NEW$ & VIEW$ (3 FEB. 2015): Consumers OK; Earnings OK; Exports, Where Are Thou?

U.S. Consumers in Rainy-Day Mode

Personal spending, which measures outlays for everything from hardware to health care, decreased a seasonally adjusted 0.3% from the prior month, the Commerce Department said Monday, the first such fall since January and the biggest decline in more than five years.

But Americans’ savings rate rose to 4.9% in December from 4.3% the prior month as Americans set aside an additional $75 billion for a rainy day. (…)

Monday’s report said personal spending for all of 2014 was up 3.9%, a modest acceleration from a 3.6% rise in 2013.

(…) wages and salaries were up 0.1% from a month earlier. Overall personal income, reflecting money collected from wages, investments and government aid, increased 0.3%. Real disposable income, which accounts for taxes and inflation, rose a somewhat stronger 0.5% in December.

Amid the gloomy headlines, the reality:

While consumer spending fell in December by the most in five years, households were taking a breather after a surge in buying during the previous two months. For the fourth quarter as a whole, household expenditures rose at the fastest clip in almost nine years, according to data from the Commerce Department in Washington. (Bloomberg).

Wages and salaries rose at a 4.4% annual clip in Q4, up from 3.7% in Q3 and 2.9% in Q2. Real personal disposable income grew at a 3.8% annual rate in Q4, almost double the Q3 pace of 2%.

A near-5% savings rate and the balance sheet improvement actually suggest that the consumer has more firepower than is commonly believed (…).

(…) the hidden gem in the Q4 GDP report was that real household outlays on discretionary items rose at a 4.6% annual rate. This followed a 5.2% pickup in Q3 and 4.8% in Q2. (D. Rosenberg)

Banks See Stable Lending Landscape, But Some Auto Loans Signal Trouble

Several large banks eased mortgage lending standards at the end of 2014 amid softer demand, including for loans that were eligible for purchase by Fannie Mae or Freddie Mac, a Federal Reserve survey found.

Still, nearly 85% of banks said underwriting standards remained basically unchanged, while 14% said credit standards eased somewhat from October through December, according to the Fed’s January survey of senior loan officers released Monday. Nearly a third of banks reported “moderately weaker” demand for mortgages eligible for purchase by Fannie and Freddie.

Most banks said they expect delinquency rates for credit cards, prime auto loans and other consumer loans would remain around current levels. Nearly one-third, however, said they expect the performance of subprime auto loans to deteriorate in 2015.

Most banks reported little change in underwriting standards for commercial and industrial loans, but those who did cited more aggressive competition from other banks. Yet the number of banks that said they had eased price terms for business loans was “noticeably lower” than in past surveys, the Fed said.

Inflation Well Short of Fed’s 2% Target The Federal Reserve’s preferred inflation gauge notched its lowest year-over-year increase since just after the recession, complicating the calculus for the central bank on when to lift short-term interest rates from near zero.

The price index for personal consumption expenditures was up 0.7% in December from a year earlier, the Commerce Department said Monday. (…) Inflation has been steadier outside of volatile food and energy prices. But that measure of “core” inflation also slipped slightly in recent months, from a 1.5% annual advance in October to 1.3% in December.

Overseas Slowdown Pinches U.S. Factories

A closely watched gauge of factory activity declined in January to its lowest level in a year, according to the Institute for Supply Management. The purchasing managers group said its key index, released Monday, continued to signal expansion in the nation’s industrial sector, albeit at a slower pace.

The exports index, however, was 49.5 in January compared with 52.0 in December, moving into contractionary territory after 25 straight months of growth.

U.S. manufacturing exports have entered contraction mode. It is easy to blame the dollar as this Gavekal chart does eloquently.

But the problem is that Eurozone and China exports are also weak as per the latest PMIs:

• Eurozone manufacturers are facing a duel constraint of weak domestic demand and subdued export performance. The final quarter of last year and the start of 2015 have seen some of the weakest gains in new export business since the recovery in foreign order inflows began in July 2013.
• [In China], relatively muted client demand, both at home and overseas, dampened new order growth. Furthermore, growth in new export work eased to a marginal pace that was the slowest in the current nine-month sequence.
• South Korea exports declined 0.4% YoY in January.

Hmmm…And rate cuts and currency devaluations continue:

Australia Cuts Interest Rates Australia’s central bank cut its benchmark interest rate to a record low of 2.25%, joining central banks that have eased policy since the start of the year in response to the deflationary impact of tumbling oil prices.

• Australian Dollar Slammed

U.S. Construction Spending Loses Strength During 2014

The value of construction put-in-place increased 6.1% last year following a 5.7% rise in 2013. The rise was led by an improved 11.0% increase in nonresidential building activity followed by an easier 5.1% gain in residential building. Public sector building bounced 1.8% higher after declines in each of the prior four years. Construction activity lost strength, however, by year end as it improved 0.4% in December (2.2% y/y) following a 0.2% decline.

But here’s the big surprise: public construction spending rose 1.1% in December, capping a 3.4% jump in Q4 (14.3% annualized):

GREXIT

• Europe Stocks Rally on Hopes of Greece Deal European stocks rose sharply fueled by hopes of an imminent resolution to a standoff between the new Greek government and its creditors.

• Greece reveals plan to end debt stand-off Varoufakis proposal for swapping debt for growth bonds

• A Evans-Pritchard: Germany will have to yield in dangerous game of chicken with Greece

(…) Jean-Claude Juncker, the European Commission’s president, yielded on Sunday, accepting (perhaps with secret delight) that the Troika is dead. French finance minister Michel Sapin bent over backwards to be accommodating at a meeting with Mr Varoufakis. There is no unified front against Greece. It is variable geometry, as they say in EU parlance. (…)

How this will end is anybody’s guess. With goodwill on both sides, you could imagine a deal along the following lines:

The Troika is renamed the Love Brigade. Greece’s primary surplus for coming years is cut from 4.5pc to 2.5pc of GDP, moving closer to fiscal neutrality and creating some leeway for Syriza’s social welfare programmes (not that expensive).

To pay for this, the debt could be stretched out until 2055 – a date already circulated before – with the average interest rate cut by around 1.5 percentage points.

Chancellor Angela Merkel could agree to this without having to admit to the Bundestag that German taxpayers have lost a lot of money (bailing out German banks in Greece) or having to submit the losses as a line-item in the annual budget.

Syriza would have little difficulty calling this debt relief. There would be no more extend-and-pretend loans shovelled onto Greece. All would have a face-saving way out. The cost would be trivial compared with the huge sums already wasted.

Yet such happy formulations overlook the furious passions ignited by six years of depression in Greece and the raging battle under way to wrest control over the economic levers in Europe and to overthrow the contractionary regime that has pushed the whole currency bloc into a deflationary vortex.

Joschka Fischer, the former German foreign minister and vice-chancellor, says the Syriza victory is really a “Greek burial” for the broader German strategy of belt-tightening and austerity for Europe. If I may quote him at length:

“Not long ago, German politicians and journalists confidently declared that the euro crisis was over; Germany and the European Union, they believed, had weathered the storm. Today, we know that this was just another mistake in an ongoing crisis that has been full of them,” he wrote for Project Syndicate.

“Even before the leftist Syriza party’s overwhelming victory, it was obvious that, far from being over, the crisis was threatening to worsen. Austerity – saving your way out of a demand shortfall – simply does not work. In a shrinking economy, a country’s debt-to-GDP ratio rises rather than falls, and Europe’s recession-ridden crisis countries have now saved themselves into a depression, resulting in mass unemployment, alarming levels of poverty and scant hope.”

“Warnings of a severe political backlash went unheeded. Shadowed by Germany’s deep-seated inflation taboo, Chancellor Angela Merkel’s government stubbornly insisted that the pain of austerity was essential to economic recovery; the EU had little choice but to go along. Now the backlash has arrived.

“It does not take a prophet to predict that the latest chapter of the euro crisis will leave Germany’s austerity policy in tatters – unless Merkel really wants to take the enormous risk of letting the euro fail.

“There is no indication that she does. So, regardless of which side – the troika or the new Greek government – moves first in the coming negotiations, Greece’s election has already produced an unambiguous defeat for Merkel and her austerity-based strategy for sustaining the euro.

“Simultaneous debt reduction and structural reforms, we now know, will overextend any democratically elected government because they overtax its voters. And, without growth, there will be no structural reforms, either, however necessary they may be.

“That is Greece’s lesson for Europe. The question now is not whether the German government will accept it, but when.”

So who really holds the trump cards here?

Meanwhile, the ruble trouble has no impact on Putin:

• Rebels Say They Will Raise Up to 100,000 Troops for Ukraine Fight Announcement Comes as Kiev Is Enlarging Its Own Army Through New Round of Conscriptions

• U.S. Weighs Sending Missiles to Kiev The U.S. government is considering providing Javelin antitank missiles, small arms and ammunition to Ukraine, part of an effort to deter further aggression by Russia-backed rebels there.

EARNINGS WATCH

As of last night, 236 companies (63.8% of the S&P 500’s market cap) have reported. So far, EPS ex-Energy are seen up 8.4% (8.3% last Friday).

Total S&P 500 EPS are seen up 5.6% (5.1%) excluding the likelihood of continued beats. So far, they are beating by 4.8% (4.5%).  Revenues ex-energy are up seen 4.1%. (RBC)

Some Good News on Buybacks One piece of the six-year bull market remains intact: corporate buybacks.

After double-digit surges in repurchase activity the past two years, Goldman Sachs projects 2015 will be another strong year with S&P components shelling out $604 billion in executed buybacks – a 12% gain from the prior year. (…)

“Early repurchase activity so far this year has been strong, and should increase as reporting season black-out periods end,” writes Goldman Chief U.S. Equity Strategist David Kostin.

January is historically the slowest month for overall buyback announcements based on data from Birinyi Associates going back to 1999. But this January was different. According to Goldman, its buyback desk saw a roughly 60% rise in spending and authorizations in January from the same time a year ago.

Last month’s strength precedes what is typically the busiest month for buyback authorizations: February. According to Birinyi, an average $46 billion in overall repurchases have been announced in February over the past 15 years. (…)