Fed’s Yellen Aims to Move Rates Up Soon, but on a Slow Path Federal Reserve Chairwoman Janet Yellen said the central bank was on a path to raise rates this year as the economy improves, in semiannual testimony to Congress that got off to a fiery start Wednesday.
Here’s why the Fed wants to begin normalizing interest rates:
Fed’s Beige Book Offers Hints of Rising Wages Demand for skilled labor picks up as business optimism grows
Overall U.S. wage pressures remain “modest,” but employers are preparing for further pay bumps as minimum-wage increases take effect, according to the Federal Reserve’s latest survey of regional economic conditions.
Most of the Fed’s 12 districts reported stronger wage growth for qualified or higher-skilled workers in industries such as construction, information technology and trucking. Several districts noted rising pressure on employers to raise wages to compete for workers due to minimum-wage policies boosting pay.
The anecdotal survey by the Fed’s regional banks covers the period from mid-May through June. Its picture of “optimistic” businesses and a generally tightening labor market in most of the U.S. could support Fed officials calling for an interest-rate increase sooner rather than later. (…)
Demand for specialized workers was a consistent theme across districts. Business contacts told the Cleveland Fed that the construction industry “remains challenged by a labor shortage,” and carpenters and drywallers are “the most difficult to find,” a problem they are trying to remedy with apprenticeship and co-op programs.
The Boston Fed said openings for high-technology positions, M.B.A.s and expert analysts “are reportedly hard to fill.” The New York Fed reported “increased demand for human resource professionals to recruit new employees—particularly in the finance and legal sectors.”
Recent legislative and private-sector initiatives to boost the minimum wage are starting to ripple through the business landscape. The Dallas Fed reported “some primary metals manufacturers increased starting salaries in part due to skilled labor shortages and to keep up with pay raises at Walmart,” although that wage boost did not extend to food-service or petrochemical workers in the district.
In Cleveland, one chain noted its employees “are more enthusiastic and turnover is lower as a result of an increase in the hourly wage rate.” Another contact observed that “retail employees will readily change jobs for an additional 10 cents per hour.”
The yearlong drop in energy prices has had mixed effects. Drilling for oil and natural gas fell in the Cleveland, Minneapolis, Kansas City and Dallas districts. But several districts “noted that low energy prices were a contributing factor to improved consumer spending at some retail locations and restaurants.” The Cleveland Fed reported that convenience stores selling gasoline “continue to report stronger sales of nonfuel items due, in part, to the ongoing, relatively low price of gas.”
The Minneapolis and Dallas regions reported soft growth along their borders due to continued strength of the U.S. dollar. But a strong dollar, combined with “restrained costs across a number of commodities” boosted margins for Atlanta-area firms relying heavily on commodities or imported goods.
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Fed Flags Rising Commercial Real Estate Prices The Federal Reserve highlighted rapidly rising commercial real estate prices as an area of concern amid broadly moderating risks to U.S. financial stability.
“Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly, and underwriting standards at banks and in commercial mortgage-backed securities have been loosening,” the central bank said in a semiannual report to Congress. (…)
The report also suggested stocks aren’t overpriced, noting the relationship in prices of equities and Treasurys is close to historical norms. As recently as May, Ms. Yellen said “equity-market valuations at this point generally are quite high.”
FED UP!
David Rosenberg:
Esther George is now the latest Fed Bank President to verbally support a rate hike sooner rather than later. So we have George, Williams, Mester, Bullard and Lacker all saying the time is right. (…)
It was just at the June meeting , from the minutes that were published, which said that “Most participants judged that the conditions for policy firming had not yet been achieved”. Not “some”. Not “a few”. Not “several”. Not “many”. “Most”.
So given what we know since then, what has changed to warrant a rate hike view by the “most” this summer? (…)
The next question is why tighten monetary policy when fiscal policy is already tightening and draining the growth in private sector activity now by nearly 1% at an annual rate (…) the 2013 tax grab has delivered a big fat 9% revenue stream over the past year which is more than double what the government is putting back into the economy in terms of spending, and also more than double the prevailing trend in nominal GDP.
David then offered the most objective views of the June retail sales report:
The component that feed into the consumer spending part of GDP, the “control” group – which excludes building materials, gas and autos – edged down 0.1% MoM and has fallen now in two of the past three months and in five of the past seven. Yikes! (…)
The surprising decline stopped a three-month string of positives in its tracks, and brings the YtD trend down to a soft 2% annual rate (this time last year, that trend was closer to 6%). (…)
The few bright spots were groceries 9flat), gas stations (+0.8%) and drug stores (+0.2%). Strip these out, and the retail sales data were actually nearly twice as bad in June as the cyclical segments combined for a 0.5% decline.
You have to go back three years to find such a weak retail sales report in terms of breadth of decline (…)
Things may not be as strong as we had thought following the Q1 GDP setback.
All I can say is that you have to go back to 2008 to find the 1st time we had such a weak first-half performance in retail sales (…).
Contrary to the Beige Book, the NFIB June survey report suggests that things have changed in recent months:
Los Angeles Garment Firms Fret Over Wage Hike Clothing manufacturers in Los Angeles fear the “Made in L.A.” label is under threat from a new law set to boost the city’s minimum wage to $15 an hour by 2020. Advocates say the new law will provide much needed help for working families, but manufacturers contend it will undercut their competitiveness.
BTW:
(…) The Los Angeles metro area has the most manufacturing workers in the country. More people work in factories there than traditional blue-collar towns such as Chicago,Detroit or Philadelphia.
While the number of manufacturing workers in Los Angeles and nationwide has plummeted from 25 years ago, the community has maintained its leadership position.
There are about 524,000 manufacturing workers in the region, well above 409,000 in Chicago and 368,000 in New York, according to the Labor Department.
(…) more than one in eight manufacturing employees in Los Angeles County, which includes the city, work in the apparel industry. That sector pays much lower wages than other factory jobs. Apparel workers in Los Angeles County earned an average of $655 a week. The average weekly wage for all manufacturing workers nationwide is $830 a week.
Empire Manufacturing Report Stronger Than Expected for a Change
Although General Business Conditions improved, the majority of the sub-indices declined in July with the largest drops coming in Inventories (-10.4) and Number of Employees (-5.5).
Inventories are swelling while new orders are weak and unfilled orders worsened…
Meanwhile, the U.S.’ most important trading partner is finding it tough:
Bank of Canada cuts key rate as economy contracts, exports stall
The central bank lowered its trend-setting overnight rate a quarter percentage point Wednesday to 0.50 per cent – the second rate cut in six months that sent the Canadian dollar tumbling and prompted three major banks to lower borrowing rates.
The central bank also slashed its forecast for the Canadian economy, acknowledging for the first time that gross domestic product will likely decline in both the first and second quarters. And the bank said growth for the full year will reach just 1.1 per cent, a major downgrade from the nearly 2 per cent it was predicting just three months ago. (…)
The Canadian dollar lost more than a cent to end at 77.40 cents (U.S.) in the wake of the decision – its lowest level since the depth of the recession in 2009. (…)
“Canada’s economy is undergoing a significant and complex adjustment,” the bank said in a statement accompanying its rate decision. “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.”
The latest rate cut marks a sudden about-face by Mr. Poloz, who has repeatedly insisted that the economic hit from the oil price collapse would be quickly offset by surging non-oil exports, such as car parts, lumber and services. He had characterized his earlier January rate cut as “insurance.”
Six months later, the export rebound remains elusive, in spite of a much cheaper Canadian dollar. Mr. Poloz said the bank anticipated that cheaper crude prices would take a bite out of exports, but the failure of non-energy exports to pick up as the dollar falls is a “puzzle” that the bank is now hard at work trying to sort out.
Among other reasons for the rate cut, Mr. Poloz cited a deeper-than-expected plunge in Western Canadian oil patch investments and weaker growth in China, which is depressing other commodities, including metals.
“The facts have changed, quite quickly actually, in the last two to three months,” Mr. Poloz told reporters. “One of the big shocks in this outlook is the downgrade of investment intentions by the companies in the oil patch.” (…)
A massive plunge in business investment – down 16 per cent in the first quarter – has become a deadweight on the economy. The energy sector makes up less than 20 per cent of the economy, but it drives an oversized share of business investment. The bank now says it expects investment in Canada’s oil patch to plummet close to 40 per cent this year, significantly worse than the 30 per cent it initially thought, as long-term investments in the oil sands are delayed or put on hold until the price of crude recovers.
Eurozone Exports Drop Despite Weaker Euro The eurozone’s adjusted trade surplus narrowed in May as exports dropped, a sign that a weaker euro exchange rate has yet to provide a lasting boost to the region’s economy.
European Car Sales Accelerate From Doldrums
Registrations rose 15 percent to 1.41 million autos from 1.23 million a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said Thursday in a statement. The jump was the biggest since a 16 percent surge inDecember 2009, when governments in the region offered incentives on trade-ins of older cars to help the industry recover from the global recession. (…)
The ACEA, which compiles data from 28 of the 29 European Union nations plus Switzerland, Norway and Iceland, is now forecasting the auto market this year will grow 5 percent, versus an earlier prediction of a 2 percent gain.
Last month was the 22nd in a row of expansion. Figures were helped in part by the Pentecost religious holiday, when retail outlets are closed in several European countries, shifting into May this year from June in 2014. First-half registrations rose 8.2 percent to 7.41 million vehicles. (…)
Audi Said to Revise China Target as Stock Rout Saps Demand
Audi AG has abandoned a target to sell 600,000 cars this year in China, its biggest sales region, as the country’s stock market rout sapped demand for luxury vehicles, two people familiar with the company’s plans said.
Audi’s Chinese deliveries dropped 5.8 percent in June, while BMW sales slipped 0.1 percent. Mercedes sales jumped 39 percent to 32,507 autos.
SENTIMENT WATCH
US earnings set to eclipse frosty forecasts Strength seen given currency effect and low oil prices
(…) Already, initial reports are eclipsing expectations — 71 per cent of the 38 companies that have released quarterly results have pipped sellside forecasts, 4 percentage points ahead of the so-called beat rate in the second quarter of 2014. (…)
“Expectations of contraction of over 4 per cent are likely to be beaten handily, serving as a catalyst for another leg higher in US equities, particularly as the international ‘storm clouds’ begin to dissipate,” says Julian Emanuel, US equity strategist at UBS. (…)
“With the ports strike resolved, the dollar down nearly 4 per cent from its March highs, and weather as temperate as spring weather can be, the non-energy headwinds from the first quarter should be largely behind us.” (…)
EARNINGS WATCH
The facts as of last night per RBC Capital:
- 38 companies (13.2% of the S&P 500’s market cap) have reported. Earnings are beating by 5.3% while revenues have missed by -0.3%.
- The beat rate so far is 68%. Ex-Financials: 72%.
- Expectations are for a decline in revenue, earnings, and EPS of -3.8%, -2.8%, and -1.4%. These would be +1.7%, +1.8%, and +3.2%, on a trend basis (ex-Energy and the big-5 banks). This excludes the likelihood of beats, which have been above 4% over the past three years.
