U.S. Auto Sales Hold Strong Fueled by low gasoline prices and easier credit, the U.S. auto industry pulled its recent winning streak into 2015 with a nearly 14% January sales increase and with over half of sales comprised of high priced pickups and sport-utility vehicles.
The annualized pace of sales increased 9% during the month, according to Autodata. If seasonal factors remain the same over the next 11 months, full-year sales would exceed 17 million for the first time in more than a decade.
The momentum, which includes double-digit percentage sales increase for each of the Detroit Three car makers compared with the same period a year ago, continues the upturn’s major trends: U.S. demand for trucks and sport-utility vehicles are skyrocketing amid $2-per-gallon gasoline, boosting transaction prices and margins at a time when the rest of the global auto industry offers little profit potential.
Sales of light trucks and SUVs in January grew 19.3%, representing 54% of the sales mix, according to researcher Autodata Corp. Passenger cars grew at a more modest 7.7% and, of those, electrified vehicles represented well under 1% of sales. (…)
All these sales are generating jobs at U.S. auto plants that are humming at some of the highest capacity-utilization rates in the history of the industry.
Chrysler on Tuesday said it would pay UAW workers $2,750 in profit-sharing for 2014, the highest for the auto maker’s blue-collar employees in several years. Ford last week said it would pay $6,900 in profit-sharing. GM will disclose its UAW payout when it announces fourth-quarter earnings on Wednesday. (Charts from CalculatedRisk and Bespoke Investment)
Ward’s says that vehicle production is scheduled to increase at a 3.4% annualized rate in Q1, down from 5.2% previously estimated. Production was down 13.9% annualized in Q4’14.
Ford to Move Hundreds of Entry-Level Workers to Higher Pay Rate
Ford Motor Co. is planning to move hundreds of workers from entry-level wages to a higher pay rate in coming weeks, a rare move in a domestic auto industry looking to cap labor costs.
The development will follow Ford’s hiring of 1,500 new hourly employees in the first quarter, which comes in response to strong demand for pickup trucks. As Ford adds the new workers, it will exceed the quota of employees it can classify in its second-tier pay bracket, and therefore will need to increase the paychecks of as much as 1% of its hourly workforce.
Between 300 and 500 existing workers—some hired as early as 2010—will graduate to the higher rate of $28.50 an hour, $9.22 above the top base pay level that new hires have been entitled to since 2007. The new rate will be in place by the end of March and represents the first time that any of the so-called second-tier employees will graduate from the lower wage to the higher one. (…)
Ford’s job announcements since the 2011 UAW contract have now topped 15,000 in the U.S., 3,000 more than originally promised, he said. Ford also has invested more than $6.2 billion in plants and equipment.
Meanwhile, mortgage purchase applications are showing some life…(chart from CalculatedRisk)
Eurozone Retail Sales Rise
Retail sales in the eurozone rose for the third straight month in December, and at the fastest annual pace in almost eight years, an indication that falling oil prices are boosting consumer spending and helping to support economic growth.
The European Union’s statistics agency said retail sales rose by 0.3% from November, following two straight months in which they increased by 0.7%, larger rises than first estimated.
That left sales 2.8% up on December 2013, the largest increase since March 2007, or well before the onset of the global financial crisis that tipped the eurozone economy into its long slump.
Compared with the third quarter, retail sales in the final three months of 2014 were up 0.9%, a sign that consumer spending was responsible for a slight acceleration in economic growth.
Last 3 months: +7.0% annualized. Core sales: +12.1% annualized! These are real sales (volume).
China Moves to Boost Bank Lending China’s central bank said it will lower its reserve-requirement ratio for banks by 0.5 percentage point, effective Thursday, a major step to boost bank lending.
In a brief statement on Wednesday, the PBOC said it will lower the share of deposits banks must set aside with the central bank. The ratio will be 19.5% for big banks after the cut.
The step effectively frees up about 500 billion yuan, or about $81 billion, in additional funds that banks can now lend out.
The cut is the first broad reduction in what is known as the reserve requirement ratio by China’s central bank since May 2012. Over the following years it has made only targeted cuts in the ratio, aimed at lenders focused on agriculture and small businesses. The new move takes effect on Thursday. (…)
The central bank on Wednesday also offered new targeted measures to stimulate growth. They include a half-point cut for city commercial and rural banks and a four-percentage-point cut for a big policy bank, the Agricultural Development Bank of China. (…)
Chinese banks issued 697.3 billion yuan of new loans in December, down from 852.7 billion yuan in November.
CEBM China Survey
Review of January Industrial Activity: All Sectors Except Property Remain Weak. The CEBM Industrial Sales vs. Expectations Index fell from January’s -11.8% to -21% in February, indicating deteriorating upstream industrial demand and low sentiment in consumer and export sectors. Upstream industrial activity remained lackluster while property developers’ willingness to start new projects improved marginally. Sales performance in consumer and export sectors largely missed expectations.
ISI’s company survey of China sales keeps falling…
Global PMI surveys signal lacklustre start to the year for manufacturing
The JPMorgan Manufacturing PMI, compiled by Markit, edged higher from December’s 16-month low of 51.5 to 51.7 in January. Output grew at the fastest rate for three months, but new orders merely showed the largest monthly increase since November amid near-stagnant export flows.
The survey signals global manufacturing output growth continuing to run at an annual rate of approximately 2.5% in January, roughly half the pace seen in the lead up to last summer.
(…) The economic plight of Russia, hit by sanctions and the oil price collapse, and Greece, hit by uncertainty caused by elections, was meanwhile highlighted by both countries falling to the bottom of the manufacturing league table.
Russia suffered the steepest rate of decline of all countries surveyed, with its PMI descending to a 67-month low, indicating that Russia is seeing the steepest downturn since the height of the financial crisis in 2009.
Greece’s PMI signalled the steepest decline for over a year.
Japan saw an expansion of manufacturing activity, continuing the sluggish recovery trend seen in prior months, but the rest of Asia more-or-less stagnated, with an overall PMI reading of just 50.3. China saw a marginal contraction for a second successive month, and Indonesian factories reported a fourth successive monthly downturn. But growth picked up slightly in both Taiwan and South Korea and modest expansions continued to be reported in Vietnam and India.
OIL
Are We Finally Seeing Some Support?
(…) Don’t hold your breath, but oil prices may finally be turning a corner. The initial spark came from Baker Hughes, which published extraordinary decline in the U.S. rig count for the last week of January. An estimated 94 oil rigs were scrapped from operation, the largest weekly drop ever recorded. For the month of January, the rig count dropped by 276, or a whopping 18.4 percent.
The unexpectedly swift decline in active rigs has opened up the possibility that U.S. oil production cutbacks may not be too far off. For that reason, oil prices surged from their doldrums, posting an 11 percent rise in just two days. It may be too early to be sure that we have bottomed out, but the huge price gains in the first few days of February are a welcomed development for drillers across the world. (…) (Chart from Ed Yardeni)
Saudi Oil Is Seen as Lever to Pry Russian Support From Syria’s Assad
Saudi Arabia has been trying to pressure President Vladimir V. Putin of Russia to abandon his support for President Bashar al-Assad of Syria, using its dominance of the global oil markets at a time when the Russian government is reeling from the effects of plummeting oil prices.
Saudi Arabia and Russia have had numerous discussions over the past several months that have yet to produce a significant breakthrough, according to American and Saudi officials. It is unclear how explicitly Saudi officials have linked oil to the issue of Syria during the talks, but Saudi officials say — and they have told the United States — that they think they have some leverage over Mr. Putin because of their ability to reduce the supply of oil and possibly drive up prices.
“If oil can serve to bring peace in Syria, I don’t see how Saudi Arabia would back away from trying to reach a deal,” a Saudi diplomat said. (…)
The Saudis have offered economic enticements to Russian leaders in return for concessions on regional issues like Syria before, but never with oil prices so low. It is unclear what effect, if any, the discussions are having. (…)
EARNINGS WATCH
Earnings are getting better. As of last night, 259 companies (67.9% of the S&P 500’s market cap) have reported. So far, EPS ex-Energy are seen up 8.8% (8.4% yesterday). Total S&P 500 EPS are seen up 6.0% (5.6%) excluding the likelihood of continued beats. So far, they are beating by 5.0% (4.8%). Revenues ex-energy are seen up 4.0%. (RBC)
But there is hope:
Digging into Eurostat data, I found that core inflation collapsed 1.9% MoM in January. If core prices remain unchanged, core inflation will turn sharply negative YoY in March (1.3%). Prices of Services, up 1.0% YoY, actually dropped 0.6% MoM in January and have declined 1.4% since peaking last August. 
What the ECB fears most of all is that consumers and businesses will grow accustomed to falling prices, and adjust their behavior accordingly. Many economists and central bankers believe that falling prices don’t by themselves constitute deflation. For that chronic condition to take root, consumers and businesses have to cut back on spending because they expect prices to fall further, the outcome being a decline in output and employment that pushes prices even lower.
There is mounting evidence that households are increasing their spending on goods and services other than energy. Figures from France also released Friday showed household spending rose by 1.5% in December, three times faster than economists had expected. While retail sales rose less sharply in Germany—by 0.2% from the previous month—that increase followed two months of strong rises. Compared with December 2013, sales were up 4.0%.