Q2 BOUNCE WATCH
Beige Book Adds a Rosy Hue to Outlook Fed report points to expanding economy, despite mixed data early in the second quarter
Early economic reports indicate U.S. growth has failed to rebound strongly in the second quarter after shrinking during the first three months of the year—but you wouldn’t know it from the tone of the Federal Reserve’s beige book survey.
The informal survey of anecdotal business contacts’ views is conducted by each of the central bank’s 12 regional districts, and paints a fairly rosy picture of the outlook. The latest beige book report finds “overall economic activity expanded during the reporting period from early April to late May.”
Growth was characterized as “moderate” in the Chicago, Richmond, Minneapolis and San Francisco districts; “modest” in New York, Philadelphia and St. Louis regions; mixed in the Boston district; “slight” in Cleveland and Kansas City; holding steady in Atlanta; and slowing “slightly” in Dallas. The latter could be associated with falling business spending in the energy sector. (…)
In a hopeful sign for the housing market, the Fed reported “residential and commercial real estate activity and construction improved since the last report.”
Overall loan demand increased, the report said, particularly in the New York district.
As for the labor market, employment was “up slightly” from the prior survey, as were wages, the report said. Prices “were stable or ticked up, although manufacturers in some districts cited lower input prices.”
Consumer spending increased across all districts except Richmond, the beige book said. Lending activity also increased. (…)
Read this again and tell me if there is really a “rosy hue” other than in the WSJ headline:
Growth was characterized as “moderate” in the Chicago, Richmond, Minneapolis and San Francisco districts; “modest” in New York, Philadelphia and St. Louis regions; mixed in the Boston district; “slight” in Cleveland and Kansas City; holding steady in Atlanta; and slowing “slightly” in Dallas.
The FT is also hopeful:
In its regular Beige Book survey of economic conditions based on discussions with business contacts around the country, the Fed said on Wednesday that seven of its 12 districts had seen either “modest” or “moderate” growth. Overall, the picture suggested “overall economic activity expanded” between early April and late May, the Fed said.
U.S. Trade Gap Shrinks by 19%, Most in Six Years April result eases concerns about weak exports undermining second-quarter growth
(…) Overall, trade was a major drag on the economy in the opening months of 2015. In the first quarter of the year, a surge in inflation-adjusted imports and falling exports subtracted 1.9 percentage points from gross domestic product, the broadest measure of output. Overall GDP contracted at a 0.7% annual pace, the government’s latest reading showed last week.
But in April, nominal imports dropped 3.3% to $230.78 billion while exports increased 1% to $189.91 billion.
The improvement, if sustained, could mean that trade may even boost GDP in the second quarter. RBS Securities is forecasting 2% GDP growth in the second quarter, with trade neutral. J.P. Morgan Chase expects trade to contribute 0.1 to 0.2 percentage point, with overall growth near 2%. Morgan Stanley is forecasting a 0.1 point drag from trade, putting second-quarter GDP at 2.7%. (…)
Through the first four months of the year, U.S. exports were down 2.3% while imports were down 1.8% from the same period a year earlier. (Chart from Haver Analytics)
CHINA STILL WEAK
From CEBM Research survey:
Downstream demand from property and infrastructure investment remains weak. In the property sector, developers remain cautious about starting new projects. This is especially the case for developers in 2nd tier and 3rd tier cities. Based on survey feedback, steel respondents have yet to see signs of a recovery in new starts. Looking at infrastructure projects, deteriorating local government finances has restrained project spending. While demand from property and infrastructure remain sluggish, feedback indicates that demand from the ship building industry has started to improve.
Developer feedback indicates that property sector policy easing and the wealth effect from China’s equity rally have supported the rise in upgrade demand observed over the past two months. The rebound in upgrade demand has helped provide support to average asking prices. Upgrade demand in general is less price-sensitive as buyers are more concerned with location and space requirements than price.
This month respondents also noted that risks in the commercial property market are becoming more noticeable: retail and office space vacancy rates in 2nd and 3rd tier cities are at very elevated levels.
And this:
Hong Kong economy deteriorates as exports to China fall at fastest rate since 2008
Business conditions in Hong Kong deteriorated at an increased rate in May, linked to weaker demand from China. The worsening of conditions puts the economy on course for its weakest quarter for six years and raises the possibility of a renewed downturn.
The HSBC PMI, which covers all private sectors of the economy, fell from 48.6 in April to 47.6 in May. The latest reading was the lowest since September 2011 and the second-weakest since the height of the global recession in mid-2009. The average PMI reading for the second quarter so far is the weakest since the second quarter of 2009 and broadly consistent with the economy stagnating in year-on-year terms.
Both the PMI survey’s Output and New Orders Indexes fell in May, the declines being among the sharpest seen over the past six years. Key to the renewed weakness was a marked acceleration in the rate of contraction of new business from mainland China.
New work from China fell at the steepest rate since December 2008, down for a tenth successive month, reflecting slower economic growth on the mainland. China is set to record its weakest economic growth for a quarter of a century in 2015.
Hmmm…
Brazil raises rates for sixth straight time Central bank fights to regain investors’ trust
The Latin American country lifted the benchmark Selic rate late on Wednesday by an expected 50 basis points to 13.75 per cent — the highest level since January 2009.
The decision reflected “the macroeconomic outlook and perspectives for inflation”, the central bank said, repeating its statement from its previous meeting and giving no indication that the tightening cycle was coming to an end.
Since October last year, it has raised the Selic rate by 275 basis points in one of the world’s most aggressive tightening cycles, angering consumers and raising concern among industry leaders that the move will deepen Brazil’s impending recession. (…)
OPEC moots $80 as new ‘fair’ oil price – but will it stick? Nearly a year after oil markets entered a deep downward spiral, unmoored from the $100-a-barrel mark that had anchored them for years, some OPEC members are publicly talking for the first time about a new “fair” price for their crude.
Oil ministers from Iraq, Venezuela and Angola said in Vienna this week that a price of $75 or $80 a barrel – barely $10 above the going rate – could be just fine. Iraq’s Adel Abdel Mahdi said it would be “equitable”.
Saudi Arabia – which for years had pointed to $100 a barrel as a “fair price for producers and consumers” – has given no indication that it subscribes to this view. (…)
As recently as May 2014, Saudi Oil Minister Ali al-Naimi was repeating that mantra: “One-hundred dollars is a fair price for everybody – consumers, producers, oil companies,” he said. (…)
Just three weeks ago, President Nicolas Maduro said it was “in the best interests of Venezuela and OPEC to see the price stabilize at $100 in the medium term” – although months earlier he cautioned his citizens that prices would never return there. (…)
Paul Horsnell, global head of commodities research at Standard Chartered and a veteran OPEC watcher, said he was surprised to hear the “fair price” refrain returning, although he cautioned that $80 was too low to be a long-term norm.
“If non-OPEC outside North America hasn’t managed to grow for five years with prices above $110, it’s not going to grow at $80,” he said. (…)
SENTIMENT WATCH
German Bonds, European Stocks Dive on Draghi Comments German government bonds and European stocks fell sharply a day after ECB President Mario Draghi said that investors would have to get used to volatility in financial markets, which he said won’t affect monetary policy decisions.
In early trade Thursday, the yield on the 10-year bund hit 0.99%, its highest level since September and a jump of more than 0.40 percentage point since the start of the week. The Stoxx Europe 600 fell 1.6%. (…)
Rising inflation threatens to erode the value of bonds over time. In addition, German bonds, or bunds, are broadly considered a low-risk asset, and signs of an improving economy can prompt investors to seek higher yields elsewhere.
On May 19, I alerted readers to the return of inflation in Europe:
Curiously, this Eurostat inflation release got very little space in mainstream media this morning. Yet, it reveals that deflation has given way to inflation in 2015. Core inflation in the Euro area has sharply accelerated this year:
- January –1.8% MoM
- February +0.6%
- March +1.4%
- April +0.3%
- Last 4 months: +0.5% or +1.5% annualized (-0.9% annualized in Germany, +1.2% in France, +1.5% in Italy)
- Last 3 months: +2.3% or +9.5% annualized (+ 3.6% annualized in Germany, +7.4% in France, +15.6% in Italy)
As a result, April YoY core inflation reached +0.6% in the Euro area (+1.1% in Germany, +0.5% in France, +0.3% in Italy).
BTW, Bunds are yielding 0.5%…
Bunds were still yielding 0.5% Last Monday. It took Eurostat’s May inflation report to wake people up:
The market is waking up to the reality that I exposed last month. Core prices rose 0.1% MoM following rises of 0.6% in February, +1.4% in March and 0.3% in April for a total of +2.4% in the last 4 months. This is a 7.4% annualized rate! Now if we subtract January’s –1.8%, core prices rose “only” 0.6% over 5 months or +1.4% annualized.
I scrupulously post PMI reports because they provide real time, objective snapshots of the real corporate world. If you read the most recent May PMIs, you read that:
- The global PMI survey also showed that inflation looks set to rise again in coming months. Having signalled the steepest decline in manufacturing costs for almost six years at the start of the year, the surveys indicate the strongest rise for eight months in May. Higher oil prices were the main contributor of rising factory running costs. Average prices charged by factories rose as a result. Although only very modest, the rise was significant in being the first recorded since November and the largest since last August.
- (…) average manufacturing output charges were unchanged since April. Increases were signalled in Germany, Italy and Spain, while French, Dutch and Austrian manufacturers all reduced their average selling prices.
- Germany reported an increase in average services selling prices, the sharpest since January 2014.
Yes Virginia, you’ll have to get used to volatility! Or step aside for a while. Did you miss this yesterday: SEASONALITY OF EQUITY RETURNS REVISITED