Economy Heating Up During Summer U.S. economic activity continued to expand over the summer, with spending on tourism, auto sales and retail sales growing and the country experiencing growth in employment, according to the Federal Reserve’s survey of regional economic conditions released Wednesday.
Stronger growth was seen in the New York, Chicago, Minneapolis, Dallas and San Francisco regions, with “modest” expansion in the rest of the country. In the Boston and Richmond, Va., districts, local economies were still expanding but at a slower pace than seen earlier in the year. (…)
The view of the housing market was also weaker, with the Boston, New York and St. Louis banks reporting that home sales were down from last year’s levels. Construction increased in several districts, but demand for properties was tepid in parts of the country. (…)
U.S. Home Builders Index Improves to Six-Month High
The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo improved to 53 this month from an unrevised from 49 in June. The latest figure was the highest since January and beat expectations in the Informa Global Markets Survey for a reading of 50. The index of single-family home sales increased to 57, the highest level since January. The index of expected sales during the next six months jumped to 64, also the highest level since September. The NAHB figures are seasonally adjusted.
Realtors reported that their traffic index of prospective buyers improved to 39, also the highest level since January.
Yes, traffic is at a 6-m high and is up 8 to 39 since February. But 39 in July remains substantially lower than the 47 average in non-recessionary periods between 1985 and 2005. It is however much better than the 17 average for Julys between 2006 and 2012.
U.S. Industrial Production Gain Slackens
Industrial output in the U.S. increased 0.2% during June following a 0.5% May rise, revised from 0.6%. Production in the factory sector rose 0.6% (3.5% y/y) after a 0.1% May slip, last month reported as 0.6%. Utility output fell 0.3% (+1.8% y/y) following a 0.4% decline.
Interestingly, IP for Construction Supplies rose 0.5% after a 1.3% gain in May which followed –0.8% in April. Are contractors signing more contracts?
From BloombergBriefs:
Empire State Factory Sector Index Moves To New High
The Empire State Factory Index of General Business Conditions jumped during July to 25.60 from 19.28 in June. The Federal Reserve Bank of New York reported that it was the highest level since April 2010 and beat expectations for a decline to 17.50 in the Action Economics Forecast Survey.
Based on these figures, Haver Analytics calculates a seasonally adjusted index that is compatible to the ISM series. The adjusted figure inched higher to 55.50 this month, the highest level since May 2012.
Improvement in the overall July index was led by a higher shipments reading to its highest level since May 2011. That was followed by a higher employment index which recouped most of its June decline.The new orders series inched higher to its highest level since June 2010. Elsewhere, the component series moved lower including the unfilled orders and the delivery times indexes. The latter indicated the quickest delivery speeds in three months.
Posting a sharp recovery was the prices paid index to its highest level since February. Thirty percent of respondents reported paying higher prices while five percent paid less.
Not mentioned in Haver’s account is that prices received rose 2.52 to +6.82.
Big Banks Lending to Businesses Rose in Second Quarter
Bank of America Corp. on Wednesday reported that average commercial loan and lease balances rose 6%. The bank also noted borrowers were using more of their credit lines.
On Tuesday, JPMorgan Chase & Co. said companies were more willing to borrow from their revolving credit lines. Utilization of those short-term financing vehicles rose by three percentage points during the first half of this year.
That is “is usually a pretty good measure of companies starting to expand,” said Jamie Dimon, chief executive officer, during a conference call with analysts.
The bank’s commercial and industrial loans grew 3% between the first and second quarters, while loans balances were up 9% compared with year-ago levels.
Citigroup Inc., for its part, reported Monday a 9% increase in corporate loans.
Michael Corbat, the bank’s CEO, said during a conference call that lending for trade and for financing mergers was up.
Wells Fargo & Co., which reported earnings last week, said that commercial and industrial loans were up 10% from the second quarter last year.
John Stumpf, Wells Fargo’s chairman and CEO, told analysts that companies in the energy sector and commercial real estate borrowed heavily in the quarter.
“As I’m out talking with customers…there is more optimism,” he said.
Producer Price Index Rises Above Expectations
June Producer Price Index (PPI) for Final Demand rose 0.4% month-over-month seasonally adjusted. Core Final Demand was up 0.2% from last month. The unadjusted year-over-year change in Final Demand is up 1.9%, little changed from last month’s YoY of 2.0%.
Fed Unveils a New Job-Market Index
(…) So four Fed staff economists have come to the rescue with a new “labor markets conditions index” that uses a statistical model to summarize monthly changes in 19 labor-market into a single handy gauge.
The new index–described in a post on the Fed’s web site in May–makes its public debut in the Fed’s semi-annual monetary policy report to Congress.
When the line is above zero, the job market is improving. When it’s below–as it was during the recession–the job market is deteriorating. So how’s the Fed reading the latest wiggle? It “suggests that labor market conditions have strengthened further this year,” the Fed says. “While increases in the index slowed a touch at the beginning of this year, partly reflecting the effects of unseasonably cold and snowy weather this winter, the pace has picked up again in recent months.”
In her testimony to Congress this week, Ms. Yellen said that “significant slack remains in the labor markets” and noted that wages are rising very slowly, all of which points to an economy which has not yet fully recovered from the Great Recession and still needs the sustenance of low interest rates.
The new index includes familiar government metrics–the unemployment rate, the fraction of the population working or looking for work, the length of the average work week, the number of people quitting their jobs–as well as private-sector surveys of help-wanted ads and consumer and business attitudes. (…)
FED WATCH
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Chicago Fed’s Evans Says Job Market Improvement Real and Welcome Charles Evans, president of the Federal Reserve Bank of Chicago, joined the chorus of central bank officials acknowledging that the employment picture has improved faster than forecast, but he added he doesn’t want to embrace interest rate increases until he is sure inflation is at 2% and will stay near there.
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Fed’s Fisher: Raise Rates in Early 2015 or Even Sooner
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Fed’s Williams: ‘Still a Way to Go’ With the Labor Market
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Fed’s Yellen Hedges Her View on Rates
European Car Sales Continue Bumpy Recovery
New car sales rose 4.5% in the European Union in June as widespread discounts and government-sponsored incentives kept a European recovery afloat despite shrinking demand in Germany, the region’s biggest market.
Auto manufacturers reported that new registrations, which closely mirror sales of new cars, rose to 1.19 million vehicles in June from 1.14 million cars a year ago, according to the latest data from the European Automobile Manufacturers’ Association, known by its French initials ACEA. Demand rose 6.5% in the first six months of the year to 6.6 million vehicles.
The data show that the EU car market grew for the 10th consecutive month, putting the 27-nation bloc on track to show annual growth in auto sales for the first time after a six-year slump.
Euro zone June inflation unchanged at low levels as expected
Consumer prices in the 18 countries using the euro rose 0.1 percent on the month in June for a 0.5 percent year-on-year gain — the same annual inflation rate as in May, data from the European Union’s statistics office Eurostat showed.
Core annual inflation – which excludes the volatile prices of energy and unprocessed food – stood at 0.8 percent in June, unchanged from May.
China Plays Big Role in U.S. Bond Rally Investors wrestling with the mysterious U.S. bond rally of 2014 got a clue about where to look: China.
The Chinese government has increased its buying of U.S. Treasurys this year at the fastest pace since records began more than three decades ago, data released Wednesday show. The purchases help explain Treasurys’ unexpectedly strong rally this year. The yield on the 10-year U.S. Treasury note has fallen to 2.54%, from 3% at the end of 2013. Yields fall as prices rise.
The world’s most-populous nation boosted its official holdings of Treasury debt maturing in more than a year by $107.21 billion in the first five months of 2014, according to the U.S. government data. The buying has been fueled by China’s efforts to lift its export-driven economy by weakening its currency, the yuan, against the dollar, market analysts said, a strategy that encompasses hefty purchases of U.S. assets.
China officially holds roughly $1.27 trillion of U.S. debt, about 10.6% of the $12 trillion U.S. Treasury market. (…)
The rise in China’s Treasury holdings disclosed Wednesday marks the biggest first-five-month increase since record keeping began in 1977 and surpasses the $81 billion of Treasury debt bought by China for all of 2013, according to Ian Lyngen, senior government-bond strategist at CRT Capital Group LLC. (…)
China’s purchases come as U.S. issuance slows, amid higher tax receipts from an improving economy. Mr. Young at Nomura Securities International estimated that net supply of Treasury notes and bonds this year would be $650 billion to $690 billion, down from $836 billion last year and $1.565 trillion in 2010.
The Fed has been dialing back its monthly purchases as well. Mr. Young said the central bank’s buying this year would account for about 38.5% of net Treasury issuance, down from 65% last year.
China hasn’t been the only big buyer this year. Japan, the second-largest foreign owner of Treasury bonds, increased its note and bondholdings by $9.56 billion during the first five months of the year. Including bills, Japan’s holdings of Treasury debt was $1.2201 trillion. (…)
Who will buy when the Fed is done this fall? Consider this chart from JPM Asset Management’s David Kelly:
Investors Seek China Discounts
By the end of the second quarter, the MSCI Asia excluding Japan stock index had risen just 6% in the past three years versus a 48% surge for the Standard & Poor’s 500-stock index. Chinese stocks this year have again been some of the world’s worst performers, down about 2% in Hong Kong and Shanghai despite recent rises amid China’s “mini-stimulus” drive.
The stocks of Asia’s biggest economy have fallen deep into the discount bin, trading about 9 times their forecast earnings, compared with 11 times for the broader region and nearly 15 times for global stocks.
Profits and margins have been under pressure in China in recent years in part due to overcapacity problems. CEBM Research sees signs of stabilization:
(…) data shows that the huge production capacity created by the four trillion RMB stimulus plan in 2009 has come onstream over the past few years, and the capacity utilization rate of industrial enterprises has begun to stabilize at a low level. Excessive pressure caused by excess capacity has been released quite thoroughly.
Perhaps you should consider these BloombergBriefs charts before jumping in blind:
Buyout Shops Must Dig Deeper Into Wallets for Purchases
Private-equity firms purchased 41 companies in the second quarter in leveraged buyouts, the busiest quarter since 2007, according to S&P Capital IQ LCD. And they fetched some of the loftiest valuations paid since that period, S&P said. (…)
Many firms have little choice but to keep making deals, despite the rising prices. Several private-equity firms have raised multibillion-dollar buyout funds in recent years. These funds typically lock up cash for 10 years or so, meaning firms have limited periods during which to invest before they have to begin selling assets to return investors’ cash.
By dollar volume, there was $47.6 billion in LBOs in the second quarter, the third-highest quarterly total since 2007, according to S&P. Most of these deals were for closely held companies, businesses cast off by big corporations and the holdings of rival private-equity firms. Prices for these assets have risen alongside those of public companies.
During the second quarter, the average cost of leveraged buyouts of $500 million or more was 10.17 times the target companies’ earnings before interest, taxes, depreciation and amortization, or Ebitda, according to S&P Capital IQ. That is well above the average cost of 8.58 times Ebitda over the past 20 years and is similar to prices in the 2007 buyout boom and in the late 1990s tech-fueled bull market, when the average multiples were above 10. (…)
ANIMAL SPIRITS
As P/E multiples rise, strategists are going out of their ways to find justification for these lofty multiples, if not for even loftier P/Es. I have seen a similar chart many times lately and I am fed up. Consumer sentiment is one of the most useless stat around being coincident at best. In fact, the best correlation I have seen is with gasoline prices: consumer sentiment shifts along with gas prices!
So using it to justify, even predict P/E multiples is beyond reason. Sure, one can, like Northern Trust here, draw a line through a cloud of points and assert that
growing confidence in the future increases animal spirits and the willingness to invest in riskier assets, generally driving equity prices higher, which reinforces consumers’ current and future prospects. Given the most recent University of Michigan Consumer Confidence Sentiment reading of 82.5, and past cycle average readings in the low 90s, we think the market has room to move higher.
The reality is that the vast majority of the data points fall within the red rectangle I drew within which there is no discernable trend up or down. In fact, for any consumer sentiment measure between 65 and 100, P/Es have been anywhere between 7 and 27. FYI, the UofM June 2014 Index of Consumer Sentiment is 82.5.
