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 (12 August 2017)

U.S. Producer Prices Dip

The headline Final Demand Producer Price Index eased 0.1% during July (+1.9% y/y) after a 0.1% uptick during June. A 0.1% rise in the index had been expected in the Action Economics Forecast Survey. The PPI excluding food & energy also slipped 0.1% last month (+1.8% y/y) following a 0.1% rise. A 0.2% gain had been expected.

An updated measure of core producer price inflation is the overall index excluding food, energy and trade services. It remained unchanged last month (1.9% y/y) following a 0.2% increase.

Final demand goods prices slipped 0.1% (+2.3% y/y) following a 0.1% improvement. The price index excluding food & energy eased 0.1% (+1.9% y/y) following a 0.1% gain. (…)

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China Car Sales Accelerated in July Passenger-car sales for the first seven months of 2017 were up 2% from a year earlier

Passenger-car sales were up 4.3% from a year earlier, accelerating from June’s 2.3% pace, the government-backed China Association of Automobile Manufacturers said on Friday. (…)

Total vehicle sales in China in July were up 6.2% from a year earlier, at 1.98 million, boosted once again by red-hot demand for commercial vehicles, whose sales rose 18% to 292,800 units. Total vehicle sales for January-July were up 4.1%. (…)

EARNINGS WATCH
Corporate America Is Posting the Biggest Profits in 13 Years

(…) While Europe was the source of earnings strength in the first three months of 2017, emerging-market sales were the driving force from April through June, said Jill Carey Hall, a U.S. equity strategist at Bank of America Corp. American companies with large overseas revenue beat estimates for sales and earnings twice as often as those with a domestic focus, she said. (…)

A weakening dollar also benefited U.S. companies such as Kellogg Co., which beat earnings estimates and said exchange rates will reduce 2017 profit by half as much as previously estimated. The dollar fell 6.4 percent against a basket of major world currencies in the first half of 2017. A weaker greenback helps overseas revenue by making American exports cheaper while also increasing the dollar value of foreign sales. (…)

Of the 451 companies in the S&P 500 that have so far reported second-quarter results, 68 percent have beaten analysts’ average estimates for revenue and 78 percent have topped per-share earnings expectations, according to data compiled by Bloomberg. Earnings rose an average of 9.7 percent, while sales have climbed 5.5 percent.

The quarter is on pace to post the highest number of S&P 500 companies beating sales estimates in 13 years, according to an Aug. 7 note from Bank of America equity strategists. Earnings beats also are the highest since 2004, they said. (…)

More from Thomson Reuters:

  • The surprise factor is +5.7%, particularly high in IT (+11.2%) and Utes (+10.9%).
  • Blended Q2 EPS now at +11.9% on +5.1% revenue growth.
  • Preannouncements for Q3 are 34 positive and 53 negative. Same time during Q2, 31 – 56; during Q3’16: 27 – 51.
  • Q3e now +6.8%, Q4e + 12.2%.
  • Trailing 12-m EPS: $125.93
China Warns Trump: “We Will Prevent A North Korea Regime Change” “If the U.S. and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so”

A CONSUMER RECESSION?

RECESSION WATCH

Recent data on the U.S. consumers are worrisome:

  • Since March 2016, real expenditures have increased 3.5%.
  • While real disposable income rose only 1.7%, half the spending pace!
  • Total consumer credit rose 7.3% during the same period, twice the spending growth and more than 4 times the income growth.

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  • Real income growth has slowed to a crawl since peaking at +5.3% YoY in January 2015. Real income growth slipped all the way down to zero in December 2016 and was only +1.2% last June. The recent uptick was greatly helped by the 0.7% decline in the YoY change in the PCE deflator from February to May, a decline which the Fed qualifies as transitory.
  • The income slowdown is principally the result of slower employment growth from +2.3% YoY in February 2015 to +1.9% in January 2016, +1.5% in July 2017. Since wage growth has remained stuck around 2.5%, there has been no offset on total aggregate payrolls (a proxy for labor income) …

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…which, in real terms, have slowed from +5.1% in Q1’15 to +3.4% in Q1’16 to +2.5% in Q2’17, lately helped in large part by the “transitory” decline in inflation.

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  • Like they often do when income growth slows down, Americans have dipped into their savings (either by dissaving or by borrowing more) throughout 2016 but borrowings have slowed measurably in 2017, either because consumers are feeling the squeeze and/or because lenders, experiencing rising delinquencies and loan losses, are tightening lending standards.

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Unless employment and/or real wages accelerate meaningfully, American consumers could tighten up even more given their current very low savings. Were this to happen during the important second half of the year (back-to-school, Thanksgiving, Christmas), it could drag the U.S. economy into a recession, right when central banks are out of ammo and Washington is in disarray.

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