U.S. Retail Sales Rose 0.6%, Pointing to Confident Consumers Household spending and the broader U.S. economy remain on track for decent growth despite growing consumer angst over the heated presidential campaign.
Household spending and the broader U.S. economy remain on track for decent growth despite growing consumer angst over the heated presidential campaign.
Sales at retail stores, online retailers and restaurants rose a seasonally adjusted 0.6% in September from the prior month, matching economists’ expectations for a rebound after sales fell 0.2% in August, the Commerce Department reported Friday.
Stronger auto sales and rising gasoline prices boosted the headline figure last month, and spending excluding gas and autos rose a more modest 0.3%, though that was still the best gain in three months. (…)
Retail sales in September were up 2.7% from a year earlier, up from 2.1% annual growth in August and easily outpacing price inflation. Sales for the third quarter as a whole rose 2.4% from the same period in 2015. (…)
Spending at restaurants and bars jumped 0.8% from August, the largest one-month jump for the category since February.
Interesting that the WSJ saw a “confident consumer” the same day as the consumer proclaimed himself the least confident he has been in over 2 years.
The [University of Michigan] Sentiment Index slipped in early October to its lowest level since last September and the second lowest level in the past two years. The early October loss was concentrated among households with incomes below $75,000, whose Index fell to its lowest level since August of 2014. (…) Perhaps the most concerning figure was a decline in the Expectations Index, which fell to its lowest level in the past two years, again mainly due to declines among households with incomes below $75,000.
The WSJ also did not see fit to dig a little more in the data. It might have found these details:
- The 3-month change in total sales at +2,1% is the weakest since March. The September upturn leaves total sales 0.7% higher in the third quarter, less than half of the 1.5% expansion seen in the second quarter.
- Control group sales, which comprise nonauto sales less gasoline, building materials & restaurants, sales rose 0.1% (2.5% YoY) after two months of decline. The 3-month trend in what goes into Q3 GDP is –0.8% a.r. From May to September: +0.2% a.r., negative 2.0% in real terms.
- Restaurant and bar sales jumped 0.8% MoM following +0.7% in August and are up 6.1% YoY. This in spite of seemingly poor trends as reported by the National Restaurant Association:
Due in large part to declines in both same-store sales and customer traffic, the National Restaurant Association’s Restaurant Performance Index (RPI) fell below 100 in August. The RPI stood at 99.6, down 1.0 percent from a level of 100.6 in July. (…)
The August reading represented the lowest value since February 2013. After three consecutive months of mixed results, same-store sales reports took a downward turn. Only 30 percent of restaurant operators reported a same-store sales increase between August 2015 and August 2016, while 53 percent reported a sales decline.
Similarly, operators reported a net decline in customer traffic. Only 21 percent reported an increase in customer traffic between August 2015 and August 2016, while 59 percent reported a traffic decline. August represented the fourth consecutive month in which restaurant operators reported a net decline in customer traffic.
Following the retail trade data, the Atlanta Fed:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 1.9 percent on October 14, down from 2.1 percent on October 7.
While the NY Fed Nowcast for Q4 turned upwards from +1.4% to +1.6% as “higher than expected retail sales data had the largest contribution, particularly for Q4.”
The very weak control group sales through the back-to-school season should worry the FOMC, even more knowing that retailers’ inventory-to-sales ratio ticked up in August (and likely again in September).
The risk is growing that year-end sales may miss expectations and carry excess inventory into next year. Wholesale and manufacturing inventories are also higher than desired:
- Particularly in the important automobile industry. (Left chart: total auto inventory/sales; right chart: wholesalers inventory/sales)
Mrs Yellen seems to understand the risk of tightening too soon here and is sending a strong message to her 14 hawks:
Yellen Cites Benefits to Running Economy Hot for Some Time Federal Reserve Chairwoman Janet Yellen offered an argument for running the U.S. economy hot for a period to ensure moribund growth doesn’t become an entrenched feature of the U.S. business landscape.
(,,,( That would mean letting unemployment fall lower and spurring faster growth to boost consumer spending and business investment.
This could encourage businesses to spend more on new equipment that would have lasting benefits for the economy and encourage future growth, she said. A fast-growing economy and low unemployment also could encourage individuals who have stopped looking for work to start looking again, expanding the labor force and national income.
Moreover, running the economy hot could encourage higher levels of research and development and increase incentives for new business formation.
(…) She effectively expressed sympathy for the idea of keeping short-term interest rates low to let the economy gather steam and reverse some of the long-run debilitating effects of the slow recovery, such as low labor-force participation and business investment. That implied very gradual rate increases in the months ahead. (…)
Ms. Yellen noted that the link between a tighter labor market and inflation seems to have weakened in recent years. Economists have found in the past that a falling unemployment rate tended to raise inflation, a connection known as the Phillips curve. But that hasn’t happened since the recession.
“The influence of labor-market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis,” she said. (…)
But this debate will be hot:
(…) “Our own forecast would say there is a reasonable probability that we would go beyond my estimate of full employment,” which is 4.7 percent, Rosengren said in an interview Saturday following a conference he hosted at the Boston Fed. “I think that actually is consistent with running it a little bit hotter.”
Rosengren said this strategy has helped bring more people into the labor force, but if pushed for too long risked triggering higher inflation or asset price bubbles that would force a more severe reaction from the Fed. (…)
- The Global PMI™, compiled by Markit for JPMorgan, edged up to an eight-month high of 51.7 in September. However, the PMI points to annual global GDP growth (at market prices) of just less than 2% in Q3, which would be the slowest for just over three years. With new business growth ticking lower in September, employment also remained under pressure. The rate of global job creation is running at its slowest since early-2013.
- The downshifting of developed world growth, which started earlier in the year, showed only tentative signs of easing. Emerging market growth meanwhile waned slightly but remained well above the lows seen earlier in 2016 to suggest a modest easing in the drag on the global economy.
- At 51.9, the developed world PMI rose to a five-month high, but the current level still looks weak when compared to the average of 54.5 seen in 2015. Companies in many countries reported business to have been subdued by political uncertainty. The survey data are signalling annual developed world GDP growth of less than 1% (at market prices).
- Global manufacturing remained stuck in a low gear in September amid weak trade flows. Thelatest PMI surveys are roughly consistent with global manufacturing output rising at a modest2% annual pace; better than the stalling seen earlier in the year but still disappointingly modest.
Global Policy Uncertainty, a Drag on Growth, Is Higher Than in Crisis Years A confluence of political events around the world is fueling market anxieties, a new study says
Global policy uncertainty is averaging higher now than during the 2008-09 financial crisis, adding another headwind to world struggling to revive growth.
That’s the surprising result of new index that helps economists draw the line between the uncertainty created by politicians and its effects on economies.
“The elevated levels of global policy uncertainty in the past five years compared even to the crisis years of 2008-09 are remarkable,” said University of Chicago economist Steven Davis. “They have contributed to the disappointing performance of the global economy in recent years.” (…)
The headline Final Demand Producer Price Index increased 0.3% (0.7% y/y) during September following unrevised stability in August. Excluding food & energy, prices gained 0.2% (1.2% y/y), the largest rise in three months. The PPI excluding food, energy & trade services rose 0.3% (1.5% y/y), the same as in August.
Food prices gained 0.5% (-3.5% y/y) after two months of sharp decline. (…)
Final demand prices for goods less food & energy increased 0.3% (0.9% y/y), the strongest rise since April. (…) Final demand services prices improved 0.1% (1.4% y/y), the same as in August.
Government Bonds Pounded by Inflation Fears Government bonds were being sold off around the world over worries that inflation is on the rise and the days of ever looser monetary policy are over.
International economics has evolved since the Victorian era, and world trade no longer consists of final consumption goods being bartered for raw materials. The rise of global value chains has come with huge growth in the trade of intermediate and capital goods. Any economy’s manufacturing exports today contain a significant chunk of value that is added abroad. We find that the low domestic value added in UK manufacturing means sterling depreciation will hurt exporters as well as help them. (…)
Services make up 45 per cent of UK exports, but demand for services is less sensitive to price than goods, with providers competing on product quality rather than price.
Well, here’s what Markit’s U.K. PMI survey said 2 weeks ago:
Conditions in the UK manufacturing sector continued to improve at the end of the third quarter. (…) The domestic market remained a prime driver of new business wins, while the weaker sterling exchange rate drove up new orders from abroad. (…)
September saw manufacturing production expand at the quickest pace since May 2014. (…)
Underpinning the latest scaling up of output was a marked increase in new business. New orders rose to the second-greatest extent since mid- 2014. Companies linked the latest increase to higher sales to both domestic and overseas clients, supported by promotional activity and (for exports) the weaker sterling exchange rate. (…)
September saw the level of incoming new export orders increase at the fastest pace since January 2014. UK manufacturers reported improved demand from clients in Asia, Europe, the USA and certain emerging markets. (…)
The Q3 season is underway and Factset summarizes the first week:
- With 7% of the companies in the S&P 500 reporting actual results for Q3 to date, the percentage of companies reporting EPS above the mean EPS estimate (76%) is above the 1-year (70%) average and above the 5-year (67%) average.
- In aggregate, companies are reporting earnings that are 6.1% above the estimates. This surprise percentage is above
the 1-year (+4.8%) average and above the 5-year (+4.4%) average.
- In terms of revenues, 62% of companies have reported actual sales above estimated sales and 38% have reported
actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-
year average (50%) and above the 5-year average (54%).
- In aggregate, companies are reporting sales that are 1.1% above expectations. This surprise percentage is above the
1-year (0.0%) average and above the 5-year (+0.6%) average. If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would improve to 4.2% from 2.6%.
- The blended earnings decline for the third quarter is -1.8% this week, which is slightly smaller than the blended
earnings decline of -2.1% last week. If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would improve to 1.8% from -1.8%.
- At this point in time, 6 companies in the index have issued EPS guidance for Q4 2016. Of these 6 companies, 4 have
issued negative EPS guidance and 2 have issued positive EPS guidance.
The “beat game” is well known as Lance Roberts reminds us:
(…) in just the past three months, analysts have now ratcheted down their estimates for the third quarter to their lowest levels yet.”
To me, the key will be the corporate guidance into Q4 which remains pretty upbeat at this point with Factset at +5.6%, Thomson Reuters at +8.1% and S&P at +35%. The wide gaps primarily relate to how each aggregator treats “special items”. Q4’15 included many writedowns from Energy companies, Financials (e.g. AIG) and Utilities. I continue to rely on TR data at this time.
Large Q4 EPS jumps are currently forecast in Financials, Materials and Utilities. Estimates for Financials are likely to prove much too high (see below). Materials could be impacted by the stronger dollar and Utilities’ true “operating profits” will likely be more subdued, especially with recently rising energy prices. The U.S. Energy Information Administration currently expects Q4 electricity power generation fuel costs to rise 1.8% YoY for coal, 35% for natural gas, 19% for resid oil and 12% for distillate oil. All these prices were down meaningfully YoY during the first 9 months of 2016.
Factset also warns that the Insurance industry’s profits fro Q4, currently estimated up 52%, could need to be revised sharply lower due to hurricane Matthew
On October 7, Hurricane Matthew hit the southeast coast of the United States. The damage and destruction from the hurricane will impact the earnings of many sectors and industries (e.g., retailers, restaurants, hotels) in the region in the fourth quarter. One industry that will likely see a negative impact to earnings due to the storm is Insurance, as a number of companies in this industry will likely report catastrophe losses for Q4 2016 due to the storm.
Hurricane Sandy (which hit the east coast of the US in October of 2012) caused the S&P 500 Insurance industry to record a much larger decline in earnings for Q4 2012 than expected prior to the storm. For Q4 2012, the Insurance industry reported a year-over-year decline in earnings of -31.2%, compared to an estimated earnings decline of -4.2% on September 30 (prior to the storm). Within the Insurance industry, the Property & Casualty and Multi-line Insurance sub-industries reported the largest decreases in earnings due to the storm. The Property & Casualty sub-industry reported a year-over-year decline in earnings of -45% for Q4 2012, compared to an estimated decline of -4% on September 30, 2012. The Multi-line Insurance sub-industry reported a year-over-year decline in earnings of -78% for Q4 2012, compared to an estimated decline of -16% on September 30, 2012.
The Financials sector is expected to report earnings growth of 15.3% for the fourth quarter. The Insurance industry is currently projected to report the largest earnings growth (52%) of all five industries in the Financials sector for Q4 2016. This industry is also projected to be the largest contributor to earnings growth for the entire Financials sector for the fourth quarter. At the company level, AIG is expected to be the largest contributor to earnings growth for both the Insurance industry and the entire Financials sector for Q4 2016, due to an easy comparison to a year-ago loss. The company is expected to report EPS of $1.24 for Q4 2016, compared to actual EPS of -$1.10 in Q4 2015. AIG is classified as a Multi-Line Insurance company. Thus, any substantial downward revisions to EPS estimates for AIG due to catastrophic losses for Hurricane Matthew will have a significant impact on the overall earnings growth expectations for the Financials sector for Q4.
US banks: dead calm One-off boosts to earnings are nice but it’s still all about rates
(…) Creditors and regulators, not tied to bank equity performance, only see stable vessels. Shareholders remain resigned to weak earnings. They will only catch a tail wind once rates finally go up.
(…) Heading into October, the hope had been that the earnings recession, marked by five straight quarters of S&P 500 profit declines, might be coming to an end. Never mind that much of the weakness in earnings was energy-related; without energy, earnings grew in three of the past four quarters, this year’s first quarter being the lone exception. Likewise, the drop in energy profits was responsible for the two-percentage-point decline in the past six quarters in S&P profit margins, to 14%. Stripping out the energy sector left margins roughly unchanged. (…)
Earnings growth is not necessarily the primary driver of stock valuation. Rather, valuations typically reflect the level of interest rates and cash being returned to shareholders.
On both metrics, the market looks far from overvalued. Companies today are converting about 20% more of net income into free cash flow than they did 15 years ago, and that cash flow is being used to pay dividends and buy back shares. That has pushed the S&P 500’s total yield—the percent of cash returned to shareholders through dividends or buybacks—up to 4.7%, topping the 4.2% yield on long-term corporate bonds, Golub says.
With numbers like that, valuations could actually move higher, he adds. “We’re not going to have inspiring earnings,” Golub says, “but all you need is ‘perfectly fine.’ ” (…)
Just for your interest, the correlation between S&P 500 EPS and the Index is 97% since 1926 and since 1950 and 95% since 1980.
ON THE FENCE
Barron’s Big Money Poll: The Bulls Rule, for Now Stocks could rise 9% through 2017, say U.S. money managers.
(…) Our latest poll finds 45% of respondents bullish or very bullish about the market’s outlook through the middle of 2017, up from the spring poll’s record-low tally of 38%. The increase owes largely to a defection from the fence-sitters’ camp, with only 39% of poll participants calling themselves neutral on equities today, down from 46% in the spring.
A modest quickening of global economic activity and a related uptick in commodities prices seem to have quelled some money managers’ doubts since spring, as did the market’s strong summer rally to all-time highs. (…)
NOTWITHSTANDING the uptick in bullish sentiment, a third of Big Money managers consider the stock market overvalued at current levels, and 57% find stocks fairly valued. Ninety percent call a correction of 10% or more somewhat or very likely within the next 12 months, with possible catalysts ranging from an economic slowdown or recession (35%) to rising interest rates (22%), earnings disappointments (10%), geopolitical crises (8%), and the election of Donald Trump (8%).
The managers seemingly are resigned to a period of substandard performance, as only 20% think U.S. stocks will equal or surpass their long-term average annual gain of about 9% in the next five years. But hope springs eternal for this aging bull. Nearly 60% see a return to form, or better, in the next 10 years, and 74% predict a reversion to the mean over the next 20 years. (…)
The bears’ lair is home to 15% of managers this fall, about on par with the spring. Respondents who call themselves bearish or very bearish see the industrials falling 5.5% through next June, to 17,114, before rebounding to 17,186. The S&P 500 could tumble almost 7% in the next 14 months, to 1990, while the Nasdaq, home to smaller, more speculative issues, could fall more than 8%, to 4764. (…)
Sixty-five percent of managers consider fixed income the least-attractive asset class today, and nearly as many expect bonds to be the worst performers in coming months. (…)
Only 20% expect the global economy to weaken in the next 12 months, and less than 20% anticipate a U.S. recession. As for U.S. gross domestic product, which grew at a revised 1.4% in the second quarter, the picture is gradually improving. A quarter of poll respondents expect growth to remain below 2% in the next 12 months, but more than 60% see GDP reaching 2% or 2.5%. (…)
Jason Zweig has done us all a favor with these two links:
(…) In a new research paper in Business History Review, an academic journal, finance professor David Chambers of Cambridge’s Judge Business School and economist Ali Kabiri of the University of Buckingham analyze how Keynes mustered the courage to invest heavily in U.S. stocks devastated by the crash and the ensuing depression. (…)
Chapter 12 of Keynes’ book “The General Theory of Employment, Interest and Money,” which he wrote 80 years ago, remains one of the most concentrated bursts of brilliance anyone has ever brought to bear on investing. His words still ring with the resolve it must have taken to buy when blood was running in the streets:
“The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.” (…)
Nice to know that, at least, the data is sophisticated…