Job gains better-than-forecast in January
- January Nonfarm Payrolls: +257K vs. consensus +234K, +252K previous.
- Unemployment rate: 5.7% vs. 5.6% consensus, 5.8% previous.
U.S. Small-Business Owners’ Optimism Highest Since 2008
U.S. small-business owners are the most optimistic they have been in seven years, according to the latest Wells Fargo/Gallup Small Business Index. The index, at +71, has increased significantly for two consecutive quarters, and reflects optimism in small-business owners’ views of both their current situation and their expectations for the future.
U.S. Worker Productivity Deteriorates Pushing Unit Labor Costs Higher
Nonfarm productivity declined at a 1.8% annual rate last quarter and was unchanged y/y. The figure followed an upwardly revised 3.7% increase in Q3. For all of last year, worker productivity rose 0.8% on average, about the same as it did in the prior two years. Real output increased at a 3.2% rate last quarter (3.1% y/y) while hours worked gained 5.1% (3.1% y/y). Compensation per hour increased a diminished 0.9% (1.9% y/y) but when adjusted for lower prices, it improved 2.1% (0.7% y/y). The deterioration in productivity caused unit labor costs to jump 2.7% in Q4 (1.9% y/y), reversing it Q3 gain. The Q4 productivity decline compared to expectations for a 0.8% rise in the Action Economics Forecast Survey. A 1.0% rise in unit labor costs was expected.
Manufacturing sector worker productivity rose at a lessened 1.3% rate (2.8% y/y) after a 3.2% rise. For all of last year, productivity grew 2.5% on average after a 2.0% rise in 2013. Output grew 5.7% (4.8% y/y) after a 4.8% gain, while hours worked improved 4.3% (1.9% y/y) following a 1.5% Q3 increase. Worker compensation per hour increased at a steady 1.5% rate (2.4% y/y). Adjusted for price inflation, compensation gained 2.8% (1.2% y/y). Unit labor costs improved 0.2% (-0.4% y/y) following two quarters of sharp decline.
U.S. Trade Deficit Widens Unexpectedly as Imports Jump
The U.S. foreign trade deficit in goods and services increased to $46.6 billion during December from $39.8, revised from $39.0 billion. It was the deepest deficit since November 2012 and compared to $38.0 billion expected in the Action Economics Forecast Survey. For all of 2014, the deficit deteriorated to $505.0 billion, giving up roughly half of its 2013 improvement. A 2.2% rise in imports (4.9% y/y) drove the December deficit’s deterioration as it reversed a 1.8% November decline. Petroleum imports gained 7.7% (-13.4% y/y) despite a m/m fall in crude oil prices to $73.64 per barrel from $82.95. The quantity of energy-related imports rose by nearly one-third (9.9% y/y). Overall exports fell 0.8% (+1.1% y/y) after a 1.1% decline. For the year, exports gained 2.9% as they did in 2013. In constant dollars, merchandise imports rose 3.5% in December (8.8% y/y) while real exports were unchanged (4.7% y/y).
The decline in real merchandise exports reflected a 3.1% drop (+3.2% y/y) in industrial supplies & materials. Foods, feeds & beverage exports also fell 1.2% (-0.3% y/y) while nonauto consumer goods exports were off 0.7% (+8.6% y/y). To the upside, auto exports rebounded 2.8% (7.2% y/y) and capital goods exports gained 2.0% (3.3% y/y). Services exports increased 1.7% (3.4% y/y) as travel exports rose 1.5% (2.0% y/y). On the import side of the trade ledger, industrial supplies & materials increased 9.8% (8.5% y/y) and auto imports jumped 3.5% (8.8% y/y). Capital goods imports gained 0.5% (7.8% y/y) while nonauto consumer goods imports nudged 0.3% higher (7.9% y/y). Services imports increased 2.2% (4.4% y/y) while travel imports gained 3.2% (7.1% y/y).
Non-petroleum imports rose 1.5% MoM in December after falling 0.8% in November. For Q4, they are up 1.7% or 7.0% annualized.
Non-petroleum exports declined 0.6% MoM in December after dropping 2.2% in November. For Q4, they are up 0.2% or 0.8% annualized.
(…) Thus, the swelling of the US trade deficit in 2014’s final quarter may be the sign of things to come. As derived from the monthly trade report, Q4-2014’s 1.4% year-to-year increase by US exports was the slowest of any quarter since the 0.1% of Q4-2009. Fourth quarter 2014’s -2.0% yearly drop by US merchandise exports to emerging market countries included setbacks of -5.6% by shipments to China and -5.1% by sales to Brazil. As derived from the ISM surveys, January’s drop by an index of export orders received by US-based companies warns of less support from foreign customers. (Moody’s)
U.S. Car Exports Top Two Million
(…) Last year, about 2.1 million new cars and trucks were built in the U.S. and shipped to other countries, the first time auto exports topped 2 million. (…)
About half of U.S. car exports go to Canada or Mexico, and both countries are big exporters to the U.S. In Mexico, auto makers produced about 3.2 million vehicles last year, a 10% increase over 2013, and exported about 82% of them, mostly to the U.S., according to the Mexican Automotive Industry Association.
(…) A growing number of U.S.-made cars are now going to countries including China, Saudi Arabia and South Korea.
“The U.S. has become one of the low-cost places to build cars,” said Ron Harbour, a senior partner with the Oliver Wyman Inc. management consulting firm. (…)
The U.S. dollar’s strength against the Japanese yen and euro is too recent to affect sourcing plans. (…)
Foreign-based car makers like BMW AG and Daimler AG are helping to drive the rise in U.S. auto exports. Both established plants in the U.S., mostly to build SUVs, and both export the majority of their U.S. production.
The 2.1 million cars exported represent about 18% of all U.S. new-vehicle production last year, according to data provider WardsAuto.com. U.S. light-vehicle production was 11.4 million in 2014. And the U.S. is still a big importer of foreign-made cars and SUVs. The U.S. auto trade deficit was about $109.4 billion last year. (…)
Daimler’s Mercedes-Benz and BMW both are planning expansions of their SUV plants in the U.S. South, a move that could further give a boost to exports of those vehicles. The Germany luxury car makers currently export more than half of the total output from those plants.
BMW will spend about $1 billion to boost production of X3 and other SUVs at its plant in South Carolina by 50% to 450,000 vehicles in the next two years. A spokesman said “there is no doubt the number of vehicles exported will increase.” (…)
BTW, the USD remains pretty low (chart from Moody’s):
Mercedes has record January car sales as core markets jump German luxury carmaker Mercedes-Benz said on Friday sales jumped 14 percent in January to a record 125,865 models, powered by double-digit gains in Europe, China and the United States.
Daimler’s (DAIGn.DE) flagship division posted 14.5 percent sales increases in each Europe and China to 47,693 and 28,080 cars respectively, the Stuttgart-based manufacturer said.
Deliveries in the U.S. were up 8.9 percent to 24,619 cars.
This narrative is becoming mainstream. This is Bloomberg’s view:
Is China Preparing for Currency War?
(…) The central bank is cooking up measures to widen the band in which its currency trades. People’s Bank of China officials say it’s about limiting volatility as capital zooms in and out of the economy. Let’s call it what it really is: the first step toward yuan depreciation and currency war. (…)
For China, Japan represents the biggest provocateur. The 30 percent drop in the yen under Prime Minister Shinzo Abe is slamming Chinese industry. Key beneficiaries of the policy such as Toyota and Sony (both projected huge profits this week) are lowering prices to gain market share abroad, effectively exporting deflation. Abe also gives Beijing political cover to devalue. It would be hypocritical, after all, for U.S. Senators Lindsey Graham and Charles Schumer to bash China for currency manipulation and not Japan.
But Fitch says that the RRR cuts are not indicative of monetary loosening:
China’s RRR Cut Less of an Easing Than It Appears
The 50bp reduction in China’s reserve requirement ratio (RRR), effective on 5 February, is less of a policy easing than it appears, says Fitch Ratings. The measure compensates almost exactly for liquidity destroyed by cross-border capital outflows during 2014. Accompanying targeted-easing measures are in line with the authorities’ practice in this easing cycle, going back to 3Q14.
Latest data from the State Administration of Foreign Exchange (SAFE) indicates that net capital outflows in 2014 totalled USD96bn (CNY575bn). We estimate the 50bp RRR cut by the People’s Bank of China (PBOC) to release around CNY570bn into the economy. Therefore, the liquidity effect of the broad-based RRR cut roughly balances out against the impact of capital outflows.
Also notable is the PBOC’s continuing with targeted-easing measures to lower borrowing costs in certain sectors of the economy, on top of the broad-based easing. The PBOC announced an additional 50bp RRR cut for smaller financial institutions focused on micro enterprises and agricultural lending, as well as a 400bp RRR cut for the Agricultural Development Bank of China (ADBC). We expect these measures to release approximately CNY101bn (USD16bn) in liquidity – CNY85bn for the smaller institutions and CNY16bn for ADBC.
The authorities’ reluctance to reduce RRRs or otherwise loosen policy more aggressively reflects awareness of the risks to systemic stability from rapid credit growth. Fitch expects the authorities will continue to engage in targeted-easing measures to maintain growth at a rate of about 7% over 2015. However, RRRs may be reduced further if substantial net capital outflows continue. (…)
Furthermore, uncertainty remains as to whether the recent easing measures by the PBOC (including the earlier rate cuts in November 2014) will actually result in increasing credit to targeted sectors, such as small and micro enterprises. If banks utilise the monetary loosening to continue expanding credit in sectors which are already highly leveraged, it would exacerbate vulnerabilities in the system and be credit negative.
And Nomura thinks that the cons to devaluation far outweigh the pros (via Ft Alphaville):
CNY depreciation pro and con list from Nomura
Pros
1. Makes exports more competitive, helping to boost growth.
2. Raises the cost of imports, helping to reduce the risk of CPI deflation.
Cons
1. We have shown that very large net hot-money outflows, which tend to occur in tandem with market expectations of CNY/USD depreciation, can push the balance of payments into a deficit. Thus, there appears to be a significant risk of a self-fulfilling spiral forming: more hot-money outflows fuels greater expectations of CNY/USD depreciation, and so on. The result could be an unintended exchange rate depreciation overshoot, or a loss of FX reserves.
2. Hoarding of foreign currencies (FC) from local corporates. From February 2014 to August 2014, RMB depreciation fears prompted a USD112.3bn rise in corporate FC deposits. Although local corporate FC deposits fell from September to December 2014, increased depreciation fears could prompt another rise (Figure 12);
3. Increased RMB depreciation fears can prompt an increase in RMB FX volatility through lower RMB trade settlement flows (Figure 13). Examples of this were seen during the European financial crisis in both Q2 2012 and Q2 2013. This could lead to USD/CNH breaching the weak side of the band;
4. Currency depreciation could cause credit stress (Chinese corporate have significantly increased their foreign currency borrowing in recent years) and a rise in investors’ perceived risk premiums, which can lead to higher market interest rates and reduce the effectiveness of PBoC monetary easing.
5. For a country striving to internationalise its currency, a weak CNY policy sends the wrong message. This is especially important this year for the CNY to be included in the IMF’s SDR basket (5-year review expected this year). We note that, when depreciation expectations were elevated during the US financial crisis, European financial crisis and local market/growth pressures in early 2014, RMB deposits in major financial centres such as HK fell (Figure 14).
6. The boost to exports and growth from CNY depreciation is likely to be limited, as China is still a large outsourcing centre for factories of multinational corporations. CNY depreciation raises the cost of imported inputs that are assembled in China for export, thus limiting the competitive boost to exporters.
7. In any case, China already records record trade surpluses. Increasing these further could provoke a protectionist reaction from its trading partners.
8. The main reason for China’s economic growth slowdown is weakening domestic demand, especially investment. The best antidote is reforms and supportive domestic macro policies, not CNY depreciation.
9. While CNY depreciation can help ease the risk of deflation, higher CPI inflation from more costly imports is not what China needs. This could have the unintended consequence of further weakening domestic demand.
10. CNY depreciation contravenes China’s longer-run goal of economic rebalancing away from export-intensive SOEs, heavy-polluting industries and investment and towards inward focussed private enterprises, services industries and consumption.
GREXIT
Tsipras Vows to Keep Promises After German Rebuff
Tsipras, 40, is preparing for a speech to parliament on Sunday in which he will set out his legislative agenda at the start of a three-day debate leading up to a confidence vote to confirm his government. On Thursday night he was greeted by the rare sight of a pro-government demonstration in downtown Athens after he vowed to stick to his anti-bailout campaign pledges, despite their rejection by German Finance Minister Wolfgang Schaeuble. (Cartoon from The Telegraph)
From Kiron Sarkar via John Mauldin:
The potential final nail in the coffin for Greece is if the ECB Governing Council votes (it needs a 2/3rds majority) to deny Emergency Lending Assistance (ELA) by the Bank of Greece to its banks. Clearly, the Central Bank is watching the Greek Central Bank’s usage of ELA and could take such a decision at any time. That’s a really tough decision for the ECB/Draghi to take, as it’s a political policy issue, rather than one which should be left to a Central Bank.
Greek banks need ELA to cover the massive amount of Euro’s which have and are continuing to be withdrawn from Greek banks by their citizens, who are speaking with their feet. If access to ELA is denied, the Bank of Greece will have no alternative but to print its own currency and for Greece to exit the Euro.
That’s the nuclear scenario for Greece.
OIL
Oil heads for biggest two-week gain in 17 years amid volatility
Angola seeks $1bn in loans as oil falls
Angola has dramatically slashed its budget for the year and is reaching out to the World Bank and international lenders for at least $1bn in loans as Africa’s second-biggest oil producer and one of the continent’s star economic performers grapples with the fallout from the collapse in crude prices.
(…) last month the government effectively wiped $14bn off this year’s budget after it reduced its assumed oil price from $81 a barrel to $40 a barrel.
Oil accounts for about 98 per cent of Angola’s export earnings, more than two-thirds of government revenues and 44 per cent of gross domestic product. (…)
Standard Chartered estimates that Angola’s fiscal break-even oil price is around $110 a barrel, and is forecasting that the budget deficit will widen to at least 7 per cent of GDP this year.
It is basing its calculations on oil averaging $85 a barrel this year, up from its current price of about £54. (…)
Brazil January Inflation at Fastest Pace in Nearly 12 Years
Monthly inflation as measured by the benchmark IPCA index accelerated to 1.24 percent from 0.78 percent in December, the national statistics agency said today in Rio de Janeiro. Annual inflation accelerated to 7.14 percent from 6.41 percent a month earlier, exceeding the target range.
Food and beverage prices in January rose 1.48 percent, after a 1.08 percent rise in December, the statistics agency said in today’s report. Transport prices jumped 1.83 percent after rising 1.38 percent the month before, and housing prices increased 2.42 percent because of an increase in electricity costs.
Regulated prices for items such as electricity, gasoline and buses rose 2.5 percent in January, the most in almost 12 years, the statistics institute said.
In the preceding 12 months, regulated prices rose 7.55 percent. That marked the first time since 2010 that regulated price increases exceeded that of the headline figure. It will accelerate to 10.6 percent by year-end, according to Rosenberg’s Costa.
EARNINGS WATCH
Earnings just keep getting better. As of last night, 317 companies (75.7% of the S&P 500’s market cap) have reported. So far, EPS ex-Energy are seen up 9.4% (9.3% yesterday). Total S&P 500 EPS are seen up 6.4% (6.2%) excluding the likelihood of continued beats. So far, they are beating by 5.0% (5.0%). Strength appears broad based with ~72% of those reported surprising to the upside on EPS. Revenues ex-energy are seen up 4.3%.
Retail is one of the few groups yet to report. Traditional Staples and Discretionary Retailers (excluding Internet Retailers) are projected to see 5.8% earnings growth. Early reporters have beaten by 4.0%, largely the result of margin upside. (RBC)
Ambrose Evans-Pritchard: ‘Putin’s goal is to shatter Nato and reassert Russian dominance’ Former Nato chief Anders Fogh Rasmussen claims Vladimir Putin has ambitions beyond Ukraine and aims to test Western resolve in the Baltic
(…) The fear is that the Kremlin will generate a murky conflict in Estonia or Latvia where there are large Russian minorities, using arms-length action or “little green men” without insignia to disguise any intervention. (…)
“There is a high probability that he will intervene in the Baltics to test Nato’s Article 5,” he said, referring to the solidarity clause that underpins collective security. (…)
Nobody knows what would happen if one of the Baltic states invoked Article 5 protection but was turned down by the Nato Council. Failure to respond would devastate Nato’s credibility and undermine the principle of deterrence, though allies could still act as a coalition of the willing outside the treaty structure. (…)
Mr Rasmussen said the Europeans have slashed military spending so deeply since the financial crisis that they can barely defend themselves without American help. “The situation is critical. We have a lot of soldiers but we can’t move them,” he said.
“Nato countries have cut defence spending by 20pc in real terms over the last five years – and some by 40pc – while Russia has increased by 80pc. The aggression in Ukraine is a wake-up call,” he said. (…)
Mr Rasmussen said there is no truth to Kremlin claims that the West violated pledges at the end of the Cold War that there would be no eastward expansion of the alliance into the territory of former Soviet Union. “No such pledge was ever made, and declassified documents in Washington prove this. It is pure propaganda,” he said.
Pension Funding Levels Plunge as Interest Rates Fall
S&P 500 companies with defined benefit plans suffered a drop in funding levels to 74.3% in January, according to Wilshire Consulting. That’s down from 77.8% in December, which was the lowest end-of-year funding ratio since at least 2000, as far back as Wilshire’s records go.
The January deficit represents a roughly $500 billion difference between the value of pension plan assets and the obligations, said Wilshire.
In a separate report, consulting firm Mercer LLC reported that the total deficit for S&P 1500 companies rose to $654 billion in January, the biggest gap since 2012. The funding level for those companies dropped to 74%, also the lowest since 2012, wiping out all the gains made in 2013.
By law, companies have to make their underfunded pension plans whole through mandatory contributions spread out over several years.
“The larger these required contributions, the less flexibility corporate CEOs and CFOs have in managing their cash flows and directing those corporate assets to more productive activities,” said Steven Foresti, head of investment research at Wilshire Consulting.
Pensions are also hitting corporate earnings. Companies such at AT&T Inc., Verizon Communications Inc., and United Parcel Service Inc. have cited higher pension charges as a drag on earnings in 2014. (…)
The average 65-year-old American woman is now expected to live 88.8 years, up from 86.4. Men who are 65 are expected to live 86.6 years, up from 84.6. (…)
