Month: April 2016

Business Spending Points to Soft Growth U.S. companies are displaying even more caution than American consumers, a potentially worrying sign for Federal Reserve officials as they evaluate when the economy will be ready for higher borrowing costs.

A gauge of business investment—orders for nondefense capital goods excluding aircraft—declined 2.4% in the first quarter, the Commerce Department said Tuesday, suggesting firms are hesitant to spend on staples like computers, machinery and electrical appliances. The broadest measure of U.S. business orders advanced just 1.4% in the first three months of the year, bolstered by outlays on military equipment. (…)

While overall new orders rose a seasonally adjusted 0.8% in March from a month earlier, the bump was largely due to higher orders for defense equipment like military aircraft. Orders of new cars, civilian aircraft, and nondefense capital goods all fell. (…) (charts from Haver Analytics)

  

This could be related:

• Math Signals Clearer Path for Trump With Donald Trump winning sweeping victories in five northeastern states Tuesday, his path to the Republican presidential nomination has become clearer than ever.

Add this:

THE ELUSIVE AMERICAN SHOPPERS

Last year I argued that the benefits from collapsing oil prices would surface after the negative impact on producing countries would first hit world economies. The rational was that producers react and adapt immediately to signs of coming revenue hit while consumers need to see that lower prices are there to stay for a while before changing their consumption patterns and actually spend the extra disposable income. The hope was that consumer spending in the major oil consuming countries would begin to accelerate by the end of 2015 and into 2016, eliminate the excess inventories and restart manufacturing production such that the economic revival in consuming countries would more than offset the drag from producing countries.

In effect, Canadian retail sales are exploding. Retail volume (real inflation-adjusted) rose 1.5% MoM on top of January’s +2.0%. Jan/Feb average retail sales volumes are up at a 7.4% annualized rate. The strength was widespread with 9 of the 11 subsectors rising in February. (Chart from Trading Economics)

Same in Europe as I commented on March 4:

The volume of retail sales in the Euro Area rose 0.4% MoM in January following a 0.6% jump in December. Last 2 months annualized: +6.2% in real terms, during the two most important months of the year (Eurostat). Core retail sales were even stronger rising 0.5% and 0.7% MoM in December and January respectively, a 7.4% annualized rate, in volume.

Meanwhile, U.S. retail sales are sagging, declining in each of the last 3 months, even after a muted 1.4% advance in the closing quarter of 2015. This even if the overall economy is arguably stronger in the USA than in either Canada or Europe. What is happening to the always-ready-to-shop Americans?

Raymond James:

Median household income has lagged aggregate personal income growth for some time, reflecting a skewing of income toward the upper end of the income scale. The median household in the U.S is often caricatured as “Joe Six-Pack,” typically a working class man with a family who earns the median income plus or minus 15% or so. This is the classic “middle third” of the income stream, also often referred to as middle to lower-middle income consumers.

The bullish consensus is that a spending rise from America’s “Joe Six-Pack” is imminent. The case for this view has been widely discussed, especially during the recovery enjoyed by global risk markets since mid-February. The logic is as follows:

Employment growth is steady with a lo 5% unemployment rate. Wages are accelerating while inflation remains tepid and energy prices depressed. House prices are strong and are back to pre-crisis levels. Back to Raymond James:

Let’s look at Joe’s current income and inflation situation to see if it matches the above narrative. Unfortunately, government data on income distribution is only issued with a long lag. Below, we show median household income on a real and nominal basis from 2005-2014 (the most recent data available).

Median household income has actually fallen on a real basis over this decade, and more recent growth has not been robust. Anecdotal evidence is strong that Joe has not been getting much in the way of raises, especially if he is self-employed, a tradesman, or an hourly employee. Joe is also much less likely to be a homeowner now that he was before the 2008 mortgage crisis.

Thus Joe has to pay market rent to house his family, and his rent is likely rising much faster than his income. While the residential rent component of the CPI is in the 2-3% annual range recently, rents are clearly rising faster than that in many major metropolitan areas.

Joe also likely buys his own health insurance. Health care costs, especially insurance premiums, have been another fast rising component within the recent inflation statistics.

(…) If this supposition is accurate, millions of U.S. households are seeing their discretionary spending power shrink despite the nominal and real wage gains being reported by the aggregate income statistics. Most investment professionals likely own their homes, which fixes the largest portion of their shelter costs. Most receive employer sponsored health insurance; while there certainly has been cost shifting towards white collar employees in recent years, it likely has not been sufficiently large to materially alter discretionary spending power. (…)

In contrast, a self-employed tradesman or hourly service worker likely rents his shelter year-to-year and buys individual or family health insurance directly. This person is very likely paying a measurably higher percentage of income for rent and health insurance than only a few years ago. Assuming an income that has approximated the median in recent years (i.e., growing very slowly), consumers in this position are likely seeing flat or even declining discretionary spending power, even after factoring in the windfall from the collapse in gasoline prices.

(…)  We believe this analysis foots with the continuing soft sales trends being reported by companies that mainly cater to middle and lower-middle income consumers in the U.S. This can change if we start to see income growth accelerate for workers in this broad income category, but evidence of that remains fleeting.

Tony Sagami (Connecting the Dots) goes even further:

I also guess that Sanders’ popularity is based on the economic stress many Americans are feeling. The chart below captures the essence of one of the biggest problems facing our next president: a shrinking middle class and a growing lower class.

Sadly, roughly 50 million Americans live below the poverty line—the largest number in our nation’s history—and the poorest 40% of all Americans now spend more than 50% of their incomes just on food and housing. (…)

I suspect the root of the issue is wages… or lack thereof. The reality is that wages—despite the recent minimum wage increase in several states—have been shrinking on an inflation-adjusted basis.

A recent report by the Pew Research Center, a nonpartisan think tank, concluded, “In real terms, the average wage peaked more than 40 years ago.”

Check out these discouraging numbers:

• 39% of American workers make less than $20,000 a year.
• 52% of American workers make less than $30,000 a year.
• 63% of American workers make less than $40,000 a year.
• 72% of American workers make less than $50,000 a year.

And it doesn’t help that Americans continue to rack up debt. Example: Outstanding auto loans have hit more than a trillion dollars, with an average balance of $12,000 per person that consumes nearly 8% of the average borrower’s disposable income!

No wonder that an estimated 62% of Americans are living paycheck to paycheck. (…)

Mrs. Yellen and her fellow FOMC members have recently openly admitted that they are highly uncertain about the U.S. economy. Their uncertainty seems to have transpired right down to Joe Six-Pack as Gallup revealed yesterday:

Americans’ confidence in the U.S. economy reached its lowest weekly level so far in 2016, with Gallup’s U.S. Economic Confidence Index averaging -16 for the week ending April 24. The latest figure represents a four-point drop from the previous week’s average. The last time Gallup found a lower weekly score was in August 2015.

Gallup’s U.S. Economic Confidence Index is the average of two components: how Americans rate current economic conditions and whether they feel the economy is improving or getting worse.

For the week ending April 24, the current conditions score of -7 was, by one point, the lowest so far in 2016 — the result of 23% of U.S. adults rating the current economy as “excellent” or “good,” and 30% rating it “poor.” The economic outlook score showed greater change, dropping six points from the previous week to -25 — the result of 35% of U.S. adults saying the economy is “getting better” and 60% saying it is “getting worse.” This is the lowest score for this component since late August 2015, when the stock market plummeted over concerns about the Chinese economy.

Bespoke details Joe-Six-Pack’s relative moodiness:

Now, Joe Six-Pack, like most economists, is rear-view gazing. The difference is that he is actually acting daily on his beliefs and he is likely to remain cautious until he is proven wrong. Hence the rising savings rate amid strong employment, rising wages and low inflation. This is not happening in Canada nor in Europe even though they each have had their share of angst.

The U.S. economy has been on low gear for 6 years. No bust, but no boom either, walking the tight rope of “uncertainty”: how big a whiff to tilt the economy in recession?

The oil whiff:

Oil Prices Reach High for 2016 Oil prices reached a fresh high for the year, with U.S. prices rising above $45 for the first time since November, following data that showed a surprise fall in U.S. oil inventories.

(…) U.S. production has fallen to below 9 million barrels a day in recent weeks, down from a peak of 9.7 million barrels a day last April, according to the EIA. (…)

The global oil market could see a 4.5 million barrels a day shortfall in supply by 2035 if oil field exploration doesn’t increase, consultancy Wood McKenzie said in a report released on Wednesday. That would support higher prices in the coming years, as investment in oil infrastructure catches up with demand. (…)

Joe has been on the road a lot lately, enjoying his new SUV. Hopefully gas prices will not climb too much, too fast…

Unpaid bills add to China debt problems Typical waiting time on accounts receivable at 14-year high in 2015

(…) Listed companies had to wait a median 70 days to receive payment last year, the longest delay in 14 years, as cash flows tightened amid slack final demand. That compares with a median 60 days in 2014 and 46 days in 2011, according to Wind Information, a Chinese financial database. (…)

China’s supply chain is more dense than in Europe or the US, and often concentrated in localities — meaning bills that go unpaid for months have a knock-on effect that can quickly rip through entire industrial ecosystems. (…)

Many Hong Kong exporters have adopted a 30-40-30 structure to keep cash flows running, whereby customers make partial payment before, during and after shipment. (…)

EARNINGS WATCH

We now have 50% of the S&P 500 market caps in:

• 185 companies (49.2% of the S&P 500’s market cap) have reported. Earnings are beating by 3.0% (+3.6% last week) while revenues have surprised by 0.1%.
• Expectations are for a decline in revenue, earnings, and EPS of -1.6%, -9.0%, and -6.7%.
• EPS is on pace for -5.2% (-4.5%), assuming the current beat rate for the remainder of the season. This would be +0.1% (+0.7%) excluding Energy.

Techs: Yesterday, Apple missed bottom-line expectations by 5%. This closely follows sizable misses by Alphabet and Microsoft. Disappointing results from all three are obfuscating the underlying trend for the sector. Excluding these three, Tech is beating by 6.9%. (RBC)

Overall, the earnings needle has not moved much so far. Thomson Reuter’s expects Q1 EPS down 7.1%, unchanged from April 1 while expectations for Q2 are –2.4% vs –2.2% on April 1. Second half hopes have been reduced a little. Full year 2016 estimates are +1.3%, down from +1.8% on April 1.

• Weak Dollar Gives a Lift to U.S. Earnings All eyes are on the Federal Reserve to see if companies can continue to count on currency tailwinds

(…) The dollar suffered its worst quarterly performance since 2010, falling 4.2% in the quarter as the Fed signaled it could take a slower approach to raising short-term interest rates because of concerns about the global economy. (…)

Now a weaker dollar is providing Delta some relief.

“One positive is that we will get a big help from currency as it turns from a headwind into a tailwind beginning in the next quarter,” Delta Chief Revenue Officer Glen Hauenstein said on a conference call April 14.

Also seeing relief is International Business Machines Corp. Its 4.6% decline in first-quarter revenue could have been worse, except that the damage from currency translation was about $90 million less than it had forecast, IBM said earlier this month.

Chief Financial Officer Martin Schroeter said on a conference call that IBM’s profit would get a boost from currency conversion if the dollar remains at current levels for the rest of the year. (…)

Procter & Gamble Co. and Microsoft Corp. also were among the more than a dozen companies that said they are benefiting or expect to benefit from a weaker greenback.

(…) Cigarette maker Philip Morris International Inc. and pharmaceutical giantJ ohnson & Johnson boosted their guidance, citing easing currency headwinds.

Toy maker Hasbro Inc. and Netflix Inc. also indicated that they could benefit from favorable currency movements starting as soon as the current quarter. (…)

The final months of 2015 were especially painful: A record 45% of U.S. companies reported a negative currency impact in the fourth quarter, according to FiREapps, a foreign-exchange software company. (…)

Smallcaps Enter New Bull Market

After falling 26% from its high last June through February 11th, the Russell 2,000 index of smallcap stocks is now up 20.5%.  That 20.5% gain means the index has entered a new bull market. (Bespoke)

Speculators march into China commodities Mania grips trading in futures contracts

(…) In the past month a near mania has gripped China’s commodity futures markets, as an army of day traders and yield-hungry wealth managers have poured into the lightly regulated sector often with astonishing results.

Daily trading volumes in some commodity futures contracts such as iron ore have been so large that sometimes they have exceeded China’s annual imports. Turnover in Shanghai steel futures one day last week eclipsed all of the shares traded on China’s equity markets.

Alarmed by the surge in trading, which has parallels with the lead-up to last year’s equity market meltdown, Chinese exchanges have moved quickly to increase transactions fees and margin requirements on future contracts to try cool some of the speculative fervour.

While this has removed some of the froth from prices, it is not clear whether this will deter the new band of investors, who have turned away from equity markets after draconian rules were imposed last year. At the same time Beijing wants to place China at the centre of global commodity markets and have prices determined and settled in renminbi. (…)

“This growth poses multiple dangers to global commodity pricing given how less regulated and therefore less protective the Chinese regimes are for investors, who are perhaps the most speculative in the world,” said analysts at Citi in report published this week. (…)

But this time the interest has gone mainstream with wealth management and retail investors piling in on domestic bourses such as the Shanghai Futures Exchange and the Dalian Commodities Exchange, which are now home to the world’s first and third most actively commodity contracts (steel reinforcement bars and iron ore).

The trigger for increased speculative interest in commodities can be traced back to the credit surge engineered by Chinese policymakers this year to prop up the economy and its currency.

This led to a pick-up in construction activity and stoked investor appetite for ways to bet on the Chinese economy. (…)

The impact of this speculative frenzy has not just been felt in financial markets. The rise in steel prices, which are up over 50 per cent this year after six years of losses, has led mills in China to restart or increase production just as the world struggles with a glut of the metal. (…)

We all know this will end badly. This from Bloomberg (Thanks Fred):

• Channel Checks: China’s Surging Metal Prices Are Getting Ahead of Fundamentals

China’s recent price surges for steel, aluminum and other metals are driven more by capital inflows from new investors than fundamentals. Trading volume, open
interest and the number of new accounts on metalfutures exchanges in China are rising as more retail investors speculate that recent improvements in demand
and inventory destocking will continue, based on a BI field trip to China in April. The price surge, however, has gone beyond fundamental supports such as rebounds in demand or cuts in supply. (…)

China announced plans last year to accelerate railway and other infrastructure projects, but that has yet to translate to more demand for metals, according to
Bloomberg Intelligence channel checks with producers and traders. Implementation of the projects probably hasn’t started, as metal producers are still waiting to
receive orders. The NPC in March announced a batch of major projects for the 13th Five-Year plan ending 2020.