Retail sales decline in February
- Feb Retail Sales: -0.6% vs. +0.3% expected, -0.8% in Jan.
- Ex-auto -0.2% vs. +0.3 expected, -0.1% (revised) prior.
Inventory Uptrend a Potential Risk for Factories
(…) The vital concern for analysts is whether or not businesses are boosting inventories voluntarily. Higher inventory levels could be desirable if they come because businesses are more confident in the economic outlook or if they are attempting to insulate production from bottlenecks related to West Coast port gridlock. Conversely, higher inventories may be undesirable if they reflect reduced demand — for example, as a stronger dollar leads to import substitution.
It is too early to tell what has driven the recent backup in the I-S ratio, but the answer will bring significant economic implications, especially if currency appreciation appears to be having a tangible negative impact on output.
Production surveys, such as the manufacturing ISM, should provide an early indication. There were mixed signals in February: supplier delivery times slowed (supporting the port traffic thesis), while at the same time imports rose and exports fell (bolstering the import substitution thesis). Now that the West Coast port disruptions appear to be resolved, the next round of production surveys should begin to reveal the true drivers, particularly if there is a sharp reversal in either delivery times or the export-import differential.
An additional rise in ISM inventories would be troubling if it is accompanied by further moderation in new orders and production, because this could be a harbinger of an impending manufacturing soft patch. To be sure, this is a risk at present — not a baseline forecast — but it bears watching.
The inventory subcomponent in the ISM survey is a useful barometer of GDP inventories, and it is currently running above its averages in both the third and fourth quarters. If this remains the case, it would strongly imply that the current quarter inventory build could again be above trend. Forecasters who have looked beyond inventory dynamics thus far in the economic cycle would be wise to pay attention to the factors driving the recent backup in the I-S ratio.
Meanwhile, housing is not taking off even with mortgage rates below 4% (chart from CalculatedRisk):
Eurozone Industrial Output Falls in January Data indicates that exporters haven’t yet seen boost from weakening euro
The European Union’s statistics agency said Thursday that production by factories, mines and utilities during the first month of 2015 was 0.1% lower than in December, but 1.2% higher than in the same month of last year.
The decline occurred despite a continued revival in energy production, as output of durable consumer goods fell sharply, while the manufacture of intermediate goods also dropped.
The positive way to look at it is that Durable goods production has risen at a 6.3% annual rate in the last 4 months.
(…) A nearly $0.2 move in the euro against the dollar is worth about 5 per cent in operating profit to European corporates, according to one analysis of 302 large stocks from Alphavalue, the research group.
The euro has fallen around 25 per cent against the dollar to $1.05 since last May when the European Central Bank signalled that it was prepared to launch a programme of quantitative easing, effectively creating money. (…)
There are two types of currency effects on earnings. The first is the translational impact for companies with business abroad when profits are, for accounting purposes, translated back into their home euro currency.
This can affect short-term earnings, cash flow, the ability to pay dividends and the share price, but has little long-term impact as the companies are not actually becoming more profitable or more competitive. (…)
The other impact of a weak euro is on companies exporting outside the eurozone, as their goods become more competitive, meaning they can either lower prices to try to add market share, or just hold on to more profit. (…)
Daimler is considering slowing down expansion of its production facilities in the US if the euro remains weak against the dollar, according to Michael Brecht, the employee representative on Daimler’s supervisory board, in remarks reported by Reuters.
Moody’s also expects European hotels and tourism companies to receive a boost from increased demand, as destinations in the eurozone become cheaper for travellers from overseas. (…)
But some analysts say that other positive factors should also help to boost profits for European companies this year, including low interest rates and the nearly 50 per cent fall in the oil price over the past eight months.
Pierre-Yves Gauthier, the head of research at Alphavalue, said that he had never seen such a combination between a strong dollar, cheap energy and cheap money. “It’s a miracle. It’s a delight, valuations should continue to go up,” he said.
ECB Official Details First QE Purchases The ECB bought €9.8 billion ($10.33 billion) of bonds with an average maturity of nine years in the first three days of its massive stimulus program, executive board member Benoît Coeuré said.
The ECB has said it would buy a total of €60 billion a month in eurozone government bonds, debt instruments issued by European Union institutions and private debt instruments through to September 2016.
Are Currency Wars Looming in Asia? Central bankers won’t utter the term, but the rising wave of surprise interest-rate cuts in Asia could portend currency wars.
Central bankers won’t let the term leave their lips. Bank of Korea Gov. Lee Ju-yeol on Thursday, in announcing an interest-rate cut to a record low 1.75%, was studious in denying such a thing existed.
Yet both South Korea and Thailand, which cut rates on Wednesday, have reason to worry about the strengthening of their currencies.
The won has lost value against a resurgent U.S. dollar, but has strengthened 10% against the euro since the start of 2015. It is also up 10% against the Japanese yen over the past year.
Now, a steep fall in the euro is adding to the complications. South Korea’s exporters of automobiles and ships compete directly with European producers. (…)
Looming? Zerohedge has the list of the 24 central bank rate cuts so far in 2015.
China Credit Growth Beats Estimates as Easing Spurs Lending
Aggregate financing was 1.35 trillion yuan ($215.5 billion) in February, the People’s Bank of China said in Beijing Thursday, above economists’ median estimate of 1 trillion yuan. New yuan loans totaled 1.02 trillion yuan and M2 money supply rose 12.5 percent from a year earlier. (…)
Last month’s M2 increase compared with 11 percent estimated by economists and January’s 10.8 percent rise. New local-currency loans compared with the 750 billion yuan median estimate of economists and the originally reported 1.47 trillion yuan for January.
Net new bank loans for Jan + Feb are up 26.8% YoY! Where are these loans going?
China housing is going nowhere for now given the huge unsold inventory. For Jan + Feb: housing starts –19.8% YoY after –14.4% in 2014; floor space sold –17.8% after –9.1% in 2014; floor space completion –15.8%. Tough to expect domestic demand offsetting weakening exports until housing stops falling.
The quarterly 
Industrial production, which is seen as a proxy for the country’s economic growth, grew 6.8% in the first two months, its lowest level since the 2008 financial crisis. That is down from 7.9% in December and well-short of a median forecast of 7.6% from a Wall Street Journal survey of 14 economists. Factories were hit by overcapacity, high inventories and tight financing, economists said. (…) 
Housing sales were even gloomier, falling 16.7% from a year ago in the January-February period. New construction starts for residential and commercial property, measured on a total square meter basis, were down a whopping 17.7%, according to official data.
Turbulence Ahead as U.S. Flies Solo