China Economic Growth Falls Below 7% China’s once world-beating economy sputtered further in the third quarter, decelerating to its slowest pace since the global financial crisis and adding to concerns about the global economic outlook.
The 6.9% growth rate for the third quarter—dipping below 7% for the first time since 2009—clouds China’s prospects for reaching the official targeted growth rate of about 7% for the year. It also renews pressure on Beijing to enact more pro-growth measures. (…)
China’s industrial production grew by a disappointing 5.7% year on year, according to the National Bureau of Statistics. That was lower than the 5.9% growth expected. Fixed asset investment came in below expectation at 10.3% suggesting that government measures to support economic activity haven’t gained sufficient traction. Retail matched expectations with a 10.9% growth rate.
(…) the agency said the government has plenty of options to meet the growth target.
Beijing has approved more than 200 rail, highway, energy and sewer projects since January worth more than 1.8 trillion yuan ($283.8 billion) and urged banks to step up lending for infrastructure. Strong loan growth in September bolstered signs that the government-orchestrated spending campaign is starting to gather momentum.
China’s fiscal spending surged 26.9% from a year earlier to 1.78 trillion yuan in September, it said on Monday. (…)
From the FT:
(…) real GDP growth from services rose to 8.6 per cent in the third quarter, up from 8.4 per cent the first half. (…)
Though still weak, the real estate sector is now recovering modestly, with property sales growing 7.5 per cent in the year to September in floor area terms, up from 7.2 per cent growth in the first eight months. Property sales had contracted for 17 consecutive months through June on a year-to-date basis. (…)
More Weakness in Manufacturing
Thursday’s release of the Empire Manufacturing report for the month of October showed continued weakness in manufacturing activity for the New York region. While economists were expecting the headline reading to come in at -8.0, the actual level was -11.36, representing the third straight month of double-digit negative readings. Empire Manufacturing has also now missed expectations in eight out of the last nine months, including each of the last three. On a slightly more positive note, plans for both Technology and Capital Spending did see modest increases this month.
The only two components that showed month over month increases were Inventories and Average Workweek. In terms of outlooks, manufacturers are more optimistic as General Business Conditions increased slightly. Components that saw the largest increases in outlook were Average Workweek and Number of Employees, which bodes well for employment in the region.
(…) Looking on the bright side, October’s reading was less bad than September.
Where there was little in the way of silver linings, though, was in the internals of the report. As shown in the table to the right, the only component of Thursday’s report that didn’t show deterioration was Prices Received. Every other category in the report showed weakness, with the biggest declines coming in Shipments and New Orders which were both down over 20 points. Since 1980, there have only been four other months where both components dropped 20 or more points in the same month (Oct. 1981, Jan. 1988, Jan. 2001, and Jan. 2008). Of those occurrences, the only one that didn’t occur during or right before a recession was January 1988. Granted, manufacturing is not nearly as large a part of the economy as it once was, but these kinds of declines certainly aren’t positive.
U.S. holiday sales expected to rise 2.8 percent in 2015: RetailNext U.S. holiday sales are expected to rise a modest 2.8 percent in 2015, as a sluggish economic recovery is likely to weigh on consumer spending, analytics firm RetailNext said on Friday.
Last week, the National Retail Federation estimated a 3.7 percent rise in holiday sales, slightly less than last year, as U.S. consumers remain concerned about a possible government shutdown, slow job creation and income growth.
Market research firm NPD forecast that holiday shopping could show the slowest year-on-year growth since 2009. Consulting firm AlixPartners said it expected 2.8 percent to 3.4 percent growth, down from 4.4 percent in the 2014 holiday season.
Labor Market Turnover Changes Little in August as Job Openings Fall Slightly The underlying churning of the U.S. labor market was little changed in August.
(…) The number of job openings decreased from 5.7 million to 5.4 million.
The data comes from the Labor Department’s monthly Job Openings and Labor Turnover Summary. (…)
July’s 5.7 million job openings was the highest in the history of the report, and more than 30% higher than its prerecession level. (…)
“The core mystery is still why the number of openings is so high relative to the unemployment rate and, more recently, the softening in payroll growth,” Ian Shepherdson, the chief economist of Pantheon Macroeconomics, said in a note. “We are leaning increasingly towards the idea that the key problem is that companies can’t find suitably qualified staff.”
The number of people voluntarily quitting a job—which economists generally regard as a positive behavior that indicates people feel they have better options—has yet to fully recover. Fed officials such as Chairwoman Janet Yellen have long indicated they would see more turnover, especially from more quitting, as a positive sign that the labor market has truly moved beyond the damage of the recession. Among people who do leave their jobs, a preponderance in recent years have done so voluntarily, according to these records.
Meanwhile, claims show no weakness in employment:
In the week ending October 10, the advance figure for seasonally adjusted initial claims was 255,000, a decrease of 7,000 from the previous week’s revised level. The previous week’s level was revised down by 1,000 from 263,000 to 262,000. The 4-week moving average was 265,000, a decrease of 2,250 from the previous week’s revised average. This is the lowest level for this average since December 15, 1973 when it was 256,750.
See much labor slack in these charts? David Rosenberg puts the numbers in the proper perspective:
(…) the last time we have claims at this level, the U.S.labour force was 90 million people; today it is 157 million – having this absolute level of people filing for state unemployment benefits is a sign that the labour market is tight and firms are retaining workers at an almost unprecedented rate (there were just 1.9 claims filings last week per 1000 employees covered under the state unemployment insurance programs, which is the lowest on record).
Gavyn Davies The Fed Board is now seriously split
(…) Furthermore, these splits could extend well beyond the date of the first rate hike to the entire path for rates in the next few years. Janet Yellen faces an unenviable task in finding a compromise path that both sides of the FOMC can support.
This week’s “rebellion” within the Board was led by Lael Brainard, a rookie Governor who was previously an Undersecretary at the US Treasury, working on international economics. During the euro crisis, her frequent trips across the Atlantic won her respect, and marked her out as a clear thinking Keynesian who wanted emergency action from the ECB long before Mario Draghi came to that view.
It is therefore no surprise to see her emerging as the “uber dove” on the Board of Governors. In a speech notable for its clarity, she directly opposed several of the main planks in the Yellen/Fischer orthodoxy (see Tim Duy and Paul Krugman.) For example, she said that the Phillips Curve is an unreliable guide to future inflation rates; that the predicted rise in the equilibrium real interest rate might never happen; and that the appropriate management of inflation and recession risks clearly pointed towards long term dovishness.
Ben Bernanke’s recent memoirs commented that divisions among the Board of Governors in Washington are more significant than divisions on the much larger and less disciplined body that sets monetary policy, the Federal Open Market Committee.
In 2013, Ben Bernanke faced a rebellion from three of his Board members, who wanted to taper the Fed’s asset purchases earlier than he did. His memoirs state that a rebellion from 3 of the 7 Board members would have made his position as Chair “untenable”, so he had to address this risk by accepting earlier tapering. The fact that he then became the spokesman for a messy compromise probably contributed to the miscommunications about the Fed’s intentions that were such a problem during the “taper tantrum” that summer.
It is possible that Ms Yellen is facing a similar problem today, though this time her opposition on the Board is coming from a dovish, not hawkish, direction. There are now only 5 seats on the Board actually filled, and two members (Brainard and Daniel Tarullo) indicated last week that they are opposed to a rate rise this year.
That is a tough obstacle, especially since the Brainard arguments about the downside risks to the US economy, and the tightening in monetary conditions that has already happened, are clearly also shared by Bill Dudley. Although Mr Dudley is not a Board member, he has a special position as Deputy Chairman of the FOMC and a permanent voter. (…)
So what will happen in December? The outcome looks increasingly uncertain. Ms Yellen herself still seems to believe that a rate rise is her central case but, this time, the ultimate decision really will be “data determined”. The growth rate in US economic activity has now dropped to only about 1-1.5 per cent. That means that the onus of proof has now completely changed: there needs to be an improvement in the data to keep a rate rise on the table.
EARNINGS WATCH
Q3 earnings season: so far, so good:
Overall, 58 companies have reported earnings to date for the third quarter. With 12% of the companies in the S&P 500 reporting actual results for Q3 to date, more companies are reporting actual EPS above estimates (81%) compared to the 5-year average (72%), while fewer companies are reporting sales above estimates (50%) relative to the 5-year average. Factset calculates that in aggregate, companies are reporting earnings that 6.6% above the estimates. This surprise percentage is above both the 1-year (+4.8%) average and the 5-year (+4.8%) average.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q3 2015 is now -4.6%. It was -5.6% last week. If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would jump to 2.8% from -4.6%. It was +1.8% last week.
In terms of revenues, 50% of companies have reported actual sales above estimated sales and 50% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is below both the 1-year (53%) average and the 5-year average (57%). In aggregate, companies are reporting sales that are 0.5% above expectations. The blended revenue decline for Q3 2015 is now -3.2%.
At this point in time, 10 companies in the index have issued EPS guidance for Q4 2015. Of these 10 companies, 9 have issued negative EPS guidance and 1 has issued positive EPS guidance. This is slightly worse than last year at the same time.
Thomson Reuters’ tally now sees trailing 12-month EPS reaching $118.23 after Q3, up from $118.15 last week. On the other hand, the inflation component in the Rule of 20 fair P/E calculation went fro 1.8% to 1.9% (core CPI) after last week’s CPI. As a result, fair value on the S&P 500 Index is now 2140, 5.3% above current levels.
As a reminder, the 200-d m.a. of 2060 is only 1.4% above and is still declining…as is the 100-d m.a. at 2042.
Iran promises pre-sanctions oil output Minister says levels can get back to 3.4m b/d within 7 months
(…) Mr Zanganeh said Iran could increase production by 500,000 b/d immediately after the lifting of sanctions and reach its pre-sanctions output level within seven months. (…)
Iran would not wait for authorisation from Opec to increase oil output, Mr Zanganeh said, having lost customers to rival producers during the sanctions years.
“This is our right,” he said, adding that traditional buyers of Iran’s oil are ready to resume imports. “There are no problems with customers.”
Iran is targeting oil output of 5.7m b/d in five years’ time, a level that if achieved would probably see it retake its position as the second-largest producer in Opec, having lost that slot to Iraq in recent years. Mr Zanganeh told the conference he expects Opec to “welcome Iran’s natural return”. (…)
Mr Zanganeh said: “The doors are open for American companies if they are willing to join. But it seems they have not received the green light from their government yet.”
He denied that the supreme leader and ultimate decision maker Ayatollah Ali Khamenei is against the presence of US businesses.
Iran Urges OPEC to Cut Oil Output to Raise Prices to $70-$80
OPEC member states should cut crude output to boost prices to a range of $70 to $80 a barrel, Iran’s Oil Minister Bijan Namdar Zanganeh said, even as his country prepares to ramp up production in the aftermath of economic sanctions.
“No one is happy” with prices at current levels, Zanganeh told reporters in Tehran. “OPEC should decide to manage the market by reducing the level of production.” Zanganeh said he doesn’t expect the producer group to decide to scale back output when its ministers meet next in December. (…)
SENTIMENT WATCH
New Credit Suisse Survey Shows Clients Are More Confused Than Ever
Over the past few weeks, the Credit Suisse global equity strategist and his team have met with customers in the U.S., Europe, and Asia. The takeaway is that everyone is baffled by the market.
Following meetings with clients in the U.S., Europe and Asia over the past few weeks, we make the following observations: Confusion: Never have we seen so many clients who just do not know what is happening and have cashed up.… The wall of bearishness was extreme in the US – roughly 80 percent of meetings – but much more balanced outside the U.S. (maybe because markets started to rally in the meantime). Often in the U.S., the question was ‘why isn’t this a bear market?’. In Asia, on the other hand, most investors were less concerned about China (though, we have always found the closer you get to China geographically, the less concerned investors are about China).
Sure, the markets have been more volatile lately and nobody can seem to agree on when the Federal Reserve will finally move off of its zero interest rate policy, but there are a number of other reasons investors wanted to move to cash until the future is a bit clearer. Some of the key concerns below.
- China’s hard landing: The No. 1 topic, according to Garthwaite. “Clients agree that ‘real’ data (even on the consumer side) are consistent with just 3-4 percent GDP growth. China has never faced a downturn when it has been this large (32 percent of global GDP growth and circa 30 percent of global capex) and has had such excess in investment, credit and real estate,” he notes. Also on the long list of China worries: the degree of zombie capital sloshing around the economy,foreign debt, and the uncertain direction of the renminbi.
- Declining global growth: In Credit Suisse’s most recent investor survey regarding growth, pessimism was extremely high, nearing an all-time record, in fact. While much of that has to do with China and emerging markets, Garthwaite said, there is growing worry over the impact on other economies: “China and emerging markets were identified as the main source of growth weakness, however, there were increasing concerns about an inventory-led soft-patch in the developed world, in particular the U.S.”
- The effectiveness of quantitative easing: A growing number of investors don’t think central bank bond-buying is doing much, if anything, for the global economy at this point. The view that QE is not working and has run out of steam is “consensus,” Garthwaite said, though he and his team disagree “on both counts, but agree that a move to QE to finance infrastructure would require more of a growth shock.”
- A smaller piggy bank of FX reserves: One of the new concerns that was discussed was the $0.5 trillion decline in FX reserves, with this already being likened (by some) to monetary tightening. Credit Suisse again doesn’t think this is the case, since 80 percent of the fall has to do with China and is being sterilized, meaning it’s being offset by more domestic liquidity.
- Hostile politicians: A number of clients were worried that politics are becoming “less capitalist-friendly,” Garthwaite said. “Ultimately, this needs to be monitored, but we feel that without capital controls or global co-ordination it is hard to unilaterally raise tax rates.”
(…) In sum, Garthwaite notes, clients are very focused on risks in global markets which are admittedly “abnormally high.” But, the analyst says, so is reward, with the equity risk premium now at 5.8 percent. “We would agree, however, that visibility is abnormally low,” Garthwaite concludes.
Institutions are putting their (your) money where there mouth is:
Institutional investors have unloaded U.S. stocks for the last six weeks in a row, and BAML reports that institutions are still the biggest net seller so far year to date. According to Hall, one problem they are facing is outflows from active funds. (Valuewalk)
Hedgies don’t really know what to do…
…while private clients have been buying recently.
The complete CS report referred to above with lots of interesting charts can be seen in Bearnobull’s Library. Here’s one of these interesting charts:
And these 2 charts which suggest that EPS revisions, essentially due to the collapse in commodity prices, may have run their course. Profits of commodity users are expected to keep rising.
Scared by negative earnings revisions? Citigroup says don’t:
The good news is that analyst downgrades are not necessarily fatal for equity markets. Figure 12 plots annual revisions to global bottom-up EPS growth
expectations against stock market performance for every year going back to 1988. The annual median EPS miss since 1988 has been 7ppt, but the median annual
stock market gain has still been 13%. Including this year, analyst forecasts have been too high in 20 of the years. But out of those 20, share prices have risen in 12.
Speaking of commodities and China. Gary sent me this table with this note:
For those seeking the next (massively levered) Glencore, by shorting those with most exposure to Iron, Nickel and Zinc (3 of the top 4 most levered commodities to China aside from copper), here is the place to start (click to expand)
Goldman offers this table:
Two more CS charts, for the contrarian in you:
BTW:
Canada election
Canadians vote today in a tight federal election, with polls suggesting that Justin Trudeau’s Liberal Party is in the lead, bringing to an end Stephen Harper’s Conservative Party’s decade in power. Odds do not favour an overall majority for any party, so policy uncertainty in the wake of the election may continue.
Chinese Copper-Trading Surge Shakes Up Market
Chinese investors hamstrung by stock-trading restrictions are piling into copper trading, a shift that analysts and traders say has distorted the global market for the metal.
Since the start of July, when authorities began limiting stock trading in China, trading in stock-index futures has fallen 97% to around 65,000 contracts a day, while trading in Chinese copper futures has nearly doubled to roughly 710,000 contracts a day. Because investors now face obstacles in betting against stock futures, they have turned to the copper market as they seek avenues to bet on a deepening slowdown in the world’s second-largest economy, traders and other market experts say. (…)
So far this year, the equivalent of 637 million metric tons of copper has changed hands among the world’s copper futures traders, according to data from Macquarie tracking the most-actively traded contracts in Shanghai, London and New York. This is a record high for the period and on pace to exceed the full-year record high of 737 million metric tons notched in 2014.
Shanghai accounted for 47% of these volumes. (…)
Committee to Destroy the World
Michael Lewitt:
(…) “I actually do think we are in the beginning stages of a bear market. In the beginning of the year…I thought there would just be a correction and not a bear market but now based on what I’ve seen in terms of China, commodity prices, a weak US economy, the dollar—which I expect to continue to strengthen—I think that the bull market is effectively over.”
“There are lots of reasons why the Fed isn’t raising rates but I think the biggest reason is that they don’t want to push the dollar higher more quickly than it’s likely to go…in other words, the Japanese and the Europeans are likely to continue their QE programs and that will strengthen the dollar because it will weaken the Yen and the Euro. So, raising rates in the US would merely accelerate that and a stronger dollar is bad for corporate earnings, it’s deflationary, and I think their reluctant to do it. So I think the stronger dollar is the biggest reason they’re not raising.”
“We have a Fed that is complaining there is not enough inflation even though the price of everything that matters is going up. They don’t know how to read the employment numbers [since] we have almost a hundred million people out of the workforce while they think that the unemployment numbers are rosy. We’re in real trouble and then you have this one member of the Fed, Kocherlakota, from the Minneapolis Fed who thinks we should have negative interest rates. So you don’t have much of a chance of having good policy when you indeed have a committee to destroy the world.”