Month: March 2015

More Signs of Wage Inflation

Via The Big Picture

From Torsten Sløk of Deutsche Bank:

The first chart below shows that over the past year employer costs have risen significantly. The second chart shows that the rise is driven partly by a significant increase in bonuses. The third chart shows that the uptrend in wages can been seen across all parts of the services sector. And the fourth chart shows that wages are rising faster for unionized workers. This data, the Employer Costs for Employee Compensation (ECEC), is created using the same raw data that goes into the Employment Cost Index (ECI). The difference between the ECI and the ECEC is that the ECI controls for changes in the industrial-occupational composition of jobs. In other words, the ECI is intended to indicate how the average compensation paid by employers would have changed over time if the industrial-occupational composition of employment had not changed from the base period. The ECEC data on the other hand, does not control for the effect of a change in the composition of jobs. For example, if a company goes from hiring fewer customer services workers to hiring more R&D workers then it would show up in the ECEC data as higher wage inflation (because R&D workers generally have higher wages than customer services workers).

This happens to be consistent with the data showing that employment growth has been stronger for high-wage occupations and it is also consistent with the recent strong uptrend seen in private sector R&D spending. In the 1990s we saw the opposite, with the ECI above the ECEC because more lower paying jobs were created. For more discussion of this and the differences between the ECI and the ECEC see also this BLS article here:http://www.bls.gov/opub/mlr/cwc/explaining-the-differential-growth-rates-of-the-eci-and-ecec.pdf. The bottom line remains that there are several ways of measuring wage inflation and although average hourly earnings remains flat, several of the other measures of wages are showing signs of broad-based wage pressure.

A slower economy, slower overall inflation with deflating retail prices, and a rising dollar against rising labour costs means lower margins and potentially lower earnings. Here’s another illustration from Moody’s:

BTW this a.m.: Q4 Corporate Profits: -1.4% vs. +5.06% prior.

EMU Trends Turn Up for Credit and Money

The EMU is showing a clear pick up in credit and money growth trends as of February 2015. It is beginning to look as though the ECB’s special efforts to stimulate credit growth are starting to pay off. The QE effort is too recent to have its direct effect included in the data, but QE has been expected and other programs appear to be having some impact too.

Japan’s Zero Inflation Is a Setback for Abenomics Japan drifts back toward deflation, two years after launching a radical monetary policy experiment to cure the affliction.

The government said Friday the core consumer-price index hit 0%, the lowest level since May 2013 and far from the 2% target that the central bank had pledged to hit by this spring. The index excludes fresh food prices and effects of a tax increase. (…)

To be sure, the economy has some bright spots, according to other data released Friday. As a shrinking working-age population and growth in construction work—in part fed by fiscal stimulus—tighten the labor market, the jobless rate fell to 3.5% in February from 3.6% in January, while the jobs-to-applicants ratio rose to 1.15, its highest level since March 1992. That means there were 115 jobs available for every 100 job seekers.

That, however, hasn’t translated into more spending by consumers. Household spending fell 2.9% from a year earlier in February, marking the 13th consecutive decline. Retail sales fell 1.8% from a year earlier. (…)

Despite the weak yen, exports have been slow to rise, in part because many Japanese companies have opted not to use the new currency advantage to cut prices on world markets, but rather maintain sales at current levels and book higher yen profits. And despite sharp earnings gains, multinationals have continued to sit on cash, rather than invest it in new equipment, as they remain unsure of Japan’s longer-term growth prospects. (…)

In the FT:

The advance inflation reading for the Tokyo area in March stayed positive at 0.2 per cent year-on-year, suggesting Japan will not dip into deflation next month, but it could still happen by summer.

“Electricity and gas charges are expected to start declining from April onwards, putting larger downward pressures on the core CPI inflation rate going forward,” noted analysts at Credit Suisse in Tokyo.

Elsewhere in the WSJ:

(…) The worries are overdone. The Bank of Japan has clearly missed its target, declared at the start of its easing campaign two years ago, to hit 2% inflation in two years. But this is due to factors largely beyond its control—sharply falling oil prices and last year’s increase in the consumption tax.

Oil prices have in fact been a positive for the Japanese economy. The tax increase has been negative. Both will be temporary in their effects on prices.

That said, zero isn’t the lower bound for Japanese inflation. Prices could turn negative in the coming months, as utility companies cut charges after a lag. But lower energy costs will be a boon to the country’s economy in the long term, putting more cash in the pockets of consumers and businesses.

Of course, even the so-called “core-core” CPI, which also excludes energy and food, was up just 0.3% from a year earlier in February. This likely reflects the lingering effects on demand from last year’s three-percentage-point increase in the consumption tax.

The concern is that these temporary disruptions could conspire to keep Japanese people trapped in a “deflationary mindset.” To head that off, some speculate that the Bank of Japan might ease policy again as soon as next month.

But a deflationary mindset takes more than just CPI turning briefly negative. Other recent data show demand strengthening. Household consumption rose 0.8% from a month earlier in February. The labor market is tight, with the unemployment rate falling to 3.5% from 3.6% a month earlier. The ratio of job postings to applicants, already at its highest in decades, climbed further. And Japan’s largest companies have just agreed to the biggest wage increases in many years.

And besides consumer prices, asset prices, from stocks to land, are rising. Export volumes are picking up. This isn’t what deflation looks like.

Japan may have laid a goose egg on inflation. But with so much else going in the right direction, the BOJ is unlikely to ramp up the stimulus just yet.

U.S. Oil Output Not Even Slowing Let Alone Falling

Another week, another record high for U.S. oil production, now topping 9.4 million barrels per day, or about 1 to 2 million barrels more than the nation needs each day. Moreover, despite a collapse in drilling rigs, the rate of increase (15% y/y) hasn’t even slowed. Shale producers are simply pumping more oil out of their best
performing wells. While supply will eventually ebb as these wells run dry, the short-term risks for oil prices are clearly on the downside. (BMO Capital)

BMO looks at the YoY rate of change. Others have noted that last week’s production rose only 3000 barrels, down to a trickle… 

EQUITY VALUATION

Posted yesterday:

Only fools and bourses – The ‘CAPE’ ratio can be useful but do not take it at face value