US economy worries mount as manufacturing output falls for third month running
Markit comments on Monday’s IP report linking the weakness in manufacturing to its PMI reading for the orders:inventory ratio and the new orders for consumer goods. These stats tie in with the apparent weakening in the U.S. goods industry following the sharp appreciation of the dollar and the recent decline in import prices transpiring into a widespread deflationary trend in goods which could explain the surprising weakness in nominal retail sales.
Altogether, our nowcasting model of the official and survey data so far available point to US economic growth running at 2% annualised in the first quarter, after having already slowed from 5.0% to 2.2% between the third and fourth quarters of last year.
Soft patch coming? (BloombergBriefs):
A sharp slowdown in new orders — compounded by shrinking export demand — suggests that industrial production may be on the cusp of a soft patch, which in turn could undermine the medium-term profile for economic growth.
Ed Yardeni is more icy in Ice Patch or Soft Patch?:
China Home Prices Extend Slide
(…) On a year-over-year basis, the average price of new homes dropped 5.7% in February, after a 5.1% decrease in January and a 4.3% fall in December. It was the sixth month in a row of declines, based on The Wall Street Journal’s calculations from data released Wednesday by the National Bureau of Statistics.
The pain in China’s property market is likely to continue despite Beijing’s efforts to help the economy, analysts said, noting that so far only major cities such as Beijing and Shanghai are showing signs of recovering.
Housing sales in the third and fourth tier cities account for around two-thirds of the country’s real-estate market, and the persistent weakness in demand in such cities has been a drag on the world’s second-largest economy. (…)
On a month-over-month basis, prices in February slipped 0.43%, unchanged from the 0.43% fall in January, but widening from December’s 0.40% decline, according to calculations by The Wall Street Journal.
Private-sector home prices fell in 69 of 70 cities in February from a year earlier, unchanged from the 69 cities that posted declines in January. On a month-over-month basis, home prices fell in 66 of 70 cities in February, compared with January’s 64. (…)
China’s real estate sector is estimated to account for nearly one-quarter of gross domestic product when construction, cement, steel, chemicals, furniture and related industries are factored in. Housing sales nationwide fell 16.7% to 498.3 billion yuan ($79.6 billion), the steepest decline in three years since a 24.7% plunge recorded in the January-February period in 2012. For the whole of 2014, housing sales slipped 7.4%. (…)
This is becoming a huge problem. How do you reverse the belief (fear) that prices will stop declining?
Japan Export Growth Slows Sharply
(…) Japan’s exports in February beat expectations to rise 2.4% by value from a year earlier. But that marked a sharp decline from growth in January, when they rose 17%, and volume for February fell 2.1%, the first drop in three months.
Much of the decline in volume last month can be attributed to the timing of the Lunar New Year holiday. Shipments to China, Japan’s largest trading partner, plunged 23% in February from a year earlier, hitting the lowest level since January 2013 and the second-lowest since the height of the global financial crisis.
Real exports during the first two months of the year, adjusted for exchange rates and prices, rose 1.6% from the fourth quarter of last year, according to economists at BNP Paribas.(…)
Exports to the U.S. held up last month, rising 1.9% by volume from the same month a year earlier. Exports of autos rose 19% by value, and 5% by volume. (…)
Economists blame Japan’s export sluggishness on companies’ unwillingness to take advantage of the weaker yen to cut prices. Japanese exporters have lowered the foreign-currency prices of their products by only 7% over the past two years, even though the yen has depreciated by around 30% against the dollar during that time, according to the Bank of Japan.
Most of the price cuts were carried out by companies in the chemical and other commodity-related industries, whose sales prices are more closely tied to the commodity markets, the BOJ data showed. Prices for autos and electronics have changed little. (…)
Japan Inc gives biggest boost to base pay for more than a decade
Toyota, Nissan and Hitachi are among Japan’s largest companies moving to slot in place the missing piece of the prime minister’s Abenomics economic stimulus effort, as they agreed to the biggest increase in base pay for more than a decade.
The across-the-board increase in wages for Japanese workers, for the second straight year, came after Shinzo Abe visibly stepped up his pressure on companies to play their part in ending nearly two decades of deflation. (…)
Toyota agreed to raise the monthly pay — including both base pay and seniority pay — for its unionised workers by an average 3.2 per cent starting in April as the world’s biggest carmaker anticipates a second straight year of record profit.
The increase of Y4,000 in base pay, or an average 1.1 per cent, is lower than the union’s request of Y6,000, but the amount is the biggest since its current pay system was installed in 2002. (…)
Among automakers, Nissan offered the biggest rise in base pay at Y5,000, which translates to an average 1.4 per cent increase. Including bonus payments, workers will receive an average 3.6 per cent raise in annual pay. (…)
The rise in basic pay last year was about 0.4 per cent, far weaker than what is needed to drive consumption on pace with a 2 per cent inflation target. This year, economists expect a base pay rise closer to 1 per cent. (…)
In a December survey by the Japan Chamber of Commerce and Industry, 34 per cent of small and medium-sized companies said they plan to raise base pay, lower than 40 per cent in the previous survey in 2013.
OECD Raises Growth Forecasts The outlook for the world economy has improved in early 2015 as a result of lower oil prices and the provision of additional stimulus by several central banks, the Organization for Economic Cooperation and Development said.
(…) The OECD said the U.S. dollar’s appreciation against other major currencies is contributing to low inflation in the world’s largest economy and could weaken growth by damping exports. It therefore expects the U.S. Federal Reserve to delay its first rise in interest rates, which many economists have been expecting to take place in June, until there are signs that Europe’s economies are strengthening, and the euro is set to appreciate.
“The question about when the Fed is going to move off of zero depends a lot on whether Europe rebounds,” said Catherine Mann, the OECD’s chief economist, in an interview with The Wall Street Journal.
In the first update to its projections in 2015, the OECD said it now expects the economies for which it provides forecasts—which account for 70% of global output—to grow by 4% this year and 4.3% next. In November, it forecast growth rates of 3.9% and 4.1% for those years.
The OECD noted that central banks that regulate economies accounting for 48% of global output have eased their policies since December, providing a boost to growth. The decline in oil prices has also helped, it said.
The OECD said the stimulus will help boost economic activity and raised its forecasts for eurozone growth to 1.4% in 2015 and 2.0% in 2016 from 1.1% and 1.7% previously, roughly in line with the ECB’s projections. (…)
The research body nudged down its forecasts for Chinese growth this year, but its largest changes were reserved for two other big developing economies. It raised its growth forecasts for India to 7.7% this year and 8% next from 6.4% and 6.6% respectively, signaling that it now expects the country to overtake China as the fastest-growing major economy.
In contrast, the OECD slashed its forecasts for Brazil, seeing the economy contracting by 0.5% this year, having previously projected growth of 1.5%. (…)
U.S. Is Awash in Oil, But What About the Rest of the World? Much of the world’s excess oil has ended up in the U.S. That’s helping separate the domestic oil price from the global benchmark.
(…) Much of the world’s excess oil has ended up in the U.S., which has the most available on-land storage, weighing on domestic prices. At the same time, Brent prices have been boosted in recent weeks by bad weather, which hampered Iraqi exports, and concerns that violence in Libya could interrupt the country’s oil output.
The two contracts are trading about $10 a barrel apart, up from zero in mid-January but down from more than $12 in late February. (…)
SENTIMENT WATCH
Suddenly Everyone Hates U.S. Stocks
With interest rates poised to rise and Europe ascending, the percentage of global money managers who are underweight American equities is the highest since 2008, a survey by Bank of America Corp. shows. At the same time, clients of exchange-traded funds have pulled about $14 billion from U.S. equities this quarter and added $29 billion to international stocks, data compiled by Bloomberg show.
Souring sentiment is a reversal from the last two years, when money flowing to the U.S. was double that going elsewhere. The Standard & Poor’s 500 Index trails virtually every developed market in 2015 as accommodative central-bank policy from Europe to Japan lifts valuations and the Fed winds down programs that helped share prices triple since 2009. (…)
The percentage of money managers holding fewer American stocks than the country’s weighting in benchmark indexes exceeds those overweight by 19 percentage points, according to a March 6-12 poll of 207 money managers in Bank of America’s survey released Tuesday. That compared with a net 6 percent overweight in February. (…)
A net 35 percent of respondents in Bank of America’s survey picked the U.S. as the worst place to invest in the next 12 months, the most in almost a decade, while the proportion of those favoring Europe jumped to a record 63 percent.
(…) a net 38 percent of respondents in Bank of America’s survey say that they expect double-digit earnings growth in Europe in the next 12 months. (…)
Options Market Signals 2007-Like Crash Risk, Goldman Warns
Long-dated crash put protection costs on the SPX have more than doubled over the past 9 months. We believe it is an important development to watch as it implies investors are increasingly concerned about downside risk even as US equities trade near all-time highs. Based on our conversations with investors over the past few months, it appears the increase in long-dated put prices has largely gone unnoticed among equity and credit investors. In fact, Investment Grade credit spreads have actually tightened slightly over the same period. The rise in long-dated equity put prices may signal an increasing fear that a substantial market correction is on the horizon, despite low short-term put prices which suggest low probably of a near-term drawdown vs history.
Furthermore, the usually tight correlation between the cost of OTM put protection and CDS spreads looks set to break down entirely as the CDS market doesn’t seem to be pricing in the same type of nervousness as the options market…
…and as Goldman notes, the fact that CDS spreads haven’t followed the price of put protection higher likely indicates this is a function of fear rather than forced hedging…
Nine months ago, equity put prices were undervalued relative to CDS spreads on S&P 500 companies. The rise in put prices has more than compensated for this undervaluation. Further, it is surprising how little CDS spreads have moved over the period.While some have suggested the rise in put prices has come from investors or financial institutions that are increasingly required to hedge, we would have expected to see an increase in similar CDS spread levels if this were the primary driver of the increase in put prices.
