Month: February 2017

Data Signal Solid Momentum for U.S. Economy Stronger consumer spending, rising factory production and firming inflation are pointing to solid momentum for the U.S. economy and another interest-rate increase by the Federal Reserve, potentially as soon as next month.

(…) Ms. Yellen told lawmakers it “would be unwise” to wait too long to raise rates, because it could force the Fed to tighten policy more quickly down the road and potentially cause a new recession in the process. (…)

Forecasting firm Macroeconomic Advisers on Wednesday projected first-quarter gross-domestic-product growth at a 2.0% pace, and the Federal Reserve Bank of Atlanta’s GDPNow model estimated GDP growth at 2.2% in the first quarter. In the fourth quarter, GDP grew at a 1.9% annual rate, near its average since the recession ended in mid-2009. (…)

U.S. Retail Sales Slow with Lower Auto Sales; Other Spending Firms

Total retail sales and spending at restaurants increased 0.4% (4.9% y/y) in January following a 1.0% December rise, which was revised from 0.6%. A more modest 0.1% increase had been expected in the Action Economics Forecast Survey.

Sales at motor vehicles & parts dealers accounted for the January slowdown in the total; these fell 1.4% (5.8% y/y), after their sizable 3.2% gain in December. The decline compared to a 4.4% decrease in unit sales of light vehicles. Excluding autos, retail sales increased 0.8% (4.7% y/y). clearly more than December’s a 0.4% rise. A 0.4% increase had been expected. Sales at gasoline service stations again lifted retail spending last month, as they went up 2.3% (13.9% y/y); December’s gas stations sales increase was revised from 2.0% to 3.2%. In the CPI array for January, gasoline prices are seen to have risen 7.8% in the month. Retail sales excluding both auto dealers & gas stations rose 0.7% (3.8% y/y) in January following a 0.1% rise.

Non-auto less gas up at a 4.5% annualized rate in the last 3 months!

U.S. CPI Strengthens With Higher Energy Prices

The Consumer Price Index jumped 0.6% during January following a 0.3% December gain. It was the strongest rise since February 2013 and lifted y/y growth to 2.5%. Expectations had been for a 0.3% gain in the Action Economic Forecast Survey. Prices excluding food & energy rose 0.3% following two months of 0.2% gain. [Core prices were up 2.3% on the year]. It was the firmest rise since August. A 0.2% increase had been expected.

Higher energy prices led the pick-up in inflation with a 4.0% jump (10.8% y/y). Gasoline prices surged 7.8% (20.3% y/y) to the highest level since July 2015. Fuel oil prices increased 3.5% (NSA, 24.8% y/y) after a 6.0% jump. Natural gas prices improved 1.5% (10.1% y/y) while electricity costs were little changed (1.0 % y/y.

Goods prices excluding food & energy increased 0.4% (-0.2% y/y) following steadiness or decline in the prior four months. (…)

Prices for services less energy provided further strength with a 0.3% increase (3.1% y/y) for the third month in a row. (…) Medical care services prices rose 0.2% (3.6% y/y) for the third straight month. Shelter costs also rose 0.2% (3.5% y/y) following five straight months of 0.3% increase. Owners’ equivalent rent of primary residences gained 0.2% (3.5% y/y), while primary residence rents gained 0.2% (3.9% y/y).

  

• According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.3% annualized rate) in January. The 16% trimmed-mean Consumer Price Index also rose 0.3% (3.7% 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.
• Over the last 12 months, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.2%, the CPI rose 2.5%, and the CPI less food and energy rose 2.3%.
• The Federal Reserve Bank of Cleveland provides daily “nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the consumer price index (CPI). “Nowcasts” are estimates or forecasts of the present. The Cleveland Fed produces nowcasts of the current period’s rate of inflation—inflation in a given month or quarter—before the official CPI or PCE inflation data are released. These forecasts can help to give a sense of where inflation is now and where it is likely to be in the future.

• The jump in the core CPI over the past three months was the largest since 2011. (The Daily Shot)

Source: @jbjakobsen, @josephncohen

• it’s clear that the core CPI increases have been broader than just medical and housing inflation. (The Daily Shot)

Source: @boes_, @josephncohen

U.S. Producer Prices Strengthen Broadly

The headline Final Demand Producer Price Index increased 0.6% during January (1.6% y/y) after a 0.2% December gain, revised from 0.3%. The rise was the largest since September 2012 and exceeded expectations for a 0.3% increase in the Action Economics Forecast Survey. The PPI excluding food and energy rose 0.4% (1.2% y/y) following a 0.1% uptick, revised from 0.2%. It was the largest gain since June 2015. A 0.2% rise had been expected.

An updated measure of “core” PPI inflation, final demand prices excluding food, energy, and trade services prices, increased 0.2% (1.6% y/y) following a 0.1% December rise. 

Final demand goods prices jumped 1.0% (3.1% y/y), the strongest rise since May 2015. It reflected a 4.7% increase (14.0% y/y) in energy prices which followed 1.8% gain. This rise was accompanied by no change (-2.2 % y/y) in food prices, which followed two months of 0.5% increase.

Nondurable goods prices excluding food & energy strengthened 0.5% (3.3% y/y) following a 0.1% rise.

Interestingly, PPI Goods ex-food, ex-energy rose 0.4% in January after +0.3% and +0.2% in December and November respectively. PPI core goods is thus up 2.1% YoY but it has increased at a 3.6% annualized rate in the last 3 months. Goods prices have been very weak in 2016 partly owing to the strong dollar.

Empire State Business Conditions Survey Strengthens; Prices Surge

The Empire State Manufacturing Index of General Business Conditions for February jumped to 18.7 from 6.5 in January. It was the highest level since September 2014. The Action Economics Forecast Survey expected 7.0. These data, reported by the Federal Reserve Bank of New York, reflect business conditions in New York, northern New Jersey and southern Connecticut.

Each of the index components increased this month, notably new orders, shipments and the average workweek. Inventories, unfilled orders and delivery times also rose. The employment index jumped to 2.0, its first positive reading since May. During the last ten years, there has been a 69% correlation between the employment index and the m/m change in factory sector payrolls.

The prices paid series increased to 37.8, the highest level since April 2012. A fairly stable 40.8% of respondents reported paying higher prices, while a lessened 3.1% reported them lower. The prices received index similarly rose to 19.4, its highest point since May 2011.

Expectations of business conditions six months ahead, in contrast, fell to 41.7, its lowest point in three months.

  

Global Risks Begin to Recede It isn’t only in the U.S. that economic spirits are looking up, Greg Ip writes. Around the world, confidence is on the rise.

(…) the upswing is global: In Europe, Japan, China and elsewhere, business surveys and markets have turned markedly more optimistic. (…)

Stronger Growth Could Set Fed Against Trump

(…) Higher interest rates will hit stock and bond valuations, and a rapid rise could spark a serious sell-off.

The new economic data highlights the tense relationship that could develop between the Fed and the administration. With the economy humming, a tax cut or infrastructure-led stimulus could boost the economy further, leading the Fed to tighten more rapidly. That could take the air out of growth and make it harder for Mr. Trump to reach his promised 4% growth. No doubt there would be angry tweets. (…)

So, from all the above:

• Fed may have to raise interest rates more than three times in 2017, Rosengren says

(…) “It is my view that it will likely be appropriate to raise short-term interest rates at least as quickly as suggested by the Fed’s current…median forecast, and possibly even a bit more rapidly than that forecast,” Rosengren said in a speech prepared for delivery to the New York Association for Business Economics.

The Boston Fed president said the economy is very close to hitting the natural rate of unemployment.

Inflation is now close enough to the Fed’s 2% target that it is possible that the target will be reached as soon as the end of the year, he said. (…)

• Fed accommodative and moving on right path, Fischer says: Bloomberg The Federal Reserve expected the current improvement in U.S. inflation and employment and, while monetary policy remains accommodative, it is headed on the right path in removing that stimulus, Fed Vice Chair Stanley Fischer said on Thursday.

But, there is this new problem:

 

And that one:

• A Harsh Reality Is Hitting the Housing Market Rising interest rates are taking a toll on a number of housing indicators at the start of the year

(…) The percentage of Americans who moved in the previous year dropped to a record low of 11.2% in 2016, according to the Census Bureau. Much of that is due to millennials staying put. Only 20% of young Americans between ages 25 and 35 said they changed addresses last year, lower than the mobility of the prior four generations when they were in that age range, according to the Pew Research Center.

Meanwhile, older people who already have locked in historically low mortgage rates will be more reluctant to move now that rates are rising. A new house could come with a far higher rate.

The average 30-year fixed-mortgage rate was 4.24%, up more than half a percentage point since the election, according to Mortgage News Daily. And the case for the Federal Reserve raising interest rates faster than anticipated only appears to be getting stronger. (…)

GLOBAL REFLATION…

Even the dogs are now reflating:

  

These Charts Show Why Something Has to Give in the Oil Market

• OPEC and Allies Promised Output Cuts. Here’s the Reality

EARNINGS WATCH

• 388 companies (86.4% of the S&P 500’s market cap) have reported. Earnings are beating by 2.1% while revenues are surprising by 0.3%. Excluding AIG’s unexpected reserve charge, earnings are exceeding expectations by 3.8%.
• Expectations are for revenue, earnings, and EPS growth of 4.3%, 5.5%, and 7.2%, respectively.
• EPS is on pace for 7.5%, assuming the current beat rate for the remainder of the season.

Trump Tax Cuts Could Boost Profit $12 Billion at Big U.S. Banks

The six largest U.S. banks could see annual profit jump by an average of 14 percent if President Donald Trump delivers on his promise to cut corporate taxes.

The lenders, which stand to benefit more than other industries because they typically have fewer deductions, could save a combined $12 billion a year, according to data compiled by Bloomberg. Trump has called for cutting the corporate tax rate to 15 percent from 35 percent. (…)

The effective federal tax rate for the biggest banks averaged 28 percent for the three years ending in 2015, data compiled by Bloomberg show, twice the 14 percent rate paid by all large companies. (…)

For some large banks, a rate cut would mean a one-time loss because of a reduction in the value of their deferred-tax assets. Those are benefits that build up because losses are recognized earlier in public company accounting than they can be in tax returns. Citigroup and Bank of America, which had the largest losses in the financial crisis, still have large amounts of such benefits that they can’t fully use in a lower tax-rate environment.

Citigroup has estimated its hit would be about $12 billion. KBW’s estimate for Bank of America’s upfront loss is $4 billion, and about $1 billion each for Goldman Sachs and Morgan Stanley. 

While those writedowns could wipe out the potential benefit from a lower tax rate, the elimination of deferred-tax assets would bring reported profits for some banks closer to what analysts and investors already look at, according to KBW’s Cannon. They generally ignore the impact of deferred-tax assets on earnings, adjusting reported figures to understand the true nature of a firm’s profitability. Writedowns on deferred-tax assets would be considered cosmetic, while the benefit from lower tax bills will be seen as concrete and permanent.