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 (17 March 2017)

Housing Starts Rise to 10-Year High U.S. single-family housing starts in February hit their highest level since the recession thanks to warm weather, a strengthening economy and increased demand from buyers looking to get ahead of rising mortgage rates.
  • Housing starts rose 3% in February from the previous month to a seasonally adjusted annual rate of 1.288 million, above the revised January rate of 1.251 million.
  • Permits fell 6.2% to 1.213 million from the revised January total of 1.293 million. Permits to build single-family homes increased 3.1% (13.5% y/y) to 832,000, nearly a ten-year high. Permits to build multi-family units fell 21.6% (-11.2% y/y) to 381,000.
  • Single-family construction rose 6.5% in February from the previous month, while multifamily construction fell 3.7%.
  • Total housing starts declined by a revised 1.9% in January, driven by a 7.3% drop in multifamily construction. Total starts in February were up 6.2% compared with a year earlier.
  • Last month was one of the warmest Februarys on record, boosting construction activity.

U.S. JOLTS: U.S. Labor Market Activity Remains Firm

The total job openings rate of 3.7% during January held steady with the prior three months. Nevertheless, the rate was below July’s peak of 4.0%. The private-sector job openings rate remained at 4.0%, where it was during all of last year. In the government sector, the job openings rate fell to 2.0%, the lowest level since June 2015. (…)

The actual number of job openings rebounded 1.6% (-1.5% y/y) to 5.626 million, down from the July high of 5.973 million. Private-sector openings improved 2.1% to 5.173 million and eased 0.8% y/y. Construction job openings increased 5.0% (-7.0% y/y) following sharp declines during the prior six months, while the number of openings in education & health services declined 2.9% y/y. Factory sector job openings jumped 6.4% (4.6% y/y). Professional & business services openings rebounded 13.8% m/m following sharp declines since July, while leisure & hospitality openings were off 3.5% y/y. Government-sector job openings declined 9.4% y/y.

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Philadelphia Fed Factory Index Declines; Prices Surge

large image(…) The ISM-Adjusted General Business Conditions Index constructed by Haver Analytics surged to 60.2 this month, the highest level since July 2004. The ISM-Adjusted headline index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each). This figure is comparable to the ISM Composite Index. During the last ten years, there has been a 71% correlation between the adjusted Philadelphia Fed Index and real GDP growth.

Despite the decline in the overall business conditions index, shipments, unfilled orders and inventories increased. New orders and delivery times improved just modestly, the latter indicating fairly stable delivery speeds.

The employment series rose to the highest level since November 2014. During the last ten years, there has been an 81% correlation between the jobs index and the m/m change in manufacturing sector payrolls. The average workweek reading strengthened significantly to an expansion high.

Prices paid strengthened to the highest level since May 2011. Forty-one percent of respondents (NSA) reported paying higher prices, while none paid less.

The future business activity index increased to the highest level since August 2014. Most component series increased m/m, notably prices paid to its 2011 high.

But

Despite the apparent strength, manufacturers have not been able to raise prices as frequently as their input prices have risen. (Mishtalk)

 Empire State Business Conditions Survey Eases

large imageThe Empire State Manufacturing Index of General Business Conditions for March fell to 16.4 from 18.7 in February.

The [ISM] adjusted figure improved to 54.9 from 54.4. It was the highest level since May 2012. During the last ten years, the index posted a 63% correlation with the change in real GDP.

New orders eased, but shipments increased. Unfilled orders and delivery times also rose, but inventories fell. The employment index jumped to 8.8, its highest level since April 2015. During the last ten years, there has been a 69% correlation between the employment index and the m/m change in factory sector payrolls. The average workweek reading also surged to the highest point since March 2012.

The prices paid series eased to 31.0, but remained up sharply versus the readings of 2016 and 2015. A lessened 33.6% of respondents reported paying higher prices, while a reduced 2.7% reported them lower. The prices received index similarly declined to 8.8, its lowest point in three months.

Sad smile Expectations of business conditions six months ahead fell sharply to 37.4, its lowest point since November. The index was pulled lower by weakened readings for orders, shipments and employment. An earlier decline in expected prices stabilized.

Richard Yamarone, Bloomberg Intelligence Economists:

Total industrial production has been flat over the past year, while manufacturing activity hasn’t been much better, mustering a lowly 0.3 percent gain from year-ago levels. A sustained uptick in production may be several months away as businesses remain sidelined until some definitive trade, tax and regulatory policy is formalized.

Consensus expects a slight 0.2 percent increase in the headline industrial production index and a more robust gain of 0.5 percent in manufacturing output during February — the difference being the softer pace of utility and mining production. Given the considerably warmer-than-normal temperatures experienced last month — the deviation in the number of heating degree days from normal was minus 183 in February versus minus 151 in January — the risk is that the headline is lower than consensus. (…)

While there’s reason to believe that greater optimism will ultimately lead to a pickup in output, businesses will likely refrain from actually putting capital to work until there’s some degree of clarity with respect to the policies regarding taxes, trade, and regulation.

Trump’s Budget Likely to See Major Rewrite in Congress Republicans were quick to lodge objections to President Trump’s budget plans, many of which trim away smaller programs that help the sort of local communities he vowed to rejuvenate during the campaign.
Insurers See Health-Care Premiums Increasing Significantly

According to a nonpartisan report released by the Congressional Budget Office on Monday, the House Republicans’ bill, known as the American Health Care Act, could raise premiums by 15% to 20% for individual plans in 2018, compared with rates without the bill. These increases would largely be due to the end of penalties for people who lack insurance; the CBO suggested that fewer healthy people would enroll without the mandate, helping to raise average costs.

(…) with a number of Republican lawmakers balking at the House bill, insurers are increasingly nervous that the time frame will slip, leaving them with no clear path forward for 2018. That could push up rates or lead some to simply withdraw from the marketplaces, as Humana Inc. has already said it would do next year.

“The more uncertainty, the higher the price,” said Martin Hickey, chief executive of New Mexico Health Connections. His nonprofit has seen a potential 40% premium increase on ACA marketplace plans.

Even if a version of the House bill does pass, insurers say it fails to answer one of their most important questions: funding for the cost-sharing subsidies, which pay most of the costs of deductibles and other out-of-pocket charges for low-income consumers. Those subsidies would be repealed in 2020 under the House bill, but it doesn’t set aside money to pay them in the meantime.

The cost-sharing subsidies are paid to insurers, which—under the current law—are on the hook to cover the consumers’ out-of-pocket costs even if they aren’t being repaid by the federal government as expected. If the insurers aren’t sure that the federal money will flow, they would build that extra expense into future premium rates. Some insurers may also simply decide to withdraw, experts said, given the high financial stakes involved. (…)

Tillerson Doesn’t Rule Out Preemptive Strike on North Korea

THE DAILY EDGE (16 March 2017)

U.S. Retail Sales Moderate as Non-Auto Spending Tapers

Total retail sales and spending at restaurants rose 0.1% (5.7% y/y) in February following a 0.6% increase in January, which was revised up from 0.4%. The February result was in line with the 0.1% increase expected in the Action Economics Forecast Survey.

Sales at motor vehicles & parts dealers decreased again in February, by 0.2% (5.6% y/y), following January’s 1.3% decline. (…) Excluding autos, retail sales rose 0.2% (5.7% y/y) after January’s 1.2% gain (…). Retail sales excluding both auto dealers & gas stations were up 0.2% (4.2% y/y) in February following a 1.0% January rise. (Chart from CalculatedRisk)

U.S. INFLATION ACCELERATES

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.5% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.2% annualized rate) during the month. (…) Over the last 12 months, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.2%, the CPI rose 2.7%, and the CPI less food and energy rose 2.2%.

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  • Last 4 months annualized: +2.7% for all core measures.
  • Last 3 months annualized: +2.8% for all core measures.
  • Last 2 months annualized: +3.0% for all core measures.

Not a good trend. Let’s see what’s in the pipeline (PPI table from Haver Analytics with my highlights)

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  • Final demand core PPI: +3.2% a.r. last 3 months, +4.3% last 2 months.
  • Core goods, supposedly still deflating: +3.2% a.r. last 3 months, +3.0% last 2 months.
  • Intermediate Processed Goods: +7.9% a.r. last 3 months, +9.3% last 2 months.

No good trends there either…Can we rely on deflating import prices?

Nonpetroleum import prices improved 0.3% (0.8% y/y), the largest increase since July. Industrial supplies & materials prices excluding petroleum jumped 1.4% (7.0% y/y), strong for the fourth straight month. Foods, feeds & beverage prices rebounded 1.0% last month (4.4% y/y), following declines in three of the prior four months. Nonauto consumer goods prices improved 0.7%, but the y/y decline accelerated to -0.7%. Motor vehicle & parts prices remained unchanged both m/m and y/y, after declines in the prior two months. Capital goods prices also were steady (-1.0% y/y) after declining from 2013 through 2016.

Nonpetroleum import prices declined -2.8% in 2015 and –1.8% in 2016. They are up at a 2.4% annualized rate in the first 2 months of January and are +0.8% YoY in February in spite of the strong USD (+5.5% since mid-August and +4.1% YoY).

Fed Signals It Is Entering New Phase The Federal Reserve said it would raise short-term interest rates and remained on track to keep lifting them this year, signaling the central bank is moving into a new policy phase as the economy strengthens.

(…) Officials said they would raise their benchmark federal-funds rate by a quarter percentage point to a range between 0.75% and 1%, and penciled in two more increases this year.

“The simple message is the economy’s doing well,” said Fed Chairwoman Janet Yellen in a news conference following the Fed’s two-day policy meeting. “We have confidence in the robustness of the economy and its resilience to shocks.”

Ms. Yellen was careful to note that the Fed hadn’t significantly changed its forecasts for economic growth, unemployment or inflation, but it expected continued improvement.

Another reason for the decision: the Fed, in its policy statement released after the meeting, said inflation in recent quarters was “moving close” to its 2% target after undershooting that level for years.

The bank also said the target remains a “symmetric” goal, meaning that, though the Fed doesn’t want inflation to run above or below that mark, it expects it will happen at times. “It’s a reminder [that] 2% is not a ceiling on inflation. It’s a target,” Ms. Yellen said.

Officials’ median expectation for the fed-funds rate showed few changes from projections released in December. In addition to three quarter-point increases this year, including the one announced Wednesday, the forecasts implied three more moves next year. (…)

On Wednesday, Ms. Yellen played down the idea that the Fed might be on a collision course with the new administration. “We would certainly welcome stronger economic growth in the context of price stability,” she said. (…)

Economic Growth Lags Behind Rising Confidence Data

(…) The latest evidence came Wednesday when the government reported that sales at the nation’s retailers—a key measure of consumer spending—rose just 0.1% in February from a month earlier. Americans cut spending on clothing, sporting goods, electronics and restaurant outings, leading to the smallest gain in retail sales since last summer.

Earlier reports showed a surging trade deficit in January and a recent drop in home sales, as measured by contract signings. Taken together, the economy appears to be stumbling once again in the first months of the year, despite unusually warm weather that might otherwise boost spending and the absence of major crises overseas, as happened in the past.

Forecasting firm Macroeconomic Advisers on Wednesday downgraded its projection of economic growth in the current quarter to an annual rate of 1.3%, from 1.4%. Barclays projected 1.4% growth, compared with 1.6% earlier. The Federal Reserve Bank of Atlanta’s GDPNow model lowered its estimate to 0.9% from 1.2%. Growth has averaged about 2% in the current expansion. Economic output expanded at a 1.9% rate in the fourth quarter and 3.5% rate in the third. (…)

HARD DATA WATCH

Beyond all the positive surveys, we are all searching for hard data to better gauge the U.S. economy amid the “Trump hopes”.

  • imageHotel lodging demand has been slowing since mid-October. Based on data from Smith Travel Research, analysts estimate that RevPar (revenues per available room) was in the 0-2% range in February, following +1.0% in January and +3.2% in Q4’16. (Chart from Raymond James Associates)
  • Is the ‘Trump Slump’ real? Spending on tourism in the U.S. slides

Fewer Americans are traveling within the U.S. and, despite evidence of a “Trump slump” keeping foreigners from visiting the U.S., the origins of the domestic dip are more complex.

Spending on travel and tourism in the U.S. fell 3.3% on the year to $1.7 trillion in the fourth quarter of 2016, after rising 3.7% in the previous quarter, according to the “Travel and Tourism Satellite Accounts” of the Bureau of Economic Analysis, a government data agency. The biggest component of the downturn was air travel, which fell 15% after increasing 2% in the previous quarter. Money spent by tourists on accommodation dropped around 6% after increasing more than 8% in the third quarter.

The fall in domestic tourism figures are likely due to prices more than politics, said Christopher Elliott, consumer advocate and author of “How to Be the World’s Smartest Traveler.” Tourism prices increased 9.1% in the fourth quarter of 2016 from just 0.1% in the third quarter, the latest data found. That also appeared to have an impact on jobs: Employment growth in the travel and tourism industries slowed in the fourth quarter, increasing 0.7% after increasing 1.6% in the previous quarter. (…)

Europeans are already avoiding the U.S., according to travel search site liligo.com. Searches for U.S. destinations in the 20 days after Trump’s original immigration ban was announced fell, including a 17% decline in searches from Italy, 14% from Germany and 12% from France. (…)

  • Below is a “heat map” of the latest “soft” and “hard” economic data. (The Daily Shot)

Source: Goldman Sachs, @joshdigga

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Pointing up U.S. Sees Mexico Joining Regional ‘Powerhouse,’ Navarro Says

Peter Navarro, who as head of the White House National Trade Council will play a leading role in the effort to re-negotiate the North American Free Trade Agreement, said in an interview the U.S. wants Mexico and Canada to unite in a regional manufacturing “powerhouse” that will keep out parts from other countries.

The Trump administration is re-examining a critical component of the free trade pact: the rules of origin, which dictate what percentage of a product must be manufactured in North America, Navarro said.

“We have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously,” said Navarro, 67. “It’s just as much in their interests as it is in our interests to increase the rules of origin.”

For example, under the current agreement, 62.5 percent of the total value of cars sold in North America must originate in the U.S., Canada or Mexico to avoid import tariffs. The U.S. wants to raise that threshold, making it harder for parts from other countries to enter the supply chain. (…)

Trump Proposes Historic Cuts Across Government to Fund Defense
Trump’s Revised Travel Ban Blocked by Hawaii Judge A federal judge in Hawaii issued a nationwide temporary restraining order that bars implementation of Trump’s revised order on immigration and refugees, a significant legal blow to the president.
China Raises Key Short-Term Interest Rates, Following Fed Closely

(…) The unprecedented, nearly simultaneous rate increase following the Fed’s decision betrays Beijing’s sense of urgency to prevent capital outflows from accelerating. It also shows Beijing’s desire to keep risks in its financial system from generating crises in a weak economy, analysts say. (…)

Minutes before domestic financial markets opened, the People’s Bank of China announced that it has raised the interest rates it charges commercial banks in the money market on the seven-day, 14-day and 28-day loans each by 0.1 percentage point. These rates are also known as reverse repurchase agreements, or repos.

As a result, the central bank pushed the benchmark seven-day repo rate to 2.45% from 2.35%. That followed an identical move on Feb. 3, after the PBOC had kept the borrowing cost unchanged since October 2015.

Separately, the PBOC also raised the interest rate by 0.1 percentage point on a form of special loans to 22 financial institutions known as a medium-term lending facility, for the second time since Jan. 24. (…)

Where are the Bulls in This Bull Market?

Corporations have spent hundreds of billions annually in recent years buying back their own stock. But what if, after netting out all the supply and demand flows in the equities market, the corporations are the only ones on balance buying their stock?

That’s the conclusion, at least for 2016, of Ed Yardeni of Yardeni Research. “The bottom line is that the current bull market has been driven largely by corporations buying back their shares,” he wrote on Tuesday. (…)

Those trends have helped fuel what’s been called a “de-equitized” stock market, in which there is simply less publicly traded stock available. (…)

And on the demand side:

To the extent that there’s money flowing into the equities market that isn’t corporate or institutional, it’s just money flowing out of other funds, and into ETFs. (…)