U.S. Consumer Spending Soared in May
Consumer spending rose 0.9% in May from a month earlier, the biggest jump since August 2009, the government said Thursday. The bulk of the increase came on goods, including everyday items such as groceries and big-ticket purchases like cars. Spending on services rose modestly.
Consumers’ incomes—including wages as well as government benefits—grew a healthy 0.5% last month, the same as April, marking the best two-month stretch of income growth since early 2014.
(…) the price index for personal consumption expenditures-picked up in May but were up just 0.2% from a year earlier. Core prices, excluding food and energy costs, were up 1.2% over the year.
Any doubt that wages are accelerating? (table from Haver Analytics)
From Ed Yardeni:
China Rate Cut Hacks a Perilous Path Central bank’s response to stock market’s nose-dive sets a dangerous precedent
The Shanghai Composite is off nearly 22% from its peak just over two weeks ago, including a 3.3% fall on Monday. (Chart from BI)
After Chinese stocks cratered Friday—the culmination of a 10-trading-day run that erased nearly a fifth of the stock market’s value—China’s central bank sprang a surprise quarter-point interest rate cut along with a loosening of bank reserve requirements Saturday.
Responding so obviously to the stock market sets a dangerous precedent.
While most assumed the government found great virtue in the bull market to help companies raise capital and deleverage balance sheets, Saturday’s move removes whatever pretense some may have had that market forces were the main driver of Chinese stocks.
The PBOC cited persistently high borrowing costs in the real economy for the cut. That is true. Banks have been reluctant to cut rates and the effect of very low inflation means real, price-adjusted rates have fallen only slightly.
But if this was the rationale, then the central bank should have moved earlier in the month when May’s sluggish inflation data was released, notes Standard Chartered. But back then, the stock market was near its recent high point. (…)
But fear of a pause in stimulus became a factor behind the stock market selloff. Chinese investors know the good times will last only so long as the easing does. (…)
The real question becomes, how long is the PBOC willing to keep this up? Given how poorly supported stocks are by the fundamentals, and given how much margin leverage isembedded in investors’ positions, withdrawal of state support will give a shock that could prove calamitous.
It remains prudent for central banks to keep the stock market in mind when making policy moves. But making stocks the implicit target of central bank policy, as China now has, sets the economy on a perilous path.
This reporter was obviously not present in October 1987 when the Fed immediately reacted after the crash. Even though fewer than 10% of Chinese households own shares (U.S. = 50%) drops of this magnitude can hurt the economy and it is appropriate for the central bank to try to mitigate the impact.
(…) hectic activity at brokerages and trading firms has been a direct support to an otherwise sluggish economy. According to research firm Capital Economics, this alone boosted the economic growth rate by half a percentage point in the first quarter, when GDP was up 7% from a year earlier. Losing this support could cut a full percentage point off the annual growth rate, Capital Economics estimates.
Rising stock prices have also encouraged a wave of equity issuance, which has helped wean companies off dependence on debt finance. If this avenue closes, China will find it that much harder to cut debt levels.
The pain could spread further if stock losses cause a wave of defaults for those who borrowed money to invest. There is some 2.2 trillion yuan ($354 billion) of margin financing in the market currently, which Goldman Sachs estimates is equivalent to 12% of free float market cap of marginable stocks, or 3.5% of GDP. The investment bank’s strategists, in a note on Monday, called both these ratios “easily the highest in the history of global equity markets.” (…) (WSJ)
Capital outflows, then and now
(…) compared to 2012 everything is certainly much, much more ring-fenced.European bank exposures being an excellent case in point.
TURMOIL
If Atlantic salmon fishing on the Québec North Shore is any indication, this will be a tough summer. I was lucky to land (and release) four salmons but many of my buddies, all good fishermen, were skunked. Lots of rain prior to our arrival muddied the Moisie River, quieting the fish which perhaps did not know its way upstream.
Investors must feel the same with Grexit looming, China crashing and the Fed beginning the rehab from financial heroin overdose. Given today’s opening (2080), U.S. equities remain overvalued at 18.7x trailing EPS and 20.4 on the Rule of 20 P/E.
The S&P 500 has broken its 100 day m.a. which is flattening. Next “support” is the still rising 200 day m.a. at 2054, last tested on February 2nd. European equities are off 6.2% from their April peak.
The Q2 earnings season begins in 2 weeks (even though 13 companies have already reported: 10 beats, 3 misses). Estimates continue to edge lower but only marginally. It is also reassuring that earnings preannouncements are not getting worse. 
The U.S. consumer is back which will alleviate any fear of a significant economic slowdown.
Not to say that U.S. equities are not vulnerable; extreme valuation levels are always dangerous. Just to say that the U.S. economic background should not be a negative factor.
Iran nuclear talks delayed by disagreements Nuclear negotiations held up by arguments over draft accord
(…) there have since been continued disagreements over core elements of the potential agreement, including the pace at which sanctions will be lifted and the access that international inspectors will have to Iran’s nuclear facilities, especially military sites.
Mr Zarif’s departure from Vienna on Sunday comes after Iran’s supreme leader Ayatollah Khamenei laid out a series of red lines last week that appeared to be unacceptable to the world powers Iran is negotiating with.
In his speech, Mr Khamenei said sanctions relief under any deal would need to be immediate and there would be considerable limits on where international inspectors would be allowed to visit in Iran.