Holiday Retail Sales Had a Lackluster November Start
Retail sales excluding cars and gasoline were unchanged from the previous month, the Commerce Department said Friday. When those volatile categories are included, sales rose 0.2%, seasonally adjusted. (…)
Due to a late Thanksgiving, there are six fewer days in the holiday-shopping season this year compared with 2018. Cyber Monday fell in December this year and wasn’t accounted for in Friday’s report. (…)
Year-over-year retail sales increased 3.3% in November, a pullback from the 4.4% pace clocked just three months ago.
Sales at motor vehicle and parts dealers, which make up about 20% of total retail sales, rose 0.5% in November. Gas station sales advanced 0.7%. (…)
Weaker than expected retail sales in November suggests the pace of consumer spending eased somewhat as the fourth quarter progressed, which will feed into the broader pace of economic growth in the fourth quarter. On Friday, forecasting firm Macroeconomic Advisers projected a 1.8% pace for the fourth quarter. The economy expanded at a 2.1% annual pace in the third quarter.
Importantly, September control sales (ex-autos, gasoline, and building materials) growth was revised down by 0.3% to –0.3% while October was unchanged at +0.3%. As a result, August to November sales are up a meagre 0.3% or +0.8% annualized compared with +1.8% (+5.5%) and +2.3% (+9.4%) in 2018 and 2017 respectively.
Because of strong spring/summer sales, this marked slowdown is not showing in YoY growth rates which averaged +4.2% this year, down marginally from +4.4% in 2018 and +4.9% in 2017. That may explain why retailers are not complaining much so far, their YoY comps are still fairly solid and could be also in December given last year’s very poor December sales.
But the sequential trend is very, very slow, in spite of good employment and wage data. Much like in 2015-16, Americans are not spending their labor income growth…
…increasing their savings rate to levels more in line with the 1980’s and early 1990’s:
Obviously, the significant dissaving between the early 1980’s and 2005 that boosted personal expenditures from 60% to 69% of GDP has reversed. The Great Financial Crisis and the effects of the trade wars have helped keep the ratio high but one has to wonder if the “magnificent American consumer era” has peaked.
The U.S. population is aging, consuming less and concerned about their long term living standards. Younger Americans must deal with high student debt and lower income levels than Boomers and Gen X people at their age. Only a third of Millenials own homes compared with 50% of Boomers and Xers at the same age. The younger generation is also highly environment conscious and seeks to consume and pollute less.
Shorter term, December sales will be critical, to say the least.
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US retailers hit by ‘worst year since 2008’ for discounting Steep promotions last long beyond Black Friday to woo customers
The FT reports that “with less than two weeks before Christmas, industry data show special offers have lasted long beyond the traditional Black Friday promotional period and are also steeper than in previous years.” It also rightly notes that many “retailers had already accelerated shipments through ports to avoid being subjected to the threatened tariffs. This had left some companies with extra inventory that they now needed to shed.”
Given the weakness in sales so far, retailers will seek to disgorge the inventory as soon as possible.
Trump’s ‘America First’ Trade Vision Comes Into Focus on Three Fronts President’s tactics break with predecessors’ to extract concessions, but issues with China remain unresolved
(…) The public details of the “phase-one” China deal were vague, with many disputed issues left to later negotiations, but one provision the U.S. announced was what it characterized as a promise by Beijing to boost imports of U.S. goods and services over the next two years by at least $200 billion over 2017 levels—roughly a doubling within four years that many analysts consider unlikely.
Beyond the top-line number, “We have a list that will go: manufacturing, agriculture, services energy.…There’ll be a total for each one of those,” Robert Lighthizer, Mr. Trump’s chief trade negotiator, said on CBS’s “Face the Nation” Sunday. Those specific targets echo various import and export quotas that Washington imposed on Japan in the 1980s, a managed-trade approach that U.S. governments came to shun over the past 30 years. (…)
Skeptics saw in last week’s activity the limits of unilateral American might in bending the global trading system to its will.
“Trump was right to call China out on their violations of rules and norms,” said Fred Bergsten, a trade expert at the Peterson Institute for International Economics. “But he has been going at them for three years, unleashed a lot of firepower, and has gotten essentially nowhere on the big issues.”
He added that Mr. Trump’s disdain for multilateralism undercut his goals: “China can stand up to us one on one, but it cannot stand up to us if we maintain our alliance structure.”
Farm groups said the gains Mr. Trump touted might not even sufficiently offset their losses to date from his actions. The American Farm Bureau Federation noted Friday that “China went from the second-largest market for U.S. agricultural products to the fifth-largest since the trade war began.”
Yet to Trump supporters, “The latest deals show that the United States has a great deal of leverage, when that leverage is used effectively,” said Stephen Vaughn, who worked until April as an administration trade negotiator. “The U.S. is actively making its own trade policy right now, and that’s going very well.” (…)
Elsewhere:
As part of the deal, the U.S. will halve its 15% tariff on about $120 billion in Chinese goods. It will also suspend indefinitely planned duties that were set to take effect on Sunday that would have covered consumer favorites such as smart phones and laptops. That leaves roughly $250 billion taxed at 25% and $120 billion that will be subject to a 7.5% duty once the agreement takes effect. Any further tariff reductions by the U.S. will be linked to the conclusion of future phases, Lighthizer said.
China, on the other hand, didn’t agree to specific tariff reductions in the deal. Instead, the nation’s obligation is to make the purchases and to have an exclusion process for its tariffs. The country has in recent months lowered some retaliatory tariffs including some on cars imported from the U.S. (…)
Among the specific commitments USTR announced Friday: China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. (…) (Bloomberg)
Robert Lighthizer told reporters that China would work to raise its total farm-product purchases to about $40 billion to $50 billion over two years. This will be part of a package intended to increase U.S. exports to China by some $200 billion, he said.
[The WSJ reported that “China imported $179 billion in U.S. goods and services last year, so this would represent an enormous increase.”]
But at a press conference in Beijing, Chinese officials declined several times to confirm the $50 billion figure or any specific level of purchases. Instead they made vague pledges to increase purchases of American goods in general, promising further details later. (…)
If U.S. farmers somehow massively ramp up production, that risks further pushing down global prices as Brazilian and European goods ditched by China flood back onto global markets. (…) (WSJ)
“Ultimately, whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States,” Lighthizer said.
“If the hard-liners are making the decisions we’re going to get one outcome, if the reformers are making the decisions – which is what we hope – then we’re going to get another outcome.” (Reuters)
USMCA deal in question in dispute over labour inspectors Mexico says it did not agree provisions included in ratification bill before US Congress
Chinese Economic Activity Gets a Lift Some economists to raise their growth estimates for next year
(…) Value-added industrial output for November rose 6.2% from a year earlier, accelerating from a 4.7% year-over-year increase in October, the official National Bureau of Statistics said. November’s reading easily topped the 5% increase predicted by a Wall Street Journal poll of 15 economists.
China’s retail sales climbed 8% in November from a year earlier, compared with October’s 7.2% increase. That beat a median forecast for 7.6% growth.
China’s fixed-asset investment remained unchanged at 5.2% for the January-November period amid accelerated industrial investment and slower expansions for the infrastructure and property sectors. Home sales, investment and construction slowed slightly in November as Beijing held firm to its policies aimed at curbing property speculation. (…)
(…) The question now is “Does China still need fiscal support with the Phase-1 deal coming?” We think the answer is yes.
- The timing of the signing of the Phase-1 deal is still uncertain, and the withdrawal of tariffs on Chinese goods, mentioned in the media, seems small (only 7.5% on $120 billion of goods). There were still 25% tariffs on $250 billion and 7.5% tariffs on $120 billion of Chinese goods. These tariffs will continue to hurt China’s export sector and its supply chains.
- 5G is going to contribute increasingly more to economic growth. But on the other hand, China will face more challenges from the technology war from the rest of the world.
- PBoC has stated that it does not prefer an ultra-low interest rate policy, and therefore monetary policy could play a supplementary role.
We discuss this in more detail in our China 2020 outlook.
Boeing considers suspending production of 737 Max Board discusses next steps after regulators dash hopes of return to service by year end
EARNINGS WATCH
Refinitiv:
Through Dec. 13, 499 companies in the S&P 500 Index have reported earnings for Q3 2019. Of these companies, 75.2% reported earnings above analyst expectations and 18.0% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 4.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.
Of these companies, 57.7% reported revenue above analyst expectations and 42.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 59% of companies beat the estimates and 41% missed estimates.
In aggregate, companies are reporting revenue that are 0.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.9%.
The estimated earnings growth rate for the S&P 500 for 19Q3 is -0.4%. If the energy sector is excluded, the growth rate mproves to 2.2%.
The estimated revenue growth rate for the S&P 500 for 19Q3 is 3.8%. If the energy sector is excluded, the growth rate improves to 5.2%.
The estimated earnings growth rate for the S&P 500 for 19Q4 is -0.2%. If the energy sector is excluded, the growth rate improves to 2.0%.
Revisions have been fairly balanced in the last 3 weeks but tilting upwards:
Even though preannouncements got worse with 3 additional negatives in the last week and no additional positive. The N/P ratio is in line with Q3’19:
Trailing EPS are now $163.87.
At this morning’s opening of 3193, the Rule of 20 P/E is 21.8
If you care, 12-month forward EPS are $171.86, resulting in a forward conventional P/E of 18.6.
Forward 12-m estimates do not yet incorporate Q4’19 and Q4’20 numbers. Using Refinitiv’s 2020 estimated EPS of $177.99 (+9.8% YoY), one can reduce the forward P/E to 17.9x. But these forward looking numbers always prove too high (e.g.: Q4’20 EPS are seen up 13.8%).
Consider that the current bottom up estimate for 2020 calls for a good reacceleration in S&P 500 revenue growth rates from +2.4% in Q3’19 to +6.4% in Q4’20.
TECHNICALS WATCH
Lowry’s Research remains positive, having witnessed its OCO Cumulative Net Points and Net Volume Indexes matched new all-time highs in the S&P 500 on December 12. “These simultaneous new highs reaffirmed the market’s intermediate-term uptrend and health of the bull market.” However, Lowry’s noted the “lack of intensity behind recent price action.”
SENTIMENT WATCH
Bank of America Says Market Primed for ‘Melt-Up’ in 1Q
As Brexit and trade war risks recede, and with the Federal Reserve and European Central Bank still adding liquidity, the outlook for the beginning of 2020 is bullish, strategists including Michael Hartnett wrote in a Dec. 12 note to clients. (…)
] , the balance of risks now leans toward lower tariffs in our view. (…)