Low Inflation Helps Boost Americans’ Spending Power in January A mix of falling inflation and rising wages last month gave Americans their biggest real raise in more than six years.
Inflation-adjusted average hourly earnings jumped a seasonally adjusted 1.2% in January, the largest monthly gain since December 2008.
Last month’s bump in spending power reflects a 0.7% monthly decrease in the consumer price index and a 0.5% rise in hourly earnings. From a year earlier, real average hourly earnings were up 3% in January.
Gas’s Drop Drives U.S. Into Deflation Territory A measure of U.S. consumer prices fell in January from a year earlier, marking the first annual decline in more than five years and potentially complicating the calculus for when the Federal Reserve will lift interest rates.
(…) In Japan and parts of Europe, negative forces such as weak demand and constrained credit caused a drop in prices for a broad swath of goods and services.
In the U.S., falling consumer prices can be pinpointed to a single sector: energy. Energy costs fell almost 20% over the past year, and gasoline prices alone fell by more than a third.
Consumer prices outside of energy advanced a healthy 1.9% in January from a year earlier. Prices for many staples are growing even faster. Food costs are up 3.2% from a year earlier, shelter costs rose 2.9% and medical care advanced 2.3%.
Removing both food and energy costs, consumer prices rose 0.2% last month and are up 1.6% from January 2014. The year-over-year change in so-called core prices held steady in January from December, after trending down from a recent peak of 2% last May.
Stabilization in those figures could show Federal Reserve officials that underlying inflation remains consistent with an improving economy.
That is the positive narrative. But Janet Yellen told Congress this week that
inflation outside of food and energy “has also slowed since last summer, in part reflecting declines in the prices of many imported items and perhaps also some pass-through of lower energy costs into core consumer prices.”
Durable-Goods Orders Rose in January Demand for big-ticket manufactured goods rebounded last month, suggesting the economic recovery remains on track while also hinting at sluggish business spending.
Orders for durable goods rose a seasonally adjusted 2.8% in January from a month earlier, the Commerce Department said Thursday. The rise ended two months of declines and exceeded economists’ expectations of a 0.6% gain.
A surge in civilian-aircraft demand, a highly volatile category, drove the increase. Excluding transportation items, orders rose a modest 0.3%.
The measure of business investment–orders for nondefense capital goods excluding aircraft—climbed 0.6% last month from December. That category, a measure of spending on equipment and software, had declined throughout the fall.
And it is down 3.5% from its August peak. A string of positive orders is needed for production to recover from two weak months in December and January (table and chart from Haver Analytics).
Doug Short charts the inner trends:
Japan flirts with return to deflation Core inflation drop to 0.2% may undermine credibility of Abenomics
The figure, down from 0.5 per cent the previous month, suggests Japan is highly likely to suffer a period of falling prices from this spring and poses a deep challenge to the central bank.
Excluding fresh food, prices rose 2.2 per cent on a year ago in January. Stripping out the effects of a consumption tax rise, the figure is 0.2 per cent.
In an indication of where inflation is headed, February’s preliminary data for Tokyo, excluding food, energy and consumption tax, showed a price decline of 0.3 per cent on the previous year.
CHINA’S LEADERSHIP BECOMES PROACTIVE
The State Council, China’s cabinet, on Wednesday pledged to step up fiscal policy support and strengthen targeted controls to combat downward pressure on the economy.
“To ensure the economy operates within a reasonable range, proactive fiscal policy needs to be stronger and more effective,” said a statement released after the executive meeting, which was presided over by Premier Li Keqiang.
The meeting decided to extend tax break policies to more micro and small businesses. From 2015 to the end of 2017, companies with annual taxable income under 200,000 yuan ($32,573) will have their corporate tax halved. Previously, the threshold was 100,000 yuan.
In an effort to activate private investments, the cabinet said taxes on investment earnings from non-monetary assets would be levied in stages rather than a one-off collection.
In addition, China will reduce the unemployment insurance rate to 2 percent from 3 percent previously, which is estimated to save over 40 billion yuan for businesses and employees annually.
The State Council also pledged to speed up construction of major water projects in the less developed central and western regions. Approvals on the new projects will be finished by the end of July and over 90 percent of funds from the central budget will be allocated by the end of June, according to the statement. (…)
Domestic consumption surpassed investment to become the strongest driving force of the Chinese economy in 2014, indicating a new growth model has already started forming as the country enters a “new normal” development era, the National Bureau of Statistics said on Thursday.
Total consumption accounted for 51.2 percent of gross domestic product growth last year, compared with 48.6 percent from investment. Net exports accounted for just 0.2 percent of the GDP growth, said the NBS report. (…)
According to the official data, in 2013 final consumption contributed half of the nation’s GDP growth and 54.4 percent was from investment, while net exports dragged down GDP by 4.4 percent.
The NBS report also said that per capita GDP increased to around $7,400 in 2014, up from $6,900 in 2013. The country’s leadership has said it is confident of doubling the 2010 per capita GDP of $4,300 by 2020.
Per capita disposable income was 20,167 yuan ($3,200) last year, up by 10.1 percent on 2013. (…)
(…) Chinese tourists made 5.2 million trips overseas during the holiday week, up 10 percent from a year ago, the China National Tourism Administration said.
As incomes improve and currencies depreciate against the yuan, more tourists are taking their breaks overseas, researcher Zhao Ping of the Ministry of Commerce said. (…)
China’s box office also took a big slice of the holiday consumption pie. Statistics from Piaofangba.cn showed holiday movies including Jean-Jacques Annaud’s “Wolf Totem” and Jackie Chan’s “Dragon Blade” raked in a record of 1.7 billion yuan during the holiday, beating the 1.4 billion yuan recorded last year. (…)
OIL
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Saudis’ Oil Price War Is Paying Off
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Rig idling near 20-year high, say drillers Offshore operators warn of two-year slowdown in oil industry
Offshore oil drillers have warned that the number of deepwater rigs “stacked” or scrapped is set to hit a two-decade high — and predicted that the industry slump caused by plunging crude prices could last another two years. (…)
Norway’s SeaDrill said on Thursday that the severity of the downturn and extent of oversupply was such that about a quarter of these so-called floaters would come available for hire this year. A third of these were newly built and yet to be delivered, ordered during the oil market boom. (…)
Rates for advanced, deepwater rigs have tumbled from a peak of about $650,000 a day two years ago to $350,000-$400,000 now, with contractors slashing prices in the face of dwindling exploration, some to near break even levels. (…)
European oil majors have slashed their spending for 2015 in response to the plunging oil price, with the average cut in capital expenditure by six of the region’s biggest firms estimated at around 10%.
But despite the budgetary revisions – which, according to Platts, will be a combined $14 billion cut from capital spending this year compared with 2014 – most of the biggest operators in the region expect their oil and gas production to rise in 2015. (…)
SENTIMENT WATCH
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US stocks: discount warehouse The discount rate on US equities looks very low
(…) So how low is the discount rate on stocks? Credit Suisse’s HOLT system estimates it starting with current free cash flow for all companies in the US market, then estimates future cash flows on the assumption that cash returns fade towards the cost of capital. Finally they calculate the real discount rate that, given those cash flows, would render the market’s current price. The rate has only been lower than today once since 1976 — in the 2000 tech bubble. Mass hysteria!
The good news for investors who have waited 15 years for the Nasdaq Composite Index to get back to its 2000 record is that analysts don’t see it stopping there.
Flirting with 5,000 and within 65 points of reclaiming the bubble peak, the Nasdaq will climb 8.6 percent to 5,415 in the next 12 months, according to analyst price targets compiled by Bloomberg. Such a rally would outpace projected gains in the Standard & Poor’s 500 Index and buck up anyone who’s sat through a pair of two-term presidencies hoping to get back to even. (…)
“With the Nasdaq breaking through an all-time high possibly soon, we’re going to see the psychological effect on the retail investor coming back to the market and trying to make money.”
(…)
The Nasdaq Composite trades at 30 times earnings, versus a multiple of 175 in March 2000. Among the biggest companies tracked by the Nasdaq 100 Index, the top 10 best performers since 2013, including Netflix Inc. and Facebook Inc., are valued at an average 51 times profit. (…)
An 18 percent jump in Apple accounts for the most of the index’s advance so far this year, followed by Amazon.com, which is up 24 percent. Biogen Idec Inc. and Gilead Sciences Inc., with gains topping 10 percent, are the next biggest contributors. All together, they account for almost half of the Nasdaq’s increase.
