Richmond Fed: Manufacturing Dropped 13 Points
Fifth District manufacturing activity slowed in August, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments and order backlogs decreased, while new orders flattened this month. Manufacturing hiring softened this month; however, average wages continued to increase at a moderate pace. Prices of raw materials rose more slowly in August, while prices of finished goods grew slightly faster compared to last month.
Chemical Maker Index Signals U.S. Manufacturing Drop
The Chemical Activity Barometer, whose indicators include the production, inventory and selling prices of numerous chemicals as well as prices of chemical stocks, rose 1.8 percent in August from a year ago (on a three-month moving average basis), the slowest pace since late 2012. That’s concerning since declines in chemical demand have preceded drops in industrial output in the past, according to Kevin Swift, chief economist for the American Chemistry Council and creator of the index.
Mortgage Applications Increase Slightly in Latest Weekly Survey, Purchase Index up 18% YoY
Up YoY but against a pretty weak base. Purchase apps sure seem to be rolling over:
Summers and Dalio flag return of QE Industry figures argue Fed should restart bond buying plan
(…) Lawrence Summers, the former Treasury secretary, and Ray Dalio, head of the world’s biggest hedge fund manager, this week indicated that the US central bank should consider restarting its “quantitative easing” programme to counter deflationary dangers and ameliorate tensions on financial markets. In an opinion piece in the Financial Times, Mr Summers wrote that raising rates in the near future would be a “serious error”, but later went further and suggested on Twitter that the Fed should even consider another bond buying programme. (…)
In a note to clients on Monday afternoon [Dalio] predicted that the “next big Fed move will be to ease (via QE) rather than to tighten” due to global debt levels, the Chinese ructions and turbulence in emerging markets as a whole. “While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces,” he wrote.
“Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required,” he added, in the note seen by the FT. (…)
ECB Ready to Expand QE If Needed on Inflation Risks, Praet Says
The European Central Bank is ready to expand or extend its bond-buying program if needed as a slump in commodity prices and risks to global economic growth threaten its inflation goal, said Executive Board member Peter Praet.
“Recent developments in the world economy and in commodity markets have increased the downside risk of achieving the sustainable inflation path towards 2 percent,” Praet told reporters in Mannheim, Germany. “There should be no ambiguity on the willingness and ability of the Governing Council to act if needed.”
The comments came a day after ECB Vice President Vitor Constancio said the council “stands ready to use all the instruments available” if needed to ensure price stability.
FIBER: Industrial Commodity Prices Post Broad-Based Declines
The industrial commodity price index from the Foundation for International Business and Economic Research (FIBER) deteriorated last month by 4.6%. In the U.S. alone, a 0.8% rise in factory sector production during July left output so far this year up a modest 0.5% and 1.4% during the last twelve months. That’s down from 2.5% growth in 2014 and from 2.5%-to-6.0% growth rates from 2010 to 2012. Growth abroad similarly remained weak.
Farm Income Set to Fall
U.S. farm incomes will decline 36% this year to the lowest level in nine years, the U.S. Department of Agriculture projected Tuesday, reflecting a continued slump in crop prices and recent weakness in the dairy and hog markets.
Net farm income will drop to $58.3 billion from $91.1 billion in 2014, marking the largest percentage decline since 1983, including when figures are adjusted for inflation. The projected decrease would mark the second consecutive drop after incomes reached nominal record highs in 2013, according to the USDA. (…)
The government said their revenues could drop more than 9%, wider than its February forecast for a 5% decrease, because of lower milk and hog prices.
The softening outlook for farm incomes comes amid a continued downturn in the U.S. agricultural economy triggered by record corn and soybean crops in the past few years. U.S. growers this autumn are expected to produce bumper harvests again, which has kept prices depressed for the two commodities. (…)
Mr. Justison said falling crop prices have significantly reduced cash flow for many Midwestern growers, forcing them to carefully scrutinize what once were regular purchases. “We’ve pretty much stopped buying machinery,” he said.
The farm-industry slump is hurting large agricultural-equipment suppliers and seed makers. Last week, Deere & Co., the world’s largest seller of tractors and harvesting combines, said its profit in its July-ended third quarter tumbled 40% as weak crop prices curb farmers’ appetite for new equipment. (…)
Trade suffers biggest fall in 6 years Figures fuel debate on whether globalisation has peaked
(…) The volume of global trade fell 0.5 per cent in the three months to June compared with the first quarter, the Netherlands Bureau for Economic Policy Analysis, keepers of the World Trade Monitor, said on Tuesday.
Economists there also revised down their result for the first quarter to a 1.5 per cent contraction, making the first half of 2015 the worst recorded since the 2009 collapse in global trade that followed the crisis.
Global trade actually rebounded 2 per cent in June, according to the World Trade Monitor but its authors warned that the monthly numbers were volatile and the more revealing pattern lay in the longer term figures. (…)
In the three months to June, global trade grew just 1.1 per cent from the same quarter of 2014, according to the new Dutch figures. The International Monetary Fund expects the global economy to grow 3.5 per cent this year. (…)
The slowdown in global trade has led some to proclaim that globalisation has peakedwith technological innovations such as 3D printing creating more disruptions.(…)
World Struggles to Adjust to China’s ‘New Normal’ China is in the midst of a tectonic shift in its giant economy that is rattling markets world-wide. The slowdown deepening this year is part of a bumpy transition away from an era powered China’s seemingly unstoppable rise; now debt has swelled to more than twice the size of the economy, and some industries are reeling.
(…) Instead of them, China is pushing services, consumer spending and private entrepreneurship as new drivers of growth that rely less on debt and more on the stock market for funding. (…)
Retail sales are still climbing, up 10.5% in July from a year earlier, although the rate of growth has slowed. A string of U.S. companies, from Apple Inc. to Gap Inc., have singled out China as a growth market in an otherwise sluggish world. Chinese consumers are spending like never before on movie tickets, toothpaste, jeans and cars.
“My life is actually getting better,” said Zhu Baolian, a retired package-handler at Beijing’s Capital International Airport. The 58-year-old said the government recently fattened his pension by 250 yuan a month, about $40, giving him more spending money. “I eat well. The quality of our food and other things is improving,” he said.
The problem is that consumer spending isn’t robust enough to replace the heavy industry and investment in infrastructure and property that powered China’s nearly 10% average annual growth for the past three decades. For that to happen, a series of wrenching changes would have to take place, from giving migrants better access to social services to breaking the dominance of state-run banks and companies in many industries. (…)
China now is exporting volatility. The CBOE Volatility Index, a measure of risk in the U.S. stock markets sometimes called the fear gauge, has surged over the past week, tracking the cratering Shanghai market. This is in contrast to previous Chinese share routs that barely registered abroad. (…)
As troubles mounted this summer, divisions within the party elite began to rise, according to Chinese officials and government-connected scholars. China’s central-bank governor, Zhou Xiaochuan, and its finance minister, Lou Jiwei, preferred more-limited stock-market intervention, said officials with knowledge of the situation, but were overruled by Premier Li, who demanded forceful actions to support the tumbling market.
Senior party members close to one of Mr. Xi’s predecessors urged him to pay renewed attention to the economy, these people said. An unusually blunt commentary in People’s Daily, the party’s main newspaper, this month criticized unnamed retired leaders for interfering in the government and sowing division. Their attempt to retain influence “not only puts new leaders in a bind but hinders them from having a free rein to do bold work,” it said.
Investors who during good times saw Beijing’s tight control of economic levers as assurance their business interests were safe now worry that authorities could be understating problems.
Mr. Li, in his statement on Tuesday, said that as the government takes “more reform measures to encourage market vitality and improve people’s living conditions, China has the ability and conditions to achieve its annual economic growth target, which will be a big contribution to the global economy.” (…)
But China also finds itself somewhere between a poor and rich country. This is a historically difficult position—dubbed the “middle-income trap” by economists—that South Korea escaped but that has held back much of Latin America.
“China is right there, where a lot of countries start to struggle,” said Peter Robertson, an economist at the University of Western Australia, adding that the “trap” often features conflict between a political system and economic reality over how a nation’s wealth is distributed. (…)
Questions over Li Keqiang’s future amid China market turmoil
(…)Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown. (…)
But even if Mr Li is blamed by the party elite for his handling of the crisis, most analysts and serving officials believe his removal from power would be too damaging to party prestige and credibility and that he is almost certain to remain in office, at least until the next five-yearly party Congress in 2017.
Mr Li is already regarded by most analysts and political insiders as the country’s weakest premier in decades, thanks largely to Mr Xi’s aggressive concentration of power in his own hands. (…)
Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks
Asia Consumer Spending Won’t Come to Rescue
(…) Household spending on consumption fell more than 4% year-over-year in the three months ended June in Indonesia and Malaysia, two of Southeast Asia’s linchpin economies, according to statistics compiled by CEIC Data. In Thailand, growth in consumer spending slowed to 1.3% year-over-year in the second quarter from 4% in the first. (…)
High-frequency data show retail sales in Indonesia fell 5.3% year-over-year. Sales fell more than 13% in Singapore, a typically volatile market, its fourth straight month of contraction.
Meanwhile, farmers in Asia have been particularly hard hit by falling commodities prices and have less purchasing power as a result. (…)
Consumer spending accounts for 56% of gross domestic product in Indonesia, 58% in Thailand and 52% in Malaysia. China’s rapid development raised hopes the world’s second-largest economy would transition toward consumption-led growth from one driven by manufacturing and construction. But consumer spending accounts for only 38% of GDP, compared with 41% 10 years ago.
There are some bright spots. In India, where private spending contributes around 57% of GDP, consumers are expected to remain a sturdy pillar of growth as the government works to connect more of the population with electricity, bank accounts and decent roads. Household and business spending grew 6.3% in the 12 months ended March, statistics show. (…)
Brazil’s Economy Shows More Signs of Weakness
(…) In 2015 through July, Brazil has lost nearly a half-million jobs, according to the Labor Ministry. Joblessness hit 8.3% in the second quarter, according to the Brazilian statistics agency’s three-month unemployment calculation. That is the highest level since the series began in 2012.
The country’s main consumer confidence measure sank to 80.6 points, the lowest since that series began in 2005. (…)
China is Brazil’s biggest trading partner (…)
Ruble Near Record Lows
BHP Billiton’s credit ratings fragile, agencies warn
(…) Both agencies said even with BHP’s sharp cut in capital spending and plans to pare costs beyond the $4.1-billion already slashed in the 2015 financial year, funding the dividend from cash flow would be a challenge if commodity prices worsened.
“This would place further pressure on credit metrics and the rating,” Moody’s said.
EARNINGS WATCH
A strategist wrote yesterday that “as long as earnings continue to grow, pullbacks such as the current one can be opportunities for investors with longer-term horizons”. The surprise is the first part “as long as earnings continue to grow”. The reality is that they are no longer growing and are set to drop 3.3% YoY based on Thomson Reuters’ methodology and calculations.
Furthermore, TR’s most recent data reveal that:
- Negative preannouncements have increased from 62 on Aug. 14 to 81 on Aug. 25. So 19 negatives against only 3 positives during the last 6 working days.
- Q3 EPS are now expected to decline 3.3%, a little worse than the –3.1% expected on Aug. 14.
SENTIMENT WATCH
(…) Tuesday, amid the six-day decline in stocks, J.P. Morgan Chase & Co.’s Dubravko Lakos-Bujas cut his year-end view by 100 points to 2150 from 2250, blaming technical deterioration and continued strength in the U.S. dollar.
“We remain cautious in the short term given outstanding global risks and higher degree of technical market deterioration, but view a deep correction as unlikely,” wrote Mr. Lakos-Bujas.
Mr. Lakos-Bujas is the first among 21 strategists followed by Birinyi Associates to have lowered his year-end price target during the recent market downturn in which the S&P 500 has shed 11% over six sessions. Still, even with Mr. Lakos-Bujas’ downward revision, the average year-end gain among strategists Birinyi tracks stands at a little higher than 8%.
Craig Johnson, a technical market strategist at Piper Jaffray and one that Birinyi does not follow, back pedaled on his year-end target for the S&P 500 Monday when he slashed his 2015 view by 215 points to 2135 from 2350. (…)
(…) In dissecting the duration of and damage from previous stock market declines, the strategist finds that this current one looks like it’s close to its finale. Since 1988, the MSCI All Country World total return index has suffered a drop of more than 10 percent on 16 occasions, averaging a 20 percent decline over a span of 18 weeks., By comparison, this retreat has lasted for 14 weeks, during which time the index has given back 19 percent.
Though timing the market is a tricky task indeed, Laidler points out that investors who manage to buy the trough can look forward to an average 12-month return of more than 20 percent:
Trading Tumult Exposes Flaws in Modern Markets Monday’s mayhem exposed significant flaws in the new architecture of Wall Street, where stock-linked funds—as much as shares themselves—now trade en masse on U.S. markets.
Many traders reported difficulty buying and selling exchange-traded funds, a popular investment in which baskets of stocks and other assets are packaged to facilitate easy trading. Dozens of ETFs traded at sharp discounts to their net asset value—or their components’ worth—leading to outsize losses for investors who entered sell orders at the depth of the panic.
Products built to provide insurance for investors came up short. As a result of trading halts in futures tied to the S&P 500 index, it was difficult for investors to get consistent prices on contracts linked to them that offer insurance against S&P 500 declines.
Elsewhere, the value of the most widely tracked Wall Street gauge of investor anxiety, theCBOE Volatility Index, or VIX, wasn’t published until almost 10 a.m. Monday, half an hour after stock trading began and after the Dow Jones Industrial Average had already posted its largest-ever intraday point decline. That made it difficult for investors to easily gauge the fear in the market. (…)
Circuit breakers, which are designed to pause trading in single stocks and ETFs during big moves, were triggered nearly 1,300 times Monday. (…) But Monday, they sometimes exacerbated problems by preventing prices from returning to normal levels quickly, according to traders, investors and market observers. (…) The declines in these and other ETFs were notable in that they exceeded the declines in the prices of their underlying holdings. (…)
Today, there are more than 1,400 ETFs trading in the U.S. markets. (…)
Dennis Houlihan, a financial adviser based in Fort Wayne, Ind., said issues like those on Monday have implications that go far beyond portfolio losses for individual clients.
“On days like yesterday, it’s up for debate if there was a larger, more systemic issue in the market,” said Mr. Houlihan. “I think you are going to lose generations of investors.”