Fed Flags Midyear Rate Hike—Or Later The Federal Reserve signaled it would keep short-term interest rates near zero at least until midyear, while also setting the stage for tough decisions in the coming weeks about whether it should wait even longer.
Economic activity is expanding at a “solid pace” and job gains are strong, the Fed said in its statement Wednesday, providing a relatively upbeat assessment of current U.S. growth and labor-market conditions. At the same time, however, the central bank hinted at wariness about low inflation, slow global growth, a stronger U.S. dollar and international market turbulence. (…)
The central bank hasn’t described economic activity as “solid” since October 2007, right near the end of the last U.S. economic expansion. (…)
The Fed “judges that it can be patient in beginning to normalize the stance of monetary policy,” officials said, in the key phrase of the statement. (…)
In another subtle note of caution, the Fed said it would be watching “international developments” as it considers its next step. Officials recently had avoided pointing to myriad pressures overseas—including an economic slowdown in China, financial instability in Greece or the European Central Bank’s launch of a new bond-buying stimulus program—that weigh on the U.S. outlook.
Most notably, those developments are putting upward pressure on the dollar, which is in turn weighing on U.S. inflation and could curb U.S. exports. (…)
Federal funds futures, which price off of Fed target-rate expectations, now put higher odds on the central bank tightening policy in September than in June.
Patience
(…) So, with competitive rate dropping by other central banks, and with the worldwide rate at zero or lower, and with little inflation, and with signs of positive improvement in the growth rate of the United States, the Fed has elected to not change a thing. Why should they? They have no reason to change anything. They really didn’t even need to have a meeting. (…)
The Fed has trouble saying “we don’t know” in plain English. It is an institution that is busy in the word-smithing trade. That is the nature of the beast. So we must be patient as investors and analysts while we wait for the Fed who is patient and practices the use of patience in crafting the text of its pronouncements. (…) (David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors, via The Big Picture)
Central Bankers Ramp Up Currency Wars A surprise move by Singapore to ease monetary policy is the latest sign of the pressure on policy makers at a time of falling commodity prices, declining inflation and softening growth expectations.
Finally reaching the front pages.
The question now is how long before the Chinese seek to devalue their own currency, given signs their economy is slowing sharply and the fact that two big trading partners, the Japanese and Europeans, have been devaluing with a vengeance.
Where There’s Already Faster U.S. Wage Growth Economists at Principal Global Investors used data from clients in defined contribution retirement plans to see if they could identify nascent trends not yet captured in the national data.
(…) Robin Anderson, an economist at PGI, notes the PGI data has differences with the numbers collected nationally by the Bureau of Labor Statistics. The PGI numbers cover about 33,000 defined-contribution plans of mainly small- and medium-sized businesses. The employees tend to be slightly older and more full-time than the national average. The positions tend to be higher quality jobs rather than low-skilled positions. Finally, because of the usual waiting periods to qualify to participate in a retirement plan, the PGI data does not capture workers who change jobs often.
Ms. Anderson and PGI chief economist Bob Baur refined their data to include only employees who had been on the job for at least one year at the time of reporting and were eligible to participate in their employers’ retirement plans. They then calculated the change in employment and the median salary for five periods: 2009-2010, 2010-2011, 2011-2012, 2012-2013 and 2013-2014. The results are published in their research note “Picking Up the Pace.”
What they found was that the growth in employment among the PGI group accelerated faster than employment growth in the Bureau of Labor Statistics data. Both payroll groups show accelerating growth since 2010.
More interesting, Ms. Anderson said, is that employees in the PGI group in general got bigger pay raises than U.S. workers as a whole as measured by the median annual wage data compiled by the Census Bureau. The median salary jumped 3.1% in 2014 for the PGI workforce compared with just 1.74% for the Census workforce group.
She believes instances of bigger pay raises will spread.
“As the unemployment rates falls further, fewer jobs are part-time because of economic reasons and people move into higher quality jobs, we will see U.S. wage growth move closer to what we’re seeing in our sample population,” Ms. Anderson said. “…Wage growth has to start somewhere.”
German Jobless Hits Lowest Rate Since 1990
The number of German unemployed fell 9,000 in January after seasonal variations in the data, following a 25,000 drop in December. The unemployment rate was 6.5% in January, down from 6.6% in December and the lowest rate since 1990.
Meanwhile, the ECB said that its broadest measure of money supply, M3, increased 3.6% in December from a year earlier, up from 3.1% in November and closer to the 4.5% pace that officials see as consistent with meeting their inflation target of just below 2% over the medium term.
GREXIT
A Evans-Pritchard: Investors have woken up to Greece’s nuclear risk
Really good article worth reading in its entirety.
(…) Contrary to expectations, Mr Tsipras has not resiled from a long list of campaign pledges that breach the terms of Greece’s EU-IMF Troika Memorandum, and therefore put the country on a collision course with the Brussels, Berlin, and Frankfurt. (…)
If anything, he is upping the ante. He could have gone in into coalition with the centrist, pro-EU Potami party, and could have explained any softening of his line towards Europe as a necessary move to hold the government together. Instead he chose to go with Independent Greeks, a nationalist party that is even more virulently hostile to the Troika. This has been a cannon shot across the bows of creditor states. (…)
“We will immediately stop any privatisation,” said Panagiotis Lafazanis, leader of the Marxist Left Platform, the biggest bloc in the Syriza pantheon. Plans to sell the PPT power utility and the Piraeus Port Authority have been halted. The minimum wage will be raised from €500 to €751 a month as a first order business. This is an explicit rejection of Troika austerity terms.
We are witnessing a democratic revolution. Never before have the EMU elites had to face a eurozone government that refuses to play by any of their rules, and they have yet to experience the lascerating tongue of Yanis Varoufakis, a relentless critic of their 1930s ideology of debt-deflation and “fiscal waterboarding”.
Mr Varoufakis told me before his appointment as finance minister that Syriza will not capitulate even if the European Central Bank threatens to cut off €54bn of liquidity for the Greek banking system, a move that would almost certainly force Greece to nationalise the banks, impose capital controls, and would – in my view, though not in his – force it to reintroduce the drachma within days.
(…) His first act in office today was to announce that 600 cleaners in the finance ministry will regain their jobs, paid for by cutting financial advisers. The corridors erupted in cheers. (…)
Yet Mr Tsipras faces a tortured moral choice. If he defaults, he walks away from debts owed to taxpayers in countries that are also net debtors with mass unemployment. Italy’s contribution to the Greek loan package is €41bn and Italy too is in crisis. The Mezzogiorno’s GDP has fallen by 15pc since 2008, and levels of hardship are comparable to those in Greece. All of Southern Europe is on the hook due to the insidious mechanisms of EMU crisis strategy. (…)
The cold reality for now is that Athens is now on a war footing with an EMU power-structure controlled by the creditors. The chorus of warnings over the last two days has been painfully loud and clear.
It is one thing to soften the terms of Greek debt repayment and cut the primary surplus from a target of 4.5pc to maybe 3.5pc of GDP. It is another to overthrow the Troika altogether. “We expect them to fulfill everything that they have promised to fulfil,” said Jyrki Katainen, EU’s economic enforcer.
The dawning awareness of this unbridgeable chasm is what is frightening investors, and events are now moving with lightning speed. Barclays says capital flight may have reached €20bn since early December. The pace is surely accelerating.
Greece will hit its first crunch-point at the end of February when its bail-out extension expires. No doubt there will be an emergency extension of some kind – perhaps a month – but the debt redemptions will pile up soon after that, culminating in a €7bn repayment to the ECB in July and August that Greece cannot possibly meet without a deal. The mere anticipation of this awful moment will bring it forward.
Marcel Fratzscher, head of Berlin’s DIW institute in Berlin, told Reuters that Mr Tsipras is playing a “very dangerous game” that ris. “If people start to believe that he is really serious, you could have massive capital flight and a bank run. You are quickly at a point where euro exit becomes possible,” he said.
Holger Schmieding from Berenberg Bank says he has returned from Athens in despair, seriously worried that events may soon spin out of control. “Vicious circles can start fast,” he said.
OIL
Oil holds above $48 a barrel after U.S. stocks hit record high
WTI settled at its lowest level since March 2009 on Wednesday after data from the U.S. Energy Department showed the country’s oil stockpiles rose by a more-than-expected 8.9 million barrels in the week ended Jan. 23. The stockpiles are now near 407 million barrels, an 84-year high. (…)
The rise in stockpiles is being driven by continued increases in U.S. oil output, which despite the fall in prices still grew at almost 15% over the year last week, according to Capital Economics, which expects stocks to continue to rise over the next few months, limiting price increases over the next year.
Some analysts, however, expect U.S. production to slow sooner than the market expects.
Norbert Rucker, head of commodity research at Julius Baer, said that as drilling in the U.S. shale oil industry has been “dropping like a stone” since December and there is usually a four-month lag between this affecting production growth, a flattening of U.S. output should be expected soon. (Chart from EIA)
Asia sees a ‘tight’ oil market despite global glut
Excess supplies of crude oil and sluggish demand may be weighing on oil prices globally, but in Asia, refiners are discovering that there are fewer barrels around to choose from.
The “tightness” in the market stems from millions of barrels of oil being pumped into storage tanks, as a sharp decline in crude prices is encouraging traders to store the oil in hopes of making a profit.
Their hopes are fueled by a steep contango in the crude market structure, which indicates higher prices for oil loading in the future than at present.
Platts on Tuesday assessed the March-May spread in Dubai swaps, also called M1-M3, at a contango of $2.75/barrel. (…)Storage plays have tightened market fundamentals in Asia by giving the impression of additional demand. It’s working to somewhat rebalance fundamentals by soaking up excess oil at a time when global demand growth has been sluggish and large producers have decided against cutting production to support prices.
Over the past month, between 15 to 20 supertankers have been chartered by oil majors and large trading companies in Asia with options to use them for floating storage. That translates into 30 million barrels to 40 million barrels of crude oil. (…)
The key questions facing Asian refiners now is how would producers react to the emerging demand from storage plays, and whether refineries will again have to compete with storage tanks next month to secure supplies.
Many in the market have balked at the surge in spot premiums this month and are concerned that producers might take a cue from that to raise their official selling prices. (…)
Several market participants said onshore commercial storage tanks are on the verge of being full, leaving traders the only option to charter supertankers if they plan to add to their stocks.
Most of the supertankers booked earlier this month were chartered at a daily storage cost of around $35,000 or 50 cents/b per month, that left market players enough room to cover financing, insurance, bunkers and other costs at a contango of about $1/month.
But an increase in chartering rates of these supertankers has now made floating storage economics less lucrative, traders say, leading fixtures for at least some of these supertankers getting canceled in recent weeks.
Demand for oil for storage “depends on whether there will be enough storage and costs” to make them economically viable, said another North Asian trader.
“Floating costs are very high now with VLCC’s at about $50,000,” he said, referring to the per-day chartering cost of a very large crude carrier.
(…) The $15-billion spending cut, which will involve cancelling and deferring projects through 2017, which would represent a 14 per cent cut per year from 2014 capital investment of $35-billion.
Reflecting the new oil price environment, Shell, having said in October it would keep its 2015 spending unchanged, announced it would have to cut what is one of the largest capital investment programs in the industry. (…)
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ConocoPhillips has quarterly loss, cuts capex again
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Scrapped: Oil Prices Shelve an $11 Billion Gulf Coast Project
South African energy giant Sasol Ltd. said Wednesday it was shelving an $11 billion project on Louisiana’s Gulf Coast, imperiling one of the largest foreign investments on U.S. soil because of the plunge in oil prices.
Sasol has spent years planning to expand its chemical factory outside Lake Charles, La., into a sprawling facility to turn natural gas into industrial compounds and diesel fuel. In October, the company committed $8 billion for equipment that produces ethylene, which is used to make plastics and other products.
That plant is still going forward, but Sasol said on Wednesday that a bigger project, to use natural gas rather than crude to make diesel, is on hold.
Plummeting oil prices have forced it to push back its own 2016 deadline for deciding whether to build the unusual and expensive plant now that oil prices have fallen from over $100 a barrel to under $50. (…)
The Sasol natural-gas-to-diesel plant, which would be one of only a handful in the world, relied on oil prices remaining high compared to natural-gas prices, which have been very low in the U.S. since the shale boom began in 2008.
When Sasol said it was thinking of building a gas-to-diesel plant in Louisiana in 2012, a barrel of oil was worth around 40 times as much as a million British thermal units of natural gas; today the ratio trades at about 17. Sasol said that ratio must be at least 16 for the project to make economic sense. (…)
So, the reality is that the project has not been scrapped as the headline says, merely deferred.
SENTIMENT WATCH
The iPhone effect How Apple saved US earnings season
It is no exaggeration to say the iPhone 6 saved the US earnings season, at least based on fourth-quarter results so far. Apple’s unexpected $5bn rise to a record $18bn quarterly profit boosted the total profit increase of the one-third of the S&P 500 that have reported to $8bn. That makes for an OK but unspectacular 6.5 per cent rise in earnings, against just 2 per cent without Apple, according to Thomson Reuters.
It may look like cherry-picking to exclude Apple. After all, exclude energy companies and earnings are up 8.1 per cent, while without Citigroup they are up 8.5 per cent. (…)
The outlook for US stocks ex-Apple has been worsening, most obviously from global slowdown and a stronger dollar. The past month has seen the biggest drop in 12-month forward earnings estimates for the S&P 500 since the recession in 2009. The change in forecasts over the past year has only been worse during recessions, in data since 1985.
Wall Street analysts are paid to be bullish, so such severe downgrades suggest serious concerns about corporate profits. Sales estimates have also been downgraded.
Investors should file these worries alongside those already visible in the markets. Bond yields are down amid weak price pressures, suggesting a softer economy. Cyclical shares sensitive to economic growth have been underperforming, too, while defensive shares best able to ride out bad times now look expensive.
Contrarians may see all these concerns as a reason to buy, at least into riskier cyclical stocks. After all, lower profit forecasts make it easier for companies to beat expectations.
On the other hand, lower forecasts also make shares look more expensive on the popular measure of price to forward earnings. Investors of a sensitive nature might want to avoid checking their portfolios on their new iPhones.
We’re on the verge of a crisis, bears warn
After nearly six years of a surging U.S. stock market, investors are worried about how much longer it will last. Suddenly, the views of the negative Nancys are getting a lot of attention.
The bears build their case that a crisis is near on four factors: falling oil prices, stagnant wages, the “two-edged sword” of a strong US dollar and big trouble abroad.
“Earnings and economic activity are actually weakening, not strengthening,” says James Abate, chief investment officer at Centre Asset Management, which manages over $8 billion. “The growth outlook, to us, is deteriorating.” (…)
Let’s look at the facts:
As of last night, 159 companies (46.3% of the S&P 500’s market cap) have reported. So far, EPS ex-energy are seen up 8.0% (7.7% yesterday). Total S&P 500 EPS are seen up 4.6% (4.4% yesterday) excluding the likelihood of continued beats. So far, they are beating by 4.4% (4.2%). Revenues ex-energy are up seen 4.0%.
As to Apple’s impact, consider that EPS growth is now forecast at 6.9% for Consumer Discretionary, 10.5% for Industrials, 19.0% for Health Care.
Two-Tier Economy Reshapes Marketplace The advance of wealthy households, while middle- and lower-income Americans struggle, is reshaping markets for everything from housing to clothing to beer.
Excellent article worth reading. A few extracts:
“It’s a tale of two economies,” said Glenn Kelman, chief executive of Redfin, a real-estate brokerage in Seattle that operates in 25 states. “There is a high-end market that is absolutely booming. And then there’s everyone in the middle class. They don’t have much hope of wage growth.” (…)
For the first time, U.S. builders last year sold slightly more homes priced above $400,000 than those below $200,000. As a result, the median price of new homes exceeded $280,000, a record in nominal terms and 2% shy of the 2006 inflation-adjusted peak. (…)
But rentals, the low-end of the housing market, are booming. Apartment construction has neared its fastest pace since 1989. (…)
Since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household, according to Mr. Cynamon, a visiting scholar at the bank’s Center for Household Financial Stability, and Steven Fazzari of Washington University in St. Louis, who published their research findings last year. (…)
The trend hit auto makers some years ago, when BMW AG ’s former chief executive Helmut Panke described the U.S. market as an hourglass: lots of demand for budget and luxury brands but little in between. (…)
BTW:
- On a Roll: Rolls-Royce Sees Best Year Ever in 2014
- Hamptons Home Prices Hit Seven-Year High in Luxury Surge
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