“It’s A Big, Scary World Out There,” BofA Warns, And Only Janet Can Save Us
Fed Chair Janet Yellen, in her speech and subsequent Q&A at the Economic Club of New York, was very clear in conveying her message that the weak global backdrop is preventing the Fed from hiking rates very much. While the Fed’s baseline economic scenario was roughly unchanged between the December and March FOMC meetings – given appropriate monetary policy accommodation – uncertainties are higher due to a weaker path of projected global growth. In other words the reduction in the dot plot to two rate hikes this year at the March meeting, from four hikes in December, is thought appropriate to mitigate the impacts of the weaker global backdrop. That reinforces the impression from the last FOMC meeting that the Fed is willing to risk higher inflation over the longer term in order reduce shorter term uncertainties. Hence the increase in 5-year, 5-year forward inflation expectations and simultaneous decline in equity vol following today’s comments by Chair Yellen (Figure 1).
To illustrate why the Fed’s clear shift to a more dovish stance is so effective in reducing uncertainties in financial markets, consider our recent survey of US credit investors. Arguably at least three – if not all – of the top-4 investor concerns – China, Oil prices, Geopolitical risk and Slow recovery (in that order, Figure 2) – are mitigated to some extent by the more dovish Fed. First of all a more aggressive Fed rate hiking cycle would likely accelerate China’s capital flight which, with an open capital account, leads to the equivalent of monetary policy tightening in China at a time where the weak economy needs the opposite. Furthermore, to stem such capital flight incentivizes the PBOC to pursue more aggressive currency depreciation, which is very deflationary through commodities. Second the stronger dollar associated with a more aggressive Fed puts downward pressure on oil prices – instead the USD weakened 0.8% today. Third to some extent even geopolitical risk is related to lower oil prices. Fourth the stronger dollar and lower oil prices could initially be negative for the US economy through the manufacturing sector – before consumers eventually do react to lower prices at the pump.
Even scarier in my view, is that Yellen actually dismissed the FOMC last Tuesday, openly taking full charge while walking blind:
“Given the risks to the outlook, I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Ms. Yellen said Tuesday before the Economic Club of New York.
She also said that she is looking at “a whole variety of factors that impact the outlook for the U.S. economy” while acknowledging that she has little visibility ahead. David Rosenberg counted that Yellen used the word “global” 11 times last Tuesday versus 4 in February and once in December and the word “uncertainty” 10 times Tuesday from 3 in February and 8 in December.
The Fed chair said it was appropriate to “proceed cautiously.” One sentence later she said “caution is especially warranted.” If her audience at the Economic Club of New York still didn’t get the message, a footnote in the text of her speech stated “uncertainty and greater downside risk” when the Fed’s policy rate is so close to zero “call for greater gradualism.”
From her speech:
I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty.
So, if “only Janet can save us”, it is indeed a scary world out there! 
Meanwhile,
Wage Surge in Hot U.S. Labor Markets Sending Hopeful Sign to Fed
While much of the U.S. seems trapped by tepid wage growth — fueling election-year anger among voters and keeping Federal Reserve policy on hold — Minneapolis-St. Paul has been doing quite nicely. The metro area generated 4.9 percent average wage and salary gains, Employment Cost Index figures from the Labor Department released Jan. 29 show. Cities including Nashville; Portland, Oregon; Seattle and Dallas also face worker shortages that’s pushed up pay.
(…) now in the part of the expansion where the labor markets get so tight in some areas that employers increasingly poach workers from each other,” said Bart Hobijn, a former San Francisco Fed researcher who is now economics professor at Arizona State University in Tempe. “This reflects more quits, which results in more switches mainly for wage gains. The tighter the labor market, the more this happens and the bigger the wage gains.” (…)
Some of the U.S.’s hottest labor markets are getting wage gains well in excess of the roughly 2 percent gains most Americans have been getting.
“We are seeing the talent shortage become a pressure point for wage inflation,” said Kip Wright, senior vice president at ManpowerGroup Inc., the Milwaukee-based staffing company. “As unemployment continues to fall, the availability of qualified resources continues to shrink.”
Some regions continue to struggle. The North York City-Newark, New Jersey metro area, for example, had just a 1.4 percent gain in wages and salaries last year as part of the Employment Cost Index. The Philadelphia region managed only a 1.5 percent gain.
In contrast, Washington County, Oregon, a suburb of Portland, had a 6.4 percent increase in average weekly wages in the third quarter compared to the same period in 2014, according to data released by the U.S. Department of Labor on March 9. The Portland-Vancouver metro area had 4.7 percent unemployment in January, down from 5.8 percent a year earlier, aided by high-technology jobs.
“Along the West Coast, Portland is something of a late-entrant in the non-manufacturing part of the tech industry,” said University of Oregon economist Tim Duy in Eugene. “That sector, which tends to have higher wages, has outperformed.”
Davidson County, Tennessee, which includes Nashville, had a 5.5 percent gain in average weekly wages in the third quarter. The Nashville area had a 3.7 percent unemployment rate in January, down from 5.2 percent a year earlier.
The area, a center of transportation, health care and music industries, has also benefited from “ongoing construction” that is driving growth for the state, said Matthew Murray, economist at the University of Tennessee in Knoxville. “The metro area is just bursting at the seams,” he said.
The Minneapolis-St. Paul area had a 3.9 percent unemployment rate in January and joblessness has averaged 3.2 percent the past six months.
Janae Olinger, of St. Paul, said the competition among employers to hire was “exciting and a bit of a whirlwind.”
“I was offered three different positions the same day,” she said. “It was my lucky day.”
After moving from Denver last November, the 28-year-old landed six interviews in a month that led to a $2,000 raise and a job at the University of Minnesota Foundation, where she raises money for scholarships for medical school students. (…)
How Millennials and Low-Income Consumers Are Propping Up the U.S. Economy
Younger consumers and those with lower incomes punched above their weight class in the final months of 2015 fueling a 2.35% increase in year-over-year spending in December in 15 U.S. metro areas, according to data released today by the J.P. Morgan Chase & Co. Institute. Those same groups were leading contributors to consumption gains in October and November. (…)
Those under 25 accounted for nearly 1 percentage point of overall spending growth, J.P. Morgan data said. Those under 35 accounted for nearly the entire gain, 1.9 percentage points. Americans ages 55 and older, conversely, slowed their spending in December compared with a year earlier, according to the data constructed from more than 14 billion anonymized debit and credit card transactions.
Sliced another way, the data shows Americans on the bottom end of the income distribution—many of whom are younger—were a leading source of gains. The bottom 20% of income earners accounted for 1.25 percentage points of total consumption growth. The upper 20% were a 0.43 point drag.
“Consumers in lowest quintile made strong contributions and they tend to not carry their full weight of spending,” meaning they typically account for less than 20% of overall purchases, said institute chief executive Diana Farrell.
In December, the bottom quintile accounted for 13.8% of total spending, but the group’s spending grew almost 10% from a year earlier. Similarly, those under 25 accounted for 6.9% of spending (they’re 9.4% of the population) but their spending grew 16% from a year earlier.
That’s likely a mix of two factors, Ms. Farrell said.
Outside of gasoline, prices for many essentials, including medical care and car repair, are rising. With little room for discretion, low-income consumers were forced to increase their spending.
But at the same time, job growth continues to be steady and wages are modestly increasing. That should give consumers who live paycheck to paycheck a boost. And the J.P. Morgan data bears that out. Spending at restaurants, typically an easy splurge, rose consistently last year. Spending on other services was also strong. That category includes doctors’ visits, but also entertainment, gaming and personal care such as trips to the barber or nail salon.
Spending on fuel declined throughout the year, but December drag on total outlays, -0.6 percentage point, was the smallest of the year. That suggests that the downward pressure fuel prices put on spending is dissipating.
(…) More than 6.1 million people age 65 and older rented their primary residences in 2014, up 29% from 2001, according to Harvard University’s Joint Center for Housing Studies. While the 79% homeownership rate for people 65 and older is the highest of any age group, the rate is down significantly since the housing boom, when homeownership among seniors peaked at nearly 82%. (…)
Of all renters, those age 75 and older have the greatest incidence of “severe” cost burdens, meaning more than half of their incomes go to rent, according to Harvard research. The typical renter aged 65 to 69 has household income of $24,700 annually, about 40% less than the median renter household income for those aged 45 to 49, according to an analysis of census data for 2014 by Enterprise Community Partners, an affordable-housing nonprofit. (…)
Eurozone prices continue to fall
Headline inflation in the eurozone edged up to minus 0.1 per cent, from minus 0.2 per cent in the year to February, according to Eurostat, the European Commission’s statistics bureau. The core rate, which excludes changes in the cost of more volatile items such as food and energy products, rose from 0.8 per cent to 1 per cent. (…)
Stocks: No Easy Way Higher Without Earnings Growth Only earnings growth is likely to send shares upward. But given the gloomy near-term economic backdrop, that is a lot to ask.
(…) Some of the factors that have hampered earnings in recent quarters—a strengthening dollar, falling oil prices and weak consumer spending—are all wild cards, casting doubt about a stock rebound fueled by earnings. (…)
Wall Street expects earnings to finally get some traction in the year’s second half, partly driven by favorable comparisons with the year-ago period, as commodity-sensitive companies like oil and gas producers have now grappled with low oil prices for more than a year.
Analysts polled by FactSet predict earnings at S&P 500 companies will rise 3.9% in the third quarter from the same period of 2015. That would be the first quarter of growth since last year’s first quarter. Revenues are forecast to advance 1.8% in the third quarter, which would be the first increase since the fourth quarter of 2014.
Profits and revenues are expected to accelerate in the fourth quarter, with analysts forecasting a 9% increase in earnings and a 4.1% rise in revenues for S&P 500 companies. (…)
Investors reconsider outlook for US banks Yellen’s promise of lower-for-longer rates is likely to aid profitability
(…) But because the gloom over the long-term economic outlook has lifted somewhat since February, Ms Yellen’s promise of lower-for-longer short-term rates is likely to have the desired effect of steepening the yield curve and aiding bank profitability. Hence the rethink on Wednesday morning. (…)
Fidelity Cuts Value of Startups Dropbox and Zenefits Fidelity Investments again took a hatchet to the valuations of its private technology shares, cutting bellwether software startups like Dropbox, Cloudera and Zenefits by as much as 38%.
OIL
Drivers’ Demand for Cheap Gas Revs Up Oil Market The prolonged slump in oil prices has been a boon to drivers. Now, the thirst for gasoline is revving up the oil market.
(…) U.S. gasoline demand hit record levels in March. Government estimates released Wednesday show consumption averaged more than 9.4 million barrels a day in the four weeks that ended Friday. That is a level usually found only during peak summer driving season, and it compares with roughly 8.8 million barrels a day in March of both 2014 and 2015. (…)
Gasoline demand rose 8.5% in March from a low in January, when it had dropped well below its 10-year average for the first time since last spring, according to U.S. Energy Information Administration estimates. An unusually warm February and March, after a snowy January, helped revive last year’s trend of strong demand.
U.S. drivers drove a record 3.1 trillion miles last year, according to the U.S. Transportation Department. The Energy Information Administration expects that to increase 2.1% in 2016 to a record of 3.2 trillion miles, citing rising population and employment, and low retail prices. (…)
The gasoline-demand trend could continue, thanks in part to vehicle sales in the U.S. and China that are up 10% to 15% and the renewed preference for cars that burn more fuel, Citigroup Inc. said in a recent note. Analysts at J.P. Morgan Chase & Co. recently recommended trades that would benefit from July gasoline futures rising compared with September’s, saying the recent demand growth foreshadows strong demand coming this summer, when gasoline consumption tends to rise.
Meanwhile,
Oil Patch Bankruptcies Hit $17.4 Billion
Nine North American oil and gas producers have commenced Chapter 11 bankruptcy proceedings so far this year, (to March 7) according to law firm Haynes and Boone LP’sOil Patch Bankruptcy Monitor.
These nine oil patch bankruptcies take the total number of North American oil and gas producers that have filed for bankruptcy since the beginning of 2015 to 51. These bankruptcies, including Chapter 7, Chapter 11, Chapter 15, and Canadian cases, involve approximately $17.39 billion in cumulative secured and unsecured debt. The total number of bankruptcies and total owed to creditors has risen sharply from November last year. Indeed, when the Oil Patch Bankruptcy Monitor was put together back in November, a total of 36 firms had collapsed owning a total of $13.1 billion. (…)
Haynes and Boone also tracks North American Oilfield Services Bankruptcies, and it looks as if the oil service industry is suffering much more than the E&P business.
So far this year seven North American oil services companies have collapsed owing a total of $2.54 billion to creditors.
Throughout the whole of 2015 the total value of bankruptcies totalled $5.3 billion, Vantage Drilling Co. Accounted for $2.8 billion of this amount. There have been 46 oil services bankruptcies filed since the beginning of 2015, including their secured and unsecured debt. (…)
Borrowing bases are redetermined roughly every six months. Figures used by banks to calculate the value of the reserves used to borrow against are based on market oil prices. And with Haynes and Boone’s Borrowing Base Survey predicting an average cut of 38% to borrowing bases when the next round of revaluations take place, it looks as if many oil companies are going to find their liquidity deteriorating significantly going forward. (…)
