RECESSION WATCH
The National Activity Index from the Federal Reserve Bank of Chicago fell to -0.44 during March. It was the weakest reading since January 2014, suggesting that economic growth was slightly below trend. At -0.18, the three month moving average has been in negative territory since February 2015. During the last ten years, there has been a 77% correlation between the Chicago Fed Index and the q/q change in real GDP.
From Doug Short:
The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.
From the CB:
The Conference Board LEI for the U.S. increased in March, after declining for the prior three consecutive months. Positive contributions from the financial components more than offset the large decline in building permits. In the six-month period ending March 2016, the leading economic index increased 0.7 percent (about a 1.3 percent annual rate), slower than the growth of 1.5 percent (about a 3.0 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators remained balanced with its weaknesses.
“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.” [Full notes in PDF]
From Doug Short:
(…) the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.
Here is a twelve month smoothed out version, which further eliminates the whipsaws:
U.S. Jobless Claims Fall to 4-Decade Low The number of U.S. workers who applied for new unemployment benefits declined last week to the lowest level in 43 years, a sign of the labor market’s vitality.
Initial jobless claims fell by 6,000 to a seasonally adjusted 247,000 in the week ended April 16, the Labor Department said Thursday. That was the lowest level for jobless claims since the week of Nov. 24, 1973.
That also marked the 59th straight week that initial jobless claims remained below 300,000, the longest such streak in more than four decades. (…)
The Easter holiday, which moves on the calendar each year, can distort seasonal adjustments to the data during March and April. The four-week moving average, which smooths out volatility, fell by 4,500 last week to 260,500. That level has stayed fairly consistent since early March.
Still, there was one other historical point of strength in the latest reading. A measure of the number of people on unemployment rolls, which are reported with a one-week lag, fell by 39,000 in the week ended April 9 to the lowest level recorded since 2000.
Here’s the widely used chart:
This chart takes into account the fact that the number of employed Americans has grown over the years:
Sure looks like a tight market to me.
Home-Price Surge Stymies First-Time Buyers
(…) With mortgage rates at historic lows, unemployment at its lowest in eight years and housing inventories shriveling, particularly on the lower end of the spectrum, U.S. housing markets are becoming less affordable compared with historical norms. That puts the most pressure on first-time home buyers, who accounted for less than a third of home purchases last year, the lowest level in nearly three decades, according to the National Association of Realtors. (…)
Three-quarters of real-estate markets in U.S. counties larger than 100,000 people are less affordable now than a year ago, according to a recent analysis from data company RealtyTrac. Home prices have outpaced wage growth in 94% of those counties since home prices hit bottom in each of the locations, the analysis found.
Of 132 markets tracked by John Burns Real Estate Consulting of Irvine, Calif., 27 are less affordable than historical averages, up from 16 last year. (…)
Meanwhile:
NMHC: Apartment Market Tightness Index declined in April Survey
Apartment markets appeared mixed in the April 2016 National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions, with two of four indexes landing below the breakeven level of 50. The Market Tightness (43) and Equity Financing (45) indexes showed declining conditions for the second quarter in a row, while Sales Volume (53) and Debt Financing (50) indicated improving and steady conditions, respectively.
“We continue to see some softening in the market relative to one of the strongest runs in recent memory for the apartment industry,” said Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist. “As new apartment construction catches up with demand, we expect to see moderation from record rent growth as well as more selectivity from equity and debt financing sources.” (…)
Here’s Bill McBride’s chart:
This could help keep the U.S. CPI low.
From Mario With Love: How ECB Cash Could Boost U.S. Stocks
The European Central Bank may be about to hand billions of euros to American shareholders.
On Thursday, the ECB set unexpectedly generous conditions for buying corporate bonds, part of its effort to refloat the eurozone economy with a deluge of free money.
The relaxed conditions mean the money can easily wash up on U.S. shores. Big American companies have long sold bonds in Europe, and last year these “reverse Yankee” issues hit a record after European interest rates turned negative. Reverse Yankee issuance hit €66 billion ($74.6 billion) in 2015, according to Dealogic. That was a fifth of all euro-denominated bond issuance, says Fitch Ratings. This year, so far, the level is the second highest on record.
Euro-denominated bonds issued by any eurozone-based company will qualify for ECB buying, so long as the company isn’t a bank. All a U.S. company has to do is set up a eurozone subsidiary to issue its debt. Even better: The ECB can buy up to 70% of each bond, and can buy at issue.
If the ECB spends money on U.S. debt, that cash is likely to end up in the hands of shareholders. Large U.S. companies have been rapidly increasing their borrowing and using the money mainly to finance share buybacks, rather than to increase investment.
Handing out money to foreign companies may prove controversial for the ECB, particularly because the central bank will take a financial hit if the bonds aren’t repaid in full.
(…) Europe is awash in spare production capacity, and there is no sign that big investments have been on hold awaiting access to bond finance.
It is also unlikely that European companies will buy back shares en masse. For one thing, eurozone companies have shown little desire to take on extra leverage, unlike their cousins across the Atlantic. In part this is because of the economic outlook; after years of weak growth, uncertainty is widespread, and European boardrooms are more focused on preserving what they have than on expanding. Indeed, they have been strengthening their balance sheets through share issues, the opposite of what has been happening in the U.S.
For another, European compensation structures don’t encourage companies to take on debt to buy back shares. Only four in 10 chief executives of the biggest European companies have compensation linked to stock performance, Goldman Sachs calculates, while in the U.S. two-thirds of big-company CEOs do. (…)
Even if foreign borrowers take a big chunk of the ECB’s handouts and pass them on to U.S. shareholders, it could still help the central bank achieve its aims, by weakening the euro. Borrowers would swap their euros for dollars, pushing up the greenback and so importing inflation into the eurozone. (…)
Yen tumbles on renewed rate cut talk
EARNINGS WATCH
- 121 companies (33.5% of the S&P 500’s market cap) have reported. Earnings are beating by 3.6% while revenues surprised by 0.4%. Expectations are for a decline in revenue, earnings, and EPS of -1.5%, -9.1%, and -6.9%.
- EPS is on pace for -4.5% (-3.4% yesterday) , assuming the current beat rate for the remainder of the season. This would be +0.7% (+1.7%) excluding Energy.