Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

RETAILING

THE DAILY EDGE: 17 JANUARY 2020

Consumer Spending Solid at End of Holiday Shopping Season

December retail sales, a measure of purchases at stores, restaurants and online, increased a seasonally adjusted 0.3% from a month earlier, the Commerce Department said Thursday.

Solid gains in nearly every category offset a drop in motor-vehicle sales, the data showed. The final month of the holiday season is key for retail businesses, especially for department stores, clothing outlets and online sellers.

Excluding the volatile categories of autos and gas, retail sales rose 0.5% in December, the strongest pace of growth in five months.

Still, updated numbers from Commerce showed retail sales outside of motor vehicles and gasoline declined in the prior three months. (…)

The National Retail Federation said on Thursday that retail sales for the November-December period, excluding automobiles, gas and restaurants, increased 4.1% to $730.2 billion, compared with the same period last year. That is at the higher end of the trade group’s expectation of 3.8% to 4.2% growth. (…)

After the report, data firm IHS Markit lowered its tracking estimate of fourth-quarter gross-domestic-product growth by 0.3 percentage point to 2.3%, citing softness in core retail sales. It lowered it further to 2.2% after weak data on retail inventories later in the day. (…)

Good thing December was good because, in total, the 2019 holidays season was pretty soft. Control sales, which exclude car-related spending, building materials and restaurants and bars, and which feed directly into GDP, were up only 0.45% QoQ in Q4, a 1.8% annualized rate, down from +1.3% (including January), or 5.1% a.r. in 2018 and +1.8% (+7.5% a.r) in 2017.

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Quarterly sales were actually down 0.1% over Q3, while still up 4.1% YoY thanks to the very bad December in 2018.

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The fact is that growth in payrolls (employment x hours x wages) is slowing steadily from a January peak of +5.7% to +3.8% in December

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Here’s the main rub: real monthly payrolls growth has decelerated sharply throughout 2019 and ended the year at +1.6% YoY with inflation at +2.3%.

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It is difficult to expect employment growth to accelerate from +1.4% YoY in December given the near-full employment state of the economy and the now negative growth growth rate in the U.S. working age population.

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Average hours worked could recover but not enough to matter much. That leaves wages, and credit, as the hoped for growth re-accelerator for retail sales. Two charts paint that picture:

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US housing starts jump in December to highest in 13 years ‘Warmer-than-usual’ temperatures may have helped activity, economists say
China’s Economic Growth Slows to Near 30-Year Low Chinese economic growth slowed to 6.1% last year, as sagging trade and business confidence pulled the closely watched reading to its lowest level in nearly three decades.

Even so, the growth rate of 6.1%, down from a revised 6.6% rate for 2018, fell within the government’s target of 6% to 6.5% for 2019. China’s official statistics bureau described the national economy as being “generally stable” last year. The economy grew 6% in the fourth quarter. (…)

Incomes grew more slowly than the economy did last year, 5.8%, while rising inflation—made worse by higher pork prices—crimped purchasing power. (…)

In December, value-added industrial output in China rose 6.9% from a year earlier, accelerating from 6.2% in the previous month. (…)

Retail sales climbed 8% in December from a year earlier, compared with November’s 8% increase; that topped the Journal poll’s median forecast for 7.8% growth.

Fixed-asset investment in China’s urban areas, meanwhile, rose 5.4% for the full year of 2019 from a year earlier. Growth in closely watched construction activity exceeded the 5.2% increase recorded in the January-November period and surpassed the growth rate expected by polled economists. (…)

(…) If 2019 proved anything, it is that U.S. pressure alone—without the help of allies—can’t completely derail China’s economy. China’s export sector was already recovering before Wednesday’s trade truce, thanks to an uptick in the global electronics industry. The real impediments to growth lie within: in a rickety financial sector and statist leadership which remains wary of market-oriented reforms. (…)

Investment in computers and electronics manufacturing accelerated into December, bringing the full-year increase to 16.8%. Overall manufacturing and private-sector investment both picked up. And the long-suffering auto business grew at the fastest pace since June 2018. All told, labor-intensive light industry is clearly on an uptrend after a tough 2019, which is helping the job market heal.

(…) there are some tentative signs policy makers are acting to contain the risks in property. The central bank has been reluctant to allow another ramp-up in mortgage lending while housing prices were still bubbly. But data released Thursday showed a pickup in long-term bank lending to households in December, notes Capital Economics, which could be an early sign that regulators are easing up. (…)

Senate Passes USMCA, New North American Trade Pact Passage of the trade agreement that replaces Nafta marks a rare moment of bipartisan cooperation on Capitol Hill against the backdrop of President Trump’s impeachment.
EARNINGS WATCH

We have 44 reports in, a 70% beat rate with a +4.7% surprise factor. Actual earnings growth for the 44 reporters was +0.3% on a +3.8% revenue growth rate. During the Q3 earnings season, the first 43 reporters boasted an 86% beat rate, a +4.5% surprise factor and earnings down 0.4% and a 3.8% revenue growth rate.

Q4 earnings are now seen declining 0.8%, from –0.3% on Jan. 1 and +4.1% on Oct. 1. Q1’20 is now seen up 5.8% from +6.3% on Jan. 1 and +8.9% on Oct. 1.

Trailing EPS are now $163.15.

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Treasury to Issue New 20-Year Bond in First Half of 2020 The U.S. government will begin issuing 20-year bonds in the first half of 2020, the Treasury Department said.
U.S. to Change How It Releases Economic Data Labor Department will no longer allow news organizations to transmit stories on the data at the same time it is released

Starting in March, the department said it would only distribute the data electronically on its website. The media currently gets an early peek at a range of reports on the economic data such as the employment report at a secure facility, so it can publish its own stories on the information via computer at the same time the economic indicators are released to the public. (…)

The official said the change would eliminate potential advantages media organizations and their clients may have over other members of the public, adding that the change implements a recommendation the department’s inspector general made in 2016, during the Obama administration. (…)

Under the new policy, credentialed members of the media will still be able to read reports in a secure room 30 minutes or 60 minutes before their release, but those journalists won’t have access to computers. (…)

THE DAILY EDGE: 15 JANUARY 2020

Target Says Holiday Sales Missed Its Forecasts Holiday sales were sluggish at Target, raising questions about the strength of the retailer’s turnaround plans and the health of the U.S. consumer.

Target’s sales rose 1.4% between Nov. 1 and Dec. 31 in stores and through digital channels operating for at least 12 months, the company said. It warned that growth for the full quarter, which includes January, would likely come in less than half the 3% to 4% growth it had predicted. (…)

While other traditional retailers have reported lackluster holiday results, Target has been held up as one of the chains that adapted to shifting consumer habits by ramping up its e-commerce operations and remodeling its stores.

Digital sales rose 19% in November and December compared with a year ago, down from 31% growth in the third quarter. (…)

The company had boasted a streak of eight consecutive quarters of at least 3% sales growth, including a 4.5% jump in the quarter ended Nov. 3. In November, Mr. Cornell said the company was gaining market share in the apparel, home and beauty categories. “We are starting to see the bifurcation of winners and losers” in retail, he told analysts a week before Black Friday. (…)

The company is maintaining its profit targets, in part because the categories with stronger sales earn high margins. (…)

Thus far Costco Wholesale Corp. is a lone bright spot, reporting comparable sales up 9% in the five weeks ended Jan. 5, including e-commerce and international sales. (…)

On Tuesday, market researcher NPD Group said holiday results were lackluster, estimating that total sales rose 0.2% compared with the previous year. The decline in the number of items sold was greater than the drop in dollars spent, NPD said, a sign that consumers gave higher-priced gifts this holiday. (…)

U.S. December retail sales will be released this Friday.

U.S. CPI Increases Moderately; Core Prices Rise Negligibly

The Consumer Price Index increased 0.2% (2.3% y/y) during December following a 0.3% November rise and a 0.4% October gain. The CPI excluding food & energy edged 0.1% higher (2.3% y/y), the weakest increase in three months. A 0.2% rise had been expected. (…)

Services prices rose 0.2%. The 3.0% y/y increase remained elevated from 2.7% early last year. (…) Medical care service prices rose 0.4% (5.1% y/y) for a second month and the cost of education & communications gained 0.2% (2.0% y/y). Shelter prices improved 0.2% (3.2% y/y) as rents of primary residences rose 0.2% (3.7% y/y). The owners equivalent rent of primary residences also improved 0.2% (3.3% y/y), but hotel costs fell 1.8% (-0.2% y/y). (…)

Goods prices excluding food & energy held steady (0.1% y/y) for the second consecutive month. (…) Used car & truck prices fell 0.8% (-0.7% y/y) but new vehicle prices edged 0.1% higher both m/m and y/y. Showing strength were medical care goods prices which increased 1.5% (2.5% y/y) after nudging 0.1% higher. Apparel prices rose 0.4% (-1.2% y/y) after a 0.1% uptick. (…)

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It is curious to see core PCE inflation (red) trend down when most other measures of core inflation have been trending up and stand above the Fed’s 2.0% target:

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Unlike the trends between CPI and PCE total inflation:

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  • Slower increases in hourly wages (chart) and fewer hours worked (chart) sent the growth in inflation-adjusted weekly wages to zero. (The Daily Shot)
U.S. Small Business Optimism Weakens

The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index declined 1.9% (-1.6% y/y) to 102.7 during December and mostly reversed its November rise. The reading was 5.6% below the high in August 2018.

Optimism declined last month as the percentage of firms indicating that now was a good time to expand the business fell to 25% from 29%. The labor market has softened. The percentage of firms planning to increase employment declined to 19% from 21%. A lessened 50% of businesses were finding few or no qualified candidates to fill job openings, down from 57% in August. The percentage of firms planning to make capital outlays also backed away from its November high. A weakened 28% planned to make capital outlays, reversing two months of increase.

Offsetting these declines, an improved 16% of respondents expected the economy to improve, the most since July, but it remained below the 48% high in January 2017. A slightly higher 16% of firms expected higher real sales, still significantly below the November 2017 high of 34%.

A slightly lessened 24% of firms planned to raise worker earnings, but that remained up from 22% in October. A reduced 29% of firms raised worker compensation, down from the August 2018 high of 37%.

Current pricing improved, as 14% of firms were raising prices now, the most in five months but below the 19% in May of last year. A lessened 20% of firms were planning to raise average selling prices.

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German Growth Falls to Six-Year Low, Hit by Manufacturing Recession Economic growth in Germany slumped to a six-year low in 2019, underscoring the vulnerability of Europe’s export powerhouse to tensions in the global economy.

The German economy grew by 0.6% last year, the slowest rate since 2013, at the height of the eurozone’s debt crisis. Output in the manufacturing sector excluding construction, which accounts for around a quarter of the overall economy, fell by 3.6%. Private consumption rose robustly, helping support growth. (…)

German car production fell to its lowest level in almost a quarter of a century last year, according to the VDA auto lobby group. Weakness in the auto sector likely trimmed German growth by 0.75 percentage points in 2019, according to the Ifo economic think tank. (…)

German exports fell 2.3% on the year in November, hurt by a fall in exports to China. (…)

  • Markit’s PMI showing green shoots?

imageGermany’s manufacturing sector ended 2019 deep in contraction, recording further marked decreases in output and employment, latest PMI® data from IHS Markit and BME showed. De-stocking remained prevalent, while the slowdown in the sector continued to translate into lower prices. More positively, however, December’s decrease in new orders was the slowest in the whole of 2019 and manufacturers’ output expectations showed a further – albeit marginal – improvement. (…)

Data showed inflows of new business at German manufacturers falling for the fifteenth month in a row in December. Reports from panellists highlighted that demand, and particularly investment, continued to be undermined by lingering uncertainties around trade and the global economic outlook. However, the rate of decline in new orders eased for the third month in a row to the weakest since December 2018, helped by export sales posting the smallest drop since last January.

Buoyed somewhat by tentative signs of stabilisation in new orders and hopes for a pickup in economic conditions in 2020, manufacturers recorded their strongest confidence for 15 months in December.

Markit also publishes a Europe Sector PMI which might temper hopes for now:

(…) The bottom end of the European sector league table told a similar story in terms of December performance versus 2019 trends. The bottom-six sectors in the final month of the year also fared the worst in terms of annual performance. (…) automobiles & auto parts registered the sharpest decline over the year as a whole. Moreover, the latter registered a faster drop in output in December, following a four-month period where the rate of  decline had continually eased.

Tech Tensions Simmer in Washington as U.S., China Near Trade Truce White House efforts to crack down on technology exports while easing tariffs reflects differing policy views within agencies

The Trump administration’s immediate focus is tightening restrictions on Huawei Technologies Co., the giant Chinese telecommunications company that the White House and Congress view as a national-security threat. The Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said. (…)

At the same time, a team of senior U.S. officials, including deputy national security adviser Matt Pottinger, lobbied the U.K. earlier this week to block local network operators from using equipment from Huawei and other Chinese vendors in their 5G networks. A British decision is expected shortly.

More broadly, the National Security Council asked the Commerce Department last week to suggest regulations to restrict sales of any U.S. technology to China, according to people tracking the early-stage discussions.

Should all the efforts bear fruit, nearly any technology exports to Huawei in particular, and China in general, would require export licenses. While Commerce could grant such licenses, U.S. companies fear their Chinese customers would turn to other suppliers. In 2018, about 36% of U.S. semiconductor company revenues, or $75 billion, came from sales to China, the Semiconductor Industry Association estimated. (…)

T-Mobile-Sprint Deal Concern Mounts on Wall Street Shares of Sprint are trading at a more than 40% discount to the value of T-Mobile’s proposed all-stock deal. The companies are preparing to make final arguments in a court battle with states led by California and New York.

(…) “The market’s getting more pessimistic,” said Ric Prentiss, an analyst at investment bank Raymond James. He said investors are waking up to the risk that “if this deal doesn’t go through, Sprint’s going to go down pretty hard.” (…)

Japan’s SoftBank Group Corp. owns more than 80% of Sprint’s shares (…).