Following on a string of recent stronger than expected data in the manufacturing sector, today’s release of the Philadelphia Fed Manufacturing survey showed a surge for March. While economists were forecasting the headline index to come in at a level of -1.5, the actual reading came in at +12.4. That was the first positive reading since August, the highest reading since last February, the largest monthly increase since November 2014, and the strongest report relative to expectations since November 2014. Concerns about weakness in the manufacturing sector that were so persistent in the beginning of the year are becoming more and more scarce by the day.
While the surge in the headline reading for the Philly Fed report was impressive, the internals were even more so. The table to the right lists the m/m change for each category. You may recall that last month, every component of the report besides the top line headline reading declined. This month, nearly the opposite happened. As shown in the table, every component increased this month, and some by a lot. New Orders, for example, surged 21 points which is the largest monthly increase since October 2005! Shipments haven’t seen such a large monthly increase since March 2014, and the last time every component of the Philly Fed report increased on a month to month basis was back in August 2009. (Bespoke Investment)
Haver Analytics relates the various Fed district surveys to the ISM:
The ISM-adjusted General Business Conditions Index constructed by Haver Analytics increased to 51.7 from 44.7. It also was the highest level since April and 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.
Doug Short averages out the last 3 months:
Meanwhile, the LEI has been flat for nearly a year…
The Conference Board LEI for the U.S. edged up in February, driven mostly by large positive contributions from initial claims for unemployment insurance (inverted) and the yield spread. In the six-month period ending February 2016, the leading economic index increased by just 0.3 percent (about a 0.7 percent annual rate), much slower than the growth of 2.0 percent (about a 4.0 percent annual rate) during the previous six months. Despite a more modest pace of growth, the strengths among the leading indicators have remained slightly more widespread than the weaknesses. [Full notes in PDF]
Global Currencies Soar, Defying Central Bankers Efforts by many of the world’s central banks to weaken their currencies are failing, raising concerns about whether policy makers are losing the ability to wield control over financial markets.
Despite the Bank of Japan’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies. (…)
Even some central banks with less actively traded currencies are having a hard time guiding markets. Norway’s central bank on Thursday cut its main interest rate to a record low of 0.5%, and a bank governor said he wouldn’t rule out negative rates, in which central banks charge big lenders to hold deposits. The Norwegian krone gained more than 1% against the dollar and was up against the euro. (…)
“Central banks are experimenting in real time,” he said. “There is no lab for them to practice in.”
Fewer Americans Got Hired or Quit Their Jobs in January The number of people hired into a new job or quitting an old job both declined in January, a sign that despite the overall 4.9% unemployment rate, the labor market has yet to regain its full vitality.
Five million people were hired in January, down from 5.4 million in December. The number of people quitting declined to 2.8 million from 3.1 million. The number laid off was little changed at 1.6 million. (…)
The decline in quitting in January represents a shift toward a less healthy mix of job separations. Among those who left a job in January, a smaller share did so voluntarily. (…)
And in a development that’s perplexed observers of the labor market, the number of job openings available at the end of the month continued to climb. Job openings are near their all-time peak, but for whatever reason, the pace of hiring is not following suit. Large numbers of jobs sit unfilled.
U.S. Subprime Auto ABS Delinquencies Hit Highest Level Since 1996 Delinquencies on U.S. subprime auto ABS have eclipsed 2009 recessionary levels and are now at a level not seen in nearly two decades.
Subprime delinquencies of 60 days or more hit 5.16% for February reporting, marking the highest level observed since October 1996 (5.96%). During the most recent recession, delinquencies peaked at 5.04% in January 2009. February’s delinquencies are increased 11.63% year-over-year (YoY) and 3.63% month-over-month (MoM).
Subprime annualized net losses (ANL) have followed the rise in delinquencies, reaching 9.74% as of February, an increase of 34.10% YoY and 11.59% MoM from January reporting. Despite the increase, ANL remains below the recessionary peak of 13.14% experienced in February of 2009.
Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year. Subprime ABS issuance averaged just over $20 billion in 2013 and 2014 before ballooning to over $25 billion in 2015, the highest level since 2005-2006. The number of lenders issuing ABS also increased to 19 in 2015 compared to the previous high of 14 in 2005 and 2006. Increased competition has led to increases in loan-to-value (LTV) ratios and extended term lending. Additionally, lenders have marginally weakened credit standards, with particular increases in originations to borrowers with no FICO scores. (…)
In contrast, performance within the prime sector remains stable, albeit slightly weaker. 60+ day delinquencies stood at 0.46% for February reporting, up 9.27% MoM but flat compared to the same period a year earlier. Prime ANL has increased slightly in 2016, reaching 0.69% for February, increased 32.17% YoY. While representing the highest level since February 2011 (0.90%), losses are still well below the historical average of 0.92% and the recessionary peak of 2.23% in January 2009. (…)
Fitch expects both prime and subprime auto loan ABS asset performance to improve over the spring months with the onset of tax refunds. That said, typical seasonal benefits are likely to be more muted this year versus recent years given rising pressures on the aforementioned asset performance as well as anticipated weakness in the wholesale market. Both the prime and subprime sectors have been buoyed by strong used vehicle values over the past five years, contributing to lower loss severity on defaults. However, with new vehicle sales and expected off-lease vehicle supply levels at historical highs entering 2016, Fitch anticipates weakness in the wholesale market, as reflected by the Manheim Used Vehicle Value Index (Manheim), which recently dipped 1.4% in February. Any future declines in the Manheim, as well as other market indicators, will likely contribute to higher loss severity for defaults and drive losses higher.
Despite further weakness anticipated, Fitch continues to have a stable outlook for prime and subprime auto ABS asset and ratings performance in 2016. ANL is expected to rise at or near the 1% and 10% area for prime and subprime, respectively, both well within peak recessionary levels.
Fitch’s indices track the performance of $99.5 billion of outstanding auto loan ABS transactions, of which 61.68% is prime and the remaining 38.32% is subprime ABS as of February 2016 reporting.
Property prices soar in top China cities Price increases in top cities expand, smaller cities bottom out
(…) Prices of new residential buildings in Shenzhen rose 57 per cent from a year earlier, up from January’s increase of 52 per cent, data from the National Bureau of Statistics showed on Friday. Meanwhile, the northern city of Dandong in rust-belt Liaoning province saw prices drop 3.9 per cent.
Nationally, prices rose at an average annual 2.8 per cent, the biggest one-month rise since June 2014, according to FT calculations based on government data. There are signs that price gains are also feeding through to increased construction activity. Growth in property investment accelerated in the first two months of 2016, breaking a two-year run of slowing growth.
Governments in Beijing and Shanghai are now concerned about housing-market overheating and undersupply, while other cities still face an overhang of unsold houses built in expectations of gravity-defying property inflation. (…)
Overall, 32 of 70 cities in the government’s official price survey posted annual price gains in February, up from 25 cities in January. Analysts expect local governments in major cities to adopt measures to tamp demand, while a slow-motion recovery in smaller cities will continue. (…)
Highlighting the contrasting fortunes of China’s two-tier property market, the central bank last month cut the minimum downpayment requirement on mortgages outside of top cities from 25 to 20 per cent, in a bid to boost demand. (…)
Hit by one of the weakest earnings seasons in at least nine years, combined with waning faith in central banks, the Euro Stoxx 50 Index is expected to advance 1 percent for all of 2016. Only a few months ago, those same strategists were calling a 12 percent rally. The most dramatic about-face: Societe Generale SA, which cut its estimate from a 22 percent surge to a 0.5 percent decline. (…)
Two-thirds of the Euro Stoxx 50 members are still trading below their Dec. 31 level. (…)
At least 10 of 12 strategists surveyed by Bloomberg have lowered their 2016 forecast since December, cutting the average year-end projection for the Euro Stoxx 50 to 3,301 from 3,646. Back then, the most pessimistic call, that of Bankhaus Lampe KG, forecast a 6.2 percent gain. (…)
Analysts expect profits for Euro Stoxx 50 members to grow by only 1.5 percent this year, down from 5.1 percent in December. (…)
Hedge fund closures back to crisis highs Clients became risk averse in 2015 as big names suffered losses
(…) Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter. (…)
The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show. (…)
So far, this year does not appear to be any kinder for the industry.
Between market losses and redemptions, assets in hedge funds fell by $64.7bn in January, bringing total money in the industry below $3tn for the first time since crossing that threshold in May 2014, according to data provider eVestment. Redemptions in January were the worst since January 2009.
In February — normally a big month for inflows — about $3bn of new money trickled in, compared with $18.6bn last year, eVestment data show. Investment losses dragged down total assets by almost another $20bn to $2.95tn. (…)
Herd mentality hurts hedge funds Markets are being whipsawed by the Fed, but it’s not working out for most hedgies
(…) Avoiding the crowd is difficult: iconoclasts miss the momentum on the way up and look bad by comparison, or they get caught in a short squeeze. But even those who play it safe may find the snapback painful when the mood turns. Last year, according to Novus research, returns dropped for hedge funds in “crowded” trades. That may be because the number of hedge funds hit a record last year — there are too many funds chasing too few ideas. Adding to the crowd are retail investment products, such as AlphaClone and Guru, that scrape hedge fund filings, mimic their investments, and now share their losses.
Trading in widely-held or widely-shorted names such as Facebook, Apple, and Netflix is already at the mercy of the view of hundreds of hedgies. Breaking away from them may lead to greener pastures.