Richmond Fed’s Surveys of Business Activity 7/26/2016
- Manufacturing Sector Activity Improved; New Orders Increased, Mild Employment Growth
Fifth District manufacturing activity improved in July, according to the most recent survey by the Federal Reserve Bank of Richmond. New orders and shipments increased this month, while backlogs flattened. Employment rose modestly, while firms continue to report wage increases. Prices of raw materials and finished goods rose at a slower pace in July, compared to last month.
- Service Sector Activity Increased Moderately; Retail Sales Strengthened
Service sector activity increased moderately in July, according to the latest Richmond Fed survey. Retail sales strengthened markedly, as shopper traffic improved and big-ticket sales continued to climb on pace with last month. Inventories increased sharply. At other services firms, revenue increases were slightly more widespread than in June. Looking ahead, survey respondents expected stronger demand for their goods and services during the next six months..
Housing market improvement continued during June. Sales of new single-family homes increased 3.5% (25.4% y/y) to 592,000 (SAAR) from 572,000 in May, revised from 551,000. Sales of 557,000 had been expected in the Action Economics Forecast Survey.
The median price of a new home recovered 6.2% to $306,00 (6.1% y/y) following May’s 9.8% decline. The average price of a new home increased 1.9% to $358,200 (8.8% y/y).
The decline in new home sales was paced by a 5.6% drop in the Northeast to 34,000 (30.8% y/y) which added to the prior month’s decline. Sales in the South eased 0.3% (+21.1% y/y) to 321,000 following three months of firm increase. Countering these declines was a 10.9% increase (24.6% y/y) in the West to 152,000 which recouped the prior month’s decline. Sales in the Midwest also firmed 10.4% (44.1% y/y) to 85,000 which added to May’s m/m rise by roughly one quarter. (…)
U.S. Home-Price Increases Maintained Strong Pace in May U.S. home prices continued rising quickly in May, according to the Case-Shiller Home Price Index, further proof that the housing market had its strongest spring since the recession.
The S&P/Case-Shiller Home Price Index rose 5% in the 12 months ended in May, identical to the index’s increase in April.
However, price growth in some of the country’s largest cities slowed—in line with other indications that the market will likely cool in the latter half of the year. The group’s 10-city index gained 4.4% from a year earlier, down from 4.7% the prior month, and the 20-city index rose 5.2% year-over-year, below a 5.4% increase in April. (…)
The hottest markets in the country, primarily on the West Coast, continued to show double-digit price gains, with Portland, Ore., reporting a 12.5% year-over-year increase, Seattle showing a 10.7% gain and Denver climbing 9.5%. (…)
After seasonal adjustment, the national index rose 0.2% month-over-month, the 10-city index posted a 0.2% decrease, and the 20-city index saw a 0.1% month-over-month decrease. (…)
Homebuyer demand fell 17% in June compared to the same time last year, the fifth consecutive month of year-over-year declines, according to Redfin, a real-estate brokerage, as fewer customers requested home tours and wrote offers. (…)
U.S. RETAIL SALES
The National Retail Federation’s new assessment of 2016 is more upbeat than it had been, but the retailer group says the big growth in the consumer market has likely already come and gone. (…) The NRF says it now forecasts U.S. retail sales rising 3.4% this year, up from an initial forecast of 3.1%, the WSJ’s Paul Ziobro reports, thanks to a stronger start to the year and a continuing shift to online sales. NRF projects a slower growth rate over the coming months and into the critical holiday season, saying lackluster wage growth, deflation and uncertainty around the presidential election are weighing on business. (WSJ)
Retail sales, as measured by a regular survey carried out by business lobby group the CBI, have slumped at their fastest pace since January 2012 this month, with orders placed with suppliers deteriorating by their worst level since the financial crisis.
The CBI’s headline retail sales balance registered -14 in July, compared to +4 in June.
The balance represents the difference between the percentage of retailers reporting an increase and those reporting a decrease in activity. Economists had expected a small +1 reading ahead of the release.
A breakdown of the survey of 132 firms shows:
- Orders placed with suppliers hit -34, the lowest since March 2009
- Wholesale volumes declined at fastest pace since April 2013
- 42 per cent of retailers placed fewer orders than at the same time last year
- Grocers suffered a 30 per cent drop in sales volumes; furniture and carpets retails fell 90 per cent (…)
China’s disposable income growth has deteriorated faster than the GDP growth
This is not good! (via The Daily Shot)
EARNINGS WATCH
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Making Sense of the Earnings Reports
Sheraz Mian (Zacks Research) provides a good analysis of the earnings season so far:
(…) Total earnings for the 130 S&P 500 members that have reported results already are down -1% from the same period last year while revenues for those index members are up +2.6% year over year. Of these index members, 70.8% have beat the Zacks Consensus EPS estimates and 54.6% have come ahead of the revenue expectations.
This is better growth performance than we have seen from the same group of 130 S&P 500 members in other recent quarters.
- The -1% decline in Q2 earnings compares to -8.1% decline for the same group of companies in 2016 Q1 and the 4-quarter average of -0.7% decline.
- The +2.6% revenue growth compares to revenue decline of -0.2% in the preceding quarter and the 4-quarter average revenue growth rate of -0.7%.
- The proportion of companies beating EPS estimates is tracking below other recent periods, indicating that the growth improvement referred to above isn’t a result of very low expectations. We have 70.8% companies beating EPS estimates at this stage, which compares to 76.9% for the same group of 130 index members in Q1 and the 4-quarter average of 73.5%.
- The proportion of companies beating consensus revenue estimates is about in-line with the preceding quarter’s pace, but notably above the 4-quarter average. We have 54.6% of the companies that have reported Q2 results coming ahead consensus revenue estimates, which compares to 55.4% in 2016 Q1 and the 4-quarter average of 47.5%.
- Of the 130 companies that have Q2 reported results, 45.4% have beat both EPS and revenue estimates, which compares to 47.7% for the same group of companies in 2016 Q1 and the 4-quarter average of 38.3%.
What this means is that the growth picture for the companies that have reported Q2 results is better than what we saw from the same group of companies in the preceding quarter and the improvement, howsoever modest, doesn’t appear to be a function of low expectations.
Of the major sectors, the improvement is more notable in the Finance sector, with results from most of the major banks coming out better than expected despite the difficult interest environment that is keeping a lid on their margins. Results from the economically sensitive and hard-hit Basic Materials and Industrials sectors have surprised to the upside as well, though the sample sizes for those sectors are still relatively on the small side at this stage. Technology sector results thus far have been ok, but we will get a clearer picture for this all-important space this week after results from Focus List members Facebook, Alphabet and many others.
What About the Second Half of the Year?
Estimates for the September quarter have started coming down as companies report Q2 results along with a weak or tentative outlook for the current period. This trend of negative estimate revisions is consistent with the trend of the last three years, so the mere fact that Q3 are falling isn’t a surprise by itself. What is different, however, is that the magnitude of negative revisions for Q3 is lower than what we saw in the last few quarters. Plenty of Q2 reports are still to come and this picture could change in the coming days. But this is nevertheless an improvement over what we have become used to seeing at the comparable stages in other recent earnings seasons.
Total Q3 earnings for the index are currently expected to be down -1% from the same period last year, which is a drop from the roughly flat-growth (0%) expected at the start of July.
Current consensus earnings estimates reflect growth resuming in the last quarter of the year, with total earnings for the S&P 500 index expected to be up +6% in 2016 Q4. Growth for the Energy sector is expected to turn positive in Q4 after remaining in negative territory for 8 quarters in a row. But it’s not just the Energy sector that is driving aggregate growth in Q4 – five sectors, including Finance, are expected to have double-digit growth that quarter.
The positive earnings growth in 2016 Q4, the first after 6 quarters of declines, is then expected to accelerate into the first quarter of 2017 and continue that year and beyond. Current consensus expectations put full-year 2017 earnings growth into double digits that follow modestly negative earnings growth in the preceding two years (modestly positive ex-Energy). (…)
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TODAY’S UPDATE
- 179 companies (44.9% of the S&P 500’s market cap) have reported. Earnings are beating by 5.4% while revenues are surprising by 1.3%.
- Expectations are for declines in revenue, earnings, and EPS of -0.6%, -5.1%, and -2.8%, respectively.
- EPS is on pace for +0.2%, assuming the current beat rate for the remainder of the season. This would be +4.4% excluding Energy and the Big-5 Banks. (RBC)
However, Boeing pre-announced that it expects a $2.1B increase in 2Q expenses related to product delays, production capacity reductions, and reclassification of expenses. This will subtract 70 bps and 670 bps of growth from the overall S&P 500 and Industrial sector, respectively.
SENTIMENT WATCH
Why Uncertainty Isn’t the Real Threat for Markets If there is one thing the world seems to be producing in abundance, it is uncertainty. It is said that markets hate uncertainty, but resolution might be the real problem.
(…) Higher uncertainty about the future and persistently sluggish outcomes may be partly responsible for markets in which assets that have more predictable cash flows are in demand. This is an alternative way to read the “search for yield.” It is as much a result of economic uncertainty as the policy response to it. Hence, investors continue to favor corporate bonds, and stocks where dividends are reliable. Meanwhile, sectors where there are multiple sources of uncertainty, such as banks that face economic, regulatory and political pressures, are laggards.
The greater risk to markets in fact looks like a reduction in uncertainty—either through a crisis that policy makers prove unable to address, leading to economic damage, or through an improvement in the growth outlook, perhaps by combining fiscal and monetary policy. Investors’ current approach to markets would face a test in either case.
(…) The shares now trade for two thirds less than their tangible book value, a steeper discount than even during the depths of the financial crisis. (…)
Which means nobody believes the numbers on the balance sheet. Myrmikan Research is among them:
(…) The concern over Deutsche Bank in particular has been driven by its roughly $75 trillion derivatives exposure. Market sophisticates ignore this figure, pointing out, correctly, that such ludicrous figures reflect gross, not net, exposure. But the figure is scary not because it measures the credit hole, but because it measures counter-party risk—other banks have that magnitude of bets with Deutsche Bank, so when it fails and can’t pay, the whole system will freeze up, as it did when AIG teetered.
This is why the failure of a large European bank will also bring down the U.S. banking system, why in a recent report the International Monetary Fund labeled Deutsche Bank “the most important net contributor to systemic risks,” and why the chief economist of Deutsche Bank has called for a €150 billion bailout program, a ploy to send more taxpayer money to bankers. (…)
But nobody cares anymore:
Back in February, we saw a massive selloff in CoCo’s (contingent convertible bonds) triggered by fears around Deutsche Bank. Now the CoCo total return index is hitting new highs as investors chase yield. (The Daily Shot)
Hmmm…Remember Bear Stearns? Myrmikan Research does:
(…) on July 17, 2007 Bear Stearns informed investors in two of its real estate funds that they had been wiped out. Bear Stearns stock had reached a record high of $172 per share the previous January and, despite the ominous news, the company’s stock fell only to $140. In fact, as late as October, three months later, Bear Stearns stock remained in the $130s and the Dow Jones Industrial Average would reach a new all-time high. Lehman Brothers wouldn’t fail for another eleven months after that.
And adds this:
Similarly, in the last few weeks six UK property fund have been forced to suspend redemptions as investors suddenly realized that though their shares in these funds may be shiftable to others when the market is hot, the underlying assets are highly illiquid. The broader markets have not reacted to this tell-tale sign of gathering crisis for the same reason the market kept rising after Bear Stearns first got into trouble: property funds engage in maturity transformation, but they do not create money through the fractional reserve process, so their failure does not commence cascading defaults—it is merely a symptom that credit creation has gone into reverse.
London real estate is not the only market to slide suddenly. Former New York City Mayor Bloomberg changed the zoning laws to allow his billionaire friends to
build the super-tall tower at 432 Park Avenue, his parting middle finger to the city that showered him with riches. According to one broker to the superrich interviewed by The New York Times, “it’s not just slow—it’s come to a complete halt.” Already the $80 million flats are being split into $40 million bargains half the size, but to no avail.
Similarly, Town & Country Real Estate reports that total sales volume in East Hampton in the second quarter fell 53 percent from a year ago as the median sale price plunged 54 percent to $2.38 million.
A few less-rich plutocrats does not a financial crisis make, but, again, it signals that credit is contracting.
Myrmikan’s complete report is here.
(…) When it comes to just wireless infrastructure, Ericsson was still in first place with a 28 percent market share in 2015, according to IHS data, with the combination of Nokia and Alcatel-Lucent at 26 percent and Huawei at 23 percent. But Nokia’s revenues are down so far this year, too. It seems inevitable that Huawei will soon overtake both companies in wireless infrastructure as well as overall sales.
Huawei is also the No. 3 maker of smartphones, after Samsung and Apple. It’s among the market-share leaders in optical networking equipment, routers and other key elements of the world’s communications infrastructure. ZTE, which is also based in Shenzhen — the giant new city that has grown up next to Hong Kong since China’s economic reforms began in 1978 — also shows up on a lot of those market-share rankings a rung or two behind Huawei. (…)
Like Amazon, Huawei has been using its low margins as a source of competitive advantage. A decade ago it broke into the European wireless infrastructure market by underbidding rivals and offering carriers equipment that would work with multiple kinds of networks (2G, 3G, etc.), thus sparing them from repeated upgrades. Now it is forgoing profits to pour huge sums into research and development. Its $9.2 billion in R&D spending in 2015 put it among the world’s leaders in that category. (…)
The major U.S. wireless carriers have been effectively barred from buying Huawei networking equipment by members of Congress worried about cyberespionage. (…)
If Huawei’s rise continues, U.S. lawmakers and regulators will face a difficult decision. A lot of the charges leveled at the company by the House Intelligence Committee four years ago come across as speculation and hearsay, but at the same time it’s not crazyto worry about putting the nation’s communications networks in the hands of a company from a country known for doing a lot of hacking of U.S. communications networks. On the other hand, by refusing the products of the global industry leader, we could also be ensuring that our communications networks aren’t up to global standards.
(…) “Acquiring Vizio is an important step in our globalisation strategy and building our North American presence,” said Jia Yueting, LeEco’s billionaire founder and chief executive.
As of June the company ranked as China’s fifth-largest online video platform with 42m monthly active users, according to Analysys Enfodesk, a Beijing-based internet consultancy. (…)
Chinese companies agreed $121.1bn in outbound M&A deals between January and June, according to data from Thomson Reuters, blowing past the all-time full-year record of $111.5bn set last year.
(…) Left cited the continued rise of Snapchat as well as the Pokemon Go craze as demonstrative of how “volatile and fragile” Facebook might be to new trends. “We all are addicted to our phones, that we know, but what it shows is that people will do different things with their phone if given a choice … the company lives and dies on engagement levels,” he said. (…)
“If you think Facebook has a monopoly on social media, just walk outside and go speak to anyone between the ages of 16 and 30 and you’ll see Snapchat.”
For the last few years, Fiat Chrysler has been acclaiming a long run of rising new-car sales. At last count, it had higher vehicle sales 75 months in a row.
Turns out, the hot streak actually ended three years ago, at Month 40.
The company, under investigation by the Securities and Exchange Commission on suspicion of inflating the data for some months, said on Tuesday that it was changing the way it counts cars sold by its dealers.
Under its new approach, it added, its winning sales streak would have ended in September 2013. And since then, the company would have reported two other down months it originally counted as growth months.
Since the federal investigation was disclosed last week, Fiat Chrysler has said that whatever the questions are about its sale reports, its financial reporting has been accurate.
Fiat Chrysler is preparing to report its second-quarter financial results on Wednesday.
The S.E.C. is looking into whether the company improperly inflated its sales totals, an action prompted by a lawsuit filed this year by two Chrysler dealerships. The dealerships contend that Chrysler had pressured dealers to report vehicles as sold in a particular month, and then to revise the sales reports a short time later.…
In January, Fiat Chrysler called the lawsuit “baseless.” (…)
On Tuesday, Fiat Chrysler said it would adjust its monthly totals to take into account sales that did not actually go through. Until now, dealers could report a vehicle sold, even if there was no actual customer for it. Days later, after the start of a new month, the dealer could then “unwind,” or undo, the sale. (…)
Although Fiat Chrysler is the only automaker known to be under federal investigation over the issue, many carmakers have come under scrutiny for the way they count monthly sales by dealers. Many allow dealers to report as “sold” cars that they soon offer for sale as “used” models, even if the vehicles have never left the lot and have never been registered by anyone other than the dealer. (…)
In a lengthy news release, Fiat Chrysler said it was “admittedly possible” for dealers to record a sale “without having a specific customer supporting the transaction.” 
Fiat Chrysler Revises Sales Data Lower After Doubts Raised