The nominal median household income was up $537 month-over-month and $2,072 year-over-year. That’s a 1.0% MoM gain and a 4.0% YoY gain. Adjusted for inflation, the numbers were up $738 MoM and $1725 YoY. The real numbers equate to a 1.4% MoM increase and a 3.3% YoY increase, thanks to -0.37% drop in the Consumer Price Index.
ECB Presses Big Banks to Increase Capital The European Central Bank’s campaign to raise bank capital well above formal regulatory requirements is likely to translate into a flurry of banks selling new shares or cutting dividends.
…while asking them to increase lending…
Russia Rating Slips to Junk, Hurting Ruble Russia’s fractured economy suffered another potential blow Monday after credit-rating firm Standard & Poor’s cut the country’s credit rating to junk.
(…) It typically takes two junk ratings from the three major credit-rating companies for major investment-grade indexes to drop such bonds. 
S&P expects Russia’s economy to expand by about 0.5% annually from 2015 through 2018—below the 2.4% rate of the previous years—and the government to post an average annual deficit of 2.5% of gross domestic product over that period. Inflation, S&P said, will rise above 10% in 2015. (…)
Europe, Greece Dig In Over Debt Greece and its creditors veered toward confrontation as its new, leftist government pledged to make good on promises to reverse years of public-spending cuts despite warnings from European capitals that doing so could plunge the country, and Europe, into deeper crisis.
(…) “There are rules, there are agreements,“ German Finance Minister Wolfgang Schäuble said of the framework for Greece’s financial rescue. “Whoever understands these things knows the numbers, knows the situation.”
(…) Mr. Tsipras also has also called for Greece’s creditors—a group that includes the European Central Bank, other European Union countries and the International Monetary Fund—to forgive about one-third of the country’s more than €300 billion ($338 billion) in debt. (…)
Both a reversal of Greece’s reform agenda and large-scale debt relief are anathema to Germany and a number of other EU countries. (…)
A closer look paints a different picture. The headline debt number is enormous, at €321.7 billion ($360.4 billion), according to the Greek Finance Ministry. But around 80% of this is in loans, not bonds, the vast majority granted on highly concessional terms.
Greece’s debt pile carries low interest rates, and the overall weighted average maturity is 16.5 years; the figure for loans from Europe’s bailout funds is 32.4 years. Greece’s debt structure is an important factor counterbalancing the amount. As a result of this, the headline debt-to-GDP number potentially overstates the burden as it ignores that the country’s economy may grow over time to support the debt. In the meantime, debt-service costs are bearable; they are certainly preferable to market rates.
Greece’s interest burden equaled about 4% of its economic output in 2014. When adjusting for the profit refunded to Greece and other measures, however, the interest burden was just 2.6%, according to researchers at Brussels-based think tank Bruegel. That compares to 4.7% for Italy and 3.3% for Spain. (…)
For the rest of the eurozone, a reduction in the face value of the debt would announce loudly that a fiscal transfer had taken place—almost certainly making it unacceptable. But via extending maturities and cutting rates, a disguised fiscal transfer has already occurred.
Here’s another way to look at the Greek situation:
(…) The point is that while issues of debt relief are in large part arguments about accounting fiction, the question of how large a primary surplus Greece runs is real and has powerful implications for the economic outlook. Keep your eyes on that ball.
OIL
(…) On Monday, the secretary-general of the Organization of the Petroleum Exporting Countries, Abdalla Salem el-Badri, said that oil prices appear to have bottomed out and could be poised for a rebound. But Mr. el-Badri also said that OPEC intends to stick to its decision to keep its output stable.
“We will review [the market at a scheduled meeting] in June and see what we will do,” Mr. el-Badri said. “You need at least six months to see the impact.” (…)
(…) Tawfiq al-Rabiah, minister of commerce and industry, told an investment conference in Riyadh that the Arab world’s largest economy was able to maintain expenditure that would then filter through to the private sector while infrastructure investment would boost exports.
(…) Now, with U.S. crude around $46 a barrel, operators are already closing some small old wells, known as strippers, and tens of thousands of similar wells are on the verge of losing money. A further slide could, by some estimates, idle an equivalent of up to 2 percent of U.S. supply, slowing overall output growth more than expected or even leaving it flat. (…)
There are about 400,000 stripper wells in the United States, most with operating costs of between $20 and $50 per barrel, according to analysts at Wood Mackenzie, a leading energy and commodities consultancy. (…)
Strippers often produce just a few barrels a day, but together they account for up to 1 million barrels per day, a ninth of U.S. output.
Not all stripper wells are losing money now and those that do may not be shut in. This is in part because producers can lose their leases forever if they shut wells for more than a few months, so owners are often willing to pump at a loss and store oil until prices rise.
“At $40, we think you have got about 100,000 to 200,000 barrels per day at risk” from U.S. stripper wells, said RT Dukes of Wood Mackenzie.
That could represent a dent of up to 2 percent dent in output compared with U.S. Energy Information Agency forecasts that this year’s U.S. production will average 9.3 million bpd.
After production hit 9.1 million bpd in late 2014, the agency now expects production to climb to 9.42 million bpd around the middle of this year, then ebb to 9.26 million bpd at year’s end. (…)
From David Rosenberg:
(…) Now keep in mind that the demand destruction that has taken place has not been to physical or real demand factors – global growth has slowed but not contracted, and at 3%-plus, it is actually not that far out of line with historical norms.
The destruction has been with the financial demand – as per the net speculative long position in the NYMEX futures and options pits.
That net long position tested 500,000 contracts just as the oil price was hovering over the $100 per barrel mark last summer (which is equivalent to around 500 million barrels or five day’s world consumption which is unheard of).
This demand has since cratered around 30% from the highs and generally when it gets to less than 100,000 contracts in the bear oil markets it is enough capitulation to mark the lows in the price.
On physical demand: Americans are getting on the road again after 7 years staying around:
Cumulative monthly vehicle-Miles travelled was up 1.4% YoY in November 2014, accelerating every month after troughing in March (DOT).
Meanwhile, China imported a record 7.18 million b/d of crude oil in December, which was also up 15.7% from November, according to data released January 13 by the General Administration of Customs. Taking into account some exports, net crude imports advanced 12.5% year on year last month to 7.12 million b/d, also a record high.
One may think this all went into strategic reserves but the fact is that Chinese are also on the road as refinery throughput in December climbed 6.3% year on year to 10.54 million b/d, was also the highest volume to date, according to figures from the National Bureau of Statistics released Tuesday. (Platts)
The Federal Reserve Bank of Dallas reported that its January Composite index of factory sector activity of -4.4 was negative for the first time since May 2013. The figure reflected weakness amongst all of the component series, most notably the growth rate of new orders which collapsed to -18.0. That was its weakest reading since the end of the recession in June of 2009. The production index value of 0.7 was its lowest figure since April 2013. Wages & benefits turned sharply lower to the lowest since October 2013. Employment, however, was off just slightly at 9.0. Pricing power also evaporated. The index reading of prices received for finished goods turned to a negative 6.7, the weakest reading since May 2013 and raw materials pricing collapsed with lower commodity prices.
The business outlook fared no better. The business activity reading for six months ahead, at -6.4, was its first negative figure since May 2013 and the lowest reading since the recession. The company outlook figure similarly stalled, but remained a positive 2.5 versus 35.5 twelve months ago. The future production figure dropped to 22.1, its weakest reading since the end of the recession. Expected new orders growth at 12.9 was its weakest figure since September 2012. The same weakening was noted on the labor front with wages expected in six months dropping to 28.2, the easiest figure since June 2012. The expected workweek ticked up into positive territory, but at 0.7 was off versus 26.5 in December 2013.
“All of the job growth from 2007 to today can easily be attributed to the shale oil fracking situation and the oil Renaissance. If you take Texas and North Dakota out of the data series for job employment, what you see is that we haven’t added any jobs in the United States other than those two regions.”
The comment above by famed bond investor Jeff Gundlach during a conference call last week set off a firestorm, repeating a trope that has been gaining traction in some quarters. The claim is that all the job creation in this economic recovery is related to the surge in oil and natural-gas fracking. This is demonstrably false. (…)
Mortgage brokers reported that Royal Bank of Canada dropped its five-year fixed rate for qualified borrowers to 2.84 per cent over the weekend. While smaller, non-bank lenders have started offering even cheaper rates, RBC’s rate cut is likely a record for a major bank, said Drew Donaldson, executive vice-president of Safebridge Financial Group. The bank also slashed its posted 10-year fixed rate to 3.84 per cent, the lowest nationally advertised rate in the country, said Robert McLister, founder of Ratespy.com. (…)
The renewed price war is raising concerns that the central bank’s rate cut will add fuel to the country’s overheated housing market even as Canadians struggle under the burden of rising household debt. Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal warned last week that falling mortgage rates could lead to “a monstrous spring in the real estate market.”
EARNINGS WATCH
As of last night, 103 companies (29.6% of the S&P 500’s market cap) have reported. So far, EPS are up 3.3%,beating by 2.5%. Ex-energy EPS are up 6.5% even though Financials’ EPS are –1.0%.
Expectations are for revenue, earnings, and EPS growth of 0.4%, 1.5%, and 3.3%. Excluding Energy, these numbers are 3.5%, 4.5%, and 6.5%, respectively. This excludes the likelihood of continued beats. (RBC)
Energy, Texas and Job Creation
Canadian banks on brink of mortgage price war