NEW$ & VIEW$ (30 JULY 2015): Housing; Fed’s Lowflation Dilemma; Breathless Technicians.

U.S. Pending Home Sales Slip in June 

The National Association of Realtors said Wednesday its index of pending home sales fell by 1.8% to a seasonally-adjusted 110.3, the lowest level since March, but 8.2% higher than June 2014.

Pending home sales rose 0.4% in the Northeast and 0.5% in the West from May. They fell by 3% in the Midwest and South.

The trend remains up: pending home sales rose 4.5% YoY in Q2 after rising 3.1% in Q1.

Sequentially, Q2 sales are up 1.5% or 6.1% annualized. Regionally, sales are all over the map with sales up 16.8% QoQ in the Northeast (+16.0% YoY), +0.6%  in the Midwest (+8.6%), –2.4% in the South (+10.3%) and +0.7% in the West (+11.7%). (Charts from Haver Analytics)

  

• ‘Boomerang’ Millennials Get Cozy at Home

A new report from Pew Research Center shows that a higher percentage of millennials, a group defined by Pew as adults born 1981 or later, is living with parents than in 2010, despite the ongoing recovery.

In the first third of 2015, 26% of millennials lived with their parents, up from a prerecession 22% in 2007 and 24% in 2010, when the recovery began. That translates to 16.3 million young adults in their family homes, compared with 13.4 million in 2007. (…)

Of course, many millennials are living independently: 42.2 million of them in 2015. But that’s slightly fewer than the 42.7 million who lived independently in 2007. (…)

A study from the Federal Reserve Board also points to one factor that, unlike the labor or housing market, has resisted cyclical trends: student debt. As the Pew study notes, the recession drove many young adults towards higher education. (…)

But all that schooling came with a serious price tag. Lisa Dettling and Joanne Hsu, economists at the Federal Reserve Board, found that mean balances on student loans rose to $12,000 by early 2014, up from $5,300 in early 2005. By analyzing individual-level credit data, Ms. Dettling and Ms. Hsu show that each additional $10,000 in student loan debt makes someone 4.6% more likely to move in with a parent.

Even if student loans are a proxy for upward mobility (higher earnings might be more likely with a degree or credential), “any income effects signaled by large loan balances are swamped by a behavioral effect wherein large balances incentivize moving in with a parent,” they wrote. (…)

Parsing the Fed: How the July Statement Changed from June

Fed Statement Tracker

Information received since the Federal Open Market Committee met inApril suggestJune indicates that economic activity has been expanding moderately after havin recent months. Growth in household spendingchanged little during the first quarter. The pace of job gains picked up while the unemployment rate remained steadys been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed softince early this year. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey–‑based measures of longer-term inflation expectations have remained stable. (…)

Jon Hilsenrath rightly focuses on lowflation:

Federal Reserve officials face a conflict as they plan to start raising interest rates later this year: There has been a lot of progress in their goal for U.S. job growth, but little in their objective of modestly rising consumer prices.

The central bank on Wednesday left its benchmark short-term interest rate near zero—for the 2,417th straight day—but dropped several hints after a two-day policy meeting that it is near seeing enough improvement in the job market to prompt officials to raise the rate as early as September.

At the same time, the Fed flagged nagging concerns in its postmeeting statement that inflation remains too low, which is making officials hesitant on the timing for liftoff and inclined to raising rates very gradually after the first increase.

So, China has become a factor in Fed policy:

The ripple effects of China’s market woes

(…) There could be several big ripple effects. First, the wild oscillations have shaken faith in the competence of China’s technocrats. For years, bureaucrats have defied doom­sayers predicting that China’s hybrid system of central planning and market forces would collapse under its own contradictions. Now the bureaucrats don’t look so good. Initially, they pumped up the market in what looks like an ill-conceived effort to enact what has been called the world’s biggest debt-to-equity swap. Worried that loans made to companies as part of a massive stimulus programme would turn sour, technocrats encouraged a stock market binge. Their subsequent actions to stop the bubble from bursting have looked anachronistic and heavy-handed. They have virtually criminalised selling stocks, banning anyone who owns more than 5 per cent of a company from offloading shares.

“This has set the Chinese stock market back 10 years,” says one close observer of China’s capital markets. Not only have such blunderbuss tactics revealed panic and outmoded instincts, they have not worked. (…)

Second, the assumption that China will gradually move towards a more market-based system might need to be reassessed. Recent events could persuade authorities they have been moving too fast. That could have an impact on everything from the pace at which China opens its capital account and makes the renminbi convertible to how fast it liberalises domestic interest rates. (…)

“What this reveals is that there is still a fundamental tension in China between a desire to intervene and a desire to let market forces operate,” says Fred Neumann, chief Asia economist at HSBC. That could affect whether the International Monetary Fund includes the renminbi in its special drawing rights, or whether China’s A-shares gain access to the MSCI Emerging Market index. Certainly, the clumsy intervention by authorities has had a chilling effect on global sentiment. Larry Fink, chief executive of BlackRock, said foreign investors would need to reassess.

The third possible impact is on China’s growth. True, it is not obvious how a market fall will spill over into the real economy. China has bucked sharp stock market slides before. This time, though, the risks are higher. Many in­ves­tors have borrowed heavily to buy shares. If authorities cannot stop a slide, some banks and brokerages could be at risk. The confidence-sapping oscillations are also taking place against the background of a much softer economy, one probably growing more slowly than the official 7 per cent figure suggests. If another point or two were shaved off growth, it could send very real tremors around the globe. Since 2008, China has been the motor of the world. The travails of its stock market add to evidence that this motor is spluttering.

• China warns media on ‘market disturbance’ Press ordered to get CSRC confirmation of ‘speculative’ reports

China’s stock market regulator began its most recent press briefing with a telling instruction for the mostly local journalists in attendance. “We have a requirement concerning speculative reports,” said the China Securities Regulatory Commission. “They must first be confirmed by the CSRC in order to prevent the spread of false information and market disturbance.”

The warning was a reminder that as a “national team” comprised of largely state-owned entities struggles to shore up China’s stock market, the government is orchestrating an equally important cheerleading campaign involving a broad array of state media outlets. (…)

The 8.5 per cent fall on July 27 left the SCI just 200 points above 3,500 — the level at which the government’s rescue effort began in earnest on July 8.

A move below the intervention point would be embarrassing for the national team led by China Securities Finance, the CSRC vehicle fronting a rescue effort estimated to be worth at least Rmb2.2tn ($350bn). (…)

In terse late night statements, posted in question and answer format, the CSRC has pledged to pursue all “relevant clues” as it pursues stock “dumping” in contravention of its July 8 decree banning listed companies’ large shareholders and directors from selling their shares.

Investors have also been urged to report any such “malicious” activity to official hotlines, in a throwback to the Cultural Revolution and other political campaigns in which the Chinese Communist party encouraged people to monitor and inform on their neighbours. (…)

China’s ripple effects on commodity prices…

…and world trade:

(…) a slowdown in China could have a profound effect on prices for U.S. consumer goods, depressing them even further. And further weakening in Chinese demand for commodities and other globally traded goods could cool inflation even further. So while the Fed might be confident the U.S. can keep growing, it would also worry that if the economy gets dented, very low inflation could turn into deflation.

China keeps exporting deflation. Now, commodity prices, in general, are also seriously deflating. While the USD keeps rising…

SENTIMENT WATCH

Technicians are out of breadth:

From Barron’s:

• Cash Is King Despite New Signs of Life in the Market Don’t let the recent rally fool you. The charts are showing that many parts of the market remain broken.

(…) Now, we have a serious breakdown in the small-capitalization Russell 2000 index interrupted by an oversold condition and a small upside reversal pattern Tuesday (see Chart 1). Even with Wednesday’s gains that breakdown is still in effect.

Investors may not be familiar with the Russell’s completed pattern. As we can see in the chart, the index formed and broke three trendlines originating at last October’s low. Called a “fan lines” pattern, it resembles a folded paper fan. But what it represents is a transition from bull to bear. We can even see two lines broken in the relative performance chart, as well, to confirm the change.

When the first and second lines broke, the index fell but then rallied back to test the now-broken lines, even setting a new high in the process. But the index was slowly rolling over and unable to sustain rallies. When the third line broke the sell signal was given.

Many traders wait for a more traditional break of horizontal support with the index taking out its May low. Indeed, there is a good deal of support in the zone between 1211.50 and 1220.50, which runs through several turning points formed over the past 29 months (the index traded near 1227 Wednesday afternoon). Coupled with a touch of the 200-day moving average and oversold short-term momentum indicators thanks to the steep late July selloff the rebound should not have been a surprise.

While small and midsized stocks have broken, the big-cap S&P 500 has not, at least not in its traditional formulation. This index is capitalization weighted so the biggest stocks carry the most influence, and this shows up quite well in the equal-weighted version. However, it is the cap-weighted version on which most people focus, and it also bounced off its 200-day average (see Chart 2). That keeps it officially in its year-to-date trading range and one of the few reasons I am suppressing my inner grizzly for now.

The bounce this week was not entirely because certain technical levels were reached but rather due to the phoenix-like awakening of some of the market’s worst sectors. Energy led the rebound Tuesday with basic materials and industrials close on its heels. This worst-to-first phenomenon is really just a snapback in beaten-down sectors. In my experience, it is more likely that if the market is going to resume its advance it will be the sectors that resisted the decline best that should lead the way.

I also find it disturbing that the Consumer Staples Select Sector SPDR exchange-traded fund (ticker: XLP ) is trading at 52-week highs while technology stumbled significantly over the past two weeks. Staples are defensive stocks that tend to lead when times are uncertain or bearish. Technology is one of the expected leaders in any bull market.

The semiconductor sector in particular is in trouble, with the iShares PHLX Semiconductor ETF ( SOXX ) down more than 13% from its June 1 peak and solidly below its 200-day average.

In short, the technical evidence available now, from sector action to declining market breadth, suggests cash is still a very good idea.

From NBF:

While the S&P has rebounded over the past couple of days it is notable that the IBD 50 fund ETF of leading stocks has not participated. As the accompanying chart indicates, the leading stocks as a group closed lower than they did two days ago. In other words, no rebound in the face of a bounce on the S&P. The chart has made a secondary high and appears set to test lower levels.

Meanwhile, new daily 52-week lows on the three major U.S. exchanges hit 735, the highest number since October 2014. More of the same internal deterioration.

The relative performance of leading stocks is starting to falter. A ratio chart of the IDB 50 ETF/ S&P made a lower high and is ready to break a prior low.

EARNINGS WATCH

• 285 companies (67.5% of the S&P 500’s market cap) have reported. Earnings are beating by 6.0% (6.1% last Tuesday) while revenues have positively surprised by 0.3%.
• The beat rate is 74% (75%) . Ex-Financials: 78%.
• Expectations are for revenue, earnings, and EPS of -3.7%, 0.0% (-0.2%), and +1.4% (+1.1%). EPS growth is on pace for 3.4% (3.5%), assuming the current 6.0% beat rate for the remainder of the season. This would be 8.2% (8.4%) on a trend basis (ex-Energy and the big-5 banks).

The big surprise among all surprises is that Industrials’ beat rate is 85% with 74% of companies already in. Their miss rate is only 8% in spite of the slow economy, slow exports and the dollar.

OIL

• Mixed Signals on U.S. Oil Output Government reports conflict on whether production is rising or falling, puzzling investors

(…) Weekly oil-output estimates from the EIA started to show falling production in April. Separate EIA reports on shale-oil drilling have forecast production declines for months. But the EIA’s monthly figures, which are released on a two-month delay, threw the market a curveball by showing that production hit a 44-year high in April and that previous months’ production was higher than initial forecasts.

U.S. crude prices have dropped 18% this month, reversing a spring rally. Some investors who entered the year betting on an oil-price rebound have responded with complaints that the U.S. data aren’t up to the task of providing an accurate picture of domestic drilling conditions. (…)

Why the discrepancy between weekly and monthly results? The EIA’s weekly production numbers are based on a forecasting model, not reported output, which underlies the monthly reports.

(…) The EIA, a wing of the Energy Department focused on data collection and analysis, says its current figures are accurate and reliable, adding that the discrepancies between its initial reporting and later revisions haven’t widened this year.

The next monthly oil report, which will include data through May, is due Friday. (…)

Alternatives abound, but even forecasters concede there is as much art as science in many of these calculations. Consulting firm PIRA Energy Group recently told clients that the U.S. produced about 9.3 million barrels a day in April, 400,000 barrels a day less than the government figures show.

PIRA’s April data accounted for lower Texas production due to flooding, while the EIA’s didn’t, said Gary Ross, head of global oil at PIRA.

“We’re all trying to bring exactness to this business that doesn’t really exist,” Mr. Ross said. (…)

Maybe people should look at other sources for better data. Since most of the shale oil production is transported by rail, U.S. rail carloads of petroleum and petroleum products, while not the perfect data, has the merit of being accurate and timely. These charts from the AAR are through June 2015 and July data will be out next week.

  

Carloads peaked during Q1’15 and have declined 2.5% YoY during Q2. They were up –1.1% YoY in April, +0.5% in May and –7.3% in June. Production has also started to drop in Canada as Canadian carloads of petroleum products, up 3.3% YtD through June, were down 4.5% in May and down 4.9% in June.

• Saudi Arabia to Cut Oil Production After Summer

The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day, bringing production to about 10.3 million barrels a day, the people said. Saudi Arabia told the Organization of the Petroleum Exporting Countries that it produced 10.56 million barrels a day in June, a record high.

“It is purely based on the [domestic] demand situation,” one of the people said, adding that “production is likely to hover around” 10 million barrels until the end of the year. (…)

The planned reduction likely wouldn’t affect exports and demonstrates that at least part of the kingdom’s recent production figures were related to its domestic-energy needs. Much of the recent production went to Saudi Arabia’s domestic refineries, including the two 400,000 barrels a day refineries it recently brought online with France’s Total and China’s Sinopec. (…)

• Shell cuts 6,500 jobs, capital spending Anglo-Dutch group takes action in response to plunge in oil prices

• $40 Oil May Force Russia Into an Emergency Rate Hike, Economists Say

Already faced with recession and sanctions, a further drop in crude might force the country’s central bank into an emergency rate hike — after four cuts already this year —  according to 65 percent of economists surveyed by Bloomberg from July 24-29. Thirty-nine percent of analysts said the government might impose Greek-like capital controls and 22 percent predicted a takeover of at least some of the country’s banks.

When asked about the central bank’s own analysis of the $40-per-barrel oil scenario, which found a roughly 600 billion ruble capital deficit and two-fold increase in the share of non-performing loans, 69 percent of economists said it has accurately estimated the risks to the Russian economy and banking sector.

The impact on growth from $40 oil would be particularly severe, weakening the ruble to 65 against the U.S. dollar by end-2015 and causing the economy to contract by 5 percent this year and 1 percent in 2016. Compare that to the far less pessimistic baseline consensus provided by Bloomberg’s monthly economic survey, which currently forecasts a 3.5 percent contraction in 2015 and a 0.5 percent expansion in 2016.