Month: September 2017

U.S. Durable-Goods Orders Rose 1.7% in August

Excluding the transportation segment, durable-goods orders rose a modest 0.2% in August. Excluding defense goods, orders jumped 2.2% from July. (…)

More broadly, total durable-goods orders rose 5.0% in the first eight months of the year from the same period in 2016.

A closely watched proxy for business spending on new equipment, new orders for nondefense capital goods excluding aircraft, rose 0.9% in August after a 1.1% gain in July. The category was up 3.3% in the first eight months of 2017 compared with a year earlier. (…)

Oil prices have helped a little…

…but the basic trend is pretty good and abnormally stable. Over the last 11 months, only two negatives and +6.2% annualized in capex orders!

U.S. Pending Home Sales Decline Sharply

The National Association of Realtors (NAR) reported that pending home sales fell 2.6% (-2.6% y/y) during August to an index level of 106.3 (2001=100). That followed an unrevised 0.8% July decline, falling to the lowest level since January 2016. It was the sixth monthly shortfall this year and left sales 6.4% below the peak during April 2016.

Pending home sales declined m/m across each region of the country. (…)

U.S. GDP Growth is Revised Up as Profits Weakened

Economic growth during Q2’17 was revised higher to 3.1% (2.2% y/y) from 3.0% in the second estimate, and compared to 2.6% in the advance report. It was the quickest rate of increase since Q1’15.

After-tax corporate profits without IVA & CCA fell 2.0% (+7.4% y/y), revised from -1.4% following a 1.3% gain during Q1. Before-tax earnings with IVA & CCA improved a lessened 0.7% (+6.4% y/y) following a 2.1% Q1 decline. Nonfinancial sector earnings rose a reduced 4.9% (7.2% y/y). Financial sector earnings declined a sharper 7.1% (+8.6% y/y) while foreign sector profits fell a larger 2.5% (+6.8% y/y). (…)

Growth in domestic final sales was unrevised at 2.7% (2.4% y/y). Consumer spending growth held at 3.3% (2.7% y/y), the strongest growth in four quarters. The gain in durable goods buying was lessened to 7.6% (6.4% y/y),  the quarterly strength led by a 13.2% jump (10.7% y/y) in recreational goods & vehicles buying. Home furnishings & appliance purchases rose 9.1% (6.2 % y/y), twice the growth during Q1 while spending on motor vehicles increased 0.8% (+4.4% y/y). Each of these figures were revised lower. (…)

Services spending gained an upwardly revised 2.1% (2.3% y/y) and equaled growth during all of last year. Spending on housing & utilities grew a little-changed 3.4% (1.1% y/y) while health care spending grew 1.3% (+2.0% y/y), instead of declining slightly as previously indicated. (…)

  

Trailing 2 quarters annualized, last 4 quarters: +2.5%, +2.3%, +1.5%, +2.1%. Good thing the consumer is cooperating; problem is his income is not growing as fast: Last 4 quarters YoY:

• Real expenditures:  +2.8%, +2.8%, +2.9%, +2.7%.
• Real Disp. Income: +1.4%, +0.2%, +0.9%, +1.3%.

Such divergence between income an spending growth happened before. In 1993, savings were high, employment was accelerating rapidly and oil prices fell. In 1999, savings were low, employment growth was steady at around 2.5% YoY and oil prices rose…until employment growth slowed down and led to the 2001 recession. At the end of 2005, savings were also low, employment growth was +2.0% YoY and oil prices rose…until employment growth slowed down and led to the 2008 recession. Currently, savings are low, employment growth is slowing down rapidly (+1.4% in August) and oil prices are rising.

The recent weakness in consumer-related stocks may have to do with more than just the Amazon effect.

• ‘Amazon Effect’ Leads Global Retail Stocks to Lose Favor Amazon.com’s expanding reach is prompting investors to dump shares of retailers far from the U.S. While the “Amazon effect” has been most pronounced in the U.S., investor concern overseas has risen.

AMZN itself is down 5% from its July high. It now trades below its 100-day m.a. which is flattening and is only 4.4% above its 200-d m.a. which is also flattening.

Republican Tax Plan Hits First Hurdle A day after announcing their ambitious tax plan, Republicans debated scaling back one of their largest and most controversial proposals: repeal of the individual deduction for state and local taxes.

• The Tenuous Logic Behind Republicans’ About-Face on Debt Donald Trump and congressional leaders take a politically convenient but risky path in drive to overhaul taxes

(…) Lower tax rates will unleash so much new economic activity and thus added tax revenue that, contrary to history and mainstream economic opinion, the debt actually won’t rise much, if at all. It’s a politically convenient face-saver, but it undermines a process Republicans themselves put in place to minimize the abuse of such reasoning. (…)

But permanently widening deficits is risky when the publicly held federal debt, now 77% of GDP, is on track to hit 91% in a decade as aging baby boomers draw on Social Security and Medicare. A $1.5 trillion tax cut would push that to 100%, according to the Committee for a Responsible Federal Budget, a watchdog group. (…)

Debt rose as a share of gross domestic product after Ronald Reagan and George W. Bush cut taxes; it fell after Bill Clinton raised them. Independent economists think tax reform could boost growth by anywhere from 0.1 point to 0.6 point over a decade. JCT and CBO would likely be at the low end of that range since they believe higher deficits nudge up interest rates and crowd out private investment. (…)

• What Awaits Wall Street in Trump Tax Plan A 20% corporate tax rate would boost profits, but there are downsides to the administration’s framework

Wall Street has hungered for a tax overhaul, and with good reason. If it spurs stronger economic growth, corporate borrowing and finance firms’ profits could jump.

A lower corporate tax rate as called for in the tax framework unveiled by the Trump administration Wednesday should immediately boost banks’ own profits. Bankers expect some pain points, but are confident the benefits will outweigh them.

Morgan Stanley Chief Executive James Gorman said at an industry conference in June that a 25% corporate tax rate would lift his bank’s earnings by 15%, assuming no changes to the business mix. The Trump framework calls for a 20% rate, so the benefit could be even greater.

Citigroup Inc. has said that a cut to a 25% rate plus a tax holiday on foreign earnings would have boosted its annual net income by $800 million, or by about 5%. It would also improve the bank’s return on equity by more than 1 percentage point, estimated John McDonald, an analyst at Sanford Bernstein. (…)

Smaller banks could also reap bigger gains since they have relatively high effective tax rates and businesses that are almost purely domestic, Evercore ISI analysts said in a note. A potential tax cut from 35% to 28% could boost 2018 earnings for regional banks by a median 9%, they said. (…)

A number of banks have what are called “deferred tax assets.” These are created by losses, in many cases huge ones racked up during the financial crisis, and act as IOUs that can be used to offset future tax bills. Those will lose value.

Citigroup Inc., for example, had $46 billion of the assets at the end of the second quarter. A reduction in the corporate tax rate to 20%, plus a shift to a territorial regime that only taxed income generated in the U.S., could reduce the assets’ value by more than $15 billion, according to figures the bank has provided. Citigroup would have to take that charge as a one-time hit to profits.

Bank of America had $19.2 billion in net deferred tax assets at the end of 2016. Only about $7 billion of these apply to the U.S. and so would be subject to revaluation. That would lead to a write-down of around $3 billion if the tax rate was lowered to 20%. (…)

Another issue is a proposal to partially limit companies’ ability to deduct net interest expense. The administration didn’t define what partially limited meant. (…)

For the private-equity industry, which relies heavily on debt financing, that change could translate into firms paying lower prices for assets. (…)

• The Fate of Trump’s Tax Cut Is in the Hands of These Six Key GOP Senators

• Here’s How Tax Reform Could Squeeze the Middle Class

• The New Republican Tax Plan Still Isn’t a Plan

China Speeds Push for Electric Vehicles China will force auto makers to accelerate production of electric vehicles by 2019, a move that will ripple around the globe as the industry bends to the will of the world’s largest car market.

Yellen Defends Fed Rate-Rise Plan Despite ‘Mystery’ of Low Inflation

(…) Although Ms. Yellen said she expects inflation to gradually move up to the target, she acknowledged the uncertainty surrounding that prediction. (…)

“How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustments,” Ms. Yellen told a National Association for Business Economics conference in Cleveland. “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.” (…)

New York Fed President William Dudley, argue that the strong economy will soon push up inflation, suggesting a need to continue raising interest rates.

”I expect inflation will rise and stabilize around [the Fed’s] 2% objective over the medium term,” he said Monday. “In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually.”

Others, such as Charles Evans of the Chicago Fed, see no indication that inflation is about to turn higher.

Speaking in Michigan on Monday, Mr. Evans said he believed weaker inflation reflected structural changes in the economy rather than a temporary phenomenon. “I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation,” he said. (…)

Still, the Fed’s understanding of inflation is “imperfect,” she said, calling the shortfall in inflation “a mystery.” “We recognize that something more persistent may be responsible for the current undershooting.” (…)

“We will monitor incoming data closely and stand ready to modify our views based on what we learn,” she said.

Bloomberg Briefs adds this:

The underlying theme of Yellen’s speech was that the Phillips curve still works. While some recent Fed research has suggested that the model — which describes the inverse relationship between the jobless rate and inflation — may no longer be useful, she is not subscribing to that notion.

The Fed is risking a policy mistake by turning a deaf ear to continued inflation weakness and proceeding with both balance-sheet unwind and rate hikes. (…)

Atlanta Fed President Raphael Bostic said an interest rate increase may be appropriate in December given clear signs of growing inflation pressures. “The contacts we have on the ground are telling us that they are starting to see far more pressure from a wage perspective and a pricing perspective,” he said. “I am starting to see those much more clearly and consistently than when I started in June.”

Robert Eisenbeis, Ph.D., Vice Chairman and Chief Monetary Economist at Cumberland Advisors:

(..) The more interesting information from this last FOMC meeting is the insights we gleaned after the meeting, both from the SEP [the Fed’s staff’s Summary of Economic Projections] forecasts and from Chair Yellen’s press conference. The picture we get is the FOMC’s view is that the economy is growing steadily and the labor market continues to improve, but the response of inflation has the Committee totally puzzled.

Consider the Committee’s GDP forecasts. The highest median forecast is for 2.4% growth for 2017, followed by a gradual decline year by year to 1.8% in 2020. Labor markets are projected to remain tight, with the median unemployment rate declining even more, from 4.3% to between 4.1% and 4.2%. Finally, the median PCE inflation measure is expected to move up to 1.9%, within striking distance of the Fed’s 2% target.

The problem is that GDP is weaker and labor markets are not significantly different in these new forecasts from what has happened in 2017. So where do the inflation pressures come from?  The question is especially interesting when we look at the distribution of the federal funds rate target that FOMC participants argue is most consistent with their forecasts. For example, the median outcomes are realized with a policy rate for 2018 ranging between 1.9 and 2.6%. (We are ignoring here the 1.1% number submitted by one participant.)

The range of assumed target rates for fed funds in 2019 is between 2.4% and 3.4%, while median GDP growth is even lower, at 2%, from that projected for 2018. All the while, inflation is seen as pushing close to the Committee’s 2% objective. This view of inflation dynamics implicit in the SEP forecasts simply doesn’t comport with what has happened and implies that substantially different underlying forecast models and inflation dynamics are being utilized by FOMC participants.

Is there an alternative, understandable explanation for the inflation path we have seen? Simple Econ 101 supply and demand analysis may hold the answer. The picture we have right now is of a real economy in which GDP growth is slow both because of slow growth in the labor supply and low productivity. If, in such a world, aggregate demand is essentially in balance with production and there is no excess demand, then there can be no upward pressure on prices. People are simply not running around trying to spend but failing to find goods and services. If producers can’t raise higher prices in the face of non-existent excess demand pressures, then prices will not move up. Moreover, there will be no need to bid up wages.

If this simple explanation works, then the FOMC’s clinging to a 2% inflation objective that is inconsistent with demand and production becomes a risky policy. This likely explains the wide range of policy rate assumptions FOMC participants are making and reflects the widely differing views within the FOMC as to what is appropriate policy going forward.

So when Yellen says that “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent”, one has to wonder “imprudent for who?”. “How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustments”. But if policymakers were focused on the man on the street, “such significant uncertainties” could also strengthen the case for a wait and see policy, given that the economy is rather weak as the Chicago Fed National Activity Index of 85 data series reveals:

In fact, the FOMC itself has the economy slowing from a current rather slow +2.4% growth rate for 2017 to +1.8% in 2020. Knowing that the Fed has consistently been too optimistic, prudence should be not to give more headwind to an economy almost totally dependent on the consumer.

The fact is that we are all going blind into the most important period of the year with data blurred by the hurricanes, a Fed convinced that the economy is steadily improving and that a mysteriously weak inflation still needs to be contained.

U.S. New-Home Sales Declined in August

Purchases of newly built single-family homes fell 3.4% to a seasonally adjusted annual rate of 560,000 in August, the Commerce Department said Tuesday, the second straight monthly decline and hitting their lowest level since December. More broadly, new-home sales were up 7.5% in the first eight months of 2017 compared with a year earlier. (…)

The agency said survey responses were lower than usual in areas of Texas and Florida affected by Hurricanes Harvey and Irma, potentially affecting the latest data. (…)

Note that all regions were flat or down in the last 2 months.

Citi Says Get Ready for an Oil Squeeze

(…) Five countries in the group — Libya, Nigeria, Venezuela, Iran and Iraq — may already be pumping at their maximum capacity this year, Ed Morse, the bank’s global head of commodities research, said in an interview. Rather than a surge in output, there’s a risk of a market squeeze emerging as early as 2018, driven by those nations because of weaker investment in exploration and development, he said. (…)

US oil producers lock in prices after crude’s rally Futures data suggest hedging is at levels not seen since oil began its slide in 2014

(…) Hedging could embolden US producers to raise volumes after putting the brakes on drilling in recent weeks. (…)

Few S&P 500 Companies Have issued EPS Guidance Since Harvey Hit U.S.

(…) Nearly all of the S&P 500 companies that have issued EPS guidance to date for the third quarter issued the guidance before the hurricanes hit the U.S. Of the 118 S&P 500 companies that have issued EPS guidance for Q3 2017, only six (or 5%) have issued EPS guidance since Hurricane Harvey first hit the U.S. on August 25.

One reason is normal seasonality. Over the past five third quarters, 101 S&P 500 companies on average have issued EPS guidance for the third quarter. Of these 101 companies, 88 on average issued EPS guidance prior to September 1. Only 13 S&P 500 companies on average have issued EPS guidance for the third quarter after September 1. Only 6 S&P 500 companies on average have issued EPS guidance for the third quarter during the month of September. Thus, many S&P 500 companies may be continuing their normal practice of not issuing EPS guidance for the third quarter after September 1.

S&P 500 companies may also still be trying to quantify the impact of the hurricanes on their bottom line. Three of the six companies that have issued EPS guidance since August 25 directly addressed the hurricanes. However, two of these three companies (Hewlett Packard Enterprise and Best Buy) stated that it was too early to provide an estimate of the impact. Thus, S&P 500 companies may provide more EPS guidance at a later time once the impact of the property damage and lost business can be quantified. (…)

But as I wrote Monday:

But amid these positive pre-announcements, analysts were busy reducing their estimates on many other companies. Since September 1, 63% of the 1416 earnings revisions for S&P 500 companies were downward.

Thomson Reuters says that the estimated earnings growth rate for the S&P 500 for Q3 2017 is 6.2% (+4.3% ex-Energy).

SENTIMENT WATCH

• Here’s why the stock market is still the ‘cleanest dirty shirt’

Think the stock market is overpriced or maybe even in a bubble? Think again, say analysts at Barclays.

In the note, entitled “Uncomfortably Bullish,” they argued that global equity valuations remain in line with longer term averages and below the previous cycle peak, while the outlook for global earnings per share remain the best in nearly five years. Compared with other pricey assets, equities remain the “cleanest dirty shirt” available to investors, they argue (…).

• “This Is Not A Time To Buy Anything” – Sam Zell Warns Retail Real Estate Market Is A “Falling Knife”

“Like a falling knife…the U.S. has 4 or 5 times the amount of square footage per person of retail as anywhere else in the world… not an area where I would want to deploy capital at this time.”