Chicago Fed: Economic Growth Picked Up in January
Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.28 in January from –0.34 in December. Two of the four broad categories of indicators that make up the index increased from December, and two of the four categories made positive contributions to the index in January.
The index’s three-month moving average, CFNAI-MA3, increased to –0.15 in January from –0.30 in December. January’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.
The CFNAI Diffusion Index, which is also a three-month moving average, ticked up to –0.11 in January from –0.17 in December. Thirty-nine of the 85 individual indicators made positive contributions to the CFNAI in January, while 46 made negative contributions. Forty-five indicators improved from December to January, while 39 indicators deteriorated and one was unchanged. Of the indicators that improved, 14 made negative contributions. [Download PDF News Release] (…)
When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.
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.
DOT: Vehicle Miles Driven increased 4.2% year-over-year in December
Travel on all roads and streets changed by 4.2% (10.6 billion vehicle miles) for December 2015 as compared with December 2014. The seasonally adjusted vehicle miles traveled for December 2015 is 268.5 billion miles, a 4.0% (10.4 billion vehicle miles) increase over December 2014. It also represents a 1.4% change (3.7 billion vehicle miles) compared with November 2015.
Canada deficit could triple Trudeau’s limit
Canada’s deficit could be triple the C$10bn cap promised by Justin Trudeau in his campaign after the new government warned of a worse than expected impact from the slide in oil prices.
Canada is now on track for a deficit of C$18.4bn in the year starting April 1, which does not include new stimulus to be unveiled in the federal budget on March 22, said Bill Morneau, finance minister.
After adding widely anticipated spending measures, the deficit could run up to C$30bn. (…)
The finance department cut its outlook for growth from 2 per cent to 1.4 per cent for 2016, “reflecting the impact of sharp declines in crude oil prices” and “elevated uncertainty” in the global economy since its November update. (…)
(…) “Ottawa can clearly afford a moderate fiscal boost without doing lasting damage to the long-term debt outlook,” BMO Nesbitt Burns chief economist Douglas Porter and senior economist Robert Kavcic said in a report on Mr. Morneau’s update.
“The federal debt-to-GDP ratio has dipped in each of the past two years, and remains relatively low at 31 per cent,” they added. (…)
Including those measures, the 2016-17 deficit would equal only about 1.5 per cent of GDP, which is “hardly a blow-up,” said CIBC World Markets chief economist Avery Shenfeld. (…)
Older Women Reshape U.S. Job Market Faced with greater debt and less savings, more female workers are delaying retirement, a shift that’s helping to transform America’s economy.
Since the start of the most recent recession in December 2007, the share of older working women has grown while the percentage of every other category of U.S. worker—by gender and age—has declined or is flat.
In 1992, one in 12 women worked past age 65. That number is now around one in seven. By 2024, it will grow to almost one in five, or about 6.3 million workers, according to Labor Department projections. (…)
Overall, older Americans are better off financially than the previous generation. In 2013, households headed by adults age 62 and older had a median net worth 40% higher than similar households in 1989, adjusted for inflation, thanks to more two-income households, stocks and real-estate equity among wealthier families. Poverty rates among older Americans are down.
Net worth for households headed by adults 35 and younger, by contrast, have fallen 28% over the same period, according to the Federal Reserve Bank of St. Louis. (…)
Older Americans also have more debt than in the past. For example, half of all homeowners ages 65 and older with a mortgage owed about $88,000 in 2013, up from $43,400 in 2001. (…)
Still, among those who remain employed, the need for money was the most cited reason for working, exceeding those who work for enjoyment by a nearly 2 to 1 margin, according to a survey published in 2014 by AARP. (…)
Low interest rates have made retirees more insecure about their ability to live well longer.
More Americans are worried about their quality of life in retirement. Confidence about being able to save enough to ensure “a desirable standard of living” dropped this year, according to a new report. The worry was particularly strong among women.
Some 52 percent of individuals surveyed view their retirement prospects negatively, down 3 percentage points from last year. Only 47 percent of women said they were saving enough for their golden years, compared with 57 percent of men. (…)
More Subprime Borrowers Are Falling Behind on Their Auto Loans
(…) Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7 percent, a level not seen since 2010, according to data from Wells Fargo & Co. (…)
BlackRock Warns Bond Traders They’re Underestimating the Fed
(…) “Will the central bankers wait out all of 2016?” Russ Koesterich, the global chief investment strategist for New York-based BlackRock, wrote in a report Monday. “Probably not, yet this is exactly what the futures market is suggesting. Inflation has strengthened, suggesting that the central bank may not be quite as dovish as the market expects.” (…)
The Fed Prepares to Dive By John Mauldin
Kyle Bass, a sharpshooting short-seller The hedge fund chief is betting on a vicious fall in the renminbi, writes Stephen Foley
(…) “Everyone has this embedded belief that China can pull off the ‘triple lindy’ every time they want to do it,” says the former springboard diver, “but our view is they are going to have to have a reset.” (…)
Yet, thanks to a 12-page dissection of China’s banks, shadow banks and central bank reserves sent to investors in his $1.7bn hedge fund Hayman Capital last week, it is Mr Bass who has given the most strident, forensic and colourful voice to those who suspect China will be forced to revalue the currency sharply lower.
“What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote. Banking system losses could be four times as big as those on subprime mortgages in the US during the financial crisis, and the central bank does not have the reserves to plug the hole and defend its currency. “China’s back is completely up against the wall today” and the country is “on the precipice of a large devaluation”. Economists and Beijing have challenged the alarming analysis; Zhou Xiaochuan, the People’s Bank of China governor, gave a rare interview to insist capital outflows were evidence of economic rebalancing rather than capital flight.
This is all of a piece with previous declarations by Mr Bass. Since the Great Recession he has predicted sovereign debt crises in Ireland, Greece, Portugal, Spain, the UK, Switzerland and France. He has compared the Japanese economy to a “Ponzi scheme” . Armageddon does not always come — he admits he was wrong on Switzerland and the UK; and Japan is notably still standing, though a devaluation of the yen meant his bet eventually made money overall there. Hayman’s returns since the financial crisis have been modest by the standards of the greatest hedge fund investors and 2015 was, by his own admission, one of his worst. But enough of Mr Bass’s predictions have come true to justify taking him seriously. One manager of a fund of hedge funds says investing with Mr Bass is like funding a “think-tank” on how to navigate the global economy. (…)
How Vulnerable Is Europe to China’s Slowdown?
(…) Unlike Latin America, a China-related sharp fall in exports isn’t likely in Europe. That’s not to say there aren’t European industries that are vulnerable to China’s problems. China takes 8.1 percent of Europe’s raw metals exports, 8.5 percent of its wood and paper, and 10.4 percent of raw materials used to make textiles. In Germany, 10 percent of machinery and transport exports go to China, and those China-bound machinery and transport products make up 5 percent of the country’s total exports.
Overall, however, Chinese demand accounts for just 1 percent of Europe’s GDP, while demand in the rest of non-Japan Asia accounts for another 1 percent. The euro area’s exports to China fell nearly 5 percent last year and yet overall exports rose 9 percent, with exports to developed economies driving much of the growth. As a result, analysts in Credit Suisse’s Global Markets division are skeptical that “the direct effects of a further slowdown in domestic demand in China or other emerging markets would deliver a severe, further, downside shock to euro area growth.”
Given the international reach of Europe’s banking system, the risk of financial contagion originating in China and finding its way into the EU cannot be dismissed. In the last quarter of 2015, more than 50 percent of Chinese banks saw an increase in the number of non-performing loans. That’s a concern for European banks that have lent money to Chinese banks, as well as borrowers who could see their access to credit decline if banks grappling with China-related losses pull back on domestic lending. French and German banks have the most direct exposure to China, having increased their loans to Chinese banks in recent years.
But the vulnerability of French and German banks – which hold some €40 billion and €30 billion in Chinese assets, respectively – pales in comparison to that of the Spanish banking system. While Spanish banks lend little to China, at least in comparison to their French and German counterparts, they do have a large exposure to Latin America, which is suffering from declining Chinese demand for commodities. Spanish banks held about €350 billion worth of Latin American and Caribbean assets last year. Credit Suisse said there’s already some evidence that credit conditions in Spain have begun to deteriorate. “In the event of a more severe financial crisis across the emerging markets asset class, it is possible that credit conditions for Spanish banks [will] tighten,” said the bank’s Global Market division analysts.
Outside of banking, perhaps the greatest China-related obstacle facing Europe is psychological. For starters, Credit Suisse’s Global Risk Appetite index is in ‘panic’ mode. What’s more, Germany’s Ifo Institute reported late last month that its monthly confidence index dropped from 108.6 in December to 107.3 in January. An earlier survey by Credit Suisse found that concerns about China and Asia topped European executives’ list of worries last year. It remains to be seen whether those concerns will translate into declining investment, or whether European business leaders will concentrate on the half of the glass that is still full.
Credit Suisse economists believe there is much to be said for the latter point of view. Europe’s outlook – and, by extension, the outlook for European equities – appears promising for a number of reasons, including anticipated easing by the European Central Bank, an improving labor market, and strong consumer demand, buoyed by a nearly 50 percent drop in the oil price in euro terms. Since Europe isn’t much for oil production, low energy prices should boost corporate margins, investment, and employment as well as household income. Fiscal conditions are finally easing, and credit conditions are loosening, too. Credit Suisse expects the euro area economy to grow 1.8 percent this year – up from 1.5 percent in 2015 and double the 0.9 percent growth rate of 2014 – and, for now, economists remain “relatively sanguine” about China’s problems dealing any kind of blow to that forecast.