THE BIG WAGER
National Bank Financial’s Stéphane Marion is one of the best economists around.
As the Federal Reserve continues to assess the economic situation, we see signs of tangible improvement in the transmission of monetary policy to the real economy that could trigger a shift in Fed guidance in the coming months. If small businesses decide to expand, than we have a real economic expansion on our hands (Mrs Yellen continues to use the word “recovery” when referring to the current cycle). As today’s Hot Charts show, commercial & industrial loans surged to a new all-time high last month, a development that suggests more capital expenditure (CAPEX) as we move into H2 2014. Historically, a CAPEX cycle that grows longer in the tooth will translate into more hires and rising wages. We have positive developments on both fronts. As shown, the proportion of small businesses that are currently increasing worker compensation is actually now back to its pre-recession level and hiring plans remain on an uptrend. We see U.S. GDP growth accelerating to around 4% in Q2 2014.
If you missed my April 25 post THE BIG WAGER, I suggest you take a look. You will find more evidence that Ms. Yellen is about to change her rhetoric… and her guidance, likely towards her March 21 “6 month slip” which looks less and less like a slip.
Fed Watchers Ready to Connect the Dots Central bankers likely will stay the course on reducing monetary stimulus when the Federal Reserve’s latest conclave ends Wednesday.
(…) Back in March, Fed officials thought the weakness in economic data probably stemmed from a frigid winter. Good news since then on employment, confidence, retail sales and industrial production during a more temperate March now leave less doubt.
So, notwithstanding an anticipated tepid first-quarter economic growth number scheduled for release just hours before the Fed’s meeting ends, officials almost certainly will stay the course on reducing monetary stimulus. That means a further $10 billion cut in monthly bond purchases to $45 billion, and nothing to change traders’ consensus that short-term interest rates will begin rising in the summer of 2015. (…)
Home-Price Gains Cooled in February
The Standard & Poor’s/Case-Shiller home price index covering 10 major U.S. cities increased 13.1% in the year ended in February. Case-Shiller’s 20-city price index advanced 12.9%, less than the 13.1% expected by economists and down from 13.4% for all of 2013.
On an unadjusted basis, both the 10-city and 20-city indexes were unchanged in February over January. Seasonally adjusted, the 10-city index was up 0.9%, while the 20-city measure increased 0.8%.
U.S. mortgage market index hits lowest since December 2000: MBA
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.9 percent to 333.2 in the week ended April 25. That was the lowest level since December 2000, the group said.
“Purchase application volume remains weak despite other data which indicated the overall pace of economic growth is picking up. The combination of higher rates, new regulation and tight inventory are all leading to a weaker spring market than we have seen in years,” said Mike Fratantoni, MBA’s chief economist.
The MBA’s seasonally adjusted index of refinancing applications declined 6.9 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, fell 4.4 percent.
Enrollment in Student-Debt Forgiveness Programs Soars in 2014
Two federal programs that offer to wipe away huge accumulations of student debt have grown at a rapid clip this year, putting them among the government’s fastest-growing forms of financial assistance.
The Journal reported last week that enrollment in the plans—which allow students to rack up big debts and then forgive the unpaid balance after a set period—surged nearly 40% in the second half of 2013.
The growth of the programs hasn’t slowed. The number of borrowers in the income-based repayment programs climbed 24% between January through March to 1.63 million, the Education Department said. The amount of debt absorbed grew by 22% to $88 billion—now nearly a 10th of all outstanding federal student debt.
At that rate, the government took on more than $5.3 billion per month in potential student-debt liability in the first three months of the year.
Interest in the programs began to surge in the middle of last year as the Obama administration promoted the programs through emails to borrowers and on the Internet. In the nine months through March, enrollment is up a staggering 72%.
The programs’ popularity comes as top law schools have taken to advertising their own plans that offer to cover a graduate’s federal loan repayments until outstanding debt is forgiven—opening the way for free or greatly subsidized degrees at taxpayer expense.
Expanding use of the programs, which have been rolled out and enhanced over the past several years, have mixed implications for borrowers and taxpayers. The programs cap borrowers’ monthly payments at 10% to 15% of their discretionary income, often reducing monthly bills by hundreds of dollars. Those borrowers are now more likely to stay current on their payments, avoiding default and the resulting damage to their credit.
(…) outside groups are warning that the income-based repayment programs could increase taxpayer costs down the road, thanks to generous debt-forgiveness provisions. Those working in “public service”—government agencies or nonprofits—make payments for 10 years and then have the remaining balance forgiven. Those in the private sector have balances forgiven after 20 or 25 years, depending the specific plan.
The Brookings Institution, a centrist think tank in Washington, said in a report earlier this month the most popular income-based repayment plan could eventually cost taxpayers $14 billion a year. (…)
Euro-Zone Inflation Picks Up
The European Union’s statistics agency Wednesday said consumer prices rose by 0.7% from April 2013, a pickup from the 0.5% rate of inflation recorded in the 12 months to March, but well below the European Central Bank’s target of just under 2%.
April marked the seventh straight month in which the inflation rate has been below 1.0%. When the inflation rate fell below that level in October 2013—a sharp drop from 1.1% to 0.7%–the ECB quickly responded with a cut in its benchmark interest rate. Since then, however, it has done little, other than to pledge that it will act decisively if it fears that inflation is heading too far off its medium-term target of just below 2%.
Some of the weakness in the inflation measure during April was down to falling energy prices, which dropped 1.2% from April 2013, a smaller decline than the 2.1% recorded in March. But prices for other goods and services that are more sensitive to domestic demand rose at a slower pace, with prices for food, alcohol and tobacco up 0.7% on the year compared with a 1.0% rise in March.
But with services prices rising more strongly in response to higher demand at Easter, the core measure of inflation—which excludes volatile items such as energy and food—picked up to 1.6% from 1.1%.
German Unemployment Falls a Fifth Month as Economy Grows
The number of people out of work decreased for a fifth month, dropping a seasonally-adjusted 25,000 to 2.872 million, the Nuremberg-based Federal Labor Agency said today. Economists forecast a decline of 10,000, according to the median of 25 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.7 percent, the lowest level in two decades.
France urges action to lower euro’s value Valls wants loose monetary policy alongside growth initiatives
(…) “because the level of the euro is too high”.
BoJ cuts growth forecast amid export fears Japan’s central bank defies calls for additional easing
According to the BoJ’s new projections, presented hours after the central bank kept its basic monetary policy settings on hold for the 14th meeting in a row, real gross domestic product will grow by 1.1 per cent in the fiscal year to March 2015. In its last interim forecast in January, the BoJ said it was expecting growth of 1.4 per cent, down a notch from its October estimate of 1.5 per cent.
The BoJ said “sluggishness” in emerging economies was the main reason for Japan’s muted export performance, but added that the steady shift of production overseas was also to blame. The increase in consumption tax, from 5 per cent to 8 per cent, would also have “adverse effects on households’ real disposable income”, the central bank said. (…)
Otherwise, the BoJ’s forecasts were bullish, signalling confidence that progress towards its 2 per cent target for consumer price inflation would continue, despite another consumption tax increase – to 10 per cent – scheduled for October 2015.
Consumer price inflation excluding the impact of tax rises would average 1.3 per cent in the current fiscal year, the BoJ said, rising to 1.9 per cent in fiscal 2015 and 2.1 per cent in fiscal 2016.
Russia in Recession Now, IMF Says Russia has already slid into recession and its central bank should be ready to tighten monetary policy, the head of the International Monetary Fund’s mission to Russia, Antonio Spilimbergo, said.
Hit by geopolitical crisis in neighboring Ukraine, Russia is on track to post a 0.2% economic growth this year, the IMF forecasts, slashing its growth projection from 1.3%. (…)
Concerns about the war-of-sanctions between Moscow and the West have already hurt investment activity, fueled capital flight and sent the ruble to all-time lows. Russia has already lost more than $60 billion in net capital outflow in the first quarter of this year and the IMF now sees 2014 net outflow at $100 billion.
CHINA: SLOW AND SLOWER
First, from The Short Side of Long blog:
Source: Standard Chartered Research
As we can see in Chart 9 above, recent components of the so called Li Keqiang Index have been rather weak. Railway freight is currently contracting from a year ago, while electricity production is growing at just above 5% from a year earlier. At the same time, recent loan figures show continued slowing in the month of March,with loan growth at the slowest rate since 2008 financial crisis.
While Manufacturing PMI readings have been average at best, other indicators also point to slow economic activity. Recent Producer Prices Index (PPI) remains in deflation territory and is currently down for 25th consecutive month. It seems that China is definitely working off at least some of the excesses it has built during the 2009 credit stimulus.
CEBM Research adds:
After the Spring Festival, property sales experienced a brief rebound before dropping again. Looking at the front end of the property industry value chain, excavator working hours have been slowing on a Y/Y basis, indicating weak housing starts. At the back end of the value chain, glass prices have continued to trend lower after Spring Festival. Also, auto sales dropped Y/Y in March. The slide in auto sales comes as no surprise given that property and auto consumption are closely linked. (…)
As for external demand, the CCFI (China Containerized Freight Index) continued to trend lower, showing no sign of export acceleration. According to our CEBM Global Mfg PMI Diffusion Index, China Mfg PMI is subject to downside risk in Q2. Taking into account seasonality, China Mfg PMI could fall back after April.
As an aside, much is being made these days from China’s regional GDP reports which point to slower growth than suggested by the national accounts. CEBM Research tallied all regional reports and derived the implicit price deflator for each of them. Possibly reflecting the sheer size of China, inflation varies from +4.5% to –5%. How much time and money do you wish to invest based on numbers like these?
Yet, China is at the top of the worries lists (from The Short Side of Long):
According to the recent Merrill Lynch Fund Manager Survey published in April, global fund managers have been losing sleep over a potential China hard landing.
Essentially nobody worries about inflation…
EBay Bites Repatriation Bullet
EBay Inc. took the unusual step of bringing home the bulk of its foreign-held cash, and triggered a $3 billion tax bill in the process. That marks a sharp contrast from Apple Inc., which went back to bond markets for $12 billion to fund its buybacks and dividends even though it is sitting on $150 billion in cash, much of it overseas.
EBay’s chief financial officer, Bob Swan, said, “We are an acquisitive company and we need to ensure we have the resources available to capitalize on targets that become available,” though he was quick to add that no large U.S.-based acquisitions are currently being announced. Still, $3 billion is a considerable hit for M&A plans that are merely speculative. Other companies have successfully tapped foreign cash for acquisitions without triggering a U.S. tax bill by focusing on foreign targets.
Pretty strange move…
Americans Grow Weary of World Stage, WSJ Poll Finds Americans in large numbers want the U.S. to reduce its role in world affairs even as a showdown with Russia over Ukraine preoccupies Washington, a Wall Street Journal/NBC News poll finds.
In a marked change from past decades, nearly half of those surveyed want the U.S. to be less active on the global stage, with fewer than one-fifth calling for more active engagement—an anti-interventionist current that sweeps across party lines. (…)
The poll showed that approval of President Barack Obama’s handling of foreign policy sank to the lowest level of his presidency, with 38% approving, at a time when his overall job performance drew better marks than in recent months. (…)
The poll findings, combined with the results of prior Journal/NBC surveys this year, portray a public weary of foreign entanglements and disenchanted with a U.S. economic system that many believe is stacked against them. The 47% of respondents who called for a less-active role in world affairs marked a larger share than in similar polling in 2001, 1997 and 1995.
Similarly, the Pew Research Center last year found a record 53% saying that the U.S. “should mind its own business internationally” and let other countries get along as best they can, compared with 41% who said so in 1995 and 20% in 1964. (…)
The poll found that 48% viewed globalization as bad for the U.S. economy, with 43% calling it a good development. Asked whether they preferred a congressional candidate who argued that free trade was a positive force or one who called it a negative force, 46% favored the pro-trade candidate and 48% the anti-trade candidate. (…)
But this week, Mr. Draghi dealt a blow to such expectations when 
From 
