Despite Record Online Sales, Freight Volumes Decline in December and Inventories Remain High
Both the number of shipments and freight transportation expenditures continued their downward slide in December, falling 4.9 and 2.7 percent respectively. The declines are not unusual for December, but they capped off a second quarter of decline. In retrospect, 2015 did not even begin to reach the heights we reached in 2014. By the end of 2015, both shipment volume and expenditures fell back to 2013 levels. Expenditures for freight transportation were 5.2 percent lower than at the end of 2014 and shipment volume was down 3.7 percent from the same period.
Because of seasonality, the YoY numbers are the more relevant with shipments down 3.7%.
JOLTS Steady In November
November data showed another solid month for the labor market as measured by the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). Below we show charts of openings and the separations rate (quits, transfers, retirements, layoffs, and other job exits as a percentage of the labor force) and the number of job openings, which recovered somewhat from the large drop in openings seen in October data, but are still trending down from their highs in early 2015.
The rate of job openings remains off its multi-year highs but posted another strong month in November at 3.7%, well above the highs seen in the last economic expansion. Private openings were flat MoM and have been trending lower in the last few months.
The quit rate returned to a post-recession high of 2.0% for the total labor force and 2.2% for the private labor force but has yet to break out. The current quit rate indicates that the existing employed population is not yet being enticed away by better opportunities at other employers, a key ingredient for wage growth to build.
Labor demand remains extremely strong as measured by the layoff rate, which is above recession lows but still negligible for the total labor force; the private layoff rate returned to normal after “spiking” to a measly 1.4% last month.
Quit rates for high turnover industries continue to improve slowly but like the broad quit rate have not by any means broken out over the last year or so. Regional views of layoff rates show no concerning upticks.
NFIB: Small Business Survey “Remains Flat”
Reported job creation faded a bit in December, with the average employment gain per firm falling to -0.07 workers from .01 in November, basically flat for the last few months. Fifty-five percent reported hiring or trying to hire (unchanged), but 48 percent reported few or no qualified applicants for the positions they were trying to fill. Fifteen percent reported using temporary workers, down 1 point. Twenty-eight percent of all owners reported job openings they could not fill in the current period, up 1 point and at the highest level for this expansion. This is a solid reading historically and indicates no significant change in the unemployment rate.
Seasonally adjusted, the net percent of owners raising selling prices was negative 4 percent, down 7 points and the first negative number since 2013. It appears that there was a lot of price cutting late in the year to boost sales and reduce inventory.
China Exports Fell Less Than Expected in December
According to the General Administration of Customs, China’s exports fell 1.4% in December in dollar terms from a year earlier, after a drop of 6.8% in November. This was a more modest decline than the 8.0% fall forecast by 15 economists surveyed by The Wall Street Journal. In yuan terms, exports rose last month. Imports last month fell 7.6% from a year earlier, compared with an 8.7% decline in November.
The country’s trade surplus widened to $60.1 billion in December from $54.1 billion in November. Last year’s weak Chinese exports and even weaker imports led to a record $594.5 billion annual trade surplus, compared with $382.5 billion in 2014, the agency said, as full-year exports fell 2.8% and imports fell 14.1%. (…)
December’s improved outbound data may reflect a one-time boost as companies rushed to meet year-end orders. (…)
Hmmm. With excess inventories just about everywhere, I doubt there was any year-end rush.
PC Sales Drop to Historic Lows Fourth-quarter numbers are lowest since 2007, the year the iPhone was introduced
PC makers shipped 276.2 million units in 2015, said IDC analyst Jay Chou. He had expected PC shipments to decline by 10.3% in 2015. In fact, they dropped by 10.4%. “2015 is the first time we’ve had the PC market, from a volume perspective, go below 300 million units since 2008,” he said.
PC makers shipped 299.6 million units in 2008 and 270.5 million units in 2007, Mr. Chou said.
Rival research agency Gartner Inc. tallied 288.7 million shipments for the year, an 8% drop. Unlike IDC, Gartner includes sales of tablets in its shipment data.
Both research firms found that shipments slid during the fourth quarter of 2015 by the top three PC vendors: Lenovo Group Ltd., HP Inc., and Dell Inc. Lenovo retained its top place with 15.4 million units shipped, followed by HP (14.3 million) and Dell (10.2 million).
HP, which recently concluded its first quarter after splitting into two separate business units, saw the biggest drop in fourth-quarter PC shipments, declining 10.1% year-over-year. Dell shipments declined 5.7%, Lenovo 4.5%. Fourth-Place Asustek Computer Inc. saw shipments rise by 0.8%. Apple’s shipments rose 2.8%, IDC said.
The continuing slump has been hardest on the smaller companies that account for roughly 29% of the PC market. Shipments from PC makers outside the top five plummeted 21.9%, allowing larger vendors to gain share even as volume diminished. (…)
China’s Slower Growth Will Benefit Everybody, Says Lagarde
International Monetary Fund managing director Christine Lagarde said Tuesday that a transformation of the Chinese economy toward slower growth will benefit everybody, even if the short-term impact rattles global trade, commodities and finance. (…)
Addressing central bankers at a conference in Paris, the head of the IMF also said the eurozone and Japan should continue with loose monetary policy to tackle low inflation and weak growth. Meanwhile, Ms. Lagarde said the U.S. should continue a gradual normalization of monetary policy after a smooth lift off from record low rates at the end of 2015.
Still, she said continued divergence of policies between major central banks creates difficulties for emerging markets by fueling increased exchange rate volatility. A further appreciation of the dollar could expose vulnerabilities in sectors in emerging economies with high dollar exposures, she said.
“Another bout of global risk aversion could lead to further commodity price declines, widening spreads, and depreciating exchange rates,” Ms. Lagarde said.
Oil Prices at $30 Bend Nations, But Which Ones Could Break?
(…) If prices stay lower for longer, as looks more likely, questions of solvency and even regime change will percolate. That is an issue for investors in sovereign debt and currencies, but also for those trying to forecast the next leg in crude’s course and could test the resolve of countries concerned first and foremost with market share. The panic is palpable: Nigeria’s oil minister called for an emergency meeting of the Organization of the Petroleum Exporting Countries possibly within the next month. (…)
Seemingly insulated Saudi Arabia actually may be less secure. Its budget deficit hit about 15% of gross domestic product last year and the government recently has taken unprecedented steps such as fuel and water subsidy cuts to ease fiscal pressure, not to mention disclosing plans to sell part of national oil champion Saudi Aramco. The coming months will show how the so-called social bargain, in which there is no income tax and the vast majority of Saudis work in some capacity for the government, holds up in an age of austerity.
With both Shiite minority dissidents and Islamic State challenging the monarchy while its military is involved a war in neighboring Yemen, it is an awkward time to put public sentiment to the test.
As oil exporters lick their wounds in the bruising fight for market share, dollars and cents don’t tell the whole story. Signs of internal unrest may become a key barometer for how long they will be willing, and able, to wage the price war, and just how much further oil may drop.
Russia to cut expenditure by 10%
(…) The government decided on the 10 per cent cuts at a meeting called by Prime Minister Dmitry Medvedev at the end of December when Brent crude sold for $37 a barrel.
Since then, prices have fallen another 20 per cent, hitting $30.43 on Monday — the lowest since April 2004 — before recovering a little to $31.46 on Tuesday.
Despite long-running pledges by the government to diversify the economy, oil revenues continue to account for more than half of Russian budget revenues. The budget for 2016 had been laid out for a 3 per cent deficit based on the assumption of an average crude price of $50.
Under that budget, adopted by parliament a month ago, federal budget expenditures were to rise to Rbs15.8tn from Rbs15.5tn last year. (…)
High-yield upgrade ratio sinks to lowest reading since Great Recession
HY spreads are near the range where they peaked in previous cycles ex the financial crisis. Moody’s is not optimistic just yet:
With and excluding oil & gas revisions, Q4-2014’s high-yield upgrade ratios are the lowest since Q1-2009’s 12.9% and Q2-2009’s 30.0%, where both quarters overlapped the Great Recession. The longer the high-yield upgrade ratio remains under 40%, the more likely is a material diminishment of business-sector liquidity that can only add to the debt repayment risks surrounding lower quality credits.
The moving two-quarter ratio of the US net high-yield downgrades to the number of high-yield issuers generates a strong correlation of 0.80 with the high-yield bond spread.
For 2015’s second half, net high-yield downgrades jumped up to 7.9% of high-yield issuers. Regarding the three previous credit cycles, the net downgrade ratio first reached 7.9% in Q1-2008, Q4-2000, and Q4-1989, or when the high-yield bond spread averaged 727 bp, 837 bp, and 632 bp, respectively. It should be noted that each of the three earlier episodes occurred within one year of a business cycle downturn. (…)
The longer the elevated readings on yields and spreads persist in the context of subpar growth for sales and profits, the more likely is a deceleration of business activity in response to a reduced supply of financial capital to below-investment-grade credits, where the latter includes most unrated small- to medium-sized firms. For now, downside risk should predominate unless the Fed strongly hints of “one and done”.
U.S. Exports First Freely Traded Oil in 40 Years Two tankers filled with freely traded U.S. oil have pulled out of Texas ports in the past two weeks, with more shipments expected.
China Drinks Up Oil and Spits It Out China’s oil demand is less than it seems, as the country sucks in more oil only to export it as refined products
(…) China keeps importing lots of crude oil, with total imports for 2015 rising 8.8%, barely less than 9.3% in 2014, according to data from CEIC.
Yet China’s refineries, which guzzle most of this crude, are turning around and exporting the final product. According to CEIC’s data, 2015 marked the first full year since 1994 that China likely exported more refined products such as diesel than it imported. This just steals demand from, say, Indonesian and South Korean refiners, who will end up consuming less crude oil.
Chinese refineries are turning overseas due to both poor local demand and too much local capacity. First it was China’s major state oil companies that expanded capacity. They slowed down expansion, but now Beijing has begun allowing smaller, mostly private so-called tea pot refineries to import crude on their own. They are suddenly running at up to 80% utilization, from 30% previously, the International Energy Agency says.
These refineries have also been given export quotas that, so far for 2016, look sizable,Citigroup’s Ivan Szpakowski notes. This could mean more product exports in 2016. China is now not only weakening the oil market with its own demand woes. It is also hurting the ability of non-Chinese companies to service whatever oil demand still exists.
Gundlach Paints Bearish Outlook for 2016 Investing, Economy
Falling commodity prices are signs of China’s weakening economy, which will lead to more destabilizing devaluations of the yuan, Jeffrey Gundlach said Tuesday during a market outlook webcast. Moves by the Federal Reserve to raise interest rates are fighting non-existent inflation and hurting gross domestic product growth, he said, adding that stocks are going to follow high-yield bonds down and low oil prices may lead to political instability.
“This is a capital-preservation market, not a money-making environment,” said Gundlach, co-founder of Los Angeles-based DoubleLine Capital. For economic growth, “2016 is not looking all that great, potentially.”
Gundlach, whose $52.3 billion DoubleLine Total Return Bond Fund beat 94 percent of its Bloomberg peers last year, has been sounding warnings for months, saying the economy is too shaky for interest rate increases. Global growth might slow to 1.9 percent this year with U.S. manufacturing already in a recession, he said on Tuesday’s call, putting the odds of a recession at about 50 percent if the services sector falls more.
Stock markets are likely to keep struggling early in 2016 before a “buying opportunity” arises later in the year, Gundlach said. High-yield bonds also probably will fall more in the first part of this year as redemptions increase at hedge funds that used leverage to invest in them, according to Gundlach.
“We could be looking at a really ugly situation during the first quarter of 2016,” he said. “It’s particularly more likely to happen if the Fed keeps banging this drum of raising interest rates against falling inflation.” (…)
Rather than try to get out in front of the market for long-term debt, Gundlach said Tuesday that he plans to wait and see whether the 10-year Treasury rate goes up or down.
“You don’t have to try to call a direction right now,” he said. “If it’s going to move, it’s going to move big and we’re going to play a go-with-it strategy.”
Oil prices, which fell to 12-year lows in the last week, seemed to hit a floor Tuesday and may climb back to $45 a barrel, Gundlach said. Such a price rebound still wouldn’t be enough to save highly leveraged energy firms, which will lead to more credit defaults, according to Gundlach.
The outlook for corporate borrowers worldwide is the worst since the global financial crisis, according to Standard & Poor’s. Potential downgrades by the ratings company exceed possible upgrades by the most since 2009, in percentage terms, according to a Jan. 11 report.
Low oil prices are likely to lead to more political instability in regions such as the Middle East, Gundlach said on Tuesday’s call.
“Oil goes below $40, it’s frightening for geopolitical behavior,” he said. “Guess what, folks? It’s below $40 and this frightening political behavior is upon us. And, also, compounding the problem is that we have a lame-duck president, who I think will do absolutely nothing in response to military activity or other bad actors out there.” (…)
Commodities may be hitting a bottom as gold shows signs of rallying, the money manager said. Gundlach said he expects gold to reach $1,400 an ounce.
A year ago, he incorrectly predicted that the price of gold was likely to rise, one of the few forecasts he got wrong. In January 2015, Gundlach accurately predicted that oil prices would fall, Treasuries would be little changed, inflation wouldn’t materialize and high-yield debt would face headwinds from lower commodity and energy prices.