Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE (7 September 2017)

DC politics getting murkier:

Trump Stuns GOP by Dealing With Democrats on Debt, Harvey Aid President Trump stunned fellow Republicans, as he sided with Democrats on a proposal to attach emergency aid for Hurricane Harvey victims to measures to keep the government funded and its borrowing limit suspended until mid-December.

(…) If approved by Congress, the agreement would defer the threat of a partial government shutdown and a default on the country’s debt until Dec. 15 and dispatch the first $7.85 billion installment of Harvey relief, clearing the three most pressing items from the crowded September legislative agenda. (…)

Just hours earlier, House Speaker Paul Ryan (R., Wis.) had called Democrats’ proposal to combine Harvey aid and a three-month debt limit increase “ridiculous” and “unworkable.”

(…) The Republican president’s move Wednesday raised questions about whether he will now turn to Democrats to reach deals on tax reform and immigration. (…)

Although Mr. McConnell said he would vote for the combined package, other GOP senators said Wednesday they weren’t sure whether they would support it, even after Vice President Mike Pence and Budget Director Mick Mulvaney explained the deal to Senate Republicans at their weekly closed-door lunch. Mr. Mnuchin fully supported the president’s decision once it was made, a senior Treasury official said. (…)

The deal will be a tough sell among House Republicans. House Rules Committee Chairman Pete Sessions (R., Texas) said it was going to take work for the GOP leadership to sell the deal to rank and file. (…)

Today’s WSJ editorial:

(…) What really happened is that Mr. Trump overruled his Treasury Secretary and GOP leaders who wanted a debt-ceiling increase to run past the 2018 election. Mr. Trump instead gave Democrats exactly what they want, which is to set up an even steeper fiscal cliff on debt and spending in December when Republicans hope to be focusing on tax reform.

Republicans will now have to take at least two difficult votes to raise the debt ceiling, while Democratic leverage will increase when the day of reckoning comes. The chances of a government shutdown in December have now risen sharply, or at least they have if Mr. Trump wants to pass something with more than a few Republican votes.

Mr. Trump may not like GOP leaders Paul Ryan and Mitch McConnell, but is he trying to elect Speaker Pelosi? As Nebraska Sen. Ben Sasse put it in a press release: “The Pelosi-Schumer-Trump deal is bad.”

Part of the problem is that Congressional Republicans once again helped put themselves in this box. Congress can’t let the U.S. default on its debt, so the majority party has to raise the debt ceiling whether it likes it or not. The smart GOP play was to attach a long-term debt increase to some other must-pass legislation and get it over with. One and done.

In familiar self-defeating fashion, the usual House suspects refused, insisting that the debt ceiling get a stand-alone vote. House Freedom Caucus Chairman Mark Meadows and Republican Study Committee leader Mark Walker also claim to be miffed that the debt-limit increase won’t include spending cuts.

Yet most of these same Members won’t vote to raise the borrowing limit no matter what they’re offered. They find the actual work of governance beneath their dignity. Their mutiny means that Mr. Ryan lacked a GOP majority to raise the debt ceiling, which meant he had to go hat in hand to Mrs. Pelosi for Democratic votes. She and Mr. Schumer came up with their three-month gambit, which Mr. Ryan immediately labeled “ridiculous” and “unworkable,” only to be sandbagged by Mr. Trump.

This may all sound like inside baseball, but it’s politically relevant because it illustrates the Republican inability to govern. The Senate killed health-care reform. The House can’t pass a budget resolution that is essential for tax reform. Mr. Trump is sore that Republican leaders failed on health care, so he now undermines their fiscal strategy and all but hands the gavels to Democrats. Readers might take note and hold off on spending that tax cut.

Fed’s analysis getting murkier:

  • Hurricanes Push Fed off Course Economic slowdown caused by Hurricanes Harvey and Irma will be enough to keep central bank from raising rates as expected in December
  • From the Beige Book:

Employment growth slowed some on balance, ranging from a slight to a modest rate in most Districts. Labor markets were widely characterized as tight. There were reports of worker shortages in numerous industries, most notably in manufacturing and construction. Firms in the Atlanta, St. Louis, and Minneapolis Districts said that they had turned down business because they could not find the necessary workers. Many Districts indicated that businesses were having difficulty filling openings at all skill levels. In spite of the tight labor market, the majority of Districts reported limited wage pressures and modest to moderate wage growth. That said, there were reports from firms in the Dallas and San Francisco Districts that labor shortages were pushing up wages.

A number of Districts indicated that pass-through to downstream prices was limited, with increases in input prices exceeding gains in selling prices.

From July 20 Daily Edge:

An estimated 2.7 million adults over the age of 26 were misusing painkillers as of 2015, while another 236,000 currently used heroin, based on test Substance Abuse and Mental Health Administration data. While opioid abusers account for a tiny sliver in a workforce of 160 million, they probably make up a great share of the 7 million who are unemployed.

Meanwhile:

Bank of Canada Surprises With Another Rate Rise The Bank of Canada raised its benchmark interest rate by a quarter-percentage point to 1%, saying stronger-than-anticipated growth—highlighted by a blockbuster performance in the second quarter—warrants the removal of “considerable” stimulus from the economy.

(…) Recent indicators, such as a report showing economic growth surged by a strong 4.5% annualized rate in second quarter, support “the bank’s view that growth in Canada is becoming more broadly based and self-sustaining,” the Bank of Canada said in a statement explaining its decision. “Given the stronger-than-expected economic performance, [the bank] judges that the removal of some of the considerable monetary policy stimulus is warranted.”

(…) the central bank said it would pay “close attention” to how the economy responds to higher borrowing costs, given households have accumulated record levels of debt. (…)

In its statement, the Bank of Canada said there had been “widespread strength” in exports and business investment. (…)

Yuan’s Sharp Rise Muddles China’s Growth Picture A recent surge in the value of the yuan has blindsided Wall Street and stands to complicate China’s efforts to simultaneously manage a slowdown in growth while deepening its ties to global markets.

CETERIS NON PARIBUS:

Western multinationals are fighting harder to hold on to their margins in China because of overcapacity and an improvement in the quality of Chinese-made products.

Companies including Merck MKKGY 1.52% KGaA, United Technologies Corp. UTX -1.44%and Honeywell International Inc. HON 0.03% are responding in myriad ways, from slashing costs to improving customer service. Still, several companies concede margins will stall long-term due to local competition.

“Our margins have been on a downward trend for over five years now,” said Philipp Baechtold, general manager at Eftec China Ltd., a Swiss chemicals company that produces glues and coatings for the car industry. (…)

Honeywell International, an industrials firm, in recent years also noticed a change in the quality of Chinese products. “Chinese companies are becoming more savvy,” said Shane Tedjarati, president of Honeywell’s high growth regions unit. “We cannot become complacent. We are benchmarking ourselves against Chinese companies,” Mr. Tedjarati said.

Chinese firms have always used price as a lever, said Joe Ngai, managing partner at McKinsey & Co.’s Greater China practice. (…)

According to a recent report by the American Chamber of Commerce in Shanghai, slightly more than 80% of U.S. companies said competition from Chinese firms is one of their most pressing issues. Even more, 93%, cited rising costs—which adversely affects margins—as a challenge. (…)

“When you have to match a price level that is much lower than yours, you need to scrutinize your specs,” said Jean-Michel Vallin, president at Faurecia China. “Chasing costs is part of our daily work,” he added. (…)

THE DAILY EDGE (6 September 2017):

Conference Board’s Employment Trends Index Rose in August

The Conference Board said its employment trends index rose to 134.62 in August from its revised July reading of 133.60. The August figure represents a 5.6% increase from a year ago. (…) Six of the eight components of the index were positive in August, with the percentage of respondents who say they find jobs “hard to get” contributing the largest positive reading.

U.S. Factory Orders Backpedal; Shipments Rise

Manufacturing sector orders declined 3.3% during July (+5.4% y/y) following a 3.2% June gain, revised from 3.0%. Durable goods orders reversed June’s increase with a 6.8% drop (+4.4% y/y). Transportation sector orders were off 19.2% (-1.1% y/y) due to lower commercial aircraft bookings. Durable goods orders outside of the transportation sector improved 0.5% (6.5% y/y). Computer & electronic product orders increased 2.1% (5.0% y/y). Machinery orders eased 0.9% (+9.2% y/y), while electrical equipment orders rose 2.6% (-3.4% y/y).

Total factory sector shipments gained 0.3% (5.3% y/y), but have been little changed in the first seven months this year. (…)

Unfilled orders eased 0.3% (+0.7% y/y) with the decline in aircraft backlogs. Outside of the transportation sector, unfilled orders rose 0.3% (3.8% y/y). (…)

Inventories at the factory level rose 0.2% (2.5% y/y) in July. Outside of the transportation sector, inventories also rose 0.2% (3.5% y/y). (…)

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Harvey’s Destroyed Cars Give Auto Industry Hope Why insurers’ losses from Hurricanes Harvey and Irma could be Detroit car makers’ gains.

Research house Cox Automotive estimates the number of vehicles damaged by Hurricane Harvey in Texas at between 300,000 and half a million. Perhaps 20% will be repaired, and most of the rest replaced with secondhand vehicles, but at least some will drive new-car sales. On top of that there is the damage to vehicles on dealers’ lots, though Ford said last week this was less than 5,000 units for its brands, which are dominant in Texas. Hurricane Irma, which is now approaching Florida, could have a similar impact in the coming days.

Brokerage Evercore ISI puts the potential bump to 2017 new-car sales from Harvey at about 135,000, or a little under 1%. That wouldn’t be enough to restore the market to growth—sales are down 2.7% for the year through August, according to Autodata—but it would cushion the decline. The impact on profits in Detroit would also likely be greater, as Texans favor the lucrative pickups in which U.S. manufacturers specialize. (…)

Any support for used-car prices should slow this gradual erosion of the market. (…)

U.S. business activity growth hits 21-month high

August data signalled an accelerated upturn in business activity across the US service sector. New orders also expanded at a quicker rate, with growth reaching a 25-month high. Higher activity and new business prompted firms to add to their payrolls again in August, and at the quickest rate for nearly two years. On the prices front, both input costs and output charges increased again, with rates of inflation reaching 26- and 35-month highs, respectively. Meanwhile, business confidence was the strongest since January, with firms encouraged by greater client demand.

The seasonally adjusted IHS Markit U.S. Services Business Activity Index registered 56.0 in August, up from July’s reading of 54.7. The latest survey extended the current sequence of activity growth to 18 months. Moreover, the upturn was the fastest since November 2015, with a number of panellists stating that higher activity was underpinned by a greater willingness to spend among clients and improving market conditions.

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Similarly, new business received by services companies increased sharply, supported by strong client demand. Furthermore, the expansion was the strongest since July 2015 and was well above the long-run series average.

Sustained growth in new orders placed further pressure on operating capacity, as shown by the level of outstanding business rising for the fourth month running in August. The pace of backlog accumulation was moderate and broadly in line with that seen in July. To accommodate greater workloads, firms hired staff at an accelerated rate. Notably, the pace of job creation was the strongest since September 2015.

Cost burdens faced by firms in the service sector continued to rise in August, extending the current inflationary trend which spans the entire series history. Notably, the pace of input price inflation was the fastest since June 2015. Panellists linked the latest increase to higher prices for raw materials and transportation. Stronger demand conditions generally enabled companies to pass on higher input prices in the form of greater output charges. Moreover, the rate of output price inflation was the fastest seen for nearly three years.

Business confidence among service providers remained robust in August, with the degree of positive sentiment reaching a seven-month high. Panellists noted that improving market conditions and forecasts of rising new orders had underpinned confidence.

The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index rose to 55.3 in August, up from July’s reading of 54.6. The latest composite figure signalled the strongest expansion of private sector output since the start of 2017. Service sector firms reported a strong upturn in business activity, the fastest since November 2015. Conversely, manufacturers indicated a weaker increase in output, with growth edging down to a 14-month low in August.

The two PMI surveys collectively point to the fastest rate of economic expansion since January as businesses enjoyed a summer growth spurt. The strong survey data add to the expectation that the economy was picking up further momentum before hurricane Harvey hit, the impact of which is still a big unknown. While the pre-Harvey data were pointing to third quarter GDP rising at an annualised rate of 3.5%, this could now be slightly below 3.0%.

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Fed’s Brainard: Weak Inflation Argues for Caution on Further Rate Rises

(…) “We have been falling short of our inflation objective not just in the past year, but over a longer period as well. My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Ms. Brainard said in a speech at the Economic Club of New York. (…)

Real short-term rates have been rising amid slowing inflation. This trend is reducing the pressure on the Fed to hike further. (The Daily Shot)

Source: FTN Financial

Strong manufacturing sector underpins solid growth of euro area economy

Eurozone economic growth remained solid and steady in August. This was signalled by the final IHS Markit Eurozone PMI® Composite Output Index matching July’s reading of 55.7, down only marginally from the flash estimate of 55.8.

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On current trend, output growth so far in the third quarter is slightly below its second quarter high, but remains among the best seen over the past seven years. August saw a strong expansion of manufacturing production, with the pace of increase regaining most of the momentum ceded in July.

imageService sector activity growth eased to a seven month low, but remained above its long-term trend. Germany and Ireland were the only nations covered by the survey to see output growth accelerate in August. (…) The German manufacturing sector saw a robust increase in production volumes – among the best since early-2011 – whereas growth in services activity was the weakest of the five nations covered. Although rates of economic expansion eased in France, Italy and Spain, they remained solid.

Underlying the continued expansion of eurozone output was a further solid increase in new business, albeit the weakest in seven months. This in turn led to rising backlogs of work, which firms across the currency union responded to by increasing employment. (…)

Price pressures accelerated in August, with rates of increase in output charges and input costs both hitting three-month highs. However, the pace of inflation remained below peaks seen earlier in the year in both cases.

The solid PMI readings for July and August set the scene for another strong GDP number for the third quarter, with the surveys running at a level historically consistent with 0.6% growth. With such robust growth being sustained into August, the region is on course to see GDP rise by 2.1% in 2017, which would represent the best performance since 2007. (…)

Chinese business activity expands at quickest pace for six months

The Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated that Chinese business activity growth picked up for the second month in a row during August. Furthermore, the latest expansion of activity was the strongest seen for six months, as shown by the Composite Output Index posting 52.4, up from 51.9 in July.

August data revealed that the latest expansion of overall business activity was underpinned by increased activity at both manufacturers and services providers. Notably, services companies registered the quickest upturn in business activity for three months. This was highlighted by the seasonally adjusted Caixin China General Services Business Activity Index rising from 51.5 in July to 52.7. At the same time, goods producers noted a further modest increase in output that was little-changed from that seen in the previous month.

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In line with the trend for activity, growth in new business accelerated in the service sector midway through the third quarter. The latest increase in new work was the fastest seen in three months and solid overall, with a number of companies linking growth to improving market conditions and new marketing strategies. At the same time, new order intakes at manufacturers rose to the greatest extent in over three years. As a result, composite new business increased at the joint-quickest pace in 2017 to date.

Stronger growth of activity and new orders led service providers to expand their payrolls again in August. Notably, the rate of job creation was the fastest seen for four months. Meanwhile, manufacturers reported a further reduction in headcounts in the latest survey period, though the rate of job shedding moderated since July. At the composite level, employment stabilised in August, thereby ending a four-month sequence of decline. (…)

Prices charged by Chinese services firms declined during August amid reports of greater market competition. Though only marginal, it was the first time that prices had fallen for nearly a year-and-a-half. Manufacturers meanwhile increased their factory gate charges and at a solid rate. According to panellists, companies raised their selling prices due to greater cost burdens. At the composite level, prices charged increased at the steepest rate for five months.

China to spend over $1 trillion on planes over next 20 years: Boeing Chinese airlines are likely to buy more than 7,000 planes worth $1.1 trillion over the next 20 years, as they grow their fleets to meet robust demand for domestic and international travel, Boeing Co said in a bullish forecast on Wednesday.
CANADA
Ghost SEPTEMBER!

Following up on last week’s post (SEPTEMBER!), the 120 Yield Spread has clearly declined below 120:

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Certainly not helping the odds here (A Powerful Combo: the Rule of 20 and the “120 Yield Spread”)