NEW$ & VIEW$ (26 FEB. 2015): Retail deflation; China devaluation?

JANUARY U.S. CPI

• January Consumer Price Index: -0.7% vs. -0.6% consensus, -0.4% prior.
• Core CPI +0.2% vs. +0.1% expected, flat prior.

The deflationary trend in retail goods has accelerated. It is not showing in core CPI mainly because of the inflationary trend in services which are mainly influenced by wages. For more on that see DEFLATING EQUITIES.

U.S. New Home Sales Hold Steady at Cycle High as Prices Weaken

New home sales during January were little-changed at 481,000 (5.3% y/y) following 482,000 sales during December, initially reported as 481,000.

The median price for a new home in January declined 2.6% to $294,300 (+9.1 y/y), pulling back from the record high of $302,100 in December, revised from $298,100. The average price of a new home fell 8.0% to $348,300 (+3.3% y/y) from $378,700, revised from $377,800.

Sales in the Northeast fell by more than one-half (-50.0% y/y) to 15,000. Sales in the West declined 0.8% (+5.0% y/y) to 126,000. A 19.2% rise in Midwest sales to 62,000 (21.6% y/y) offset much of these declines. Sales in the South also gained 2.2% (8.6% y/y) to 278,000, the highest level since 2008.

The inventory of unsold homes increased 1.4% to 218,000 (15.3% y/y), the highest level since March 2010 and up by roughly one-half from the 2012 low.

TRUCKING NOT DEFLATING!

In January, the Cass Truckload Linehaul Index rose 7.9% year over year. With demand improving and capacity remaining extraordinarily tight, contract rate increases should continue to filter into our index at higher levels.

Eurozone Recovery Hopes Buoyed by Data

(…) Data released by the ECB showed lending to the private sector may be nearing a turning point after almost three years of decline. The ECB said that compared with the same month of 2014, lending to the private sector fell by only 0.1% in January after declining by 0.5% in December. (…)

Separate figures released by Germany’s Labor Agency showed the number of jobless fell more than expected in February, underlying the continuing strength of the country’s labor market.

The number of jobless fell by 20,000, according to seasonally adjusted data, after a decline of 10,000 in January.

The adjusted jobless rate remained at 6.5% in February, same as in January and in line with analysts’ forecasts. (…)

Oil: How Much Does China Need? China has snapped up oil at low prices to build up its stockpiles, buying that has made it even more difficult to assess actual demand from one of the biggest crude importers.

(…) “They’re building an awful lot of storage tanks that need to be filled,” said Thomas Pugh, a commodities economist at Capital Economics. When China will buy the corresponding oil is far from clear. (…)

In October, China National United Oil Corp. , a trading subsidiary of China National Petroleum Corp., the nation’s biggest oil-and-gas producer, scooped up a record 47 tanker loads, or more than 23.5 million barrels, as part of a buying spree on the Singapore spot market, according to Singapore-based traders. It hasn’t bought so aggressively since then. (…)

In the Indian Ocean last month, a tanker laden with Middle Eastern oil became the first to dock at a new Chinese port off southwest Myanmar. The China National Petroleum facility is the gateway to a pipeline that will soon pump tens of millions of barrels a year of crude to southwest China, cutting the time it takes to reach that market.

The same month, 2,500 miles away in China’s far northern province of Heilongjiang, the local government said that the Daqing oil field, which supplies about a quarter of China’s domestic production, would cut output by 11 million barrels this year. High-cost oil from the aging field was no match for the cheap crude available on the global market. (…)

Stockpiling for the strategic reserves remains a wildcard. A three-stage program initiated by the government last decade aims to build more than a dozen sites around the country by 2020. In a rare disclosure, the National Bureau of Statistics said in November that the facilities built in the first phase held about nine days of national oil consumption, out of a goal of 90 days.

CLSA analyst Simon Powell estimates that after the recent buying binge, strategic reserves now hold around 40 days of usage. Investment bank North Square Blue Oak, citing trade and production statistics, calculates that the level is as high as 50 days when commercial reserves are factored in. (…)

“I’d love to know what’s going on in China,” said Ian Taylor, chief executive of Vitol Group, one of the world’s largest oil traders. “Energy intensity seems to be dropping off very markedly there.”

CHINA DEVALUATION?

From CLSA (tks Gary):

A weaker Rmb would be to China’s advantage especially given its REER was up 6.2% last year. The government needs to stabilize growth and options are
limited as investment slows. Consumption will also experience a knock on effect. Global growth is anemic, so a slightly weaker Rmb is one of the few options to stabilize growth. A larger depreciation will lead to large capital outflows especially combined with further interest rate cut and potential US rate hike.

We believe that a reasonable outcome would be a 3% depreciation in the Rmb this year. This would imply another 2% depreciation from current levels and would be consistent with last year’s trend. A small depreciation would achieve the policy goals of maintaining stability and supporting growth. Rmb pressure will be highest in 1H where there will likely be more interest rate cut.

The reality is that China has changed. Services are now contributing to GDP and employment growth more than Industry and Construction (charts from CLSA). A large devaluation would increase import prices and hurt the domestic economy.

Another chart illustrating the remarkable change in corporate leadership is a short decade:

Nonetheless:

The enormous importance of the Communist Party is something that seems to be underplayed. If you operate in China, whether in business or any other sphere, the Party can make you or break you any day of the week. Nobody is bigger than the CPC. Somewhat related to this pervasiveness is the fact that China’s government is overwhelmingly concerned not with the South China Sea, relations with Japan or US criticism of its human rights record, but with stability and the provision of basic services – jobs, affordable food, basic medical care, i.e. bread and butter issues. And the reality is that for a developing country China does a very good job of providing these services. (David Murphy, CLSA’s head of China Reality Research).