CHINA: GROWING RISKS
China Data Show Weakness
(…) Home sales in the first four months of the year fell 9.9% to 1.53 trillion yuan ($245.6 billion), according to China’s National Bureau of Statistics, compared with a 7.7% decline for the three months ended March. The statistics agency relies on year-to-date figures and doesn’t break out individual months.
Demand weakened in more Chinese cities as banks continued to tighten mortgage lending and buyers stood on the sidelines, expecting developers to cut prices further.
Property investment in the first four months of 2014 rose 16.4% year-over-year to 2.23 trillion yuan, but that was down from the 16.8% growth seen in the first quarter. (…)
Industrial production by the nation’s factories and mines rose 8.7% year-over-year in April, the statistics agency said, a slight decline from 8.8% in March.
Fixed-asset investment in machinery, land and buildings, excluding rural areas, meanwhile rose 17.3% in the January to April period, compared with the same period a year earlier, a decline from the 17.6% increase in the January to March period.
Retail sales for the month rose by 11.9%, a decline from the 12.2% year-over-year increase in March. (…)
China Bank Loans Grow at Slower Pace As Chinese policy makers walked the line between adding to high levels of debt and choking off credit to a slowing economy, April bank lending in the country came in slightly below expectations.
Banks made a net 774.7 billion yuan ($124 billion) of local currency loans in April, down from 1.05 trillion yuan in March and slightly below market expectations, according to data released Monday.
Total social financing, a broader measure of credit creation that includes bank loans, bonds and “shadow bank” lending—or nontraditional financing outside the banking sector—also slowed. That tally dropped to 1.55 trillion yuan in April from 2.09 trillion in March. (…)
Outstanding private credit has risen to 208% of gross domestic product from 203% since the start of the year, according to estimates by London-based research firm Capital Economics. The equivalent figure for the U.S. is 156%, down from a peak of 175% in 2008, Capital Economics said. (…)
China’s property bubble really could burst (George Magnus)
Chinese property is the most important sector in the global economy. It has been pivotal in the country’s economic development, provided lucrative business for industrial commodity producers from Perth to Peru, and been the backbone of the surge in world exports to China. In the past few years, predictions that the sector was about to implode at any moment have not been borne out – but now is the time for the world to pay attention. Property activity indicators have been trending lower since mid-2013, and the downturn in the sector now threatens to turn into a bust. At best, China is entering a deflationary phase at a time of global fragility. (…)
The greater risk to China lies in the pervasive consequences of any property bust. Property investment has grown to account for about 13 per cent of gross domestic product, roughly double the US share at the height of the bubble in 2007. Add related sectors, such as steel, cement and other construction materials, and the figure is closer to 16 per cent. The broadly defined property sector accounts for about a third of fixed-asset investment, which Beijing is supposed to be subordinating to the target of economic rebalancing in favour of household consumption. It accounts for about a fifth of commercial bank loans but is used as collateral in at least two-fifths of total lending. The booming property market, moreover, has produced bounteous revenues from land sales, which fuel much local and provincial government infrastructure spending.
The reason things look different today is the realisation of chronic oversupply. As the property slowdown has kicked in, housing starts, completions and sales have turned markedly lower, especially outside the principal cities. Inventories of unsold homes in Beijing are reported to have risen from seven to 12 months’ supply in the year to April. But when it comes to homes under construction and total sales, the bulk is in “tier two” cities, where the overhang of unsold homes has risen to about 15 months; and in tier three and four cities, where it is about 24 months.
The anti-corruption crackdown, often targeting individuals who have built up ostentatious property wealth, has poured cold water over the market, in which, according to a recent investment bank report, the richest 1 per cent of households is estimated to own about a third of residential property. Elsewhere, the tightening of credit terms, including funding costs for property developers, especially in the shadow banking sector, is taking its toll. Rates of return on commercial property and infrastructure, and cash flows for developers and local government, have been deteriorating.
The crunch in the property market, and for the economy, will come when land and property prices fall more broadly across the country. Official data still show that property prices in 70 cities were 8 per cent higher in March than a year ago – but prices have actually fallen since the end of 2013.
If activity levels and prices weaken further, Beijing’s resolve not to respond with traditional stimulus programmes is unlikely to hold. We should expect a potpourri that might include: extra spending on infrastructure and environment programmes; faster urbanisation in inland and western provinces; some relaxation on restraints on home buying, such as mortgage deposits; and, ultimately, new monetary easing.
Such steps may provide financial markets and the economy with some short-term relief. But if Beijing goes too far it will undermine the essential strategy of rebalancing the economy, in which case the negative economic impact would be larger and last longer. China is different from the west in many ways but the real economic effects of a burst property bubble are the same the world over. Beijing will have to cope with them in the next two years but the rest of us should be prepared for the deflationary consequences in a still fractious global recovery phase.
Hangzhou exposes China’s property woes Ominous sign for economy as prices fall in top-tier cities
(…) Hangzhou has shaken that belief. Capital of Zhejiang province, it has a population of nearly 9m and is one of China’s richest cities. If its property market is in trouble, it is an ominous sign for the country as a whole.
In the first four months of the year property sales across the country fell 7.8 per cent in value terms from the same period a year earlier, according to the latest government figures, which were released on Tuesday. That has already hurt sentiment among property developers, who cut investment in new projects, pushing newly started floor space in China down by 22.1 per cent in the first four months, compared with a year earlier.
Property investment directly accounts for nearly a fifth of Chinese gross domestic product, so if bulging inventories lead to slower construction, as they should, the consequences for economic growth will be unpleasant.
Observers could be forgiven for thinking that China has been here before. The housing market briefly wobbled in 2008 and 2011, only to rebound with great vigour. But on both those occasions, the slowdowns occurred because the government had deployed a battery of tightening measures to try to rein in runaway prices. This time, it is market forces leading the way. “This downturn is almost entirely because of the oversupply,” Mr Du says.
At the current pace of home sales in Hangzhou, it will take buyers about 25 months to digest the existing supply of property in the city, according to data from China Real Estate Index System. That is well above the average 10-month inventory of recent years.
A similar pattern is playing out across China. The worst laggards are still what are often referred to as third and fourth-tier cities, which have populations of roughly 1m-3m people. Their housing inventories have climbed to more than 30 months’ worth of sales from 25 at the start of 2012, according to UBS.
However, the headwinds are now also reaching China’s biggest cities. Housing sales in the country’s four massive metropolises – Beijing, Shanghai, Shenzhen and Guangzhou – fell 20 per cent on average in April from a month earlier, a steeper decline than in most smaller cities. (…)
Here’s the situation in Beijing and Shanghai, courtesy of BloombergBriefs:
OECD Composite leading indicators point to weakening growth in major emerging economies but stable growth momentum in most OECD countries
Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to weakening growth in major emerging economies. CLIs point to growth below trend in Brazil, China and India, and to growth losing momentum in Russia.
For the OECD as a whole, and for the United States, Canada and Japan, CLIs point to stable growth momentum. The same is true for the United Kingdom, where the CLI indicates that the growth momentum is stabilising at above-trend rates.
In the Euro Area as a whole, and in Italy, CLIs continue to indicate a positive change in momentum. In Germany and France, CLIs point to stable growth momentum.
Bundesbank Open to ECB Stimulus Plan Germany’s central bank is willing to back an array of stimulus measures from the European Central Bank next month if needed to keep inflation from staying too low, a person familiar with the matter said.
Consumer prices dropped 0.1% on the year in April and rose 0.1% on the month, Hungary’s central statistics office KSH said Tuesday. The annual figure compares with a 0.1% rise in March and with a 0.2% rise forecast by analysts in a poll by The Wall Street Journal. The last time inflation was in negative territory was 1968 but the exact month wasn’t recorded, KSH statistician Borbala Minary said.
TECHNICAL CONFUSION
Jonathan Krinsky, chief market technician at MKM Partners, alerted clients Monday of a sharp divergence playing out in the markets. As of late last week, some 80% of S&P 500 components traded above their 200-day moving averages—a proxy chart watchers use to gauge a market’s long-term trend.
The fact that so many companies traded above this technical indicator is a positive sign, suggesting wide participation among the market’s rally.
At the same time, only 42% of Russell 2000 small-cap stocks traded above their 200-day averages, a sharp contrast from the S&P 500. In fact, it marks the widest divergence between the two indexes since 1995, according to Mr. Krinsky’s calculations.
It’s unclear what the ramifications of this divergence suggest for the broad market’s next move, although the trend is an oddity that is gaining attention among market watchers.
The departure between the Dow and S&P 500, which hit new records Monday, and the Russell 2000 is hardly surprising. Small-cap stocks have fallen out of favor in recent months as investors flocked to larger, dividend-paying and more attractively priced companies. The Russell 2000 Friday briefly tumbled on an intraday basis into correction territory, Wall Street parlance for a 10% drop from a recent high.
“What we have seen over the last few weeks is unprecedented in at least the last 20 years,” Mr. Krinsky said.
He outlined three instances–1995, 1999 and 2007—in which the market experienced similar—albeit not as extreme—divergences.
(…) three similar market divergences led to three very different results, making it difficult to glean any significant takeaways from the market’s latest moves. (…) (WSJ)
Here’s one explanation:
EPS and Revenue Beat Rates
Earnings season comes to an end on Thursday with Wal-Mart’s (WMT) report. More than 2,000 companies have reported earnings so far this season, and as shown below, 57.4% of them have beaten bottom-line EPS estimates. Early on this season, the earnings beat rate was holding right around the 60% level for US stocks, but last week it took a nosedive down to 57.4%. The large caps report early on during the typical reporting period, while smaller cap companies typically report towards the end. Last week, the earnings beat rate was weighed down by a large number of smaller cap names missing estimates. If the current beat rate holds through Thursday, this would actually be the weakest reading we’ve seen during an earnings season since the bull market began in early 2009.
While bottom-line beats have been tougher and tougher to come by as earnings season has progressed, top-line revenue beats have actually been hung in there well. As shown below, 56.7% of the companies that have reported this season have beaten revenue estimates. Earlier this season, the reading was holding around the 50% mark. If 56.7% were to hold through Thursday, the revenue beat rate would be well below last quarter’s reading above 60%, but it would be above the readings seen in 5 of the last 7 quarters.
But small companies are turning more optimistic:
The NFIB Index of Small Business Optimism jumped 1.8 points from last month to 95.2. This is the first time the Index has reached 95 since October 2007. The gain is modest but it is still the best reading post-recession. The main contributor to the improved Index came from expected business conditions. Small business owners are a bit more optimistic in this area but still 9 percent more owners expect business conditions to deteriorate than improve.
Small companies have raised prices more aggressively lately:
Perhaps because they have had to boost salaries:
As their employment needs are at or near previous cyclical peaks:
While their unfilled openings keep rising:
(See also FACTS AND TRENDS: THE BIG WAGER)
OIL
U.S. Considers Relaxing Crude Oil Export Restrictions The U.S. is considering relaxing regulations that ban the export of crude oil as domestic production grows and the quality of some of the crude produced in the country isn’t suitable for refining locally, U.S. Energy Secretary Ernest Moniz said.
Libyan Crude Flows Restart, Again Trading screens may have been dominated by headlines about Ukraine in recent times, but for oil traders there is a longer-running supply-side issue: Libya.
(…) Crude flows have resumed from major oil-producing fields of El Sharara, El Feel and Wafa and the pipelines linking them to the Zawiya exports terminal, The Wall Street Journal’s Benoit Faucon reports.
The fields together produce 500,000 barrels a day, and their resumption will push total Libyan daily crude output up to 750,000 barrels.
There are two caveats. Although such a large increase is welcome, this still leaves Libyan producing at half its normal capacity. Also, this is far from the first time that talk of normality has emerged from Libya.