U.S. Consumer Prices Flat, but Offer Glimmer of Inflation U.S. consumer prices were unchanged in January but rose over the past year at the fastest clip since October 2014, a sign inflation may be firming despite a strong dollar and continued slide in energy prices.
The consumer-price index was flat in January after falling 0.1% the previous month, the Labor Department said Friday. From a year earlier, however, prices rose 1.4%, the fastest annual gain since October 2014.
Excluding the volatile food and energy categories, so-called core prices rose 0.3% in January, the biggest monthly increase in more than four years. From a year earlier, core prices were up 2.2%, the most since June 2012. (…)
Friday’s report showed the gains in core prices were broad-based, driven primarily by higher costs for services such as medical care and rent—which have risen steadily over the past year–along with rising prices for goods, including apparel, new and used cars and food at restaurants and bars. (…)
Elsewhere:
Still, there has been a clear pickup in inflation for items less affected by the dollar’s strength, a sign the U.S. job market’s strength is starting to get reflected in prices. Core services prices, which run the gamut from child care to funeral expenses, were up 3% on the year. That was the strongest advance since 2008. Meanwhile, core goods prices, which are far more exposed to currency movements and global economic developments, were down 0.1% from a year earlier. (WSJ)
Median CPI
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.9% annualized rate) in January. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.4% annualized rate) during the month.
Easy to see the rising trend in core inflation. Last 5 months annualized:
- Core CPI: +2.6%
- 16% trimmed-mean CPI: +1.9%
- Median CPI: +2.2%
The Cleveland Fed’s Nowcast model suggests that core CPI rose 0.2% MoM in February, +2.23% YoY. It also calculates that core CPI in Q1’16 is +2.6% annualized (+1.7% core core PCE).
EARNINGS WATCH
Factset’s weekly summary:
Overall, 87% of the companies in the S&P 500 have reported earnings to date for the fourth quarter. Of these companies, 68% have reported actual EPS above the mean EPS estimate, 10% have reported actual EPS equal to the mean EPS estimate, and 21% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is slightly below the 1-year (69%) average, but slightly above the 5-year (67%) average.
In aggregate, companies are reporting earnings that 3.4% above the estimates. This surprise percentage is below both the 1-year (+4.9%) average and the 5-year (+4.7%) average.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q4 2015 is now -3.6%. If the Energy sector is excluded, the blended earnings decline for the S&P 500 would improve to 2.5% from -3.6%.
The blended revenue decline for Q4 2015 is now -3.7%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 0.5% from
-3.7%.
At this point in time, 97 companies in the index have issued EPS guidance for Q1 2016. Of these 97 companies, 78 have issued negative EPS guidance and 19 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 80%. This percentage is above the 5-year average of 72%.
The problem remains Q1’16 EPS which are now seen down 6.5% with all sectors materially worse than 7 weeks ago.
Here’s Thomson Reuters’ tally for Q1’16:
Per TR, 2015 EPS should come in at $117.37, down 1.2% YoY, pretty remarkable given that Energy EPS dropped 60%. But Q1’16 EPS are seen dropping 5.1% which would bring trailing 12-month EPS down to the $116.70 area (allowing for the usual beats). This earnings headwind will need hopeful news from elsewhere to overcome…
…good news must either come from the economic landscape and/or central banks and/or politicians 
.
Or it can come from lower inflation data as per the Rule of 20. The problem is that inflation is going higher, as per the wishes of central bankers. OK for them and for deflationary risks but the fact is that higher inflation hurts P/E multiples. In case you did not notice, U.S. core inflation rose from 1.5% to 2.2% during the last 12 months. Per the Rule of 20, this cuts fair P/E by 0.7 (20 – inflation).
Based on this morning’s level (1945), the upside to fair value of 2089 is 7.4%, down from +12.5% at the time of my upgrade last week. This is without normalizing for Energy as discussed last week. With normalization, the upside rises to 20%. Given that Q1’16 EPS will likely drag down trailing earnings, rising oil prices seem needed to keep investors’ expectations reasonably positive.
Deflation Fears Dim as Consumer Prices Strengthen Core inflation in U.S., Europe and elsewhere is steady or rising, an encouraging sign for central bankers even as stock markets, oil prices tank
(…) In the U.K., core prices in January rose 1.2% from the previous year, accelerating from a 0.8% annual increase recorded in June. In the eurozone, broader inflation was only 0.4% on the year in January, but core inflation was higher, near 1%.
And in Japan, which has wrestled for years with ultralow inflation, consumer prices excluding food, alcohol and energy have been slowly ticking up since the middle of last year. Annual core inflation inched up to 0.8% in December from 0.4% in April. TheBank of Japan’s preferred measure, which excludes only energy and fresh food, was up at an annual 1.3% rate in December. (…)
Bank of America’s Newest Mortgage: 3% Down and No FHA Bank of America Corp. is rolling out a new-mortgage product that would allow borrowers to make down payments of as little as 3%, in a move that would represent an end run around a government agency that punished the bank for making errors on similar loans.
(…) The new mortgage program, which the Charlotte, N.C.-based lender plans to unveil on Monday, will let borrowers avoid private mortgage insurance, a product to protect mortgage lenders and investors that is usually required for low-down-payment loans.
That could make the new loans cheaper than those offered through the Federal Housing Administration, the government agency that has won big settlements from banks in recent years for what the lenders describe as minor errors. (…)
Bank of America’s new mortgage cuts the FHA out of the process. Instead, the new loans are backed in a partnership with mortgage-finance giant Freddie Mac and the Self-Help Ventures Fund, a Durham, N.C.-based nonprofit. (…)
Many big banks have pulled back sharply from FHA-insured lending in the past few years, citing the risk of being hit with penalties for minor errors. A raft of nonbank lenders have rushed in, but the banks’ retreat from the program has made it more difficult for low-income borrowers to get home loans. (…)
To get the loans under Bank of America’s new program, borrowers must have a credit score of at least 660, which is higher than FHA’s requirement, and an income that is less than the area’s median. (…)
Bank of America says that for a borrower with a $150,000 mortgage, a credit score of 680 to 719 and a 3% down payment, the monthly cost of the new mortgage would be about $782. A comparable FHA borrower with Bank of America would pay $887 a month, the bank said. (…)
EU businesses warn China on trade strains from overcapacity
China’s crushing overcapacity risks inflaming trade tensions as well as swamping the country’s companies with debt, the European Chamber of Commerce in Beijing has warned.
“They can’t outgrow this problem any more,” Jörg Wuttke, president of the European Chamber, told reporters in Beijing. “Politicians need to realise that [Chinese] overcapacity leads to job losses, which leads to protectionism in Europe.”
Six out of eight industries studied by the chamber, ranging from glass to paper to steel, show signs that factories are operating at even lower rates than they were in 2009 in the immediate aftermath of the global financial crisis. In all of the industries studied, Chinese companies compete with large European businesses. (…)
More worrying for central planners is the deteriorating return on capital investment in China and the difficulty many state-owned and private businesses are having in paying off loans.
“The downward pressure has still not let up. PPI [producer price index] is still falling, overcapacity pressures are high, corporate profits are down,” Wang Yiming, vice-minister of the Development Research Center, which advises China’s cabinet, said in a briefing last week.
(…) the European report concludes that the lion’s share of the problem lies with bloated state firms. They enjoy easy access to loans from state-owned banks and protection from local officials who worry about the impact of a shutdown on local jobs and bank loans. (…)
IEA Sees Oil Markets Rebalancing Next Year
In its closely followed medium-term report released Monday, the agency—a watchdog for big oil consumers—said “supply and demand will gradually rebalance by 2017, with a corresponding recovery in oil prices from around $30 a barrel.”
The IEA said U.S. shale production is now set to decline by 600,000 barrels a day this year and by a further 200,000 barrels a day in 2017.
The agency said that because of expected global decreases in oil production, world-wide oil inventories will increase by just 100,000 barrels a day next year and fall by about 400,000 barrels a day in 2018. That compares to a buildup of 2 million barrels a day in inventories last year.
Global oil inventories are still projected to rise by a total of over 1.5 billion barrels between 2014 and 2017, the agency said. (…)
The Saudis blink over oil production
(…) they blinked and that is all important. The myth of Saudi power is broken.
The real steps necessary to rebalance the market have yet to come. Saudi production must come down. Others may join in the process but an overall cut of 3m barrels a day is now necessary and most of that will have to come from Saudi Arabia. Stocks must be run off. That will take time. Iran must be welcomed back into the market. That process will be slow and even estimates of another 400,000 barrels a day during 2016 now look high. But they will come backand have to be accommodated. The interests of other Opec member states — such as Venezuela and Algeria — must be taken into account. The Saudi’s lack of respect for their fellow producers over the last year has shaken many traditional alliances. The kingdom does not have that many allies.
The process won’t be easy and will take time. The continued Chinese recession doesn’t help, nor does the almost religious attachment to austerity in Europe. But recessions end and the combination of the coming elections in France and Germany and the disruptive impact of the migration crisis should lead to more expansionist economic policies over the next 12 months.
Even if Saudis do blink again and cut production on a serious scale there are so many downward pressures that it is hard, short of a revolution in Riyadh, to see prices going above $50 for some considerable time. That could mean three years or even more. And even beyond that, potential supply growth — including all the postponed projects of which we have heard so much — is stronger than the likely growth in demand.
Within Saudi Arabia, the full political implications of what has happened over the last week are not yet clear. The change of policy is a humiliation for oil minister Ali al-Naimi. Power has shifted, and heads may roll (not literally I hope) although it is not yet clear who the winners will be. (…)
Sovereign Wealth Funds May Sell $404 Billion of Equities
Sovereign wealth funds may withdraw $404.3 billion from global stock markets this year if crude prices stay between $30 to $40 per barrel as oil-rich nations seek to shore up their finances, according to the Sovereign Wealth Fund Institute.
The value of listed equities held by the world’s largest wealth funds will probably drop to $2.64 trillion this year, from about $3.04 trillion at the end of 2015, the Las Vegas-based SWFI said in an e-mailed report sent Monday. Withdrawals are set to approximately double from last year, when sovereign funds sold about $213.4 billion of equities, it said. (…)
Cameron sets date for UK’s EU referendum Eurosceptic ministers will campaign for Brexit vote on June 23
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British Pound Plunges on ‘Brexit’ Fears The British pound fell by 2% after London’s mayor, Boris Johnson, became the most prominent politician to say he would back the campaign for Britain to leave the EU.
Europe’s Biggest Banks Ordered to Boost Capital
Europe’s new banking watchdog ordered the biggest eurozone banks to boost their capital levels by 0.5 percentage point on average after a yearlong assessment of their risks.
The so-called Single Supervisory Mechanism, established in late 2014 as part of Europe’s efforts to head off its debt crisis, warned in a report published on Friday that overall risks for the roughly 130 large eurozone banks it supervises have “not decreased compared to 2014.”
It said many banks were still recovering from the 2012 financial crisis and “they continue to face risks and headwinds.” The biggest risk consists in adapting their business models to a new environment of low interest rates, the supervisor said.
It is the first time that the eurozone’s single banking watchdog has reviewed the riskiness of the bloc’s biggest banks based on a common standard. The task previously fell to national regulators, who took different approaches to capital levels and business risks.
The review aims to restore confidence in Europe’s battered banking sector, which has come under renewed pressure in recent weeks amid broader concerns around the health of the global economy. The MSCI Europe Financials Index has fallen more than 15% so far this year.
The eurozone banks need to boost their core tier one capital ratios to 9.9% on average this year from 9.6% last year, and set aside an additional 0.2% of capital as a buffer against the risk posed by systemically-important institutions, the supervisor said. The supervisor informed the banks of its decision in late December.
Core tier one ratios are a key measure of a bank’s balance sheet strength, comparing equity capital to risky assets.
The report shows that five banks didn’t have enough capital to meet the current requirements, including one that fell significantly short. It didn’t name the banks. Some lenders, though, won’t need to boost their capital at all because they already meet or exceed the requirements.
The report shows that five banks fell short of common equity Tier 1 capital requirements, a widely used measure of a bank’s financial strength, including one that fell significantly below the required level.
To assess the strength of the banks, the supervisor looked at four elements: business models, governance and risk management, risks to capital and risks to liquidity and funding. Its additional capital demands consisted of a 0.3-percentage-point increase based on its own assessment of risks, and a further 0.2-percentage-point for capital buffers that are being gradually phased in. (…)