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Rise in U.S. Consumer Credit Reflects Steady Household Spending Outstanding consumer credit, a measure of nonmortgage debt, rose by a seasonally adjusted $17.71 billion in July from the prior month, the Federal Reserve said, topping expectations for a $16 billion increase.
Outstanding consumer credit, a measure of nonmortgage debt, rose by a seasonally adjusted $17.71 billion in July from the prior month, the Federal Reserve said Thursday.
July’s 5.83% seasonally adjusted annual growth rate outpaced June’s upwardly revised 4.8%.
Revolving credit, mostly credit cards, climbed at a 3.45% annual pace in July, compared with an 11.5% pace in June.
Nonrevolving credit, including student and auto loans, advanced at a 6.7% annual pace in July. June’s growth rate was 2.41%, a nearly five-year low.
From Haver Analytics:
Over the past ten years, there has been a 46% correlation between the y/y growth in consumer credit and y/y growth in personal consumption expenditures.
- Another way to look at it from The Daily Shot:
- And my own way. So much for deleveraging. And the Fed wants to raise rates!
Massive weekly draw on US crude oil inventories. Crude oil jumped sharply in response. (The Daily Shot)
Prognosis uncertain: Obamacare
Parts of the Affordable Care Act are looking a little shaky. The law established “exchanges”, government-run marketplaces where individuals lacking employer-provided health insurance can buy coverage. In April Unitedhealthcare, America’s largest insurer, said it would pull out of almost all the exchanges, citing losses. Last month Aetna, another large firm, said it would quit many. Next year as many as one in six potential customers may live in counties with only one insurer.
Firms are raising prices across the market for individual plans, which includes the exchanges as well as direct sales to customers, by about 25%. For most of those on the exchanges federal subsidies ease the pain. But others—especially healthy folk who are attractive to insure because they don’t much need it—may be tempted to drop their plans. The administration will hope that fines levied on those who go without coverage make enough of them continue to buy insurance. (The Economist)
Foreign and domestic auto makers delivered about 1.8 million cars including sedans, sport-utility vehicles and minivans to dealers last month, up 26% from a year earlier, the China Association of Automobile Manufacturers said Friday. August was the fourth consecutive month in which sales grew at a double-digit rate.
Recent gains haven’t come as a surprise given the market’s poor performance a year earlier.
China’s car sales fell for three months in a row in the summer of 2015, when plummeting stock prices disrupted purchases of big ticket items including cars. In a bid to resuscitate the auto industry, Beijing in October halved the 10% purchase tax on vehicles with engines no larger than 1.6 liters.
More than 70% of cars sold in China qualify for the tax break, said Shi Jianhua, a deputy secretary-general of the manufacturers’ group. In the first eight months of this year, auto makers sold 14.4 million cars, up 13% from a year earlier. (…)
Nationwide, the average inventory at dealerships was equivalent to about 43 days of sales in the past two months, the association said. Anything above 45 days is considered unhealthy for dealers.
Overall vehicle sales of passenger and commercial vehicles increased by 24% in august from a year earlier, to 2.1 million. (…)
In the year to date, 16.8 million motor vehicles including cars, trucks and buses have been sold, 11% more than the previous year.
(…) September and October are part of the key period when manufacturers and suppliers, including those in Asia, deliver holiday-season goods to retailers, such as those in the U.S. (The effort to identify this year’s hottest holiday-season toy is well under way.) The Hanjin logjam is expected to have minimal impact if it’s resolved within a matter of weeks. Citigroup, in a research note, predicts that inventory shortfalls for the holiday season “are unlikely.” (…) 
SENTIMENT WATCH
In his presentation titled appropriately “Turning Points” (presented below) Gundlach said that “this is a big, big moment,” predicting that “interest rates have bottomed. He also said that the Fed “wants to show that they are not guided by the markets” and that “they can’t be replaced by WIRP.” A Fed surprise would send rates spiking, and Gundlach warns the 10Y may close 2016 at 2% or higher.
Fitch Ratings has revised the Sector Outlook for U.S. life insurers to Negative based on heightened macroeconomic challenges and uncertainty, which are expected to negatively impact the industry’s underlying credit fundamentals over the near to intermediate term. Fitch’s Sector Outlooks reflect our view of underlying fundamental trends in the industry and the current operating environment.
At the same time, the Rating Outlook on the U.S. life insurance sector remains Stable. Rating Outlooks indicate the direction in which ratings are likely to move over a one to two year period.
Key macroeconomic challenges impacting U.S. life insurers include declining interest rates and increased financial market volatility, which are expected to have a more pronounced impact on the industry’s earnings profile and reserve adequacy relative to Fitch’s base case scenario for 2016 and 2017. While we don’t anticipate immediate implications for ratings of most companies, deterioration in the macroeconomic environment in 2016 exacerbates an already challenging operating environment for U.S. life insurers.
Over the past several years, U.S. life insurers have been able to largely mitigate compression of interest margins on spread based products through active management of crediting rates, interest rate hedging, and new business repricing. However, the industry’s ability to further reduce crediting rates on in-force business has become increasingly limited. As a result, the decline in portfolio yields supporting legacy in-force business over the past one to two years has led to more meaningful deterioration in interest margins and an increase in reserve charges, which have led to declines in operating earnings, a trend we expect to continue over the near term. (…)
However, should interest rates remain at current low levels or decline further, Fitch would likely revise its Rating Outlook to Negative on both the sector and a cross section of individual companies. Without an uptrend in interest rates, Fitch believes this could occur within two to three years on an expectation of deterioration in key profitability metrics and reserve adequacy. As one point of context, Fitch would view a further decline in the industry’s GAAP operating return on equity (ROE) by 1.5 to 2.0 percentage points as a potential ratings trigger. Over the past year, the industry’s average ROE has been in the 11%-12% range. (…)
Between 2012 and 2015, US companies acquired $1.7tn of their own stock, according to Goldman Sachs, counteracting sales by pension funds, foreign investors and households.
Indeed, excluding corporate buybacks, net US equity flows would have been negative to the tune of $1.1tn over that period, despite burgeoning inflows into exchange traded funds. (…)
But the buyback-palooza has begun to splutter. US shareholder payouts rose by 15 per cent annually between 2010 and 2014, but an earnings downturn meant growth slowed to 2 per cent last year. And the outlook for 2016 is looking even gloomier.
A handful of companies, most notably Biogen, Visa, CBS and AIG, announced multibillion-dollar buyback programmes, but the overall volume in the first seven months of 2016 was down by over a fifth compared with the same period a year ago, according to TrimTabs, a research company.
Slower buybacks would not matter if companies were shifting their shareholder reward programmes in favour of dividends. But dividend-per-share growth is set to slow from 9.3 per cent in 2015 to 5.5 per cent this year according to BCA. And the S&P 500’s dividend yield is just 2.1 per cent, well below the historic average of 3 per cent, the Canadian research firm notes.
Corporate austerity has come as their once-towering cash piles have begun to shrink modestly, both due to falling profitability and recent shareholder generosity. Non-financial companies in the S&P 500 still sit on $825bn, but America’s 50 wealthiest companies account for most of the nest egg. The median cash or cash equivalent for all S&P 500 companies shrank to $860m in the second quarter of the year, the lowest in three years according to Bloomberg data.
At the same time, borrowing to boost shareholder payouts becomes less feasible, with many measures of corporate indebtedness now at or near record highs, after the frenzied post-crisis bond issuance spree. (…)
The tremendous outperformance of US dividend-focused shares over the past year. (The Daily Shot)
Related to my post HARD HAT ZONE:
SMALL CAP LEVERAGE!
La Nina, a weather pattern that can cause flooding in parts of Asia and colder weather in the U.S. , has set in and may continue through the winter, the Japan Meteorological Agency said, a day after the U.S. dropped its watch for the event.
There is 70 percent chance that the event, which also causes dry weather in Brazil, may continue through the winter period, the Japanese forecaster said on its website Friday. The U.S. Climate Prediction Center said Thursday it was dropping its La Nina watch and lowered the odds it will form this year to 35 to 45 percent from 75 percent in June. The Australian Bureau of Meteorology says a late and weak La Nina is still possible.
The onset of La Nina can bring more rains to countries including Indonesia, India and Thailand and help ease stress on palm oil and sugar cane from two years of below average rains caused by El Nino. While there’s little chance of the event forming this year, any event is unlikely to affect commodity supplies, according to Olam International Ltd. Still some investors may be caught off-guard if the weather event materializes, according to Naohiro Niimura, partner at Market Risk Advisory Co., a researcher in Tokyo.
“Investors have built up short positions in grains and oilseeds futures on an outlook for record U.S. crops,” Niimura said. “They may be forced to buy back them, sending Chicago prices surging, if the La Nina phenomenon causes abnormal weather.” (…)
Last year’s El Nino was one of the three strongest on record, generating the hottest global temperatures in more than 130 years, according to the U.S. National Centers for Environmental Information in Asheville, North Carolina. The event reduced Indian rainfall, parched farmland in Asia and curbed cocoa production in West Africa.
“Supplies from South America would become even tighter next year after drought in Brazil and floods in Argentina hurt corn and soybean production this year,” Niimura said.
