EMPIRE STATE MANUFACTURING SURVEY WEAKENS
The March 2015 Empire State Manufacturing Survey indicates that business activity continued to expand at a modest pace for New York manufacturers. The headline general business conditions index, at 6.9, remained close to last month’s level.
The new orders index fell four points to -2.4, suggesting a small decline in orders, and the shipments index declined six points to 7.9. Labor market indicators pointed to a solid increase in employment levels and a lengthening in the average workweek. Pricing pressures remained subdued, with the prices paid index inching down two points to 12.4, and the prices received index at 8.3. As in February, indexes for the six-month outlook conveyed less optimism than in many of the preceding months, and the capital spending and technology spending indexes declined.
Fedspeak Cheatsheet: Fed Officials a Bit More Upbeat Ahead of Policy Meeting This Week Federal Reserve officials heading into this week’s policy meeting have recently offered nuanced guidance about the outlook for interest rates. But they haven’t provided much guidance on when exactly that first rate increase is likely to occur, other than to say it will depend on the economy’s health.
Chairwoman Janet Yellen (voter), May 22 in Providence, R.I.: “I think it will be appropriate at some point this year to take the initial step to raise the federal-funds rate target and begin the process of normalizing monetary policy.”
Vice Chairman Stanley Fischer (voter), May 25 in Herzliya, Israel: “We will wait and see what happens. If the economy is moving slow we’ll wait. If fast, we’ll do it earlier.”
Gov. Daniel Tarullo (voter), June 4 in New York: No direct comment on rate policy, but says he’s watching the state of the economy: “There are more questions at this point in 2015 than there were at this point in 2014.”
Gov. Jerome Powell (voter) No public comments on monetary policy.
Gov. Lael Brainard (voter), June 2 in Washington, D.C.: “But while the case for liftoff may not be immediate, it is coming into clearer view. If continued labor market strengthening is confirmed and inflation readings continue to improve, liftoff could come before the end of the year.”
Boston Fed President Eric Rosengren, June 1 in Hartford, Conn.: Would like to raise rates “as soon as possible, but it has to be because the economic conditions are right. The economic conditions haven’t been right to date.”
New York Fed President William Dudley (voter), June 5 in Minneapolis: “If the labor market continues to improve and inflation expectations remain well-anchored, then I would expect–in the absence of some dark cloud gathering over the growth outlook–to support a decision to begin normalizing monetary policy later this year.”
Cleveland Fed President Loretta Mester, May 1 in Philadelphia: “I’m going to be data-dependent, I’m going to look at the data, and go into each meeting with an assessment of the data that comes in. So I’m not taking any of the meetings off the table.”
Richmond Fed President Jeffrey Lacker (voter), May 26 in Baton Rouge, La.: “I haven’t made up my mind yet about June…I am going to wait and see what the data reveals.”
Atlanta Fed President Dennis Lockhart (voter), May 6 in Baton Rouge, La.: “Probabilities as reflected in forward markets, or futures markets for fed funds, seem to have moved from December toward September. I think that’s a reasonable alignment with what I think to be the likely policy outlook” for short-term rates.
Chicago Fed President Charles Evans (voter), June 3 in Chicago: Favoring a 2016 rate rise, he said “the hurdle is pretty high for raising rates at the moment.”
St. Louis Fed President James Bullard, June 3 in St. Louis: “I would like to move on the back of good news, basically, and I think it’s very difficult to say that you’re trying to normalize interest rates just at the moment where the economy looks a little bit weaker.”
Minneapolis Fed President Narayana Kocherlakota, May 28 in Helena, Mont.: “Under my current outlook, I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015.”
Kansas City Fed President Esther George: No public comments on monetary policy.
San Francisco Fed President John Williams (voter), May 28 in Singapore: “I’ve gotten myself into trouble there [on the likely timing of a rate increase]. I said at one point that we will do something in summer, and I found out that my definition of summer was not the right definition of summer….So, I’ve got to be very careful about these things. I would say sometime [in] the remainder of the year.”
U.S. Producer Prices Climb as Oil Stabilizes
The producer-price index for final demand, which measures prices that businesses receive for their goods and services, increased a seasonally adjusted 0.5% last month from April, the Labor Department said Friday. That was the largest gain since September 2012.
Core prices, which exclude volatile food and energy categories, rose a more modest 0.1%.
From a year earlier, overall producer prices are down 1.1%, the fourth straight decrease, and core prices are up only 0.6%. (…)
A strong dollar has held down the price of goods from overseas. Import prices for autos, natural gas, nonfuel industrial supplies and capital goods all fell last month, according to a separate Labor report released Thursday.
Thawing Economy Should Support Wage Growth
With the U.S. economy picking up momentum, employment and wage growth should continue to accelerate in the months ahead, providing a boost to consumer spending. While the average hourly earnings series, released with the payrolls report every month, has shown only a slight acceleration in wage growth, other measures are pointing to a faster pickup. The Employment Cost Index (ECI) showed wages and salaries growing at the best pace since 2008 in the first quarter of 2015, while the more volatile Employer Costs for Employee Compensation (ECEC), released this week, has surged over the past year to a growth rate of more than 4 percent. (Guggenheim Partners via BI)
EARNINGS WATCH
Analysts have lowered earnings estimates for the S&P 500 for Q2 2015 to date by a smaller margin relative to recent quarters. On a per-share basis, estimated earnings for the second quarter have fallen by 2.3% since March 31. This percentage decline is much smaller than the percentage decline at the same point in time in the previous quarter (-8.0%), and it is also smaller than the trailing 5-year and 10- year averages.
As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q2 2015 is -4.6% today, which is higher than the expected decline of -2.3% at the start of the quarter (March 31). Seven sectors have recorded a decline in expected earnings growth since the beginning of the quarter due to downward revisions to earnings estimates, led by the Industrials and Consumer Discretionary sectors.
If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 2.2% from -4.6%.
The Industrials sector has witnessed the largest decrease in expected earnings growth (to -3.2% from 4.2%) since the start of the quarter. The Consumer Discretionary sector has recorded the second largest drop in expected earnings growth (to 4.2% from 9.0%) since the start of the quarter.
The estimated sales decline for Q1 2015 of -4.4% is higher than the estimated year-over-year revenue decline of -3.1% at the start of the quarter. If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 1.7% from -4.4%.
Companies have lowered the bar for earnings for Q2 2015 as well. Of the 104 companies that have issued negative EPS guidance, 76 have issued negative EPS guidance and 28 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 73%, which is above the 5-year average of 69%. (Factset)
However, this percentage is below the percentage recorded at the same point in time last year (75%).
FedEx joins dozens of companies, such as AT&T Inc., that have adopted mark-to-market pension accounting in the last few years. The method allows pension gains and losses to flow into earnings sooner than under old rules, which allow companies to smooth out the impact over several years.
FedEx said it will now recognize actuarial gains and losses in the fourth quarter of its fiscal year rather than amortizing them over several years, making its operating performance easier to understand and more transparent.
Net of tax, the charge is valued at $1.4 billion, or $4.88 a share. Before the announcement, analysts polled by Thomson Reuters expected FedEx to post $2.68 a share in adjusted earnings in its fiscal fourth quarter, which ended in May.
Given that S&P treats pension expense as operating expense, unlike most other aggregators, The S&P earnings series will get a hit from Fedex when it reports on Wednesday. There was a large ($1.05) pension charge taken by telecom companies in Q4’14, of which At&T contributed $7.9 billion.