U.S. Consumer Spending Shows Caution
Personal spending, which measures how much Americans paid for everything from sofas to taxi rides, rose 0.1% in September from a month earlier, the Commerce Department said Friday. Consumption climbed 0.4% in August and 0.3% in July.
Personal income, reflecting Americans’ pretax earnings from salaries and investments, climbed 0.1% in September. That was the smallest increase since March. (…)
The price index for personal-consumption expenditures, the Federal Reserve’s favored inflation measure, fell 0.1% from August, the largest drop since January, when it fell 0.5%. Prices were up just 0.2% from September 2014. (…)
Core prices, which strip out food and energy costs, rose 0.1% from August and are up 1.3% from a year earlier.
Consumers increased their spending on durable goods, items like refrigerators and lawn mowers designed to last at least three years, by 0.8%. Spending on services rose by 0.4%. (…)
Americans tucked away slightly more savings in September. The personal saving rate, which measures the share of a person’s disposable income that is saved, rose to 4.8%, compared with 4.7% in August. (…)
Last three months annualized:
- Personal income: +3.6%
- Wages & Salaries: +4.0%
- Disposable personal income: +4.0%
- real: +4.0%
- Personal consumption expenditures: +3.2%
- real: +3.2%
Chicago Business Barometer Nears This Year’s High
The Chicago Business Barometer rebounded to 56.2 in October following its sharp September decline to 48.7. This is the highest reading since January. The improvement contrasts with weaker readings in other major metropolitan areas. (…)
Notable improvement was realized in the production and new orders components. Inventories also showed a sharp gain but each of the other component series fell. The employment series eased just moderately. During the last ten years, there has been an 86% correlation between the employment index and the m/m change in factory sector payrolls.
U.S. WAGEFLATION:
The employment cost index for private industry workers improved 0.6% in Q3’15 (1.9% y/y), following an unrevised zero change during Q2. (…) The index for the professional & business services sector posted a 1.0% gain (1.7% y/y) but that followed a 1.2% decline. Trade, transportation & utility workers realized 1.0% growth (2.3% y/y) which built on a 0.6% rise. Information sector compensation rose 0.7% (-1.5% y/y), but that didn’t make up the 3.6% Q2 decline. Factory sector compensation improved a lesser 0.4% (2.3% y/y) after a 0.7% increase. Education & health services workers realized 0.3% growth (1.9% y/y) after a 0.4% increase. In the public sector, state & local government workers compensation rose 0.6% (2.3% y/y), the same as in Q2.
Wages in private industry rose 0.7% (2.1% y/y) following a 0.2% increase. Workers in professional & business services realized 1.2% wage growth (2.0% y/y) and that followed a 1.3% decrease. Trade, transportation & utility wages grew 1.1% (2.2% y/y) after a 1.1% rise. Information sector wages rose 0.6% (2.4% y/y) for the fourth consecutive quarter. Wages in leisure & hospitality declined 0.3% (+1.6% y/y) following 0.7% rise. Factory sector wages grew a fairly steady 0.6% (2.5% y/y) but construction wages advanced a lessened 0.6% (2.4% y/y). Wages for state & local government workers improved 0.3% (1.8% y/y) after a 0.6% gain.
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Shift to Benefits Helps Explain Sluggish Wage Growth U.S. employers’ move toward offering workers extra benefits rather than more pay provides clues that help explain the current expansion’s unusually sluggish wage growth.
(…) The share of worker compensation that comes in the form of wages or salaries has slipped over the past decade, with the decline accelerating since the recession ended. In the second quarter, 31% of total compensation came in the form of benefits such as vacation time, health insurance and bonuses, up from 29% a decade earlier. (…)
Companies began offering health insurance to skirt wage controls during World War II. Now they are getting more creative, offering gym memberships, cappuccino machines, free cellphones and dog-friendly workplaces. (…)
Time off and perks like subsidized commuting costs and flexible schedules rank high on worker wish lists, according to surveys by Robert Half, a staffing service for various professional fields.
There are also tax implications for higher-income earners. Many benefits, including health insurance, are generally not taxed, but wages are. (…)
But under the Affordable Care Act, tax-free health insurance is slated to change. The so-called Cadillac Tax would impose a levy on generous employer health plans in 2018. That’s already causing some employers to consider reducing benefits or blocking workers from putting money into tax-free health-savings accounts. (…)
The increasing reliance on benefits also may reflect a shifting makeup of the workforce. Employment in management and professional fields, including doctors, lawyers and engineers, grew by 7.3% from 2009 to 2014. A smaller share of compensation for those workers, 69%, comes from wages and salaries.
In contrast, the number working in service occupations, including waiters and home-health-care aides, grew more slowly, up 5.1% during the five-year span. A higher share of compensation for those workers, 76%, came in the form of wages. (…)
Another potential factor in the shift toward benefits: Many companies were quick to cut them during the recession. For example, some stopped matching 401(k) contributions rather than cut salaries. (…)
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Retailers Work Harder to Lure Holiday Employees Retailers are facing a shrinking pool of workers as they staff up for the holidays, prompting some to offer more hours or higher pay.
Toys “R” Us Inc. is giving part-time employees the chance to double their hours compared with a year ago. Macy’s Inc. is looking to turn more part-time jobs into full-time positions and Target Corp. is offering holiday workers more money for the busiest shifts. (…)
Retail wages are rising faster than in the broader economy, as Wal-Mart Stores Inc. and others lift pay. The average hourly retail wage, including managers and supervisors, was $17.61 through September, up 3.1% compared with the prior year. That compares with a 2.2% rise for all private employees to $25.09 over the same period, according to the Labor Department. (…)
“There is tightness in the labor market and we have more vacancies and job openings than we’ve had in the past,” Macy’s President Jeffrey Gennette told investors at a recent conference. (…)
China’s Banks Are Laying Profit Growth Goose Eggs
China’s banks are targeting a particular growth rate. Unfortunately for investors, that target is zero.
The country’s biggest banks reported listless earnings for the quarter ended September. Profit growth has dried up from rates above 20% a few years ago to virtually nothing now. For the country’s eight biggest lenders, average profit growth was just 0.7%. For the top four, it was 0%.
This is intentional. Chinese banks have a certain amount of flexibility in the amount of provisions they take against bad loans. Currently, they are taking just enough to wipe out all profit growth, but no more. Pre-provision operating profit growth was actually 15% in the third quarter, according to Bernstein Research. (…)
From The Economist:
(…) sending a container from Shanghai to Europe now costs half as much as it did in March.
EARNINGS WATCH
Factset:
Overall, 340 companies have reported earnings to date for the third quarter. With 67% of the companies in the S&P 500 reporting actual results for Q3 to date, more companies are reporting actual EPS above estimates (76%) compared to the 5-year average, while fewer companies are reporting sales above estimates (47%) relative to the 5-year average. In aggregate, companies are reporting earnings that 5.9% above the estimates. This surprise percentage is above both the 1-year (+4.8%) average and the 5-year (+4.8%) average.
In aggregate, companies are reporting sales that are 0.7% above expectations. This surprise percentage is equal to both the 1-year (+0.7%) average and above the 5-year (+0.7%) average.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q3 2015 is now -2.2%, which is an improvement from the blended earnings decline of -3.9% last week and smaller than the estimate of -5.2% at the end of the third quarter (September 30).
If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 5.0% from -2.2%. [That was +3.9% last week.]
The blended revenue decline for Q3 2015 is now -2.9%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 2.2% from
-2.9%. [+2.0% last week].At this point in time, 56 companies in the index have issued EPS guidance for Q4 2015. Of these 56 companies, 39 have issued negative EPS guidance and 17 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 70%. This percentage is slightly below the 5-year average of 72%.
At the same time last year, there were 46 negative pre-announcements (72%). One month after the end of q3’15, there were 76 negative pre-announcements (71%).
During the month of October, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the earnings estimates for all the companies in the index and can be used as a proxy for the earnings for the index) dropped by 2.4% (to $30.02 from $30.75) during the month.
During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 3.3%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 1.7%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of the quarter has been 2.1%. Thus, the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was lower than the 1-year average, but higher than the 5-year and 10-year averages.
Remarkably, all 10 sectors but one (Materials) are beating expectations.
This is from Bespoke Investment which tallies all NYSE companies:
Zacks Research provides a scorecard for smaller caps as of Oct. 28:
For the Russell 2000 index, we currently have Q3 results from 486 members that combined account for 29.1% of its total market cap. Total earnings for these 486 index members are down -3.6% from the same period last year on +0.3% higher revenues, with 50.6% beating EPS estimates and only 32.1% beating revenue estimates. This is weaker performance than we have seen from same group of 486 index members in other recent periods, as the charts below show.
Oil Guru Who Called 2014 Rout Sees OPEC Production on Hold
OPEC will probably hold production steady at its meeting next month as the gap between supply and demand for oil closes, according to the analyst who correctly predicted last year’s rout in prices.
“I don’t think they have to do anything,” Gary Ross, founder and chairman of PIRA Energy Group, said in an interview in Singapore on Monday, referring to the Organization of Petroleum Exporting Countries. Global consumption of crude will continue to grow while output from non-OPEC countries will decline next year, helping to bring the market toward equilibrium, he said. (…)
“There has to be a tightening of balances,” said Ross, who last year turned bearish on oil before prices shrank by almost half. While OPEC volumes have increased, both demand and production from outside the group have responded to low prices, he said. (…)
PIRA forecasts demand for crude to grow 1.7 million barrels a day in 2016, compared with 1.9 million a day this year. Output outside OPEC is expected to decline next year by “several hundred thousands of barrels a day,” Ross said. Among the 12 members of OPEC, production is predicted to increase only in Iran and Iraq.
“Total non-OPEC crude and condensate production is forecast to fall below last year’s levels,” said Ross, predicting that Brent may rise to $70 by the end of 2016. “Supply growth is limited to OPEC, which grows just 500,000 to 600,000 barrels a day.” On average, Iran’s output will rise 300,000 barrels a day and Iraq’s will increase 240,000 barrels a day, compared with a year earlier, he estimated. (…)
Saudi Arabia Said to Create Special Office to Help Cut Spending
(…) This office will oversee similar bodies, being created in ministries, municipalities and state entities to ensure infrastructure projects are executed on time and within budget, the people said.
Saudi Arabia is trying to control spending as crude, which accounts for about 80 percent of revenue, slumped by over 50 percent since the end of Aug. 2014. Last month, the International Monetary Fund warned the kingdom that it may run out of financial assets needed to support spending within five years. The kingdom is tapping foreign reserves, cutting spending, selling bonds and delaying projects all while funding a war in Yemen. (…)
Mohamed El-Erian Cash entices as central banks diverge
Recent signals from the European Central Bank and the Federal Reserve have reignited talk of divergent monetary policies among the world’s two most influential central banks.
The short-term implications for investors include a stronger dollar, greater equity market volatility and a wider trading range for key interest rate differentials. The longer-term consequences are up for grabs. Both suggest investors should revisit conventional wisdom that dismisses cash as a “wasting asset” in their portfolios. (…)
The opposing policy signals bring back to the fore a policy divergence that, in recent months, had been muted by developments in the emerging world. A broad-based weakening in economic growth became evident in emerging markets during the summer, with every systemically important economy slowing (including China) and two of them in recession (Brazil and Russia). The financial market dislocations that followed raised alarm bells on both sides of the Atlantic in view of concerns about unfavourable spillovers. With that, the Fed had no choice but to signal increased dovishness at its September meeting.
Now that emerging markets have calmed down quite a bit — helped in part by additional Chinese monetary stimulus — the Fed feels more comfortable about diverging from other central banks. Such divergence will fuel dollar appreciation, particularly against the euro. But the dollar is unlikely to move far enough to accommodate fully the required relative price changes throughout the economy. As such, the trading range for the differential between US and German government yields will increase.
Together with pockets of concern about the consequences of a less united and less market supportive central banking community, that is likely to trigger more frequent bouts of heightened equity market volatility.
The longer-term implications are harder to pin down. Persistent policy divergence will prove hard to maintain given the extent of interconnectedness, as well as limits to US willingness to allow its currency to carry the burden of the adjustment process. Either the Fed will be forced to reverse course as the US economy is pressured by persistent weakness in Europe and the emerging world; or, a more comprehensive policy response out of Europe reinvigorates growth there, enabling the ECB to start its own policy normalisation process.
In responding to these considerations, investors should revisit the conventional wisdom that cash, deemed a “wasting asset”, does not have a legitimate place in sophisticated asset allocations. Instead, this is a world in which a good cushion of cash and cash equivalents in portfolios makes sense for both strategic and tactical reasons.
In the short term, it places investors in a good position to scale into the inevitable price overshoots that are likely to materialise, together with excessive contagion within asset classes and unusual correlations between them. As we were reminded on several occasions this year, this is a market in which fundamentally solid stocks and bonds can easily get unduly contaminated by weaknesses elsewhere, especially given the high likelihood of patchy liquidity.
Over the longer term, a strategic cash cushion provides investors with an important element of resilience at a time of genuine uncertainty. It remains unclear whether the global economy will transition to broader-based growth, thereby validating elevated market prices, or tip into even lower global growth and financial instability as weaker fundamentals undermine central banks’ effectiveness in suppressing volatility and bolstering asset prices.
