March, 2017 - Edge and Odds

THE DAILY EDGE (16 March 2017)

U.S. Retail Sales Moderate as Non-Auto Spending Tapers

Total retail sales and spending at restaurants rose 0.1% (5.7% y/y) in February following a 0.6% increase in January, which was revised up from 0.4%. The February result was in line with the 0.1% increase expected in the Action Economics Forecast Survey.

Sales at motor vehicles & parts dealers decreased again in February, by 0.2% (5.6% y/y), following January’s 1.3% decline. (…) Excluding autos, retail sales rose 0.2% (5.7% y/y) after January’s 1.2% gain (…). Retail sales excluding both auto dealers & gas stations were up 0.2% (4.2% y/y) in February following a 1.0% January rise. (Chart from CalculatedRisk)

U.S. INFLATION ACCELERATES

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.5% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.2% annualized rate) during the month. (…) Over the last 12 months, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.2%, the CPI rose 2.7%, and the CPI less food and energy rose 2.2%.

Last 4 months annualized: +2.7% for all core measures.
Last 3 months annualized: +2.8% for all core measures.
Last 2 months annualized: +3.0% for all core measures.

Not a good trend. Let’s see what’s in the pipeline (PPI table from Haver Analytics with my highlights)

Final demand core PPI: +3.2% a.r. last 3 months, +4.3% last 2 months.
Core goods, supposedly still deflating: +3.2% a.r. last 3 months, +3.0% last 2 months.
Intermediate Processed Goods: +7.9% a.r. last 3 months, +9.3% last 2 months.

No good trends there either…Can we rely on deflating import prices?

Nonpetroleum import prices improved 0.3% (0.8% y/y), the largest increase since July. Industrial supplies & materials prices excluding petroleum jumped 1.4% (7.0% y/y), strong for the fourth straight month. Foods, feeds & beverage prices rebounded 1.0% last month (4.4% y/y), following declines in three of the prior four months. Nonauto consumer goods prices improved 0.7%, but the y/y decline accelerated to -0.7%. Motor vehicle & parts prices remained unchanged both m/m and y/y, after declines in the prior two months. Capital goods prices also were steady (-1.0% y/y) after declining from 2013 through 2016.

Nonpetroleum import prices declined -2.8% in 2015 and –1.8% in 2016. They are up at a 2.4% annualized rate in the first 2 months of January and are +0.8% YoY in February in spite of the strong USD (+5.5% since mid-August and +4.1% YoY).

Fed Signals It Is Entering New Phase The Federal Reserve said it would raise short-term interest rates and remained on track to keep lifting them this year, signaling the central bank is moving into a new policy phase as the economy strengthens.

(…) Officials said they would raise their benchmark federal-funds rate by a quarter percentage point to a range between 0.75% and 1%, and penciled in two more increases this year.

“The simple message is the economy’s doing well,” said Fed Chairwoman Janet Yellen in a news conference following the Fed’s two-day policy meeting. “We have confidence in the robustness of the economy and its resilience to shocks.”

Ms. Yellen was careful to note that the Fed hadn’t significantly changed its forecasts for economic growth, unemployment or inflation, but it expected continued improvement.

Another reason for the decision: the Fed, in its policy statement released after the meeting, said inflation in recent quarters was “moving close” to its 2% target after undershooting that level for years.

The bank also said the target remains a “symmetric” goal, meaning that, though the Fed doesn’t want inflation to run above or below that mark, it expects it will happen at times. “It’s a reminder [that] 2% is not a ceiling on inflation. It’s a target,” Ms. Yellen said.

Officials’ median expectation for the fed-funds rate showed few changes from projections released in December. In addition to three quarter-point increases this year, including the one announced Wednesday, the forecasts implied three more moves next year. (…)

On Wednesday, Ms. Yellen played down the idea that the Fed might be on a collision course with the new administration. “We would certainly welcome stronger economic growth in the context of price stability,” she said. (…)

Economic Growth Lags Behind Rising Confidence Data

(…) The latest evidence came Wednesday when the government reported that sales at the nation’s retailers—a key measure of consumer spending—rose just 0.1% in February from a month earlier. Americans cut spending on clothing, sporting goods, electronics and restaurant outings, leading to the smallest gain in retail sales since last summer.

Earlier reports showed a surging trade deficit in January and a recent drop in home sales, as measured by contract signings. Taken together, the economy appears to be stumbling once again in the first months of the year, despite unusually warm weather that might otherwise boost spending and the absence of major crises overseas, as happened in the past.

Forecasting firm Macroeconomic Advisers on Wednesday downgraded its projection of economic growth in the current quarter to an annual rate of 1.3%, from 1.4%. Barclays projected 1.4% growth, compared with 1.6% earlier. The Federal Reserve Bank of Atlanta’s GDPNow model lowered its estimate to 0.9% from 1.2%. Growth has averaged about 2% in the current expansion. Economic output expanded at a 1.9% rate in the fourth quarter and 3.5% rate in the third. (…)

HARD DATA WATCH

Beyond all the positive surveys, we are all searching for hard data to better gauge the U.S. economy amid the “Trump hopes”.

Hotel lodging demand has been slowing since mid-October. Based on data from Smith Travel Research, analysts estimate that RevPar (revenues per available room) was in the 0-2% range in February, following +1.0% in January and +3.2% in Q4’16. (Chart from Raymond James Associates)
Is the ‘Trump Slump’ real? Spending on tourism in the U.S. slides

Fewer Americans are traveling within the U.S. and, despite evidence of a “Trump slump” keeping foreigners from visiting the U.S., the origins of the domestic dip are more complex.

Spending on travel and tourism in the U.S. fell 3.3% on the year to $1.7 trillion in the fourth quarter of 2016, after rising 3.7% in the previous quarter, according to the “Travel and Tourism Satellite Accounts” of the Bureau of Economic Analysis, a government data agency. The biggest component of the downturn was air travel, which fell 15% after increasing 2% in the previous quarter. Money spent by tourists on accommodation dropped around 6% after increasing more than 8% in the third quarter.

The fall in domestic tourism figures are likely due to prices more than politics, said Christopher Elliott, consumer advocate and author of “How to Be the World’s Smartest Traveler.” Tourism prices increased 9.1% in the fourth quarter of 2016 from just 0.1% in the third quarter, the latest data found. That also appeared to have an impact on jobs: Employment growth in the travel and tourism industries slowed in the fourth quarter, increasing 0.7% after increasing 1.6% in the previous quarter. (…)

Europeans are already avoiding the U.S., according to travel search site liligo.com. Searches for U.S. destinations in the 20 days after Trump’s original immigration ban was announced fell, including a 17% decline in searches from Italy, 14% from Germany and 12% from France. (…)

European Parliament votes to end visa-free travel for Americans The passing of the non-binding resolution comes after the US failed to agree visa-free travel for citizens of five EU countries
But here’s a really hard data:

Below is a “heat map” of the latest “soft” and “hard” economic data. (The Daily Shot)

Source: Goldman Sachs, @joshdigga

Inventories Tell the Story of a Real Upturn in Progress

U.S. Sees Mexico Joining Regional ‘Powerhouse,’ Navarro Says

Peter Navarro, who as head of the White House National Trade Council will play a leading role in the effort to re-negotiate the North American Free Trade Agreement, said in an interview the U.S. wants Mexico and Canada to unite in a regional manufacturing “powerhouse” that will keep out parts from other countries.

The Trump administration is re-examining a critical component of the free trade pact: the rules of origin, which dictate what percentage of a product must be manufactured in North America, Navarro said.

“We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously,” said Navarro, 67. “It’s just as much in their interests as it is in our interests to increase the rules of origin.”

For example, under the current agreement, 62.5 percent of the total value of cars sold in North America must originate in the U.S., Canada or Mexico to avoid import tariffs. The U.S. wants to raise that threshold, making it harder for parts from other countries to enter the supply chain. (…)

Trump Proposes Historic Cuts Across Government to Fund Defense

Trump Budget Seeks Big Cuts to Arts, EPA, Foreign Aid President Donald Trump will call for sharp cuts to spending on foreign aid assistance, the arts, environment and public broadcasting to pay for a bigger military and stronger defense along the border in a fiscal 2018 budget blueprint. 203
Trump Seeks Billions for Border Wall
Budget Would Cut EPA Funding By 31%
State Dept., USAID Face 30% Budget Cut
Funding for NIH Would Be Cut 18%

Trump’s Revised Travel Ban Blocked by Hawaii Judge A federal judge in Hawaii issued a nationwide temporary restraining order that bars implementation of Trump’s revised order on immigration and refugees, a significant legal blow to the president.

China Raises Key Short-Term Interest Rates, Following Fed Closely

(…) The unprecedented, nearly simultaneous rate increase following the Fed’s decision betrays Beijing’s sense of urgency to prevent capital outflows from accelerating. It also shows Beijing’s desire to keep risks in its financial system from generating crises in a weak economy, analysts say. (…)

Minutes before domestic financial markets opened, the People’s Bank of China announced that it has raised the interest rates it charges commercial banks in the money market on the seven-day, 14-day and 28-day loans each by 0.1 percentage point. These rates are also known as reverse repurchase agreements, or repos.

As a result, the central bank pushed the benchmark seven-day repo rate to 2.45% from 2.35%. That followed an identical move on Feb. 3, after the PBOC had kept the borrowing cost unchanged since October 2015.

Separately, the PBOC also raised the interest rate by 0.1 percentage point on a form of special loans to 22 financial institutions known as a medium-term lending facility, for the second time since Jan. 24. (…)

Where are the Bulls in This Bull Market?

Corporations have spent hundreds of billions annually in recent years buying back their own stock. But what if, after netting out all the supply and demand flows in the equities market, the corporations are the only ones on balance buying their stock?

That’s the conclusion, at least for 2016, of Ed Yardeni of Yardeni Research. “The bottom line is that the current bull market has been driven largely by corporations buying back their shares,” he wrote on Tuesday. (…)

Those trends have helped fuel what’s been called a “de-equitized” stock market, in which there is simply less publicly traded stock available. (…)

And on the demand side:

To the extent that there’s money flowing into the equities market that isn’t corporate or institutional, it’s just money flowing out of other funds, and into ETFs. (…)

THE DAILY EDGE (15 March 2017)

Fed Is Ready to Raise Rates, but Key Bank Metric Suggests Caution

(…) Bank loans across all categories are growing 4.6% annually, the slowest pace since 2014, according to weekly Federal Reserve lending data from March 1. The trend is particularly marked in business loans, which are now increasing 3.9% annually, a rate that is a nearly six-year low. A number of factors are at play including rising interest rates; bankers also say some of their business clients put borrowing on hold before the U.S. election and aren’t yet confident enough to jump back in. (…)

Bank loans are one of the hard data not showing any economic momentum. This chart from David Rosenberg illustrates the weakness in borrowings in the last 3 months, that is since the elections.

Yet:

CEOs’ Economic Optimism Jumps by Most in Seven Years Leaders of the largest U.S. companies are becoming more optimistic about sales growth, hiring and capital investment, causing a measure of chief-executive sentiment to increase by the most in seven years.

The Business Roundtable CEO Economic Outlook Index rose 19.1 points in the first quarter from the fourth quarter, to reach 93.3, according to a survey released Tuesday. It was the largest one-quarter gain for the index since the fourth quarter of 2009, when the economy was just emerging from the recession. Readings above 50 indicate economic expansion. (…)

The Roundtable survey showed CEOs upgraded their forecast for 2017 economic growth to a 2.2% increase, from the 2% gain forecast in December. (…)

“CEOs strongly believe that we can do a lot better than we’ve been doing,” he said. “With the right policies, this country can do better. We’re not believers that we’re stuck in low growth forever.” [J.P. Morgan Chase CEO Jamie Dimon] (…)

Mr. Dimon isn’t concerned that higher interest rates could slow growth. The Federal Reserve is expected to raise its benchmark rate at a meeting this week.

A rate increase is a “sign of strength, not a sign of weakness,” he said. (…)

The survey showed 41% of CEOs expect to increase hiring at their firms in the next six months, up from 35% in the prior quarter’s survey. And 46% plan to boost capital spending, also up from 35% in the December reading.

The NFIB surveys are also showing that exploding optimism has not triggered much actual spending just yet.

Thinking smile Could it be that companies are delaying expenditures waiting for the eventual tax reform that could allow full capex expensing in the first year? Maybe but weak capex spending is not a very recent trend as this Pictet chart shows:

The USA has not seen such widespread optimism for a very long time. Consumers, small business owners, CEOs, economists, strategists, commentators and investors are all displaying jolliness like if none of these groups includes any Democrat whatsoever.

Equity markets will occasionally feed from sentiment, boosting P/E ratios in anticipation of eventually higher earnings. But confidence alone is not enough. Equity markets need the proteins only supplied by actual profits to remain energized and healthy. David Rosenberg produced tables comparing various measures of confidence levels with equity returns 12 months later. Whether you look at consumer confidence, ISM surveys or the NFIB index, equity returns tend to be inversely proportional with confidence levels.

AMAZING CHART

From Pictet:

Natural-Gas Glut Deepens

A flood of natural gas swamping the U.S. is turning into a global glut, sinking prices and dimming the hopes of American producers to export their way out of an oversupplied domestic market.

Natural-gas futures have fallen 25% over the past 2½ months. The declines continued Tuesday, with April futures dropping 3.45% to $2.938 a million British thermal units on the New York Mercantile Exchange. Shares of gas-production companies are among this year’s worst performers. (…)

Many investors wagered that new gas-fired power plants and record exports would help burn off much of the excess supply in the U.S. But a historic level of exports hasn’t been enough to transform a market dominated by unpredictable weather and massive new supplies from fracking. (…)

One issue for U.S. producers is their own growing influence: More gas for sale world-wide—often floating on ships—eases bottlenecks that once drove big local price spikes. Global prices for natural gas have plummeted, down by half in some places in recent years.

Mild U.S. weather in February also has reduced demand. Warm winter temperatures sapped about 2.9 billion cubic feet a day of demand from the market this season, compared with just the 2.3 billion cubic feet a day of new exports added, according to Platts Analytics, a unit of S&P Global Platts. (…)

U.S. gas producers have nearly doubled their number of rigs from a historic low last year. Oil rigs also have nearly doubled, and they produce gas as a byproduct. Macquarie estimates that 9 billion cubic feet a day of new gas from oil wells alone between 2017 and 2021 will completely cover all new demand from exports.

Global supply is likely to increase by 44% in 2020 from 2015 levels and outpace new demand through the end of this decade, according to Moody’s Investors Service. (…)

Pipeline delays in Mexico and President Donald Trump’s pledge to change trade terms with that country could undermine sales to the most important export market for U.S. producers. Mexico last year received nearly 60% of U.S. gas exports, according to EIA. (…)

Oil Falls For 7th Day As Saudis Report Output Hike After Warning U.S. Shale Firms

(…) Saudi Arabia said it raised its oil production to 10.011 million barrels per day in February, up 2.7% from January, but still under the 10.05 million-barrel target the country agreed to under a production-cut deal reached last year between OPEC and top non-OPEC countries.

But the number conflicted with figures OPEC derived from other sources, showing Saudi production falling by 68,100 barrels a day to 9.8 million barrels per day. (…)

The OPEC report comes as Saudi energy minister Khalid Al-Falih told attendees at IHS’s CERAWeek energy conference in Houston last week that the output deal is “so far so good,” but his country “will not bear the burden of free rides” by others in the agreement. (…)

The Saudis can talk and warn all they want. American entrepreneurs are not just sitting on their hands and praying:

Source: @jsblokland, @DeanDijour via The Daily Shot

Meanwhile…

Strong Chinese Data Contain One Warning Sign: Flagging Consumption

(…) Value-added industrial output, a proxy for economic growth, expanded by a faster-than-expected 6.3% in the first two months of 2017 from a year earlier, compared with 6.0% growth in December,

Investments in factories, buildings and other fixed assets in urban areas rose by a better-than-expected 8.9% year over year in the January-February period, compared with an increase of 8.1% in 2016. (…)

Sheng Laiyun, a spokesman with the statistics bureau, said private investment in property, factories and other capital goods tied to Beijing’s public-private infrastructure projects is noticeably better. “The business environment has improved,” he said in a briefing. (…)

Property investment rose 8.9% in the first two months of 2017 to 985.4 billion yuan ($142.5 billion) compared with a 6.9% increase in all of last year, the statistics bureau said. Housing sales rose 22.7% by value in January and February from a year earlier, according to Wall Street Journal calculations, compared with a 49.2% increase in January-February of 2016. (…)

However, retail sales clocked the slowest increase in 11 years, with a 9.5% rise in the two-month period, according to the National Bureau of Statistics, compared with a 10.9% increase in December.

Goldman Turns Cautious on Stocks

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Note: Translation is Google’s with obvious oddities…

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U.S. INFLATION ACCELERATES

Fed Signals It Is Entering New Phase The Federal Reserve said it would raise short-term interest rates and remained on track to keep lifting them this year, signaling the central bank is moving into a new policy phase as the economy strengthens.

HARD DATA WATCH

European Parliament votes to end visa-free travel for Americans The passing of the non-binding resolution comes after the US failed to agree visa-free travel for citizens of five EU countries

Trump Budget Seeks Big Cuts to Arts, EPA, Foreign Aid President Donald Trump will call for sharp cuts to spending on foreign aid assistance, the arts, environment and public broadcasting to pay for a bigger military and stronger defense along the border in a fiscal 2018 budget blueprint. 203

Trump’s Revised Travel Ban Blocked by Hawaii Judge A federal judge in Hawaii issued a nationwide temporary restraining order that bars implementation of Trump’s revised order on immigration and refugees, a significant legal blow to the president.

CEOs’ Economic Optimism Jumps by Most in Seven Years Leaders of the largest U.S. companies are becoming more optimistic about sales growth, hiring and capital investment, causing a measure of chief-executive sentiment to increase by the most in seven years.

AMAZING CHART