Fed Beige Book: Economic Activity ‘Continued Expanding’
(…) The report, based on anecdotes in the Fed’s regional survey of economic conditions known as the beige book, suggests wage growth remains sluggish nationally. But it offered strong evidence that in some pockets, such as parts of the Midwest, northern California and New York, workers are gaining leverage and starting to see a boost in pay.
“Several Districts reported increasing wage pressures caused by labor market tightening,” the Fed said. (…)
Eleven of 12 Fed districts reported moderate or modest growth; the Cleveland district reported slight growth. Inflation remained stable, it said, suggesting consumer prices continue to grow at a historically slow pace.
Among the economy’s strengths, the Fed said, the housing market had “widely improved,” with existing home sales and prices climbing. But it also warned of growing obstacles facing American manufacturers, particularly the strong dollar, depressed oil prices and an economic slowdown in Asia. (…)
According to the beige book, most districts reported “relatively stable wages,” with “slight to modest” increases at the start of the third quarter compared with the prior six weeks.
But there were hints of a pickup in some areas due to the tightening market. Half of the Fed’s districts reported labor shortages for certain skills or difficulty finding workers, the Fed said.
The St. Louis Fed—a district that includes Arkansas and portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee—said almost three-fifths of companies that responded to the survey had raised wages in the prior three months.
The San Francisco district, which includes Silicon Valley, reported “upward wage pressures” for skilled workers in information technology, information security, and construction. Firms in the New York region cited “pressure on starting salaries.”
The Cleveland Fed pointed to “intensifying wage pressure” among construction, retail and transportation industries.
Home Builders Say Loans Are No Longer Scarce
(…) Figures released Wednesday by the Federal Deposit Insurance Corp. show that total outstanding balances on construction loans from FDIC-backed institutions amounted to $255.8 billion in the second quarter, up 3.9% from the first. That marks the fifth consecutive quarter of double-digit, year-over-year percentage growth as construction lending rebounds from its nadir of $201.5 billion in early 2013.
The main residential component of that total–loans for constructing homes of single- to four-family units–also continued to gain ground this year. Outstanding balances on loans from FDIC-backed institutions for building those houses totaled $56.1 billion in the second quarter, up nearly 4.7% from the first.
“For residential-construction loans, this is the fifth consecutive quarter of year-over-year growth in the range of 16% to 17.5%,” said Robert Dietz, a senior economist with the National Association of Home Builders. “Ongoing growth in residential construction loans points to additional expansion for single-family (construction) starts.” (…)
However, increased availability doesn’t mean looser terms. Many banks still won’t lend for as large a percentage of a project’s total cost as they would during last decade’s boom. And some banks want guarantees from builder executives to personally repay loans if their companies can’t, a proposal at which many builders balk.
Credit “is available, but it’s definitely more conservative,” said Gary Tesch, president of Houston-based McGuyer Homebuilders Inc., a closely held builder aiming to construct 1,500 homes this year. “On vertical construction, most banks are back in that business today. Not all are back in land-development financing.” (…)
IMF Says China Slowdown, Other Risks Threaten Global Outlook
“Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook,” the IMF said in a report on the state of the global economy ahead of a meeting of top finance officials from the Group of 20 biggest economies.
“Strong mutual policy action is needed to raise growth and mitigate risks,” the IMF told the G-20. (…)
“Near-term downside risks for emerging economies have increased,” the IMF warned. (…)
World faces third deflationary wave EM crisis means further fall in potential global output is unavoidable
(…) The impact of this emerging market crisis on the developed world will be a little different this time. In 1997 it created a price shock that raised real income and real consumption levels in the developed world. Today an emerging crisis will create both a price and volume shock due to its greater relevance to world GDP and to global companies than in the past. (…)
Lower gasoline prices may now be being felt, but the fall in manufactured goods prices from Asia is still ahead of us. Tighter US monetary policy, and a strong dollar, would only intensify these oncoming deflationary forces.
The volume shock from the deflationary wave will become visible in trade data between developed and developing nations. The Financial Times recently noted that currency devaluations had failed to stimulate exports while limiting imports. In aggregate they had diminished world trade.
So it is critical that the US trade deficit now be allowed to expand and fill the aggregate demand gap that must arise from the fall in purchasing power from the developing world. Tighter US monetary policy will not help here either.
In sum, this third deflationary wave will mean that world GDP will continue to operate at a level below potential output. Downward pressure on prices will persist and a supply-side contraction in developing nations will be required before prices stabilise. A further fall in potential global output is now unavoidable. The adjustments to GDP forecasts are still ahead of us. (…)
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Those Inflation Targets Keep Getting Harder to Hit Central banks have promised higher inflation is on its way. They’ve promised that before
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Draghi Seen Sharpening Language as ECB Fights Low Inflation
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Waning demand for commodities sends cargo ships to scrapyard
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Are Deteriorating Emerging Markets a Contagion Threat? (Bloomberg video)
FYI:
OIL
Yesterday I wrote about the on-going decline in shale oil production and about the recovery in product demand in the U.S.:
Total product demand was estimated at ~19.6 MMbpd for June, up from ~19.1 MMbpd in May but down from the implied weekly demand figures. Importantly, gasoline demand increased by ~1.5% sequentially to just under 9.4 MMbpd (up 4.0% y/y), implying impressive growth for the biggest driver of total U.S. demand. Additionally, continued strength in the weekly figures implies that our forecast from January for 3% demand growth for gasoline in 2015 may well prove conservative. (Raymond James)
Another way to monitor U.S. gasoline demand is to look at convenience store operators’ same store fuel sales trends: Circle K and Casey’s are two of the best run groups in this industry with limited geographical overlap. CST Brands is a smaller operator with declining volumes. Their numbers likely include some market share movements but the trends in the growth rates confirm that U.S. consumption is accelerating (numbers from NBF):
Omega says ‘risk parity’ helped tip market Chorus of investors perturbed by esoteric trading strategies grows
Lee Cooperman, the founder of Omega Advisors, has joined the growing chorus of investors blaming last week’s stock market sell-off — and his own poor performance in August — on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.
In a letter to investors on September 1, Mr Cooperman and his partner Steven Einhorn said fundamental factors such as China’s ructions and uncertainty over the US interest rate outlook “cannot fully explain the magnitude and velocity of the decline in equity markets last month”. (…)
The “systemic/technical investors” blamed by Mr Cooperman include so-called risk parity funds and momentum investors known as CTAs. Initially commodity-focused, these commodity trading advisers’ funds now invest across futures markets and are typically computer driven.
These investors, along with “smart beta” passive equity strategies that have become increasingly popular, adjust their exposures according to algorithms in response to market moves, and spikes in volatility can trigger a rash of automated selling. (…)
Some analysts and investors fear a self-reinforcing cycle of selling, as RP funds and other volatility-sensitive trading strategies respond to the recent bout of turmoil. Mr Kolanovic estimates that the selling pressure could reach $300bn over the next three weeks, and some big traditional investors are perturbed at the consequences. (…)
Echoes of 1987 again!
Giant U.S. Pension Fund to Propose Shift Away From Stocks, Bonds The California State Teachers’ Retirement System is considering a significant shift away from some stocks and bonds.
Top investment officers of the California State Teachers’ Retirement System have discussed moving as much as 12% of the fund’s portfolio—or more than $20 billion—into U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund. Its holdings of U.S. stocks and other bonds would likely decline to make room for the new investments.
The board of the $191 billion fund, which is known by its abbreviation Calstrs, discussed the proposal at a meeting Wednesday. A final decision won’t be made until November.
A wave of deep selloffs over the past two weeks has shattered years of steady gains for U.S. stocks. Calstrs isn’t reacting directly to those sharp price swings, but they are a reminder of the volatility in stocks and how exposed Calstrs is when markets swoon.
“There’s no question,” Calstrs Chief Investment Officer Christopher Ailman said in an interview. The recent market volatility “has been painful.”
Calstrs currently has about 55% of its portfolio in stocks. (…)
Fed official flags concern over US growth
Canada: This doesn’t look like a recession
A big debate is whether U.S. shale production is declining. Monday, the DOE released monthly figures for crude oil supply and disposition for the month of June. Total U.S. crude oil production declined by 104,000 bpd from May to June and prior months (Jan-May) production figures were revised by ~40,000-130,000 bpd lower. Here’s Raymond James’ summary: 
Regular Bearnobull readers will recall that timely and never revised data from the Association of American Railroads have been showing declining rail shipments of petroleum products since April (see the OIL segment in my Aug. 10 
