Edge and Odds

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Month: September 2015

NEW$ & VIEW$ (17 SEPTEMBER 2015): InflationS.

U.S. Consumer Prices Fall 0.1%, Muddling Fed Decision

The decline was due entirely to depressed oil markets, which have pushed the price of gasoline down 23% over the past year. “Core” consumer prices—which exclude food and energy components and are considered a more-reliable measure of underlying inflation—rose 0.1% last month.

Overall prices are up just 0.2% over the past year while core prices are up 1.8%.

Shelter costs—reflecting rent and mortgage payments—climbed 0.2% from July and 3.1% over the year. Food prices were up 0.2% over the month and 1.6% over the year. Medical commodities increased 0.3% over the month and 3.4% over the year.

Also Wednesday, a separate Labor Department report showed Americans’ inflation-adjusted weekly earnings grew 0.7% in August. Earnings rose because of increases in both workers’ hourly pay and hours. Average hourly earnings, adjusted for inflation, rose 0.5%, the biggest jump since January. The average workweek grew 0.3%.

From a year earlier, real average weekly earnings rose 2.3% and hourly earnings rose 2%.

The Median CPI

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in August. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

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The Fed Chart
The Consumer Chart

While market inflation expectations declined from 2.8% to 1.8%, consumers remained doubtful.

Rich Are Winning the Recovery; More Income Than in ’06

U.S. Census Bureau data out Wednesday underscore just how lousy the recovery has been if you aren’t rich. Looking at eight groups of household income selected by Census, only those whose incomes are already high to begin with have seen improvement since 2006, the last full year of expansion before the recession. Households at the 95th and 90th percentiles had larger earnings through 2014, the latest year for which data are available. Income for all others was below 2006 levels, indicating they’re still clawing their way out of the hole caused by the deepest recession in the post-World War II era. Read the full story here.

Who’s traveling in your view?

Spending on U.S. Travel and Tourism Speeds Up Despite Stronger Dollar

Travel and tourism spending rose 6.5% in the second quarter at a seasonally adjusted annual rate, the Commerce Department said on Wednesday. That’s up from a 2.2% pace in the first quarter and 5.5% in fourth quarter 2014. (…)

The acceleration appears entirely driven by domestic travelers. Separate Commerce Department data show travel spending by international visitors has leveled off this year. Travel spending for business or personal reasons is down 2.2% from January to July compared with the same period a year earlier.

The dollar appreciated by about 12% from the middle of 2014 to the middle of 2015 against a basket of currencies tracked by the Federal Reserve, making travel in the U.S. more expensive for foreign visitors.

The same trend also has made travel abroad cheaper for Americans. U.S. travel spending in other countries was up about 8.5% from January through July compared with the same period a year ago, according to Commerce data. (…)

The Commerce Department said the tourism industry supported eight million jobs in the second quarter of the year, up about 1.6% from the first quarter.

U.S. Home Builders Index Strengthens to 2005 High

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo improved to 62 (5.1% y/y) from an unrevised August level of 61. It was the highest level since October 2005 and beat expectations for 61 in the Informa Global Markets Survey. The NAHB figures are seasonally adjusted. During the last ten years, there has been an 80% correlation between the y/y change in the home builders index and the y/y change in single-family housing starts.

The index of single-family home sales improved to 67 (6.3% y/y), the highest level in ten years. The index of expected sales during the next six months eased to 68, the lowest level since May.

Realtors reported that their traffic index rose m/m to 47, the highest level in twelve months.

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U.S. Mortgage Loan Applications Decline; Financing Rates are Steady

The Mortgage Bankers Association reported that its total Mortgage Market Volume Index fell 7.0% last week (+2.2% y/y) to the lowest level since early last month. Applications to refinance a loan led the decline with a 9.1% fall (+0.5% y/y). Home purchase applications followed with a 4.2% easing (+4.6% y/y) and they have been moving slightly downward since mid-June.

The effective interest rate on a 15-year mortgage was fairly steady at 3.39%, the lowest point since late-May. The effective rate on a 30-year fixed rate loan also held w/w at 4.22% and the rate on a Jumbo 30-year loan was unchanged at 4.11%. (Chart from CalculatedRisk)

Japanese Exports Rise in August Japanese exports rose 3.1% on year in August as a weak yen increased the nominal value of outbound shipments, while they faced headwinds from a slowdown in China.

Japan’s export growth slowed for a second month, signaling waning overseas support for an economy that’s already beset by weakness at home. The value of shipments rose 3.1 percent in August from a year earlier, compared with estimates compiled by Bloomberg for a 4.3 percent increase. Imports dropped 3.1 percent, leaving a deficit of 569.7 billion yen ($4.7 billion), according the figures released by the finance ministry. Exports to China fell 4.6 percent as a market rout and economic slowdown in Japan’s biggest trading partner sapped demand. Disappointing data in recent months has raised concern on the outlook for economic growth after a contracted last quarter and an inflation rate that’s slid back to zero. (Bloomberg)

Hollande seeks growth with tax breaks

(…) France’s budget for 2016, to be detailed in a fortnight, will include €2bn in tax breaks for the middle class on top of €3bn already doled out over the past two years. About 8m households, representing two-thirds of French taxpayers, will see their tax bill decrease next year, finance minister Michel Sapin said on Wednesday.

The measures will come on top of €9bn worth of tax breaks and other gifts for companies that were part of a €41bn package that runs from 2014 to 2017, when the next presidential election takes place.

These initiatives — as well as any extra costs that may arise, including France’s pledge to take on 24,000 refugees from the Middle East — will be funded through cuts in other parts of government to meet deficit targets previously agreed with the European Commission, Mr Sapin vowed. (…)

The government is betting on 1.5 per cent growth next year, an estimate Mr Sapin described as “prudent”, and building on the at least 1 per cent it is forecasting this year. Public spending, which stands at 56 per cent of gross domestic product, is expected to decrease to 55 per cent in 2016, a level still well above the 48 per cent eurozone average.

Mr Sapin indicated he was counting on lower interest payments and increased efforts to fight tax evasion to help pay for the measures. He reiterated France would narrow its deficit to 3.8 per cent of GDP this year and 3.3 per cent in 2016. (…)

Goldman Sees 15 Years of Weak Crude as $20 U.S. Oil Looms

There’s less than a 50 percent chance that prices will drop to $20 a barrel, most likely when refineries shut in October or March for maintenance, Jeffrey Currie, head of commodities research at the bank, said in an interview in Lake Louise, Alberta. Goldman’s long-term forecast for crude is at $50 a barrel, he said. (…)

“When we think of the longer term oil price, yes we put it at $50 a barrel,” he said. “However the risks are to the downside given what’s happening in the other commodity markets and the macro markets more broadly.” (…)

The world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase,” with shale fields as an important source of output, he said. (…)

FOLLOWING UP ON THE PENNANT

Ray Dalio’s Interview at Bloomberg
Drink to that?

It is no longer just pub gossip: yesterday SABMiller, the world’s second-largest brewer, confirmed that it is being courted by AB InBev, the biggest. The resulting behemoth would earn about half the industry’s profit. The announcement follows months of deal talks among drinks-makers thirsty for growth. A year ago SABMiller tried and failed to buy third-ranked Heineken. June brought rumours of a union between AB InBev and Diageo, the world’s leading distiller. Most recently, analysts weighed a deal between Diageo and SABMiller. But a tie-up of the two top brewers is in some ways the most logical: SABMiller’s strength in emerging markets complements AB InBev’s in the Americas. But a deal is by no means done. AB InBev has yet to make a formal offer. Under British rules, it must do so by October 14th. (The Economist)

NEW$ & VIEW$ (16 SEPTEMBER 2015): Fed Up or Not?

FED UP…

Sales at retailers and restaurants have recovered after a bumpy start to the year, posting a 0.2% monthly gain in August and a 2.2% annual increase, the Commerce Department said Tuesday.

Excluding gas, retail sales rose 0.4% in August and a solid 4.4% over the year.

Non-Auto less Gas, Building Supplies & Food Services, so called core sales that feed GDP, rose 0.4% (2.8% YoY) and are up at a 5.3% annualized rate in the last 3 months.

Few parts of the U.S. economy better illustrate the benefits and perils of the Federal Reserve’s near-zero interest-rate policies than the auto industry, and few will be as exposed to the fallout if central bank officials decide this week to end America’s seven-year era of rock-bottom borrowing costs.

Auto debt owed by U.S. households in the second quarter this year rose above $1 trillion for the first time, fueling car purchases and a Lazarus-like revival for an industry brought down by the 2007-2009 financial crisis. (…)

What happens next for the industry depends a great deal on how aggressively the Fed moves. If it raises rates slowly, then froth in the industry—including a profusion of subprime borrowing—could end up hurting borrowers and lenders. If it moves aggressively, it could take a big bite out of sales. (…)

In the U.S. car capital, the auto explosion has helped reduce the unemployment rate in the Detroit metropolitan area to 5.8% in July from more than 16% in 2009. Among other hopeful signs: Whole Foods Markets, the upscale chain, opened a store in midtown Detroit. Bidding wars have replaced home foreclosures in some suburban neighborhoods. And car makers are paying hourly workers profit-sharing bonuses as high as $9,000 a year.

“It really is a boom,” said Ellen Hughes-Cromwick, an economics professor at the University of Michigan in Ann Arbor and former chief economist for Ford Motor Co. “If you came here and you compared it to what happened in the late 1990s, it is exactly the same.” (…)

Employment agencies for retailers and logistics companies say they are having trouble finding warehouse workers to stock early holiday inventory and employees to train for work in fulfillment centers, where holiday orders will be packed and shipped.

(…)  As a result, retailers and delivery companies expect to have to raise starting pay in some places. (…)

Starting warehouse wages, which have been stagnant for years, have been rising by about $1.50 to $3 an hour to attract workers in some markets, according to logistics staffing firm ProLogistix. The firm said that in this holiday season, temporary jobs—especially at e-commerce companies—start in a range of between about $11 and $13.50 an hour, up from between about $9 and $11, though it varies significantly by region.

Ozburn-Hessey Logistics LLC, a third-party logistics provider, is raising its hourly wages by about 10% in some markets to compete for talent in e-commerce hot spots, such as around Louisville, Ky., and Memphis, Tenn., where UPS and FedEx, respectively, operate some of their biggest package-sorting hubs. (…)

The United Auto Workers union reached a tentative labor deal with Fiat Chrysler Automobiles NV that will eventually remove a controversial two-tier wage system that pays newer hires less than more-experienced co-workers doing the same jobs, according to people familiar with the agreement.

Under the current arrangement, newer factory employees earn about $9 an hour less than more senior employees, a point of friction for many rank-and-file workers. The new structure will eventually phase out the two classes of wages over time, the people said.

Pay for entry-level workers hired after 2007 is currently capped at $19.28 an hour. The new deal would raise that pay ceiling after a number of years closer to $25 an hour, the people said, though the precise time frame and dollar amount couldn’t be learned. Veteran workers earning more will keep their wages until they no longer work for the company, leaving the other wage as the new pay standard for auto workers going forward, the people said. (…)

Fiat Chrysler is the smallest and least profitable of the Detroit Three car makers. With about 45% of its hourly workforce earning the lower wage, the company has a labor cost advantage of about $9 to $10 an hour over rivals GM and Ford, putting it more on par with Asian rivals such as Toyota. (…)

…OR NOT

(…) The layoffs disclosed Tuesday are in addition to a 55,000 head count reduction that the company previously announced. (…)

Industrial production, which measures output in the manufacturing, utilities and mining sectors, fell a seasonally adjusted 0.4% in August from July, the Federal Reserve said Tuesday. It was the sixth time in eight months that the measure fell from the previous month.

Capacity utilization, which measures industrial slack, fell to 77.6% in August from 78% in July.

Meanwhile, industrial production for July was revised up to a 0.9% rise from an initial estimate of 0.6% growth.

Manufacturing output, which accounts for almost three-quarters of overall industrial production, fell by 0.5%, driven by a 6.4% drop in production of autos and auto parts after an increase in July of more than 10%. Manufacturing output was up 1.4% in August from a year earlier.

  • U.S. Business Inventory Total Rises

Total business inventories edged up 0.1% in July (2.6% y/y) after a 0.7% advance in June, revised slightly from 0.8% reported initially. The resulting 3-month growth was 3.0% (AR), down from 5.0% in June. Total business sales also increased 0.1% in July (-2.7% y/y), less than June’s 0.3%, which was revised from 0.2% reported before. July’s 3-month growth rate was 3.1%, compared to 5.0% in June. The overall inventory/sales ratio was 1.36 in July, the same as in June, which was revised down from 1.37.

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The Empire State Factory Index of General Business Conditions remained negative during September, nearly the weakest reading since the recession. The latest figure of -14.67 compared to an unrevised -14.92 in August. These diffusion indexes were the lowest since April 2009. The latest disappointed expectations for -3.0 in the Action Economics Forecast Survey. The data are reported by the Federal Reserve of New York and reflect conditions in New York, northern New Jersey and southern Connecticut.

Based on these figures, Haver Analytics calculates a seasonally adjusted index that is compatible to the ISM series. The adjusted figure eased to 44.9, also a six-year low. (…)

New orders and shipments also were close to the lowest levels since 2009, while vendor delivery speeds quickened to the fastest pace this year.

(…) Prices received fell into negative territory, also for the first time since 2009.

Expectations for business conditions also deteriorated to the lowest positive level since January 2013. A sharply reduced 39.6% of respondents expected improvement. Each of the component series deteriorated m/m.

Empire State Manufacturing(Doug Short)

  • Worries Rise Over Global Trade Slump A sharp drop in global trade growth this year is underscoring a disturbing legacy of the financial crisis: Exports and imports of goods are lagging far behind the pace during past expansions, threatening future productivity and living standards.

For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization and projections from leading economists. Before the recent slump, the last time trade growth underperformed the rate of an economic expansion was 1985.

Since rebounding sharply in 2010 after the financial crisis, trade growth has averaged only about 3% a year, compared with 6% a year from 1983 to 2008, the WTO says.

Economists blame the slowdown on many factors, from China’s shift away from certain kinds of manufacturing to a decline in international investment. They also point to a dearth of major new trade agreements and the erection of trade barriers after the 2008 downturn, as well as a newfound reluctance by companies to source products and components far from home. (…)

For the first seven months of 2015, U.S. exports dropped 5.6% to $895.7 billion. The value of South Korean exports shrank a revised 14.9% in August from a year earlier, the sharpest fall in six years, as shipments to China dropped. Chinese imports in August fell 13.8% in dollar terms from a year earlier, after an 8.1% decrease in July. (…)

Eurozone Inflation Slows Unexpectedly in August Growth in labor costs dipped across the bloc, increasing the likelihood of more ECB stimulus

The annual rate of inflation declined to 0.1% in August from 0.2% July, the European Union’s statistical office said Wednesday. That marks a downward revision to Eurostat’s flash estimate of 0.2% and pushes annual inflation further away from the ECB’s target of just below 2%. (…)

There were more signs of easing inflationary pressure Wednesday, as Eurostat reported slowing growth in labor costs across the bloc. Eurozone labor costs, for every hour worked, rose 1.6% in the second quarter from the same period last year. Gross wages rose 1.9%, while non-wage costs were up 0.4% over this period. In the first quarter, labor costs had increased by 1.9%.

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