Takeaways From Fed Chief’s Two Days on Capitol Hill
- Mr. Powell also repeatedly cited soft inflation numbers.
- “There are a lot of lessons to be learned from the experience of Japan over the last quarter century, and all of us have looked very carefully at that,” Mr. Powell said Wednesday, explaining why it was important to keep inflation at the Fed’s 2% target.
- Mr. Powell pushed back against a characterization that the labor market is hot, or so tight it could fuel too much inflation. “To call something hot, you need to see some heat,” he said. “While we hear lots of reports of companies having a hard time finding qualified labor, nonetheless we don’t see wages really responding.”
- Support for tighter money has evaporated.
Will this “never-mind-what-we’ve-been-saying-data-don’t-really-matter” Fed dismiss the recent uptick on core CPI as “transitory” given that goods inflation was positive for the first time in 5 months?
Source: Eric Winograd, AllianceBernstein (via The Daily Shot)
Looking at these Cleveland Fed table and chart, one could say that U.S. inflation is indeed at or above 2.0%.
This chart from Blackstone also points to 2.0%+ core CPI:
About Powell’s “we don’t see wages really responding”, somebody should show him this chart…
…with this one: as of yesterday, initial unemployment claims are showing no signs of a “not hot” labor market slowdown just yet:
In spite of this:
Source: Credit Suisse (via The Daily Shot)
One of these key economic gauges isn’t telling the truth
By Mark Hulbert:
Even as new all-time highs have been registered by broad-market U.S. indices such as the Dow Jones Industrial Average DJIA, +0.85% and the S&P 500SPX, +0.23% , the market’s transportation sector has lagged. The Dow Jones Transportation Average DJT, +0.96% , for example, is more than 6% below its April high, and more than 10% below its all-time high set in 2018.
Dow Theorists will immediately recognize the significance of this divergence: it sets up a potentially bearish “non-confirmation” which, if it continues, could turn this oldest of stock market timing systems negative on the major trend. To some, this recent divergence is eerily reminiscent of a similar divergence prior to the bursting of the internet bubble in early 2000: near the top of that bull market, in March 2000, the Dow Transports hit a then all-time high in May 1999, almost a year prior to the broad market.
The lagging transports might worry you even if you’re not a follower of the Dow Theory. That’s because the transportation sector is widely considered to be a leading economic indicator, on the basis that this sector will be among the first to signal coming economic weakness.
As I’ve pointed out before, there is empirical support for this theory. According to research conducted by the Bureau of Transportation Statistics of the U.S. Department of Transportation, declines in the sector have, at least over the last three decades, led economic slowdowns by an average of four to five months. (…)
Which economic benchmark is painting a truer picture? (…)
To be sure, even if you believe that the Baltic Dry Index is painting the more accurate picture, it’s clear that the transportation sector needs to catch up with the broad market, and soon. It’s hard to imagine a healthy economy without the transportation sector’s participation, after all.
The sector’s performance on Thursday of this week is a small, but helpful, sign in this regard: The Dow Transports were up 0.96% for the day, versus 0.23% for the S&P 500. Still, the Dow Transports have a deep hole out of which to dig. Pay close attention.
But the Baltic Dry Index has shown much volatility in recent years. Some suggest the fluctuations have more to do with supply than with demand:
On June 19, the Daily Edge discussed the Economic Outlook from Freight’s Perspective from Cass Information System. To recall:
With the -6.0% drop in May, we see the shipments index as going from “warning of a potential slowdown” to “signaling an economic contraction.” (…) The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes. Weakness in commodity prices and the decline in interest rates have joined the chorus of signals calling for an economic contraction. (…)
Bottom line, more and more data is indicating that this is the beginning of an economic contraction.
DHL designed its own Global Trade Barometer:
The DHL Global Trade Barometer predicts a deceleration in global trade growth, with a decrease in the overall growth index of -8 points to 48 compared to March, thus indicating negative growth. Air trade also decelerated -6 points to 49, while ocean trade fell -8 points to 48; this deceleration below 50 in the growth indexes for overall world trade, air trade and ocean trade is happening for first time since the GTB’s launch in January 2018 and just for the second time when using historical data that go back to 2013.
The negative outlook is to a large extent affected by decline in China and US (US -11 points, China –7 points). The fact that the trade conflict between US and China is leading to a shift in trade routes and supply chains, may be responsible for softening the impact on a global level, as the overall index is still just three points below positive growth.
Furthermore, Japan (-7 points,) India (-6 points,) and South Korea (-3 points) are expected to lose momentum, while Germany (-1 point) and the UK (+2 points) are relatively stable. (…)
The DHL Global Trade Barometer predicted a downturn in US trade as the index drops rapidly to 44, representing a decrease of -11 points compared to the latest update in March. With this, The US is the GTB country with the most significant losses of the seven constituents. The decline in the US total trade index is substantiated by the weakening of air and ocean trade; air trade slides -8 points to 45, while ocean trade drops -14 points to 43. The overall sharp decline can be interpreted as a result of the increasing intensity in the US-Chinese trade dispute.
I added this from the Association of American Railroads:
You have to look pretty hard to find good news in May’s rail traffic data, but disappointing news is easy to find. Total U.S. rail carloads were down 2.1% in May 2019 from May 2018, their fourth straight monthly decline.
I look at rail volume excluding coal, grain and oil to get a better sense of what’s happening in the economy: the 6-wk m.a. is down 5.4% in May, back to the 2017 level.
U.S. IP could drop significantly in coming months:
Is this only the result of pre-tariffs inventory hoarding temporarily impacting the goods economy?
The U.S. LEI better be turning up soon as Blackstone seems to suggest?
ECB Follows Fed in Signaling Fresh Stimulus Minutes for June meeting suggest ECB could cut interest rates or restart its $2.92 trillion bond-buying program
(…) This puts the world’s two biggest central banks on the cusp of injecting fresh stimulus into their economies to ward off a global slowdown and weak inflation. (…) Many central banks in the Asia-Pacific region, including Australia and New Zealand, have already lowered interest rates. (…)
ECB officials were in “broad agreement” at their June meeting that the bank should “be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments,” according to the minutes. (…)
The eurozone economy performed better than expected in the first three months of the year, but the June minutes revealed deep concerns that global uncertainties will weigh on the region’s economy for some time.
In particular, ECB officials highlighted a downward shift in market expectations of future inflation rates, which have fallen “near the previous lows recorded in September 2016.” The ECB has previously used weakening inflation expectations to justify aggressive stimulus measures.
“Inflation was still projected to reach only 1.6% in 2021, which was seen to remain some distance away from the Governing Council’s inflation aim,” the minutes said. (…)
The June minutes suggested that the ECB might be able to find creative ways to expand its toolbox. Officials argued that “considerations of a more strategic nature might be warranted in order to reinforce the credibility of the ECB’s monetary policy.” (…)
Eurozone production up in May, but outlook remains meagre
Industrial production bounced back by 0.9% in May after a weak start to the year. (…) The growth was broad-based, with only production in intermediate goods declining on the month, while consumer goods production grew at above 2% for both durable and nondurable goods production. (…) While May production may look like a green shoot, as we argued this morning, it looks like weakness in global demand and trade uncertainty will dampen the industrial outlook for the second half of the year. (…)
Even though export growth is still positive, business surveys have been pointing to a contraction in orders from abroad. Moreover, there is a strong correlation between the percentage that industries produce for foreign final demand and the performance in production since December 2017, with the industries that produce more for foreign final demand doing much worse than the ones producing more for domestic final demand. This indicator includes intermediates that are used in products that are exported, therefore giving a more complete indication of industry sensitivity to weaker external demand.
While export growth has remained positive up to now, weaker production of intermediates used for exports indicates that weaker gross exports could well be on the cards over the summer months. This view is also supported by the reported deterioration of eurozone companies’ international competitiveness. (…)
When looking at episodes of declining production, this one stands out. We have not seen a decline this long and this deep without a contraction in GDP since the 1960s, which is the furthest back that the data go. This is except for the early 2000s around the dotcom crisis, which was officially not a eurozone recession although many eurozone countries did experience a recession at the time. Now, while the second half of 2018 saw a marked slowdown in growth, the eurozone has avoided a (technical) recession for now, but the question is, how long can this industrial slump continue without broader repercussions?
The strong performance of the service sector has kept the eurozone economy from contracting. Remarkably enough, the poor performance of the manufacturing sector has not yet led to a decline in employment growth in the sector. The expansion of the 2000s was marked by a strong decline in manufacturing employment, but the current picture is the reverse of that. Employment in the manufacturing sector continues to grow, thereby supporting household consumption, which in turn mainly benefits the service sector.
There are signs that manufacturing employment could turn down though. For example, businesses indicate that hiring intentions in the manufacturing sector are weakening and in Germany, layoffs have increased while short-term work is returning. Still, as long as overall manufacturing employment continues to grow, the sluggishness in industrial production may well remain relatively contained. The manufacturing job market could, therefore, be key in the coming months to see whether the expansion can hold out amidst industrial sluggishness.
Warning Shot to World Economy as Singapore Slumps, China Exports Drop
(…) Gross domestic product in export-reliant Singapore shrank an annualized 3.4% in the second quarter from the previous three months, the biggest decline since 2012. China trade figures showed exports fell 1.3% in June from a year ago and imports shrank a more-than-expected 7.3%.
Like South Korea’s economy — which already contracted in the first quarter — Singapore is often held up as a bellwether for global demand given its heavy reliance on foreign trade. (…) The data “points to the risk of a deepening slowdown for the rest of Asia.” (…)
About 40% of the city state’s exports are integrated circuits alone, according to Tuuli McCully, head of Asia-Pacific economics at Scotiabank in Singapore. (…)
Huawei sees little benefit from Trump promises, calls on U.S. to lift export restrictions
(…) “So far we haven’t seen any tangible change,” Liang said. (…)
U.S. Budget Gap Widened 23% in First Nine Months of Fiscal Year The government collected $2.6 trillion in receipts, a 3% increase, but higher spending on the military and interest on the debt drove federal outlays up 7%
(…) A strong economy typically leads to narrower deficits, as rising household income and corporate profits help boost tax collections, while spending on safety-net programs such as unemployment insurance tends to decline.
The U.S. economy has been growing for 10 years as of this month, the longest economic expansion on record. Yet annual U.S. deficits are on track to exceed $1 trillion over the next few years, due in part to the 2017 tax law, which constrained federal revenue collection last year, and a 2018 budget deal that busted spending caps enacted in 2011. (…)
In the 12 months that ended in June, the deficit totaled $919 billion, a 22.6% increase from the same period a year earlier. As a share of gross domestic product, the year-over-year deficit totaled 4.4%, much higher than the previous 12 months. (…)
Overall, corporate tax revenue is now up 1.6% for the fiscal year to date. (…)
The latest estimate puts pressure on Congress and the White House to reach an agreement on raising the limit before the House and Senate leave for their August recess. Lawmakers are not scheduled to return to Washington until Sept. 9. (…)
EARNINGS WATCH
At the end of the day, earnings always matter more than anything else.
The Q2 earnings season officially starts next week but we already have 24 companies in (13 consumer-centric, 4 industrials, 6 IT and 1 financial): their beat rate is 83% and their surprise factor +5.7%. But their aggregate earnings are down 7.8% on a 3.0% revenue growth rate.
Amazon Prepares to Retrain a Third of Its U.S. Workforce Amazon.com plans to spend $700 million over about six years to retrain a third of its U.S. workforce, as automation, machine learning and other technology upends the way many of its employees do their jobs.
U.S. companies are increasingly paying up to retrain workers as new technologies transform the workplace and companies struggle to recruit talent in one of the hottest job markets in decades. (…)
Amazon’s promise to upgrade the skills of its workforce—reported by The Wall Street Journal Thursday—represents one of the biggest corporate retraining initiatives on record, and breaks down to about $7,000 per worker, or about $1,200 a year through 2025. By comparison, large employers with 10,000 workers or more that were surveyed by the Association for Talent Development reported spending an average of $500 per worker on training in 2017. (…)
Yesterday I gave the link to a Blackstone webinar with Byron Wien and Joe Zidle. I encourage you to use 45 minutes of your time to watch it and access their chart package. An occasion to learn what a $500B investment organization thinks. I guarantee you will learn something.
We invite you to join us today for the Blackstone Webcast: