer is that the U.S. election isn’t until November, while Britain’s vote is in June. Traders tend to focus on the next thing in the calendar, and there is plenty else to worry about before American voters head to the polls. This may sound like a cynical comment about short-termism in markets, but hard-to-assess political risks are frequently ignored entirely by traders until they become so obvious they can no longer be avoided. (…)
The risk itself is also hard to assess. While many both in the Republican party and the wider world are horrified at the idea of a president who promises to wall off Mexico and ban foreign Muslims from visiting the U.S., Mr. Trump has committed to few economic policies.
Stephen Jen, founder of hedge fund SLJ Macro Partners LLP, says the market has reacted to Brexit and not Mr. Trump in part because they are the “difference between personalities and institutions.” Brexit is about changing the legal and governmental framework for the U.K. Mr. Trump has put personality way above policies, but would sit in the same Oval Office as any other president, and like them be limited by Congress and the Supreme Court.
“In developed markets you have very strong institutions and the personalities matter less,” he said. “In emerging markets it’s the other way round.” (…)