Q2 BOUNCE WATCH
Sorting Out the Statistical Discrepancy in GDP
The US economy may not be booming, but it certainly isn’t doing as badly as suggested by the 0.7% (saar) drop in real GDP during Q1. By now, everyone is aware of the “residual seasonality” problem that has been weighing on Q1 growth rates. That includes the Bureau of Economic Analysis, which announced in a 5/22 blog post that it should fix the problem by the end of July.
Recently, I’ve noted that the problem can be overcome by simply calculating that real GDP rose 2.7% during Q1 on a y/y basis. This automatically eliminates the seasonal adjustment problem and shows that the economy continues to grow at a slow but steady pace. Real nonfarm business output, which excludes government spending, rose 3.5% y/y during Q1.
Furthermore, national income rose faster than GDP during Q1. In theory, these two should be identical. In practice, there is a statistical discrepancy, which rose to a record high of $328 billion (saar) during Q1. In other words, the economy looks better when the BEA adds up all the incomes than when it adds up all the demand data that are used to calculate national output.
This is the known unknown: consumers are not spending their rising incomes and the oil windfall as this Haver Analytics table shows:
However, monthly trends are not as different than the YoY data. In the last 3 months, nominal DPI is up 0.8% while PCE is up 0.6%. In real terms, same trends in both data: +0.4% in last 3 months, +1.6% annualized.
Inflation Returned to Eurozone in May Eurozone consumer prices rose for the first time in six months during May, a significant victory for the ECB in its campaign to avert a slide into deflation that could have derailed the currency area’s fragile economic recovery.
The European Union’s statistics agency said Tuesday consumer prices in May were 0.3% higher than in the same month last year.
Some of the rebound in the index of consumer prices was due to energy. Over the 12 months to May, energy prices fell by 5.0%, compared with 5.8% in the 12 months to April.
Excluding prices for energy, food and alcohol that are largely beyond the ECB’s influence, inflation picked up. The core annual rate jumped to 0.9% from a record low of 0.6%. Services prices rose by 1.3% on the year, having increased by 1.0% in April.
The market is waking up to the reality that I exposed last month. Core prices rose 0.1% MoM following rises of 0.6% in February, +1.4% in March and 0.3% in April for a total of +2.4% in the last 4 months. This is a 7.4% annualized rate! Now if we subtract January’s –1.8%, core prices rose “only” 0.6% over 5 months or +1.4% annualized. Still not close to deflation.
Manufacturing soft-patch persists amid deteriorating global trade flows
Global manufacturing eked out only very modest growth again in May. The JPMorgan PMI, compiled by Markit, rose from April’s 21-month low of 51.0 to 51.2, but that was still the second-lowest reading seen for almost two years.
The disappointing performance in May reflected the first, albeit only marginal, decline in worldwide exports since June 2013, indicating a stalling of global trade flows.
Global factory output
Global goods exports
CURRENCIES BITING
Of the major developed economies, the US – the main engine of global growth over 2014 and 2015 so far – continued to record the strongest pace of manufacturing growth, even with its rate of expansion slowing to a four-month low. Markit’s US PMI slipped to 54.0, in part reflecting a second-successive monthly decline in export orders – blamed in turn by many companies on the strong dollar.
The UK had also seen one of the fastest growing manufacturing sectors in the world last year according to the PMI surveys, but has seen the pace of expansion slow sharply in recent months as the appreciating pound has hit exports. At 52.0, the UK PMI was the third-weakest seen for two years with exports dipping for the third time in the past four months.
In contrast to the export-led weakness seen in the US and UK, the eurozone saw faster manufacturing growth. The PMI edged higher to 52.2 in May, the joint-highest seen over the past year. The weaker euro was cited as a boost to exports, growth of which hit a 13-month high.
So far in the second quarter, eurozone countries have held four of the top five places in the global manufacturing PMI rankings. However, the overall rate of growth signalled by the PMI remained modest rather than impressive, attributable to an ongoing downturn in the French manufacturing economy and only very modest growth in Germany.
Asia remained the main area of weakness in the global manufacturing economy, with the PMI for the region signalling a third successive monthly downturn in business conditions, led by the steepest drop in exports since August 2013.
Markit’s PMI for China signalled the fifth contraction seen over the past six months, with downturns also recorded in Taiwan, South Korea and Indonesia and only meagre growth in Japan as exports remained near-stagnant. Vietnam was Asia’s star performer in May, bucking the malaise seen across the region to register the strongest growth recorded in the survey’s four-year history.
Other emerging markets also provided plenty to worry about. Downturns intensified in both Brazil and Russia. The former saw the PMI dropping to a near four-year low of 45.9 in May, while the latter’s PMI sank to 47.6, the joint-lowest seen over the past six years.
India, in contrast, saw manufacturing growth hit a four-month high. However, at 52.6, the rate of growth signalled remains disappointingly subdued compared to pre-crisis rates of expansion.
Inflation back on the rise
The global PMI survey also showed that inflation looks set to rise again in coming months. Having signalled the steepest decline in manufacturing costs for almost six years at the start of the year, the surveys indicate the strongest rise for eight months in May. Higher oil prices were the main contributor of rising factory running costs. Average prices charged by factories rose as a result. Although only very modest, the rise was significant in being the first recorded since November and the largest since last August.
MORE BLEAK NEWS FORM CHINA
The most recent CEBM Research survey offers little hope that the economy is self-healing:
Based on this month’s survey results the aggregate demand picture continued to look quite bleak. Weaker-than-anticipated demand from property developers combined with poor weather conditions resulted in worsening inventory conditions for cement producers and further downward pressure on cement prices. Steel sector survey feedback varied by region: respondents in some locations reported quite dismal conditions, while respondents in designated policy development areas
(i.e., the Beijing-Tianjin-Hebei Economic Hub and provinces along the One Belt, One Road) have started to observe the government’s support for infrastructure projects positively impact order levels.Looking at property developer feedback, respondents reported that the pickup in sales momentum has been driven primarily by first-home buyer demand, yet there has also been a noticeable rise in upgrade demand. Improving sales conditions have helped to support asking prices. In the banking sector, this month’s survey
results indicate that the scale of credit issuance for most survey respondents contracted on a month-over-month basis. Overall, respondents reported that the lending attitude remains very cautious.
India Cuts Key Interest Rate Again Reserve Bank of India cuts its main interest rate for the third time this year.
India’s central bank cut its main interest rate Tuesday for the third time this year, a move that appears at odds with recent data showing the country’s economy has accelerated to become one of the fastest-growing in the world.
Reserve Bank of India Governor Raghuram Rajan cut the bank’s overnight lending rate by a quarter percentage point to 7.25%, the lowest level since May 2013. The move to loosen monetary policy was predicted by eight out of 11 analysts surveyed by The Wall Street Journal last week.
“With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today,” Gov. Rajan told a news conference after the bimonthly rate-setting meeting at India’s central bank. (…)
Data Friday showed India’s output expansion accelerated to 7.5% in the last quarter, putting it ahead of China as the world’s fastest-growing large economy. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index held above the 50 mark for the 19th month in May, indicating an expansion in manufacturing activity.
But there is mounting evidence suggesting slack in the economy.
Industrial production was up just 2.8% in the year ended March 31st. Exports in April fell for the fifth month in a row, and corporate profits have been disappointing. Some economists, including Moody’s Faraz Syed, point to falling core inflation and lower production to suggest that the cyclical upswing is fading. Emkay Global Financial Services Ltd.’s Jimit Harde noted credit growth has declined to a multi-decade low, while rising bad loans at banks and a subsided investment cycle point to low growth.
Gov. Rajan also mentioned Tuesday weak corporate results, suggesting that final demand has yet to pick up strongly in India. Deputy Governor Urjit Patel told the news conference that the Indian economy has potential to grow by 8% to 8.5%, faster than its current expansion rate. (…)
Oil Prices Boosted by Dollar, Saudi Comments
Mr. Naimi, a key figure in the global oil market, said that oil demand is picking up and supply is slowing down, but also acknowledged that there is still a problem of an oil surplus.
Ford Motor Co. is shortening summer vacation for workers at 16 North American factories to meet growing demand for sport-utility vehicles and its new aluminum-bodied F-150 pickup.
To churn out an extra 40,000 vehicles, Ford is cutting the second half of a planned two-week break that starts June 29, according to an e-mailed statement. The change affects six assembly plants and 10 parts factories for models such as the Explorer, Edge and Escape SUVs, as well as the F-150, Ford’s top seller and biggest moneymaker.
Ford said in April that it planned to boost North American production in the second quarter by 13,000 vehicles, or 1.6 percent, to 815,000 cars and trucks. The Dearborn-based company said the additional output announced Tuesday was included in its April financial forecasts.
(…) By contrast, Ford this month is cutting a shift of 700 workers at a factory that makes small cars and hybrids.
US dealmaking smashes records Value of M&A in May passes highs of dotcom bubble and debt boom
The overall value of deals in US-bound mergers and acquisitions activity amounted to $243bn in May compared to $226bn during the same month in 2007 and $213bn in January 2000, the previous biggest and second biggest months respectively, according to Dealogic data. (…)
The M&A boom has come amid a borrowing binge by US companies, as treasurers lock in cheap, longer-term funding ahead of an expected interest rate rise by the Federal Reserve. (…)
Average company bond yields have halved since 2007 to about 3 per cent in the US, and there has been more than $100bn of corporate bond issuance every month for the past four months — the longest ever streak of issuance above that mark. Bank of America Merrill Lynch predicts that June will become the fifth month in a row. (…)
Global issuance of collateralised loan obligations — or CLOs, bundles of loans made to poorly-rated companies that are sold off in slices to investors — almost doubled last year to $99.3bn, according to Dealogic. Although below the heydays of 2006-07, the market’s renaissance has helped lubricate the resurgent M&A boom. (…)
FT’s Lex column adds:
(…) Citigroup estimates that CLO funds need about $200bn of loans this year to meet investor demand.
Companies have taken advantage of the tight market to “reprice” (that is, call and replace) existing debt. S&P LCD reported that repricing deals (where terms of an existing loan stay the same except the coupon) reached $32bn in May, their highest level in 16 months. The average repricing reduced annual interest rates by 68 basis points. Petsmart and Dollar Tree, for example, both went back to the loan market just a few months after first issuing loans. (…)