The Latest Conference Board Leading Economic Index (LEI) for July increased 0.4 percent to 124.3 from June’s revised 123.8 (previously 123.7) and an upward revision was made to May’s number.
Here is an overview from the LEI technical press release:
The Conference Board LEI for the U.S. increased for the second consecutive month in July. Positive contributions from hours worked in manufacturing, initial claims for unemployment insurance (inverted) and financial subcomponents more than offset the negative contribution from consumer expectations for business conditions. In the six-month period ending July 2016, the leading economic index increased 1.1 percent (about a 2.1 percent annual rate), faster than the growth of 0.2 percent (about a 0.3 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators became more widespread. [Full notes in PDF]
We are pretty close to the potential trigger…
…or maybe not that close…
And this from Bespoke Investment:
The Philadelphia Federal Reserve reported that its General Factory Sector Business Conditions Index improved in August to 2.0 from an unrevised -2.9 in July. This latest positive reading compares with negative figures throughout most of the year, and was higher than December’s low of -10.2.
The rise in the Philadelphia Fed index contrasts to the decline in the Empire State reading, released Monday. The shipments component and the prices paid series improved, while new & unfilled orders, delivery times and inventories deteriorated.
The employment component dropped sharply to the lowest level of the economic expansion. During the last ten years, there has been an 81% correlation between the jobs index and the m/m change in manufacturing sector payrolls.
The ISM-Adjusted General Business Conditions Index, constructed by Haver Analytics declined to 45.4 this month from 49.9 in July, and both readings continued to indicate declining activity. The ISM-Adjusted headline index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each). This figure 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.
The Haver chart above shows a sharply rising Future Activity Index against a flat Current Activity Index. Why expectations would be so positive against weak new orders and declining Unfilled Orders is a mystery.
From The Daily Shot:
Oil Companies Need Prices to Keep Rising Past $50 a Barrel A rally that pushed international crude-oil prices above $50 a barrel Thursday is a welcome sign for many energy companies but not enough to kick-start an industry in the midst of a two-year slump, executives said.
(…) It won’t be until next year that BP PLC plans to generate enough cash to be cash-flow neutral—meaning it can cover its capital spending and dividend payouts—with oil prices at $50 to $55 a barrel, even after a series of huge cost cuts. Exxon Mobil Corp. has said it would be in a similar position next year at $40 to $80 a barrel and Chevron Corp. has said it would balance its cash generation and spending at $52 a barrel next year—after as much as $5 billion in asset sales.
As oil crosses back into $50 territory, some American shale producers with strong balance sheets are starting to drill again. For instance, Apache Corp., based in Houston, set its budget for 2016 assuming an average oil price of $35 a barrel, but higher prices in recent months have allowed it to add a rig in Texas and keep two drilling in the North Sea that it was planning to release.
But Dave Hager, chief executive of Devon Energy Corp., said many U.S. producers need oil to hit $60. (…)
Wood Mackenzie is forecasting that oil prices will average $55 a barrel in 2017, as long as demand for oil holds up and U.S. production doesn’t kick back in. The Scottish energy consultancy said oil companies have cut around $1 trillion of capital investment in new oil and gas projects from the shale fields of Texas to oil deposits in the North Sea from 2015 to 2020.
For the largest companies, the uptick to $50 a barrel doesn’t help much in their quest to maintain their dividend payouts to investors this year. (…)
- There seems to be some maneuvering by the Saudis ahead of the expected OPEC/Russia output freeze, as the nation’s production may hit a record this month. (The Daily Shot)
This Kind of Corporate Debt Gets Bigger as Rates Drop Investors can expect pension plans in deficit to demand higher contributions at upcoming funding reviews.
Companies tend to put pension-fund deficits in the same box as goodwill write-downs or hedge revaluations: accounting technicalities with little bearing on business. This convenient fiction is becoming ever harder to sustain in Europe, where falling bond yields in the wake of Brexit are generating staggering inflation in projected pension obligations.
In the U.K., the liabilities of defined-benefit pension plans—whereby the employer shoulders the risks of pensioner longevity and poor investment performance—totaled £139 billion more than the assets backing them at the end of July, according to a Mercer survey of the largest 350 listed companies. That’s more than twice the £64 billion deficit at the start of the year. The situation elsewhere in Europe is only slightly less dramatic, with deficits in the Netherlands up by almost two-thirds and those in Ireland roughly doubling year to date.
The lower the return on capital the more capital is required now to fund future payments to retired staff. The accounting treatment of pension liabilities therefore relies on bond yields. These have fallen dramatically this year as investors have cut growth expectations and both the European Central Bank and the Bank of England have cut benchmark interest rates.
The bond bull market has also buoyed the value of pension plan assets—but by less than their liabilities. Only 61% of FTSE 100 pension assets were invested in bonds at the end of last year, reports JLT, another consultant.
The resulting shortfalls can amount to an alarming share of companies’ stock-market valuations. The worst offender, according to RBC, is car-parts group GKN, whose pension plan liabilities at the end of June outweighed its assets to the tune of £2.1 billion—45% of its market capitalization. Other prominent offenders were defense group BAE, Systems (39%), telecom operator BT Group (21%) and British Airways owner IAG (9%).
The key risk for shareholders is to cash flows. Every three years U.K. companies are required to agree on new funding deals with their pension plans. This year’s ballooning deficits will oblige many to raise their contributions. That means a greater share of profits will flow to pensioners rather than shareholders or growth initiatives.
The current surge in deficits is partly cyclical: any increase in long-term bond yields would ease the pain. But the current drift of central-bank policy is in the opposite direction. The U.K. deficits measured by Mercer increased by £10bn in the first five days of August alone as a result of the Bank of England’s unexpectedly punchy easy-money package.
Ratings firms treat pension-fund deficits as a form of debt, albeit one with a volatile redemption value. The difference—an unfortunate one in the current environment—is that looser monetary policy increases the cost of this debt.
Pension deficits are not just a balance-sheet problem; by taking cash flows away from investment, they also weigh on growth. In Europe even more than in the U.S., investors let their eyes glaze over at their peril.