Fed Sends New Signals About a Possible December Rate Increase Inflation is finally showing signs of behaving the way Federal Reserve officials want it to, bolstering the case for them to raise short-term interest rates next month
(…) Inflation has “increased somewhat since earlier this year,” Fed officials said in a statement released after a two-day policy meeting, noting also that some investors’ expectations of future inflation “have moved up but remain low.” (…)
The Fed’s policy committee “judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” it said. (…)
The word “some” is new. Given that the October manufacturing PMIs were strong almost throughout the world, the Fed needs to make sure that the U.S. consumer is active during the coming holiday period because that would clear the remaining excess inventories in the system and set the stage for a good 2017 first half. The Fed statement acknowledged the slowdown in consumer spending in Q3 vs Q2 (“Household spending has been
growing strong ly…”). The FOMC of Dec. 13-14 should have enough info on retail sales to assess the trend.
Everybody is focused on Friday’s payroll data but retail sales are more significant at this point. Higher employment with increased savings would not help clear excess stocks.
Retail sales will suffer in the months ahead due to rapidly rising medical and rental CPI. Whenever rental and medical costs have risen significantly in the past, they have led to a big decline in retail sales. You can see from the chart below that Medical CPI plus Rental CPI provides a nine month lead on Redbook Same Store Sales. Consumers will start cutting back spending on non-essential items in order to pay for medical care and housing.
Retail stocks are highly correlated to the ups and downs of same store retail sales. As you can see from the next chart, the S&P 500 Consumer Discretionary sector has fallen sharply when rental and medical costs have risen, notably in 2001-02 and 2008-09.
Interesting, but I am not sure Redbook sales are still a good proxy for retail sales given online sales.
BTW, Thomson Reuters’ Same Store Sales Index
(…) is expected to show a 1.1% gain for October 2016, an improvement from October 2015’s -0.4% result. An increase of 3% or more indicates a healthy retail industry. (…)
October marks the last month of the retail industry’s third quarter. Our Thomson Reuters Quarterly Same Store Sales Index, which consists of 80 retailers, is expected to post 1.1% growth for 3Q (vs. 1.4% in 3Q 2015).
The ADP/Moody’s National Employment Report indicated a 147,000 increase (1.9% y/y) in October nonfarm private sector payroll employment following a 202,000 September addition, revised from 154,000.
The ADP report is not a solid indicator but it was pretty weak in October.
The JPMorgan Global Manufacturing PMI, compiled by Markit from business surveys in over 30 countries, rose to 52.0 from 51.0 in September, its highest since October 2014. The upturn means that the latest survey data are roughly consistent with global manufacturing output rising at a reasonable 4% annual pace.
Both output and new orders grew at the strongest rates for just over two years, and the recent drag from inventory reduction continued to ease. Stocks of both finished goods and inputs showed the smallest declines for over a year.
Global exports continued to rise at only a modest rate, however, acting as a dampener on overall order book and production growth, especially in the emerging markets. While the developed world manufacturing PMI edged up to a 24-month high of 53.0, the emerging market PMI merely rose to 50.9 (albeit a 20-month high).
Key drivers of the overall global improvement were the US and China, where the PMIs hit 12- and 27-month highs respectively, the latter buoyed by output rising in China’s factories at the fastest rate for over five years (despite a renewed drop in exports).
The upturn was broad-based, however, as further support came from Europe, where the eurozone PMI hit a 33-month high and the UK continued to register solid growth. The Nikkei PMI for Japan also recorded its best performance for nine months, and the Russian PMI meanwhile lifted to a four-year peak.
However, the fastest rate of growth (as signalled by the headline PMI) continued to be reported by the Philippines, followed by the Netherlands and Germany, these two runners-up highlighting the relative strength of factory production in northern and central Europe (neighbouring Austria and the Czech Republic were also in the top eight).
India moved into fourth place, helping demote the UK to fifth place. The UK nevertheless remained a strong performer, thanks largely to the weakened pound. Only the Philippines and then Germany reported faster export sales growth than the UK in October. (…)
Brazil once again suffered the steepest downturn, despite seeing its smallest deterioration in nine months, followed by Malaysia and then South Korea, the latter two sitting in contrast to the surging growth recorded in the Philippines and highlighting the marked divergence in manufacturing trends within Asia.
(…) the survey provided scant evidence that prices were being driven up by demand rising faster than supply. Suppliers’ delivery times, for example, were largely unchanged, suggesting much of the increase in costs could be explained by higher oil prices rather than a fundamental improvement in suppliers’ pricing power.
(…) Production expanded especially sharply, growing at the fastest rate since March 2011, helped by a further rise in new orders. A renewed decline in export sales, albeit marginal, suggested that much of the uplift was driven by a welcome strengthening of domestic demand.
Part of this further improvement in manufacturing conditions therefore appears to have been due to the government’s efforts to stimulate the economy through fiscal measures. Other encouraging leading signals were busier supply chains and increased purchasing activity.
(…) Job cuts in the manufacturing sector consequently continued to be widely reported despite strong improvements in output and new orders, as companies downsized and sought cost savings. On a brighter note, there were nascent signs of stabilisation in the manufacturing workforce as the rate of decrease in employment slowed to the weakest since May 2015.
CEBM Research’s own analysis suggests that China’s manufacturing-related employment surged 28% in October.
Alibaba Group Holding Ltd. is using its e-commerce stronghold in China to grow beyond its online marketplace. The company reported strong results in its latest quarter, with users increasing spending and the company showing profit potential in areas that include internet and entertainment services, the WSJ’s Alyssa Abkowitz reports. The Chinese internet giant is betting big on cloud computing, and is challenging Amazon Web Services and Microsoft with growing business that could give the company a cushion against a hard landing for China’s economy. The foundation e-commerce business is still growing, however, and defying China’s downturn. It’s also changing in significant ways: mobile revenue now accounts for 78% of Alibaba’s China retail revenue, and users of mobile devices are spending more every time they log in, suggesting the market is getting more comfortable with big purchases as well as small, one-off retail buys.
SHORT-TERM PAIN FOR LONG-TERM GAIN
Ocean carriers shouldn’t expect relief from overcapacity anytime soon, or even during this decade. A new report from the Boston Consulting Group Inc. projects the imbalance between shipping supply and demand will only grow in the next few years, WSJ Logistics Report’s Erica E. Phillips writes, suggesting that this year’s plunging freight rates and shrinking carrier profits will only grow worse without a big shock to the market. BCG says in a new report that the market right now shows container shipping lines steaming straight ahead with a strategy of adding more and bigger ships even as global trade sputters. The bottom line: the cap between shipping capacity and demand that reached 7% this year will grow to between 8.2% and 13.8% in 2020, the firm says. Freight rates have ticked up this fall, but analysts say that’s just brief relief for carriers, not a trend.
43%:Share of global container shipping the top three carriers will hold next year, according to Maersk, compared to 17% twenty years ago.
Oh-Oh! Is there suddenly a demand problem in the U.S.? This is the biggest weekly crude surplus on record.
The Daily Shot adds this telling chart:
Russia continues to agree with OPEC about the need to “cut” production while sharply raising its own output.
And these two:
All just in time for Thanksgiving and Christmas…
The Economist: “An appeal is likely. The government insists that it conducts foreign affairs under the ancient “royal prerogative”, without lawmakers’ oversight.
Egypt Free Floats Its Currency, Devaluing It Against the Dollar Egypt’s central bank said Thursday it would freely float the local currency, a move aimed at eliminating a flourishing black market for U.S. dollars and securing a much-needed IMF loan, but devaluing the pound by almost half.
Good season overall.
- 385 companies (83.1% of the S&P 500’s market cap) have reported. Earnings are beating by 6.1% while revenues are surprising by 0.2%.
- Expectations are for revenue, earnings, and EPS growth of 2.5%, 1.9%, and 4.1%, respectively.
- EPS is on pace for +5.1%, assuming the current beat rate for the remainder of the season. This would be +8.6% excluding Energy.
- If there are no further beats this season, EPS would grow 4.1% with revenues, margins and buybacks contributing 2.5%, -0.5%, and 2.1%, respectively. Excluding the drag from Energy, margins would be adding 100 bps.
So margins are back on the uptrend! Recent PMI surveys reveal that manufacturers are seeing some pricing power finally while wages are not (yet) threatening.
Thomson Reuters’ tally sees EPS up 3.3% in Q3 but Q4 estimates are being trimmed from +8.3% on Oct. 1 to +6.8% yesterday.
September and October have historically been the worst months for equities. Lance Roberts shows that early November can also be nasty, even more so during election years:
First, if we look at the month of November going back to 1960, we find that there is a bias for the month to end positively 61% of the time. In other words, 3 out of every 5 months finished in positive territory which is why it is included in the seasonally strong period of the entire year. Furthermore, the average and median returns for the month top 1% over the course of that time. (…)
A look at daily price movements during the month, on average, reveal the 5th through the 8th trading days of the month are the weakest followed by mid-month. (…)
However, during election years, we see the same periods remaining weak, but more dramatically so as the volatility of election years skews the average of all years. In other words, regardless of who is elected on the 8th, look for a relief rally on the 9th, followed by a sell-off over the next few days. The traditional post-Thanksgiving rally tends to be stronger performance wise as the “inmates run the asylum” during exceptionally light volume trading days.