Today: Fed down, Fed up. China, Europe, oil and equities.
Fed Closes Chapter on Easy Money The Federal Reserve said it would end its long-running bond-purchase program, concluding a historic experiment that stirred disagreement among policy makers, economists and investors about its impact.
(…) “There has been a substantial improvement in the outlook for the labor market since the inception of [the] current asset-purchase program,” the Fed said in its policy statement, released Wednesday after a two-day policy meeting. “Moreover, the [Fed] continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.” (…)
If all goes as they expect, officials will now turn their attention in the months ahead to discussions about when to start raising interest rates and how to signal those moves to the public before they happen. For now the central bank stuck to an assurance that it will keep short-term interest rates near zero for a “considerable time.” (…)
Twice before officials declared they would stop printing new money to buy bonds, only to restart the process when growth, hiring and inflation appeared to sag. (…)
Underscoring its own uncertainty, the Fed’s official rate assurance included a new qualifier about the economic outlook: If the job market improves more quickly than expected or inflation rises, rate hikes could come sooner, and it could wait longer if the job market or inflation slow. (…)
Officials noted “solid job gains” and said labor-market slack is “gradually diminishing,” signs of economic vigor that might spur early rate increases. Since July the Fed had been saying it saw “significant” slack, a phrase it struck this time around.
But Fed officials also noted falling energy prices and downward pressure on market expectations of inflation, signs of low inflation that give them leeway to wait before raising rates. Inflation has been running below the Fed’s 2% target for more than two years. (…)
Critics of the Fed for years have argued the strategy risked stoking inflation, devaluation of the dollar and market distortions.
The worst fears about bond buying haven’t come to pass. Inflation, as measured by the Commerce Department’s personal consumption expenditure price index, has been unchanged at 1.5% since September 2012. The dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies. Meantime, the price of gold, which some investors believe should rise when inflation fears pick up, has fallen from $1730.60 per ounce to $1229.20, a 29% decline. (…)
Fed officials say they are prepared to use bond buying again, but disagree about the circumstances that would warrant it. (…)
The U.S. dollar rose in early European trade Thursday, after the Federal Reserve met expectations by calling an end to quantitative easing, but caught the market off guard as it adopted a more optimistic tone on the economy, leading some strategists to bring forward forecasts for a first rate rise.
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Economists React to the Fed Statement: ‘Surprisingly Hawkish’ Economists largely expected the end of the Fed’s third round of quantitative easing, as it was known. But many found the statement more “hawkish.”
China Backs Growth in Housing Again as Slowdown Prompts U-Turn With China headed for its slowest full-year expansion in a generation, the government has listed housing as one of the six consumption areas to be encouraged after years of trying to cool the property industry.
(…) China will “stabilize” property-related consumption and make it easier for people to access mandatory housing savings, the State Council said in a statement late yesterday after Premier Li Keqiangpresided at a regular meeting.
The last time China’s State Council documents mentioned “stabilizing” housing consumption was in April 2009, when the government was rolling out a massive stimulus plan to shield the economy from a global slowdown. (…)
“The announcement marks a U-turn in stance towards the property sector after years of attempts to cool it down,” Dariusz Kowalczyk, a Credit Agricole CIB strategist in Hong Kong, wrote in a note today.
It’s the first time in recent years that the central government officially declared direct support for the housing market, according to Credit Suisse Group AG. (…)
The Chinese government, which started tightening lending to property developers and buyers in April 2010 to prevent asset bubbles from expanding, has also signaled plans to reverse course on home financing, with the central bank on Sept. 30 relaxing mortgage rules for homebuyers who have paid off existing loans.
“The government’s stance on the property market has changed to encouragement from caution,” said Johnson Hu, a Hong Kong-based property analyst at CIMB Securities Research. “It realizes the importance of real estate consumption. Most cities no longer need curbs on housing-price increases.”
Consumption is an “important engine of economic growth,” the Cabinet said yesterday, adding that the government will also support e-commerce, environment-friendly products and tourism. It didn’t provide details.
BTW:
PBoC loosened mortgage policies on September 30th in order to stabilize the property market. During the National Holiday, sales did increase by 14% and 21% Y/Y when compared to 2013 and 2012 respectively. We expect that successive loosening of property policies will help stabilize property sales further. (CEBM Research)
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Sluggish Demand for Excavators Continued in September
According to the Chinese statistical database Wind, China’s excavator sales in September fell -33% Y/Y to 4,599 units, a result of limited new projects. In the
first 9 months of 2014, total excavators sold amounted to 76,533 units, down 15% Y/Y (-14% YTD in August and -13% YTD in July). Loader sales in June were 10th, indicating -24% Y/Y growth. (CEBM Research)
German Jobless Numbers Fall
In seasonally adjusted terms, the number of jobless fell 22,000 in October, data from the country’s labor agency showed Thursday, in contrast to the expectations of analysts polled by The Wall Street Journal last week, who saw the jobless numbers rising by 2,000.
The seasonally adjusted jobless rate remained unchanged at 6.7%, the Nuremberg-based labor agency said.
Merkel Proposes Curbing Unions as Strikes Cripple Germany
Merkel’s government, in a proposal released this week, is pushing to limit the role of smaller labor groups in wage negotiations.
“We are observing a tendency for strikes by small unions with big consequences that result in many, many people suffering,” Merkel told reporters. “We’ve made the decision” to change the law to limit collective-bargaining power to one party per business, she said.
Even before this year’s strikes, which include walkouts by Amazon.com Inc. (AMZN) workers, labor unrest in the country has been rising. The number of companies hit by industrial action soared in 2013 to 1,384, the highest in two decades, according to data published by the Federal Labor Agency. While unions say they’re pushing for pay gains to make up for stagnating household incomes, companies argue they can’t afford higher wages as Europe’s biggest economy flirts with recession. (…)
The number of German workers participating in walkouts in 2013 stood at the highest in five years, while working days lost were the most in six years, according to Federal Labor Agency data. Unions argue raises are necessary because wages have been flat. Adjusted for inflation, household incomehas not risen between 2006 and 2012, according to the Hans-Boeckler-Foundation, a labor-affiliated organization. (…)
German exports to Russia tumble
In August, Germany exported goods to the value of €2.3bn to the Russian Federation, a decline of 26.3 per cent on August 2013, Germany’s federal statistical office said on Wednesday.
Between January and August 2014, German exports to Russia declined by 16.6 per cent to €20.3bn compared with the same period a year earlier. (…)
The US and Canada imposed sanctions, too, and both have seen sharp drops in arrivals from Russia.
Before the Ukraine crisis, the number of Russian trips to the US had been growing substantially – up 36 per cent in January compared with the same month in 2013, and by 30 per cent across the first three months of 2013.
But growth in trips to the US slowed in the second quarter to13 per cent. Russian arrivals in Canada deteriorated even further. In July arrivals were down 17 per cent.
In Europe, Poland, Italy, Germany and Spain suffered a sharp fall in arrivals. Before the annexation of Crimea, Russia was becoming one of Europe’s most important source markets, accounting for 6 per cent of all arrivals in the continent, said Oxford Economics.
Turkey, Greece and Cyprus, however, decided against imposing sanctions and all three countries saw an increase in Russian tourists. (…)
Russia is the fourth most important export market for German machinery manufacturers, many of which are small and medium-sized. (…)
The data released on Wednesday show that exports of German motor vehicles and vehicle parts were hardest hit, dropping 27.3 per cent between January and August, compared with the same period in 2013.
Exports of machinery dropped 17.2 per cent and chemical products dropped 5.9 per cent.
Although Russia accounts for less than 3 per cent of Germany’s exports overall, the crisis – coupled with a slowdown in other emerging markets – has rattled German business confidence. (…)
ECB’s Lending Survey Is Cause for Cautious Optimism
Demand for loans was positive across all three categories in the three months to October. The figure for non-financial corporations stands at six. That for home
purchases is 23 and for consumer credit is 10. Those figures are the differences between the sum of the percentages of banks reporting an increase and those of
banks reporting a decline in demand. That demand has coincided with an easing of lending standards by banks, a development that may continue in the months ahead with lenders having put the ECB’s first comprehensive assessment behind them.Loans to non-financial corporations, adjusted for sales and securitization, declined 1.8 percent year over year in September and the equivalent figure for households rose only 0.6 percent, according to data released by the ECB on Monday. The country breakdown suggests those aggregate figures hide some bad news, especially from Italy. The demand figures for loans for businesses and those for consumer credit both stood at minus 13 for the nation.
Net demand for loans for fixed investment stood at minus six in the most recent survey. (…) Net demand for loans for fixed investment stood at minus 20 for Spain, minus 13 for Italy and minus 14 for the Netherlands.
Now that the EU bank stress test is past, EU banks may be more willing to let the denominator (i.e. loans) grow. Bankers are not completely stupid. Why would they risk failing the 2014 stress test by allowing loans to rise just before the test? The big question now is not whether loans rise but rather how fast.
OIL
OPEC Chief Says Output Likely to Stay Unchanged OPEC’s oil output is likely to remain around the same level next year as it has this, despite the recent sharp slide in global oil prices, its secretary-general said.
OPEC’s oil output is likely to remain around the same level next year as it has this, while the group is unlikely to cut the ceiling on its production at a meeting next month despite the recent sharp slide in global oil prices, its secretary-general said Wednesday
“I don’t think 2015 will be far away from 2014 in terms of production,” Abdalla Salem el-Badri told reporters on the sidelines of an industry conference in London. (…)
Mr. el-Badri said the ‘call’, or likely demand for OPEC oil next year would likely be between 29.5 million and 30 million barrels of oil a day next year, roughly the same as this year. (…)
Mr. el-Badri said oil price weakness would likely hit output of shale oil hard, suggesting OPEC expects oil’s weakness to eventually temper supply growth.
“At this [current] price, 50% of tight oil will be out of the market,” he said. (…)
Some analysts now believe oil prices will only recover when some of the extra shale oil supply starts to be removed from the market, rather than when and if OPEC decides to start cutting production.
Mr. el-Badri said tight oil projects typically need oil prices at $90 to $100 a barrel a day to break even. OPEC’s estimate of the price at which such projects become uneconomic is higher than most in the industry, including that of the International Energy Agency which says most tight oil production is sustainable at $80 a barrel.
Mr. el-Badri said, however, that the impact of lower oil prices on supply would only start to be felt next year as shale oil-producing companies would have hedged themselves against the price drop in the near-term. (…)
Wait, wait:
Energy Boom Can Withstand Steeper Oil-Price Drop Oil prices would need to fall at least another $20 a barrel to choke off the U.S. energy boom, industry experts say, though some smaller American producers would face serious problems from a more modest decline.
(…) Abdalla Salem el-Badri, OPEC’s secretary general, predicted Wednesday that if current prices hold, half of the U.S. oil that is fracked from shale formations will be uneconomic, leading companies to stop producing it.
That view is at odds with most U.S. forecasters, who say output can remain steady at current prices because companies have cut their costs by finding ways to produce oil more efficiently. For example, the amount of oil coming from each new well in South Texas has nearly doubled since 2012, federal data show.
Marianne Kah, chief economist of ConocoPhillips , said oil prices would need to fall to $50 a barrel “to really harm oil production” in U.S. shale basins. She said 80% of the American shale sector—in which ConocoPhillips is a major operator—is profitable at prices between $40 and $80 a barrel for benchmark West Texas Intermediate crude.
Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, said he believed prices would have to fall much further to put significant pressure on the U.S. energy boom. “I am not sure if $80 is enough,” he said. “You might need $60 or $65 to really see a stress test.”
Occidental Petroleum Corp. ’s chief executive said last week that he saw plenty of drilling opportunities in the Permian Basin in West Texas at current prices. “We think there’s a lot of economic oil at $75,” Steve Chazen said on a call with analysts. “Do I think there’s a lot of economic oil at $50? No, I don’t.”
The Permian, where U.S. drilling activity is heaviest, will be profitable for companies to drill at U.S. oil prices of $57 to $75 a barrel, depending on location, according to research from Robert W. Baird & Co. As a result, companies active there, such as Chevron Corp., Apache Corp. and Pioneer Natural Resources Co., are likely to keep drilling.
The Eagle Ford Shale, located farther south in Texas and home to Marathon Oil Corp. ,Anadarko Petroleum Corp. and EOG Resources Inc., would remain economic at even lower prices—$53 to $65, according to Baird. North Dakota’s Bakken Shale, which is the focus of companies including Continental Resources Inc., Whiting Petroleum Corp. and Hess Corp. , comes in at $61 to $75 a barrel.
“If you didn’t overpay for acreage, you will get by just fine,” said Ken Morgan, director of the TCU Energy Institute at Texas Christian University in Fort Worth. “But if you paid an arm and a leg to get in the game, banking on $95 oil, there could be trouble and significant belt-tightening ahead.”
Even so, companies have strong incentives not to dial back on drilling. They are likely to be reluctant to let go of their well-site crews after training them to operate efficiently.
And nobody wants to be the first to cut production, a move that would help competitors. “If you think it’s hard to get 12 OPEC nations to act in concert, try getting thousands of independent operators to agree to react to lower oil prices,” said R.T. Dukes, a senior analyst at Wood Mackenzie.
Many companies have hedged their oil production, ensuring a good price for part of it. And energy producers’ debt typically isn’t due for several years. (…)
Lower commodity prices always result in supply curbs. It is always the marginal producer who is forced to cut as margins and financing quickly disappear.
Poloz says Canada’s economic growth at risk if low oil price persists
EQUITIES
Looking at month-end data, nothing really happened in October. The 200-day m.a. held and keeps rising along with earnings (chart from Ed Yardeni)
Stock Rally Leaves Technical Analysis in the Dust There are times when technical analysts can do little but watch the price action. The past two weeks have been one of those times.
(…) “Resistance hasn’t mattered,” he wrote, “being stretched hasn’t mattered; and high profile earnings misses have not mattered. What has mattered is a persistent bid that has shown no signs of slowing down (yet).” The S&P 500 has jumped 9% in less than 10 days, and while the market has seen six separate 9% rallies since November 2012, none have come this quickly, Mr. Cappelleri noted.
Yesterday was a particularly strong day, he noted. The S&P 500 hit two key technical markers: It regained its 50-day moving average in the morning, and hit hit 1978 in the afternoon, around 3 p.m., a number that completed a “head and shoulders” pattern. The last hour saw buying explode.
It wasn’t just the S&P 500 that enjoyed the benefits. The Dow Transports have hit new highs on Tuesday. Just two weeks ago traders and investors were looking at the airlines, looking at the Ebola headlines, and putting two and two together. “The index has tacked on 13.9% since then,” he noted, and the Russell 2000 added nearly 3% just yesterday.
What about now? Do the charts tell Mr. Cappelleri anything about where the market’s going? Well, those two key technical markers having been hit, there isn’t much upon which traders can key, he said. “They are behind us, leaving no live formations to key off of. That and support being light means that we should be prepared for the expected volatility in the day’s final two hours.”
What about now?
- Earnings are coming in more than OK with 69.0% of the S&P 500’s market cap (299 companies) having reported. RBC Capital says that so far, earnings are beating by 4.5% while revenues have surprised by 0.8%. Expectations for Q3 keep rising and are now for revenue, earnings, and EPS growth of 4.2%, 7.2%, and 9.3%,
respectively. - Guidance has not worsened, so far anyway.
- The Fed has acknowledged that the U.S. economy looks better, in spite of China and the EU.
- Interest rates have declined thanks to China and the EU.
- The dollar is strong.
- Core inflation has slowed a little from 1.7% to 1.5%.
- Total inflation will slow materially in coming months thanks to falling oil and commodity prices.
Trailing EPS are likely to reach $114.50 after Q3. With inflation at 1.5%, the Rule of 20 says that fair P/E is 18.5 = 2118 on the S&P 500 Index, 7.2% above this morning’s apparent opening of 1975.
China Opens Door on Credit Cards China is taking a step toward easing its grip on credit cards, potentially allowing foreign companies like Visa, MasterCard and other electronic payment processors to have a greater presence there.
The State Council, the nation’s cabinet, said in a statement on the main government website late Wednesday that qualified domestic and foreign firms can apply to set up bank card-clearing operations, a process that involves settling payments between banks and vendors. (…)
Currently, China UnionPay Co. has a near monopoly on processing and clearing yuan-denominated payments made via bank cards and credit cards. The state-controlled firm has close ties to China’s central bank. In an email, a spokesman from China UnionPay said that the company “welcomes competition” and “supports and will implement the decision to open up access to the bank card clearing market.”
Plastic from Visa, MasterCard and American Express Co. already is accepted in China and those companies process transactions there if they are made on cards that are issued by banks from another country. But Chinese banks aren’t able to issue cards with U.S. card processors unless they also are branded with China UnionPay. (…)
The move came as a surprise to card executives in the U.S., according to a person familiar with the situation.
Although the U.S. players would welcome the chance to enter the Chinese market, it likely will take some time for that to happen. Terms of any acceptance by U.S. companies haven’t been disclosed, such as whether firms such as Visa and MasterCard would have to apply for a license in China. (…)
Meanwhile, UnionPay has grown increasingly strong and is potentially in a position to withstand the imminent arrival of competition from overseas. It has expanded globally, and its tricolor logo has become more common on ATMs and sales counters around the globe, meaning Chinese consumers can use the same card at home and abroad. (…)
Nato jets intercept Russian aircraft ‘Significant military manoeuvres’ conducted in past 24 hours
More than two dozen Russian military aircraft, including six nuclear bombers, have conducted “significant military manoeuvres” on the edges of Nato and European airspace since Tuesday, causing jets to be scrambled from eight countries as well as Nato’s own Baltic air policing force.
The incidents – three of which occurred on Wednesday and one on Tuesday – followed last week’s violation of Nato airspace by a Russian spy plane, the first since the end of the cold war. Taken together they constitute the most serious air provocation mounted by the Kremlin against the alliance this year, if not in more than a decade, according to Nato officials. (…)
The most significant intercept on Wednesday occurred in the North Sea. A force of eight Russian aircraft, including four Tu-95 long-range strategic nuclear bombers and four refuelling aircraft, were detected flying in formation at about 3am central European time flying from mainland Russia over the Norwegian Sea.
Six aircraft turned back, but two bombers continued southwards, close to the Norwegian coast and followed by F16s sent to intercept them by the Royal Norwegian air force. When the Russian aircraft then turned over the North Sea, RAF Typhoons were scrambled to intercept as they approached UK airspace. Portuguese fighters were later deployed as they came near the Iberian peninsula.
The aircraft did not file flight plans, had turned off their transponders and did not respond to any radio calls from civilian or military controllers.
Simultaneously, jets from the Nato Baltic Air Policing mission based at Šiauliai in Lithuania had to be scrambled to intercept a force of seven Russian fighters, including two MiG-31 Foxhounds, two Su-34 Fullbacks, one Su-27 Flanker and two Su-24 Fencers.
Turkish jets were also sent up to monitor two Russian strategic bombers escorted by two Russian fighter jets approaching their airspace from across the Black Sea.
On Tuesday, German, Danish, Finnish and Swedish jets had to be scrambled to deal with another big incident in the Baltic, instigated by a force of seven Russian jets identical to that a day later.
Though the Russian jets had filed a flight plan, and were using transponders, they kept radio silence with air traffic controllers despite attempts to contact them, according to Nato. (…)