INFLATION WATCH
From Markit’s Global Business Outlook Survey of 11,000 companies conducted Feb. 12-26, 2014:
The survey also showed that companies globally are expecting to raise their selling prices to the greatest extent since mid-2011, providing evidence to allay worries about deflation in many developed economies.
Brazilian firms reported the highest price selling expectations, followed by UK companies, the latter seeing the highest inflationary predictions since data were first collected in late-2009.
Selling price expectations also picked up in the US, Japan and the eurozone. While the single currency area saw only a modest upturn in price expectations, larger improvements were seen in the US and Japan, the latter rising to a survey high.
- Cass Truckload Linehaul Index
Truckload linehaul rates continue to rise. February saw costs that were 2.8% higher than the same month last year. And while, on average, truckload rates fall .5% from January to February, this year only saw a .1% decline.
With demand increasing and capacity decreasing (the last two quarters have witnessed an unusually high number of carriers exiting the business), capacity is tight. The 2014 bid season – which is well under way – is expected to be a tough one for shippers. Transportation sector analysts are forecasting rate increases between 3% and 6% in 2014.
- Cass Intermodal Price Index
Throughout most of 2013, intermodal freight costs held steady with – or even fell below – costs from the year before. 2014, however, will likely shape up differently, with intermodal costs consistently coming in higher than comparative 2013 levels.
January costs were 1.7% higher than the prior year, and February saw costs at 1.4% higher than last year. The capacity problem for truckload freight is pushing more loads toward intermodal, likely causing some upward pull on intermodal pricing. “Although we expect the pricing dynamic in intermodal to remain competitive and see linehaul rates remaining relatively flat in the near term, we do believe that intermodal pricing could improve modestly in 2014 if truckload capacity continues to be squeezed.” This is the prediction of the transportation analysts at Avondale Partners.
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Amazon Raises Rate for Prime Amazon plans to raise the rate for Prime membership to $99 a year from $79, the first price increase for the shipping and video-streaming service.
The Seattle retailer said the 25% increase was needed to offset rising delivery and content-acquisition costs. The $99 price takes effect for new members on March 20. Existing Prime members will pay the higher rate when they renew.
In January, Amazon said it was considering raising Prime fees by $20 to $40 per year.
Analysts said they expect fewer than 10% of the more than 20 million Prime members to drop their accounts. Including additional spending by Prime members, the change could generate between $150 million and $300 million in operating income annually, analysts predicted. (…)
Mr. Sebastian and other analysts said similar recent price increases had prompted few cancellations. Netflix Inc. has boosted its membership rolls since dividing pricing plans for its DVD-by-mail and streaming services in 2011, which resulted in a price increase for some customers.
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Cotton Traders Wonder: How High Is Too High? Cotton futures hit a nearly one-year high Thursday, juiced by a government report showing continued exports for the fiber even as costs rise. But some investors say the latest gains pushed prices into a range that could cool demand.
Prices have risen steadily in 2014, after this season’s cotton harvest shaped up to be the smallest since the 2009-10 crop year. The U.S. Department of Agriculture also raised its forecast for cotton exports Monday, increasing concerns about tight supplies in the U.S. Cotton prices are up 8.3% this year. The crop year ends July 31, but most cotton is harvested by the end of December.
Droughts in South America and Southeast Asia are sending soybean and palm oil prices surging, and pushing cooking oil prices higher in India and China.
India is particularly sensitive to global edible oil prices. It relies on imports for more than half of its cooking oil, and its edible oil imports plunged 40% in February.
The U.N. Food and Agriculture Organization’s price index rose 2.6% in February from the previous month, the biggest jump since mid-2012, and its vegetable oil index jumped 4.9%.
Janet Yellen says Federal Reserve policy makers need to look at a broader range of data to get a good handle on the job market. She hasn’t highlighted one labor indicator that economists say is sounding inflation alarms: short-term unemployment.
With total joblessness at 6.7 percent in February, still higher than the Fed wants, the rate for those who’ve been out of work less than 27 weeks was just 4.2 percent. That’s near the lowest since April 2008 and 0.6 percentage point below the average since 1948, Labor Department data show.
The depressed level suggests the labor market is tightening, raising the odds that a pick-up in wages will eventually lead to faster inflation, according to economists including Michelle Girard of RBS Securities Inc. That’s important because Fed policy makers have cited a slack job market and subdued inflation as reasons for keeping short-term interest rates near zero even as the economy picks up. (…)
Investors are starting to pay attention. More than $350 million flowed into inflation-protected bond funds in the week ended March 5, the most since May 2012, according to data from Cambridge, Massachusetts-based EPFR Global. The increase followed eight straight weekly declines. (…)
The Fed chair suggested that the jobless rate, if anything, may understate how loose the labor market is. She pointed to the large number of people working part-time who would prefer more hours. Some7.2 million Americans faced that predicament in February, well above the 20-year average of 5.3 million, according to seasonally adjusted Labor Department data.
In a speech last year, Yellen pointed to a number of other indicators of labor market slack, including the share of the working-age population in the labor force and the hiring rate by employers.
While Yellen hasn’t drawn attention to short-term joblessness as a key indicator, some of her Fed colleagues have. John Williams, president of the Federal Reserve Bank of San Francisco, said on Feb. 19 that the drop in short-term unemployment may cause inflation to pick up more quickly than the gradual increase he currently envisions.
“It could be that slack in labor markets is much less than assumed,” he told a meeting in New York. “I currently see this as a risk to the inflation outlook.” (…)
Average hourly earnings for production and non-supervisory employees rose 2.5 percent in February from a year earlier, the biggest increase since October 2010, according to the Labor Department. (…)
Jeff Joerres, chief executive officer of Milwaukee-based staffing firm ManpowerGroup, has been advising some clients for more than two years to raise salaries in order to attract better talent. Only in the last nine months has the suggestion turned into a conversation, he said.
“Some markets are starting to tighten up,” Joerres said. (…)
Fortyseven percent of the owners hired or tried to hire in the last three months and 40 percent (85 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. This is not just a “skills” issue, but one of poor attitudes, work habits, timeliness, appearance and expectations, especially
among the applicants for lower skill jobs. (NFIB)
The Fed’s Age of Inflation
(…) At their confirmation hearings before the Senate Banking Committee on Thursday, Fed board nominees Stanley Fischer and Lael Brainard dutifully noted the risks of high inflation, while skirting the issue of whether it is too low. This even though the Fed’s preferred measure of core inflation, at 1.1%, is well short of its 2% target. Headline inflation just 1.2%.
Experience likely breeds suspicion of such low numbers. Since turning 18, Mr. Fischer, now 70 years old, has seen an average U.S. inflation rate (including food and energy costs) of 3.6%. Ms. Brainard, who is 52, has seen an average of 2.8%.
Both of them may also have been playing to their audience. The median age for a U.S. Senator is 63. As adults, 63 year old Americans have experienced an average annual rate of inflation of 3.8%.
The voting members of the Fed’s policy-setting committee who have experienced the highest inflation: Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have both seen an average rate of 3.8% as adults. Little wonder that both are considered inflation hawks. In contrast, the Minneapolis Fed’s dovish Narayana Kocherlakota has seen an average rate of 2.5%.
That’s as nothing against the median-aged American, though. At 37, they have seen inflation average just 1.9% since turning 18. Call them Generation QE.
This INFLATION WATCH segment hints as to where I fit on the chart. I know what inflation does to the economy and to one’s investments.
Maybe oil will help:
A relentless increase in oil supply from the U.S. and Canada and a surprise surge in Iraqi crude production last month is offsetting demand pressures bought about by the cold winter in the U.S. and geopolitical concerns over the rising tensions between Russia and Ukraine, the International Energy Agency said Friday. (…)
The cold snap in the U.S., which has seen commercial oil inventories in industrialized countries plummet this winter to hit a whopping 154 million barrels below the seasonal average last month, is abating. Meanwhile, oil supply looks comfortable. The IEA expects supply from outside the Organization of the Petroleum Exporting Countries to rise by 2 million barrels a day in the first quarter of the year, while a surprise surge in Iraq’s output last month boosted OPEC’s output to more than 30 million barrels a day for the first time in four months.
Iraq’s oil production rose to its highest level since 1979 in February, jumping by half a million barrels a day to reach 3.6 million barrels a day, the IEA said. Exports soared by almost 600,000 barrels a day to hit 2.8 million barrels a day as major bottlenecks at the country’s southern port of Basra were finally removed.
(…) the IEA also raised its forecast for demand growth this year by 100,000 barrels a day to 1.4 million barrels a day on expectations of a more robust economic backdrop.
On Wednesday, OPEC made a similar move, upgrading its forecast for demand growth this year for the second month in a row. The oil-producing cartel increased its forecast by 50,000 barrels a day to 1.14 million barrels a day.
OPEC said that the changes to its demand outlook would mean an increase of 100,000 barrels a day in the demand for its oil, which it pegs at 29.7 million a barrels a day this year. At 30.1 million barrels a day in February, its production is comfortably above that level.
Iran’s oil exports peaked at a one-year high in the past two months, a top energy agency said Friday, as a thaw in relations with the West boosts the troubled economy of the Islamic Republic.
But the boost in oil exports—if it continues—threatens to exceed a cap on exports Iran agreed to as part of an interim deal over its nuclear program. The deal between Iran and six global powers requires that Iran’s shipments shouldn’t average more than 1 million barrels a day of crude over the six months of the agreement, which started Jan 20.
In its authoritative monthly oil report, the International Energy Agency said crude exports of Iranian oil averaged 1.16 million barrels a day in January and, based on preliminary estimates, stayed put in February. That compares with average crude exports of 1 million barrels a day in 2013, based on the report. (…)
U.S. HOUSING
Blackstone’s Home Buying Binge Ends as Prices Surge
Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm. After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.
“The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, said in a telephone interview. “It’s at a much lower level than it was 12 or 24 months ago.”
Private-equity firms, hedge funds, real estate investment trusts and other institutional investors have spent more than $20 billion to buy as many as 200,000 rental homes in the last two years. (…)
American Homes 4 Rent and Colony American Homes, the second- and third-largest single-family landlords, also have been scaling back as bargains dry up. Home prices have risen 24 percent since a post-bubble low in March 2012, which was about when corporate buyers started their buying spree, according to the S&P/Case-Shiller index. (…)
DataQuick: February Bay Area Home Sales Slowest Since 2008
A total of 4,963 new and resale houses and condos sold in the nine-county Bay Area last month. That was the lowest for any February since 2008, when 3,989 homes sold. Last month’s sales rose 5.7 percent from 4,696 in January, and fell 8.2 percent from 5,404 in February 2013, according to San Diego-based DataQuick. (…)
Distressed property sales – the combination of foreclosure resales and “short sales” – made up about 12.5 percent of last month’s resale market. That was down from 14.0 percent in January and down from 34.1 percent a year earlier. (…)
Senators Strike Deal on Jobless Benefits A bipartisan group of senators announced a deal to restore emergency jobless benefits for the long-term unemployed through late May.
(…) Under the agreement reached Thursday, those who had lost benefits in late December would receive retroactive payments. (…)
Under the deal, any individual whose adjusted gross income in the preceding year was $1 million or more wouldn’t be eligible for unemployment insurance payments.
Darn!
ECB Raises Alarm Over Euro European Central Bank President Mario Draghi issued his strongest statement yet that the strong euro is pulling down inflation in the euro zone.
“The strengthening of the effective euro exchange over the past one-and-a-half years has certainly had a significant impact on our low rate of inflation and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability,” Mr. Draghi said Thursday in a speech in Vienna. (…)
“The fact that he’s said this is quite a departure from where they’ve been on [euro strength] for almost forever…In the history of the ECB it’s almost unprecedented,” said Lorcan Roche Kelly, an analyst with Agenda Research in Ireland. (…)
The most recent rise in the euro is due largely to the ECB’s inaction last week, when it decided to keep key interest rates in the euro zone unchanged at its policy meeting and announced no additional measures to fund euro-zone banks. (…)
But here’s what Mario “whatever-it-takes” Draghi actually said, thanks to the FT:
“Our forward guidance creates a de facto loosening of [the] policy stance, as real interest rates are set to fall over the projection horizon,” Mr Draghi said in prepared remarks. He added: “At the same time, the real interest rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”
Once again, no need for the ECB to actually do anything, just saying something should suffice. But, just in case, Benoît Cœuré, who sits beside Mr Draghi on the ECB’s executive board, said:
The ECB’s forward guidance should be supportive: the governing council expects interest rates to stay at present or lower levels for an extended period of time, while inflation should rise towards 2 per cent over our projection horizon.” He added: “This implies that real interest rates for borrowers will progressively fall as inflation rises. And we stand ready to act if this scenario does not materialise.
In French that tells the market: if you don’t do our job this time again, we will eventually do it ourselves. So why not save us all this time and aggravation? Just do it!
That’s forward guidance.
Euro-Zone Employment Rises
The European Union’s statistics agency said that on a seasonally adjusted basis, 145 million people were in work across the currency area during the three months to December, an increase of 0.1% from the previous quarter. That was the first rise since the second quarter of 2011, after which employment fell steadily for two years. Compared with the peak of employment in 2008, 5.8 million fewer people were at work in the currency area.
There are wide disparities within the currency area. In Germany, employment levels were up 0.6% on the same period last year, while in Greece they were down 2.6%. But there were signs that jobs were being created in parts of the euro zone that suffered most from its interlinked government debt and banking crises, with employment in Ireland up 3.2% on the final quarter of 2012, and employment in Portugal up 0.5%.
China Copper Premiums Point to Weak Demand
Premiums–the fee buyers pay suppliers in addition to the price–have dropped by as much as 35% since the start of the year, from around $200 a metric ton in the Shanghai spot market to $130 a ton last week, traders and analysts say. (…)
In a further indication of weak demand, copper fabricators were operating at 55.5% of capacity in February, compared with 57% during the same period last year, said Helen Lau, a senior analyst with UOB Kay Hian. The average capacity utilization of Chinese fabricators is 70%-75%.
Ms. Lau quoted fabricators as saying that the order book for March is “not strong.”
SENTIMENT WATCH
Do Traders Need to Add the U.S. to Their List of Worries?
We wouldn’t get too worked up about today’s losses. Yes, 200 points on the DJIA is headline grabbing. But a 1% hit to U.S. equities, which is roughly what that represents, isn’t much when the market is near its all-time highs anyway. (…)
Traders certainly don’t seem particularly phased. They seem more than willing the chalk it up to China, the Ukraine, and the snow, and just wait for the next buying opportunity, because in this five-year-old bull market, there has always come another buying opportunity.
At least so far. It appears that nobody is seriously considering is the odds that the apparent slowdown in the U.S. economy in recent months is about anything more than bad weather. Ignoring that possibility, however, might be a mistake.
“While it is good news retail sales rose in February after back-to-back declines, consumer spending is weak,” the economists Chris Low and Jay Morelock at FTN Financial wrote this morning on the heels of the February retail sales report. “Harsh winter weather certainly played a role, but as seen in the chart of year-over-year sales, the trend has slowed considerably since the middle of 2013. Household purchases are responsible for about 70% of U.S. GDP; until consumers have the means and confidence to increase their spending, growth in 2014 will disappoint.” (…)
“Pick your reason for the drop: weather, consumer retrenching, end of emergency benefits, all of the above.”
None of this has mattered to stocks in the past. Every dip has been a buying opportunity, and it still isn’t completely clear to what extent the snow tamped down the economy. But that tidbit from FTN about the pace of sales going back to last summer is something investors should keep an eye on.
‘A Big Hit to the Bull Case’ To some chart watchers, Thursday’s selloff in stocks means last week’s breakout to new highs never happened.
The S&P 500 closed Thursday below 1850, a key level for chart watchers. That is “a big hit to the bull case,” said Frank Cappelleri, a sales trader and the resident technician at brokerage firm Instinet. The longer-term trend is still up, but Thursday’s selloff “could lead to a change in market character,” Mr. Cappelleri said, putting short-term traders on the defensive. (…)
If the slide continues, a drop below 1800–which would entail a further decline of 2.6% from current levels–and perhaps even a return to the Feb. 3 low at around 1740 can no longer be ruled out, technical analysts say. (…)
But as long as the S&P 500 stays above the March 3 “panic low” of 1834, “the bias is still to the upside,” says Steve Suttmeier, a technical research analyst at Bank of America Merrill Lynch. On that day, after reports that Russian troops had moved into the Ukrainian region of Crimea, the S&P 500 dropped as much as 1.3% to an intraday low of 1834.44, before bouncing to close down just 0.7%.
Until 1834 gives way, Mr. Suttmeier said pullbacks can be considered just “backing and filling,” which is technical parlance for short-term declines that confirm and solidify support levels.
In other words, the charts may offer some clues as to whether investors will once again “buy the dips,” a common investing mantra throughout the five-year bull market.
Man, I love reading these technicians explain everything saying nothing.
BTW, on this day in 1879, Albert Einstein was born. He was no technician!
ZACKS KEEPS CHEERLEADING
Pardon Me for Yawning
Am I supposed to be scared by this recent pullback?
Sorry I didn’t get the memo that this was something to worry about. I simply do not agree that China slowing from insanely awesome growth, to a pace that is still 3X better than the US economy, is a real problem.
Nor am I a fan of Russian actions in the Ukraine and Crimea…but the true economic impact to the US is negligible.
The real story is that stocks rallied virtually nonstop for a month making new all-time highs this week at 1882. The natural response to such fast paced action is to consolidate or pullback for a little while. The previous high at 1848 would seem to be a spot of good support. And if that fails, then hard to imagine a move lower than 1800.
So pardon me for yawning, but this is just business as usual with even higher highs on the way for stocks this year.
Funny how the image Zacks used to illustrate their point could be used for the exact opposite view. 
This next piece, you should not yawn at:
SELL HIGH, SELL HIGH
Fortress Executives Join Peers Selling Stock After Rally
Four top executives of Fortress Investment Group LLC (FIG), the first publicly traded private-equity and hedge-fund manager in the U.S., will sell 25.7 million Fortress shares and operating units, about 10 percent of their interest, in an underwritten public stock sale.
The planned offering, disclosed yesterday in a regulatory filing by the New York-based company, is the first large disposal of shares by Fortress insiders since the firm went public seven years ago. Co-founders Wesley R. Edens and Randal A. Nardone and senior executives Peter L. Briger Jr. and Michael E. Novogratz stand to collect about $215 million in the sale based on Fortress’ closing price yesterday of $8.37.
The Fortress executives are joining peers at Carlyle Group LP, Apollo Global Management LLC (APO) and Oaktree Capital Group LLC (OAK) in selling stakes in their companies after a five-year rally in U.S. stocks. Fortress shares have surged almost nine-fold from their 2008 low through yesterday.
Fortress, a 16-year-old firm that managed $61.8 billion in assets as of Dec. 31, first sold shares to the public in February 2007, beating Blackstone Group LP (BX) to the public market by four months. KKR & Co., Apollo, Carlyle and Oaktree have since followed suit, creating a mechanism for the firms’ founders to exit their stakes in addition to giving the companies a currency to expand.
Hmmm…Well, you can’t blame people to secure some pocket change for the next little while. (Thanks Jeff)
And, there is also this:
