WHERE’S WALDO? (Continued)
The jury is still out, and nervous, on consumer spending into this very important year-end.
Slow U.S. Consumer Spending Signals Caution U.S. consumers have grown increasingly cautious ahead of the holiday shopping season, a potential weight on economic growth during the final months of the year.
Consumption climbed only 0.1% in October from a month earlier, the same slow growth as in September, the Commerce Department said Wednesday.
Personal income rose a healthier 0.4% in October, led by gains in dividends, rental income and wages.
Rather than spend, though, Americans in October decided to put away more money. The personal saving rate, which measures the share of a person’s disposable income that is saved, was 5.6% in October, the highest level since December 2012. At $761.9 billion, the level of personal saving was also the highest since the final month of 2012, when new taxes set for 2013 skewed the numbers.
Real income is +3.9% YoY but spending is only +2.7%. Dry powder building for the holidays?
Digging into the data, we find that real expenditures on goods are +3.7% YoY in October after +4.0% in September and +3.7% between March and August. Pretty good indeed. Even more telling, spending on durable goods is even stronger at +5.6% in October after +6.0% in September and +5.7% during the previous 6 months. This is where Waldo is. Not terribly cautious, is he? Meanwhile, non-durables are +2.8% in October after +3.1% in September and +2.7% during the previous 6 months.
Services: +2.2% in October following +2.6% in September and +3.0% between March and August. Why did services slow down so much? David Rosenberg, commenting on the revision to the U.S. Q3 GDP numbers observed that
(…) we saw a surprising downward revision to PCE growth to (a still solid) +3.0% from +3.2% in the advance estimate – interestingly, the revision was concentrated in weaker estimated services spending (revised to +2.2% from +2.6%), which is somewhat odd since we do not get any actual data on services spending in Q3 until the release of the Quarterly Services Survey in December.
Go figure! The fact is that consumers are actually buying goods at a pretty solid pace, faster than their income growth. So much for the cautious consumer.
But why the weak retail sales data? Deflation. Retail sales are reported in nominal dollars, dragged down by declining prices. See WHERE’S WALDO? on that but here’s the recent October data:
The November Richmond Fed survey of Services is a little worrisome even if it only accounts for 10% of the U.S. economic activity. Keep in mind that the survey was conducted before Thanksgiving:
Retail sales contracted in November, accompanied by a steep drop in big-ticket sales. The index for sales revenues fell to a reading of -12 from October’s index of 20. The indicator for big-ticket sales lost 22 points to settle at -25. In addition, the index for shopper traffic cooled to a nearly flat reading of -3 from the previous index of 36. Retail inventories declined this month. The index dropped 33 points to -18. Expectations for product demand also pulled back, with that indicator dropping to –21 from the month-ago reading of 10.
Retail employment levelled off, bringing the index to -1 from -12. Despite the other softer readings, retail wages continued to increase robustly. The index shed just two points, settling at 35 this month.
Traffic has declined a lot less than actual sales, In fact, traffic is in line with last year on a 3-m basis but there was a big drop in November which followed a strong October. This could be a regional phenomenon given that both manufacturing and services were much weaker in the November Richmond Fed surveys than in the Markit national surveys. 
We will need to follow closely the earnings pre-announcements by consumer-centric companies during the next few weeks. As of Nov. 20, there have been 21 negative pre-announcements from Consumer Discretionary companies and no positive one. At the same time last year, there were 20 negative and 3 positive.
U.S. New-Home Sales Continue Robust Pace October’s annual rate of 495,000 was 4.9% higher than a year ago
Purchases of new single-family homes rose to a seasonally adjusted annual rate of 495,000 in October, the Commerce Department said Wednesday, up 10.7% from September’s revised 447,000.
The October rebound follows reports of renewed sales momentum for many home builders.
Taylor Morrison Home Corp. reported a 15% increase in October sales from a year earlier, while CalAtlantic Group Inc. posted an 8% increase. D.R. Horton Inc. reported “solid” sales in October, and Meritage Homes Corp. noted that its October sales were up more than 20%.
Toronto-based builder Mattamy Homes, which operates in Florida, North Carolina, Minnesota and Arizona, posted a frothy 93% increase in October sales in the U.S. from a year ago to 164 last month. (…)
“The first-time home buyer market is very strong,” Mr. Hamill said. “There’s been a little softness above the $500,000 price point, but our average selling price is about $350,000. We’ve actually had to stop selling in our two most affordable communities because we were just selling too far out in advance.”
Nationwide, October’s pace of newly built home sales is up 4.9% from a year earlier, the Commerce Department said. (…)
The year-to-date rate of new home sales, not seasonally adjusted, is up 15.7% from the same period a year earlier. (…)
Remembering that the 2004-07 period was truly exceptional and unlikely to be repeated anytime soon, this CalculatedRisk chart below shows that existing home sales are back to their previous “normal” level but new home sales lag considerably. Reasons: new home prices are too high for younger families and tough lending criteria limit access to the mortgage market.
Raymond James confirms the trend with comments on existing home sales:
Higher priced home sales continue to grow faster than the overall market, with homes priced $750,000-1 million growing 13% y/y while home sales priced below $250,000 dropped 2% y/y. First-time buyers remained conspicuously absent in 2015, with a new Realtor survey indicating the lowest first-time buyer participation since 1987.
This longer-term chart is even more telling:
Mortgage “demand” has shown no new life post crisis.
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Mortgage Limit to Pinch Home Buyers Home prices continue to climb, but the U.S. government is keeping a lid on the size limit for federally backed mortgages, posing problems for home buyers in many pricey markets.
The Federal Housing Finance Agency on Wednesday said mortgage-finance giants Fannie Mae and Freddie Mac in most markets next year can back only loans of $417,000 or less. It will mark the 11th straight year that limit has been in place. (…)
In most parts of the U.S., where the median home price is $219,600, the federal mortgage limit isn’t an issue. But in some California cities and others with fast-rising home values, the limit is starting to weigh on the market, real-estate agents and economists say. (…)
In the first nine months of the year, so-called jumbo mortgages—those that exceed the government limits—made up nearly 19% of the market, according to trade publication Inside Mortgage Finance. That was up from a low of 5.5% in 2009 and is the highest market share since the government last raised the loan limit in 2006. (…)
While Fannie and Freddie allow for a down payment of as low as 3% in some circumstances, many jumbo lenders don’t allow a down payment below 10% or 15%. A borrower’s credit score also typically has to be higher when he or she gets a jumbo.
U.S. Durable Orders Climb 3% in October Orders for long-lasting goods rose in October, climbing 3.0%—a sign demand for manufactured products could be firming after falling for most of the year.
Through the first 10 months of the year, durable-goods orders were down 4.2% compared with the same period in 2014. September durable-goods orders were revised to a 0.8% decrease from the previously estimated drop of 1.2%.
Excluding transportation, durable-goods orders were up a more-modest 0.5% last month, though the gain was the best since June. Orders outside of transportation were down 2.7% through the first 10 months of the year.
Orders for nondefense capital goods excluding aircraft—a proxy for company spending on equipment—increased 1.3% in October. The figure was down 3.8% through the first 10 months of the year…in part reflecting a hefty drop in spending on oil- and gas-field machinery. Orders for railroad equipment, another category tied to oil and gas production, and farm equipment have also slumped this year.
CANADA
Hiring, wages up sharply in September after sluggish summer: Statscan
The statistical agency’s monthly Survey of Employment, Payrolls and Hours (SEPH) showed that businesses added 30,700 jobs in September, recovering almost all of the 34,100 positions shed in August. (The August decline was revised from an originally reported 58,600.)
The survey also showed that average weekly earnings rose 1 per cent from August levels, the biggest one-month increase in more than two years, to $955. Average weekly hours rose to 33, from 32.8 in August. (…)
And while the September jump in weekly earnings suggests that wage inflation may be picking up after several months of sluggishness, the year-over-year wage growth was a relatively tame 1.7 per cent – evidence of the damage done by the oil shock. (…)
The survey showed year-over-year job losses of 57,000 in Alberta, in stark contrast to the 31,000 net gains reported in the September LFS. On the other hand, Ontario has added 107,000 jobs over the past 12 months. (…)
French unemployment reaches record level
Japan jobless rate falls to 20-year low
Japan Unveils New Social Programs to Stimulate Economy
(…) Mr. Abe said the government would give cash handouts to the elderly poor, and build child-care and elder-care facilities to help people enter and stay in the workforce, as part of a stimulus package expected to cost at least ¥3 trillion ($24 billion). (…)
Taiwan Cuts Growth Forecast to Lowest Since 2009 on Export Slump
The statistics bureau projects gross domestic product will rise 1.06 percent this year, down from 1.56 percent estimated in August, according to a statement released Friday in Taipei. The economy contracted 0.63 percent last quarter, compared with the 1.01 percent decline in the preliminary report and the median forecast in a Bloomberg survey of economists that saw a 1 percent drop.
Demand from Taiwan’s top buyer China has weakened, the electronics cycle is in a downturn, and local firms are facing stiffer competition from their mainland rivals. Domestic consumption, a pillar for growth earlier this year, also slowed last quarter as an equity slide added to the effects of the export slowdown. (…)
EARNINGS WATCH
The Q3 earnings season ended on a positive note at $30.10, essentially flat YoY and QoQ.
There have been 26 positive pre-announcements for Q4 vs 18 at the same time last year and 81 negative vs 86 last year. Better than last year but in line with same period during Q3. So far, so good.
S&P: “2015 operating earnings are estimated to decline 5.6%, but ex-energy it is expected to be up 6.1%”. Remember that S&P is more conservative than Factset and Thomson Reuters and treats energy asset impairment charges as operating costs. Facstet sees 2015 EPS down 1.6% but +5.2% ex-Energy. TR’s tally is +0.3% for total S&P 500 EPS.
Factset makes an interesting analysis, calculating that the companies reporting dollar earnings growth in Q3 showed total growth of 23.2% while those reporting lower earnings showed earnings down 29.8%. Ten companies recorded 42% of the $38.5B in profit decline, six of them being Energy companies that contributed 32% or $12.2B of the total decline.
OIL
The retail price of gas is 30% lower than at Thanksgiving 2014:
Oil Falls on Robust U.S. Production Data
While U.S. production of crude slid by 17,000 barrels a day to 9.165 million barrels, compared with the previous week, the four-week average daily production of 9.173 million barrels was still 144,000 barrels above the same period last year.
Oil Prices Rise After Fall in Rig Count, Stockpile Data
The number of active U.S. oil-drilling rigs, viewed by some as a signal about trends in oil production, is down to 555, which is 54% lower than the peak in October 2014. It has fallen in 12 of the past 13 weeks.
THE SAUDIS ARE MURMURING “HELP”
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Saudi counters ‘lower for longer’ mantra Kingdom shifts message ahead of Opec meeting as investment collapses
Saudi Arabia’s veteran oil minister made clear late last year that the kingdom would no longer prop up the oil market, saying it was tired of cutting output to guarantee $100 a barrel for high-cost rivals.
Ali al-Naimi added that even if oil “goes down to $20” Opec’s largest producer would not change course.
A year on, as Opec ministers prepare to meet next week with oil languishing near $45 a barrel, senior Saudi officials have a different message. In recent weeks, in public forums and private briefings, they have emphasised the dangers of future supply shortages as the oil industry has slashed investment in new projects.
Prices fell further than they ever anticipated, they say, remarks that for many in the oil market imply the Opec kingpin wants the year-long oil rout to come to a close.
Saudi officials say they are not about to reverse the policy that saw them open the taps and prioritise their long-term exports over short-term financial gain. But behind closed doors they say they want prices to stabilise between $60 and $80 a barrel.
That level, they believe, would foster oil demand but not encourage too much supply growth from alternative sources — a goldilocks scenario. Market watchers say that by focusing on the future outlook the kingdom can slowly coax the price higher without abandoning its strategy.
“They have made their point and no one in the world has missed it,” says Nat Kern, at Washington DC-based consultancy Foreign Reports. “Prices have fallen a lot lower than they wanted to go and investment cuts are far steeper than they expected.”
Prince Abdulaziz bin Salman al-Saud, Saudi Arabia’s deputy oil minister and son of the king, has been at the forefront of the shift in messaging. In a speech in Doha this month he warned that the investment needed to ensure future oil supplies could not be achieved “at any price”.
“The scars from a sustained period of low oil prices can’t be easily erased,” he said. (…)
Mr Naimi said last week that the world will need $700bn in investment over the next decade to meet growing oil demand, which it estimates will increase by at least 1m barrels a day each year.
In many ways, Saudi Arabia is now being forced to present a counter narrative to the oil industry’s new mantra of “lower for longer” prices — that has taken hold as a result of Riyadh’s own policy and is being pushed by influential banks such as Goldman Sachs. (…)
The kingdom is also showing signs of easing off. After raising production to a record 10.6m barrels a day in June — almost 1m b/d above the 2014 average — output was cut to 10.3m b/d by October, the latest data from Opec show. (…)
The kingdom is vying with Russia to be the top oil supplier to China and must prepare for the return of higher Iranian oil exports next year if sanctions are lifted. It already faces increased competition in India and Europe from record Iraqi exports, while the US could become a growing market again as shale production tails off. Saudi oil exports to the US have dropped 29 per cent in three years. (…)
Saudi Arabia may also have good reason to talk up the price. An oil price averaging almost half the level enjoyed for the first four years of this decade has put pressure on domestic finances. (…)
(…) The biggest Arab economy may run out of financial assets needed to support spending within five years if the government maintains current policies, it said.
- From the IMF:
In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends, however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years (see Chapter 1). In, contrast, CCA oil exporters have at least 15 years’ worth of available financial savings, while GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).
With Goldman raising the spectre of a $20 crude price, here’s an alternative scenario from Ecstrat strategist Emad Mostaque…
(…) As prices have fallen, both demand and supply have risen sharply.
On the supply slide production has increased at the expense of future ultimate recoverable resources.
In the US, shale companies have focused on their most productive areas, increasing rig density and extraction pressure to pull forward future production. In OPEC, Iraq has surged production and Gulf nations have tapped into their spare capacity. Essential maintenance has been deferred, as can be seen in rising North Sea production.
Supply is approaching a “Wile E. Coyote” moment, particularly in the US, where production could fall by 1 mbpd versus expectations into the next year as lower drilling and spending catches up with the market.
Shale is not the “marginal” barrel. Contrary to declarations of leaps in “rig productivity”, spud to production time for shale wells can be up to four months. Wells, not rigs, produce oil. Once started shale wells will continue to produce as long as they cover their cash costs. As a comparison measures of OPEC spare capacity assume a maximum 45-day ramp up period.
Shale has also benefited from the easy monetary environment in the US to financing drilling. Confidence to finance new drilling is likely to lag any oil price recovery
Cuts to spending will also hit other nations, particularly those that have had issues attracting foreign investment in the boom years such as Algeria, Nigeria and Venezuela.
Gulf producers who have been diversifying downstream are likely to see seasonal declines as they maintain exports but internal demand subsides. This will be most apparent in Saudi Arabia, where production could fall 1 mbpd from its peak.
New supply from Iran is unlikely to exceed 0.5 mbpd and the oil sector needs over $30bn a year in new investment. The poor political situation in Libya is worsening, as in Iraq where a lack of cash is widening political divisions.
Supply from existing fields continues to fall, with decline rates above 6 per cent, or nearly 7 mbpd of oil that needs to be replaced annually. Major oil companies have historically spent at most 12 per cent of sales to try to stem output declines. As sales fall and profits essential for dividends are pressured by falling margins, we can expect further spending cuts even if oil prices rise. To visualize this at $20 capex per barrel, $100bn in cuts means 1.5 mbpd of oil not coming to the market in the next decade.
Demand is healthy, driven by China and the US in particular. (…) Fears of oversupply may be overstated. US inventories are nearly two thirds full, but part of this has been due to increased oil infrastructure. There are also similarities to the so-called “missing barrels” conundrum of 1999, where a large number of excess barrels were revised away.
As supply falls and demand remains solid, the back end of the oil futures curve should move towards $100 full-cycle marginal cost of off-shore deep sea oil, or even higher given increased demand versus 18 months ago and dramatic spending cuts. (…)
The above should be sufficient to take oil back towards $100 per barrel. Geopolitics could take it higher.
Spare capacity is at multi-year lows but geopolitical risk is the highest it has been in a decade.
Multiple Middle East and African nations are reconstituting their entire social order as the Arab Spring becomes an Arab Winter. Russia is becoming increasingly assertive and ideological extremism is spreading worldwide as economies stagnate. Daesh continues its rampage, declaring the Paris, Baghdad, Beirut and Sinai attacks as the first of a coming storm.
Speculators, who remain negative, could easily be caught short by market or geopolitical surprises. For example, an OPEC cut at the start of December, despite being largely meaningless as Gulf production will subside seasonally, would cause a significant squeeze.
We are at an intriguing time as oil has moved from overpricing to underpricing geopolitical and supply risk. The adjustment back is likely to be volatile and the chances of an upside shock to oil prices are growing.
One world cost curve from JP Morgan (there are many):
But this does not include the fiscal deficits of sovereign state producers. For many, oil is such a large part of revenues, their fiscal balance must be integrated into their production costs. The IMF estimates that Saudi Arabia has a fiscal breakeven oil price of nearly $110 in 2015, potentially declining to $95 next year. From a current account viewpoint, SA’s external balance breakeven oil price is $60.
Here’s an OPEC cost curve from the Arab Petroleum Investments Corporation:
BTW: some demand data:
- Gasoline volume growth at 3 large U.S. convenience store operators averaged +4.0% YoY in their latest 6 fiscal months, up from +1.5% in the previous 6 months.
- South Korea’s oil demand in October rose 6.3% year on year to 73.20 million barrels, or an average 2.36 million b/d, KNOC data showed. It marked the biggest year-on-year growth since February, when demand increased 6.6%. For the first 10 months of the year, oil demand climbed 3.6% year on year to 702.6 million barrels.
Demand for gasoil in October rose 11.7% year on year to 14.11 million barrels, while gasoline consumption climbed 6.3% to 6.67 million barrels on lower retail prices. (Platts)
Another squeeze coming? Hedge funds’ oil shorts reach peak for the year
(…) The short futures and options position in London-traded North Sea Brent is the highest since October 2014 at 141m barrels, rising a quarter in the last week, while bets against US benchmark West Texas Intermediate have jumped nearly 60 per cent since early October to almost 200m barrels.
Fattest-Ever U.S. Cattle Herd Signals End to Record Beef Prices
Cattle futures have plunged 23 percent from an all-time high a year ago as the U.S. herd began a long-awaited expansion and consumers switched to cheaper chicken and pork. That’s squeezed feedlot owners who buy year-old steers and raise them on a diet of mostly corn for more than four months. To ease the pain, operators like Fanning are taking advantage of ample, low-cost grain supplies by holding cattle for almost a month longer than normal, which means the animals get bigger and generate more revenue. (…)
On Nov. 10, the USDA forecast fourth-quarter production will rise 1.8 percent from a year earlier and that output in 2016 will increase 4.8 percent to 24.85 billion pounds, the first gain in six years.
The U.S. cattle herd had shrunk to the smallest since 1952 after a 2012 drought parched pastures and sent corn futures surging to a record. Spurred by the jump in beef, ranchers are showing signs of rebuilding their inventory. The herd on July 1 was 98.4 million head, up 2 percent from a year earlier and the first increase for that time of year since 2006, the USDA reported on July 25. As of Nov. 1, feedlots held more animals for that time of year since 2012 and were growing at the fastest rate in four years, government data show. (…)