U.S. Pending Home Sales Rebound With Improved Weather
Following eight straight months of decline, pending sales of single-family homes improved 3.4% during March, according the National Association of Realtors (NAR). The 0.5% February decline was revised from a 0.8% shortfall reported last month. Despite the increase, sales remained 12.1% below the peak last June. Expectations had been for a 1.0% rise, according to Bloomberg.
Home sales improved across most of the country last month. In the West, sales gained 5.7% (-11.1% y/y) following a 2.3% February rise. Nevertheless, sales remained down 20.8% during the last nine months. Home purchases in the South improved 5.6% (-5.3% y/y), a gain that made up three months of decline. Sales were 5.2% below the peak nine months ago. Purchases in the Northeast improved 1.4% (-5.9% y/y) and made up February’s shortfall. Sales still were off by 12.5% since the peak in April of last year. In the Midwest, home buying slipped 0.8% (-10.1% y/y), the eighth decline in the last nine months. Sales were off 16.2% since the May peak.
China provincial GDP data adds to slowdown concerns
Annual economic growth in Hebei province, the nation’s top steel producer, tumbled to 4.2 percent in the first quarter of 2014 from 8.2 percent in the previous quarter, according to data released by government websites and official newspapers.
Inner Mongolia, which provides one-third of the coal supply in the country, saw gross domestic product (GDP) growth dipping to 7.3 percent in the first quarter from 9.9 percent a year earlier.
Growth in Heilongjiang was 4.1 percent in the first quarter, the lowest among 30 of 31 provinces and municipalities, according to the data.
Economic growth was 5.5 percent in Shanxi, a major coal producing province which has been hit by slumping coal prices.
Shaanxi province has yet to publish its first-quarter growth data.
First-quarter growth in almost all Chinese provinces was below their annual targets, according to local media.
The government has stepped up efforts to rein in sectors with excessive capacity and heavy polluters, even as it has hastened construction of railways and affordable housing in a bid to underpin growth, while the central bank has cut its required reserve ratios for rural banks.
“The move (on overcapacity and pollution) is having a big impact on economic growth, but we see some signs of stabilization due to recent policy support,” said Li Heng, an economist at Minsheng Securities in Beijing. (…)
Hebei has pledged to slash total steel capacity by 60 million metric tons by 2017 as part of a program to cut air pollution in northern China. At least 16 of its steel firms have also stopped producing as a result of financial problems, the provincial governor said last month.
Local media attributed slower growth in Heilongjiang, which relies heavily on manufacturing and coal mining, to its efforts to shut down inefficient factories.
The biggest export-oriented provinces such as Guangdong and Zhejiang provinces also posted slower growth in the first quarter, with their GDP growing only around 7 percent, dragged by faltering trade orders.
The fastest growth regions are Chongqing, Guizhou and Tianjin. Chongqing’s growth rate slowed to 10.9 percent in the first quarter from 12.5 percent a year earlier, while Guizhou’s rate slowed to 10.8 percent from 12.6 percent.
Analysts at Bank of America/Merrill Lynch estimated that weighted average of provincial real GDP growth rate in the first quarter was 8 percent, down from 9.5 percent in 2013.
China’s national economy grew an annual 7.4 percent in the first quarter, slowing from 7.7 percent in the previous quarter. Some analysts have raised suspicion over the growth data, pointing to sluggish factory growth and weak investment.
Growth in China’s less developed western and central provinces have consistently outpaced that of more affluent eastern regions in recent years, but the latest data showed the gap is narrowing as the former saw growth slowing more quickly.
“One explanation is that China’s slowing fixed asset investment and falling global commodity prices made China less dependent on those resource producing provinces,” analysts a Bank of America/Merrill Lynch said in a note.
China’s coastal provinces such as Guangdong and Zhejiang have been leading the drive to transform the source of growth from manufacturing to services.
The combined economic output of China’s provinces has long exceeded that of the national level compiled by the National Bureau of Statistics, raising suspicion that some growth-obsessed local officials have cooked the books.
Chinese leaders have recently set new standards for local officials, stressing that their performance cannot be simply based on regional growth rates, but should include resource and environmental costs, debt levels and work safety.
Lending to Euro-Zone Firms Drops
Data released Tuesday showed loans to the private sector fell 2.2% on the year in March, following a 2.2% decline in February. On the month, loans to firms declined by €4 billion ($5.5 billion), an improvement on the €13 billion decline in February. Loans to households increased by €2 billion in March in seasonally adjusted terms after increasing €6 billion in February.
The ECB’s broadest measure of money supply, M3, increased 1.1% from a year ago, below expectations for a 1.4% rise. The figure worsened from February’s 1.3% increase, and remains well below the ECB’s reference value of 4.5% money growth that it considers consistent with its target of keeping the inflation rate just under 2%.
(…) But early inflation figures from Germany, Europe’s largest economy, point to increasing inflation, which should help lift the overall euro-zone figure, due to be released tomorrow. Data from individual German states on Tuesday suggested that consumer prices in the country increased by about 1.3% or 1.4% in April on the year versus around 1.0% in March. This would be broadly in line with expectations that price pressures would bounce back because of seasonal effects.
In a speech last week, ECB President Mario Draghi indicated that if bank lending conditions don’t improve, the central bank could respond with a longer-term refinancing operation targeted toward encouraging bank lending or with a program of purchasing asset-backed securities.
But this week, Mr. Draghi dealt a blow to such expectations when he told German parliamentarians that the bank is still far from engaging in large-scale bond purchases to bolster the economic recovery.
Draghi Tells German Lawmakers ECB Bond-Purchases Unlikely
Slowing German Wage Growth Complicates Deflation Fight
The German economy is at full employment and companies face mounting difficulties in filling job vacancies. At the same time, increases in gross wages are slowing down. (…)
The labor force participation rate — the number of persons employed or searching for a job as a percentage of the working-age population — is now at an all-time high of 81.3 percent. Employers are contending with increasing challenges in hiring. Half of German small and medium-sized enterprises are having difficulty filling job vacancies and 71 percent expect to struggle with that in the future, according to a Baumann Unternehmensberatung survey. Consequently, about 10 percent of SMEs have had to cancel orders and 26 percent forecast a need to do so in the future.
A negative unemployment gap provides further evidence of a tight labor market. This is calculated as the difference between the unemployment rate and an OECD-calculated NAIRU, the nonaccelerating inflation rate of unemployment. Conceptually, NAIRU should be a guidepost to future inflation at higher employment levels. Anomalously, the gap has been negative during the past four years yet core inflation fell to 0.7 percent in 2013 from 1.5 percent in 2012.
Historically, lower unemployment has led to higher wages in Germany. This relationship seems to have weakened since 2008. The annual rate of growth in households’ gross wages has been slowing for the past three years, to 2.3 percent in 2013 from 4.3 percent in 2010. Slower wage growth seems to result from higher migration and lower inflation expectations. Companies have relied on foreign workers to counter the labor shortage. Net migration flows to Germany
reached their highest level since 1995 last year.Receding inflation expectations further reduce employees’ bargaining power for pay raises. Price expectations from German consumers are now at their lowest level since February 2011, according to the GfK survey. In the face of full employment, lower wage growth is unlikely to raise domestic demand sufficiently to accelerate German inflation. The ECB has a mandate to keep annual inflation “below, but close to, 2 percent.†To fulfil this condition now, deflation in the periphery needs to be offset by higher inflation rates in core countries, especially in the largest and fastest-growing economy of the euro-area. The opposite is happening as Germany’s annual headline inflation fell to a four-year low of 0.9 percent in March. (BloombergBriefs)
Average Retirement Age In America Hits Record High
The average age at which U.S. retirees report retiring is 62, the highest Gallup has found since first asking Americans this question in 1991.
While not a total surprise, given our previous discussion of the rise in employment that is so focused on the elder cohorts of society as they smash headlong into the realization that they have no retirement plan.
As we pointed out here, the typical worker near retirement only has about 2 years of replacement income saved, or about 15 years short of the median lifespan post-retirement.
What is perhaps more worrisome is the rapid rise that Gallup notes in the last few years, as we have pointed out in the past that in fact, over 60% of workers accumulated more debt than they contributed to retirement savings between 2010 and 2011.
As Gallup concludes,
Retirement age may be increasing because many baby boomers are reluctant to retire. Older Americans may also be delaying retirement because of lost savings during the Great Recession or because of insufficient savings even before the economic downturn.
But optimism remains… until it’s too late…
The majority of all age groups expect to retire at age 65 or older. This includes 62% of 18- to 29-year-olds, 62% of 30- to 49-year-olds, and 58% of 50- to 64-year-olds. At the same time, an optimistic 15% of the youngest age group expect to retire before age 60. Adults closer to that age are naturally less likely to think they will be ready for retirement by that point.
The Megadeal Makes a Comeback After years spent shying from big deals, corporate executives are returning to the takeover arena, spurred by rising stock prices and recovering economies in the U.S. and Europe.
From Comcast Corp.’s planned $45 billion takeover of Time Warner Cable Inc. to Inc.’s attempt to buy Botox-maker Allergan Inc. for almost $46 billion, companies are embarking on bold deals that have the potential to upend their industries.
So far this year, 14 deals or bids worth at least $10 billion have been announced, according to Dealogic, the most since 2007. Those figures don’t yet include Monday’s news from Pfizer Inc. that it is interested in buying AstraZeneca PLC, a deal that could be valued at about $100 billion, or General Electric Co. ‘s talks to buy Alstom SA’s energy business for more than $12 billion or Siemens AG’s interest in that business. (…)
Meanwhile, announced deals of less than $500 million account for 21% of volume this year in terms of dollar value, the lowest amount for this period in Dealogic’s records. (…)
International tax rules also are making foreign acquisitions attractive to U.S. companies, including so-called inversion deals, where U.S. companies can tap lower tax rates by rebasing to a foreign country through a merger. (…)
The all-stock trend is particularly pronounced on tech deals, said Chris Gaertner, global head of corporate finance for the technology investment bank at Credit Suisse Group AG, who said stock deals essentially help the acquirer to retain top talent by giving them stock in the combined company.
“You’re buying the vision and execution, and that’s really about the people,” said Mr. Gaertner, who said about 75% of the discussions he is having are stock deals, compared with around 25% historically.
INFLATION WATCH
-
Natural-Gas Prices Climb Prices jumped to a two-month high as investors wagered that supplies wouldn’t bounce back fast enough from their lowest levels in 11 years.
(…) Inventories are just starting to climb after an unusually cold winter drove demand for the heating fuel to records. Supplies are at about half their normal level for late April, even as U.S. gas production hits a record. Investors in the $52.1 billion natural-gas futures market are turning increasingly bullish, questioning whether producers are up to the task of replenishing stockpiles.
Analysts said producers would need to add an extra 20 billion to 35 billion cubic feet a week above the average for six months to ensure power plants have enough gas on hand to meet another frigid winter. Some investors said prices could climb this summer should a hot summer drive up air-conditioning demand, reducing the amount of gas left over for winter.
(…) Prices are up 9.7% this month and 13% in 2014. (…)
Canada also is exporting less gas as the country’s utilities refill their own inventories, further reducing U.S. supplies. Canadian exports to the U.S. are down 14% this month, to 4.3 billion cubic feet a day, according to Barclays.
To be sure, many analysts and investors expect inventories to recover by November, barring an exceptionally hot summer. Some expect output to continue to rise from shale-gas formations in Pennsylvania and Louisiana, as companies drill more wells and use technologies that boost output. (…)
Prices dipped late last week after the EIA reported inventories rose 49 billion cubic feet, more than the average forecast of 42 billion cubic feet. But prices quickly rebounded, suggesting that many investors think storage levels aren’t rising fast enough.
The addition of 49 billion cubic feet “does not imply a pace sufficient to refill inventories by…early November,” said Kyle Cooper, director of research at IAF Advisors, a Houston consulting firm.
- Meanwhile, at the pump, gas prices are up 4.3% Y/Y.
-
Markets Gird for Return of El Niño
The weather phenomenon known as El Niño is poised to return, a development that threatens to drive up prices for food and other staples, investors and analysts say.
Temperatures in the Pacific Ocean are rising, prompting U.S. government forecasters to predict a more than 65% chance for an El Niño by the end of the year. El Niño is set in motion when winds in the equatorial Pacific slow down or reverse direction. That warms the water over a vast area and can upend weather patterns around the world. In 1997, a record-breaking El Niño caused heavy rainfall and mudslides in California and a water shortage in Australia.
El Niño has a reputation for triggering sharp run-ups for prices in markets as diverse as nickel, coffee and soybeans, and commodities investors, traders and analysts are bracing for impact. Société Générale SA recently developed an El Niño commodities index at the request of a client looking to trade on the weather anomaly.
An El Niño looms at a time when global supplies of many raw materials already are stretched. Investors are loading up on commodities futures contracts that would rise in value if global food supplies are crimped further. Money managers hold more bullish than bearish bets in all 16 major agricultural futures markets, according to a Wall Street Journal analysis of data tracked by the U.S. Commodity Futures Trading Commission. The last time that was the case was in June 2011, when prices in many commodities markets were near their highest in decades.
El Niño can work its way through commodities markets in surprising ways.
While unpredictable rainfall is El Niño’s signature feature, analysts at Société Générale found that it was miners, not farmers, who had the most to worry about. Since 1991, nickel prices rose the most—13.9%—during El Niño years among the 11 commodities the bank’s index tracks.
The reason: El Niño causes dry weather in Indonesia, the world’s top producer of the metal, which is used to strengthen steel. Mining equipment in the country relies heavily on hydropower; the less it rains, the less nickel can be produced. (…)
The name El Niño is a Spanish reference to the Christ child because it often comes around Christmas, though forecasters in Australia say the next one could form as soon as July.
More extreme weather could further boost already rising prices of commodities such as coffee, sugar and soybeans, stretching consumer budgets and undermining economic recovery in developed nations. Higher commodities prices also could trigger unrest in poor countries that import much of their food supply, analysts say. (…)
Global food prices—which at the start of 2014 were expected to be largely flat this year—could easily climb 15% to record highs in as a little as three months after an El Niño occurs, said Mr. Baffes, who co-wrote the World Bank’s quarterly commodities outlook released Thursday.
Mr. Baffes pointed to North Africa and the Middle East, which are highly dependent on grain imports, as potential hot spots. He added that India—which typically sees less rain during its monsoon season in an El Niño year—also could be hard-hit, as it consumes almost all of the staple crops like rice and wheat that its farmers grow.
Drought-stricken Brazilian coffee farmers would welcome the rains El Niño typically brings to the region if they came today. But in July or August, downpours would only slow the harvest, further reducing supplies of arabica beans, which are prized for their mild taste. Arabica prices have nearly doubled this year on supply concerns.
Chocolate lovers also may have a reason to worry. El Niño reduces cocoa production by an average of 2.4%, according to the International Cocoa Organization. That would come on top of an already expected shortfall that has driven up prices 8.7% this year.
Not all of El Niño’s effects are bad. The phenomenon typically brings wet weather to California, which has been ravaged by drought this year. That could benefit crops such as limes, almonds and avocados. Prices for all three commodities, which don’t trade on exchanges, are up sharply this year. (…)
U.S., Europe Raise Stakes With Putin The U.S. and EU imposed new sanctions on Russia over military activity in Ukraine, but stopped short of targeting broad economic sectors
Bearish Sentiment Spikes
Internet Group Crashes
After losing more than 10% over the last four trading days, the Nasdaq Internet Index is now down 21% from its high in early March. We wouldn’t argue with anyone that wants to call this a crash in the group given the magnitude of the decline over such a short period of time.
Below is a look at our trading range screen for the 30 largest stocks in the Nasdaq Internet Index. For each stock, the dot represents where it is currently trading in its range, while the tail represents where it was one week ago. Moves into the green shading are considered oversold.
As you can see, big stocks like Netflix (NFLX), Pandora (P), YY Inc (YY), Yandex (YNDX) and Zillow (Z) are down 15-25% over the last four trading days alone. Amazon.com (AMZN) is down 11.63% over the last four days, and it’s now down 27% year to date. Keep in mind that most of these companies recently reported better than expected numbers, and we have still seen wholesale liquidation of them. Longer term, these names are in steep downtrends, which means the path of least resistance remains down. That being said, they have gotten to extreme oversold levels in the near term, and like we saw earlier this month, they can certainly experience short-term bounces within longer-term downtrends.
Canada Sells 50-Year Bonds Canada made a rare and successful foray into the ultralong-bond market, raising US$1.36 billion from an issue of 50-year bonds.
The Canadian bond carries a coupon of 2.75%. In comparison, a 45-year U.K. bond is currently yielding about 3.4%.