Edge and Odds

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

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Edge and Odds

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (15 JULY 2016): China & Credit???

Massive Stimulus Keeps China GDP Steady in Second Quarter

Chinese growth held steady at 6.7% in the second quarter after a flood of stimulus in the first quarter lent at least temporary stability to a slumping economy.

The growth report beat forecasts after prior data showed weaker manufacturing, exports and private investment. A Wall Street Journal poll of 16 economists had predicted 6.6% growth in China’s gross domestic product in the April-June period. (…)

The National Bureau of Statistics also said Friday that industrial output rose 6.2% in June from a year earlier, accelerating from 6.0% growth in May. It said fixed-asset investment climbed 9.0% year over year for the January-June period, compared with an increase of 9.6% in the first five months of the year. Retail sales grew 10.6% in June from a year earlier, accelerating from a 10.0% increase in May. (…)

The Finance Ministry reported Friday that government spending rose 19.9% year over year in June compared with a 17.6% increase in May. (…)

Banks issued 1.38 trillion yuan [$206.5 billion] in new loans last month, up from May’s 985.5 billion yuan, while total social financing, a broader measure of credit in the economy, more than doubled over May levels to 1.63 trillion yuan in June. (…)

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(…) In another mystery of Chinese data, on a seasonally adjusted basis, the growth rate was even slower at 6.4%. (…) Private-sector investment, for instance, is crumbling. Private fixed-asset investment (white line below) actually shrank in June from a year earlier. That is troubling since private companies make up two-thirds of such spending. Overall fixed-asset investment grew 7.3%, but only because of a massive increase in government spending (orange) on things like railways and airports.

(Via The Daily Shot)

Growth also got less of a boost from the services sector than in the past, an outfall of the decline in financial-market activity after last year’s stock-market bubble. Services expanded 7.5% in GDP terms, the slowest quarterly rate in two years. A pickup in old-school industrial activity, again, driven by government activities, helped make up the difference. (…)

New residential-housing construction grew 7% and property sales grew 22%, respectable numbers on their own, but both slower for the third consecutive month. Unreasonably high prices in China’s biggest cities and continued oversupply in the hinterlands are the main culprits.

Beijing’s biggest worry, as always, is employment. The government’s official jobless rates are mostly useless since they hardly ever change. A government ratio of job seekers to job listings, which has varied with economic conditions, fell to its lowest level since 2012 last quarter, showing 105 jobs for every 100 job seekers, compared with 115 at its 2014 peak. The private Manpower survey of employment showed the weakest hiring conditions in China since it began surveying the country in 2005.

(…) personal disposable income isn’t growing like it used to, rising 6.5% in real terms last quarter. That is slower than the overall economy, implying households aren’t getting a full share of growth.

All this points to an economy tilting away from households, services and the private sector, which are supposed to be the economy’s growth drivers. What Beijing delivered more of was state spending and debt: Including a local government bond-swap program, overall credit was 16% larger in June from a year ago.

U.S. Producer Prices Climb 0.5% U.S. businesses paid higher prices for a range of goods and services in June, the latest sign that a rebound in oil prices and a tightening labor market are pushing up inflation.

Excluding food and energy categories, which can be volatile, so-called core prices climbed 0.4%. Over the past year, overall prices grew 0.3% while core prices increased 1.3%. (…)

Excluding food, energy and trade services, prices rose 0.3% from a month earlier and 0.9% from a year earlier.

A component of the Producer Price Index closely aligned with consumer prices increased 0.6% in June from May and was up 0.2% compared with a year earlier. (…)

Last 3 months annualized:

  • Final demand PPI: +4.2%
  • Ex Food, Energy: +3.2%
  • Goods ex Food, Energy: +2.4%
  • Services: +2.8%
U.S. Exports to China Shrink, Especially for Heavy Industry China’s economic roller coaster is taking a bite out of American exporters, hurting U.S. industries ranging from mining equipment to cotton producers and adding to criticism that China is getting more than it gives in trade with the U.S.

The U.S. shipped just $42.4 billion to China in the first five months of the year, or 8.2% less than the year-earlier period and 13.8% below the peak export year of 2014, according to the Census Bureau. (…)

The world’s largest heavy-equipment maker, Caterpillar Inc., is fighting for market share in China with Japan-based Komatsu Ltd. and homegrown Chinese rival Sany Heavy Industry Co., among others.

Still, modest government stimulus spending on infrastructure projects has lifted the company’s spring equipment shipments there for the first time in at least three years, Caterpillar chief executive Doug Oberhelman said in April, after visiting the country in March. Cat declined to comment further, citing a quiet period ahead of earnings.

Another U.S. giant hit by China’s slowdown is General Electric Co. U.S. exports of turbines and generators to China have fallen 46% this year compared with 2013, although 2016 is shaping up to be better than last year for those products.

Plagued with pollution in many cities, China is shifting its energy mix away from coal. A G.E. spokesman said the company is selling an increasingly diverse set of energy products in China, with more than 100 gas turbines and 200 wind turbines provided in the past decade.

Auto European car sales solid in June despite UK dip European car sales remained buoyant in June, except in Britain, where they fell for only the second time in four years amid uncertainty about the country’s vote on EU membership.

Total registrations of new cars in the European Union and the European Free Trade Association increased 6.5 percent in June on the year, to 1,507,303 vehicles, data provided by the Brussels-based Association of European Carmakers (ACEA) showed on Friday.

That was much slower than a 16 percent increase in May, partly due to seasonal factors, but sales in Italy and Spain rose at double-digit rates last month from a year earlier and Germany, Europe’s largest new car market, posted 8.3 percent growth despite smaller discounting. (…)

In Italy and Spain total new car registrations rose 11.9 percent and 11.2 percent respectively, while French sales increased only 0.8 percent.

In Germany, sales were solid even though overall discounts were 12 percent of list prices, 0.5 percent less than in June last year and down 0.3 percent from May, analysts at Evercore said. (…)

Car registrations in Britain, Europe’s second-biggest car market, fell 0.8 percent in June, weighed by a 25 percent retreat in cars registered by businesses and a slowdown in private demand.

Passenger car registrations in the European Union rose for the 34th consecutive month, with June registrations reaching 1,459,508 new cars.

The European auto industry association ACEA lifted its 2016 EU sales forecast last month to 14 million passenger cars or 5 percent growth year-on-year, from an earlier forecast of 2 percent sales growth, predicted in January.

Saudi Arabia’s non-oil sector slips into recession

Saudi Arabia’s non-oil economy has slipped into a technical recession for the first time since the 1980s, compounding the woes of a country already grappling with an oil sector pummelled by low prices.

The country’s non-oil sector contracted 0.7 per cent year on year in the first three months of 2016, according to official data.

This follows on from a weak fourth quarter of 2015, which the country’s statistics agency has now revised to show a 0.5 per cent year-on-year fall in non-oil output, rather than the 3.5 per cent rise originally reported. (…)

So far the oil sector has managed to keep the Saudi economy as a whole out of recession, with higher production helping overall gross domestic product to rise 1.8 per cent year on year in the fourth quarter of 2015 (revised down from 3.6 per cent) and by 1.5 per cent year on year in the first three months of 2016.

However Capital Economics’ proprietary GDP tracker suggests overall growth turned negative in May as “the slump in the non-oil sector deepened, contracting by around 4 per cent year on year”, says Mr Tuvey. (…)

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Global Corporate Defaults Just Hit 100, On Pace To Surpass Financial Crisis Record

(…) According to S&P, with half of 2016 in the history books, corporate bond defaults just hit the milestone “century” mark, or 100, last week, rising by 50% from the number of bankruptcies at this time last year and the highest level since the US emerged from recession in 2009. The number rose by four to 100 in the first full week of July, as defaults in the US oil and gas sector ratcheted higher, according to Diane Vazza of S&P Global Ratings, the FT reports.

As a result, the total amount of defaulted debt has risen to $154 billion.

But what is most troubling is that at the current run-rate, with half of 2016 still to come, the global debt default total is on pace to surpass 2009 for the all time corporate bankruptcy record. (…)

Defaults have – so far – been led by energy companies, specifically low-rated crude producers, which have been slammed with a shortage of liquidity unable to secure (or refi into) new debt since oil began to tumble two years ago, while collateral bases shrunk substantially. (…)

“So far, there has been little spillover effect into other sectors, but we are not ruling this out in the coming quarters,” Vazza said. (…)

We, on the other hand, expect that – as the following chart from Morgan Stanley clearly shows – as the corporate default cycle is only now starting to ramp up, that the inevitable tsunami of bankruptcies will ultimately be the catalyst that forces the central banks to lose control as there is only so much insolvent reality that the “magic men” can bend to their will.

“Year-over-year numbers have not been encouraging of late,” warns National Asscociation of Credit Managers’ economistsChris Kuehl, noting that the “nice little run of steady improvement in NACM’s Credit Managers’ Index seems to have come to an end.”

as the index suggests the credit cycle is back at its weakest since 2009…

As credit extended is tumbling… not at all what The Fed wants…

As Bankruptcies soar…

BUT NO WORRIES (via The Daily Shot):

Oil’s rocky outlook

An increasing number of analysts expect oil’s next move to be a drop back towards $40 a barrel. The International Energy Agency cautioned this week that “the road ahead is far from smooth,” with supply disruptions fading in Canada and possibly Libya. A barrel of West Texas Intermediate crude for August delivery was down 47 cents at $45.21 at 6:13 a.m. ET.

EARNINGS WATCH
  • 32 companies (7.4% of the S&P 500’s market cap) have reported. Earnings are beating by 3.3% while revenues are surprising by 0.4%. Expectations are for a decline in revenue, earnings, and EPS of -1.4%, -6.5%, and -4.1%.
  • EPS is on pace for -1.0%, assuming the current beat rate for the remainder of the season. This would be +3.5% excluding Energy and the Big-5 Banks. (RBC Capital)

NEW$ & VIEW$ (14 JULY 2016)

Fed Beige Book: Brexit Weighs on Outlook in Some Regions The U.K. vote to leave the European Union is causing concern among businesses in certain pockets of the U.S., a Federal Reserve report said. But broadly, the beige book showed the U.S. economy is expanding at a modest pace.

(…) The wide-ranging report said employment continued to grow modestly, with strong demand for skilled labor. The report said firms are finding it difficult to fill information technology, biotechnology and health-care services positions—pushing up wage rates in those types of fields.

Consumer spending showed signs of softening, the report said, and inflation pressures outside of wages “remain slight.”

Factory activity was “mixed but generally improved across districts,” the report said.

Residential real estate activity strengthened from earlier in the spring, with home sales increasing despite limited inventory. Commercial real estate activity was stable or improved in almost all districts. (…)

U.S. Budget Deficit Widens to Near Two-Year High in June The U.S. government’s budget deficit widened in June to its highest level in two years, as revenue growth continues to slow.

Over the past year, the deficit totaled $523 billion, up 20.6% from a year earlier, the Treasury Department said in a monthly update Wednesday.

The deficit has largely been a result of weaker corporate tax revenues. While individual income taxes have been on the rise thanks to steady job growth, corporate taxes have been declining. (…)

In Advanced Economies, Two-Thirds of Population Have Seen Incomes Stagnate, Study Shows Across 25 of the world’s advanced economies, about two-thirds of the population—more than half a billion people—earn the same as or less than their peers did a decade ago.

Between 540 million and 580 million people in 2014 had lower or stagnant incomes than similarly situated people in 2005, according to a new study from the McKinsey Global Institute, the research arm of the global consulting firm McKinsey & Co. (…)

McKinsey surveyed households in the U.K., France and the U.S. In these countries, 30% to 40% of people said their incomes hadn’t advanced, indicating that even if transfers and taxes have allowed some families to improve statistically, many still yearn for higher incomes. These households expressed sharply negative views about trade and immigration. (…)

Governments in most advanced countries have cushioned the declines, at least in part. When measured in terms of disposable incomes, after taxes and transfers, disposable incomes were lower for only 20% to 25% of households.

With slow economic growth, and potential disruptions from the aging of the workforce and workplace automation, McKinsey cautioned these trends could continue in the decade ahead, and that most households in advanced economies could experience another a decade of stagnation.

U.S. Import Prices Rise on Higher Oil

Import prices, measuring what U.S. companies pay for everything from South Korean cars to Middle Eastern oil, increased 0.2% in June from a month earlier, the Labor Department said Wednesday. (…)

Excluding fuel products, import prices declined 0.3% in June from May and 2% from a year earlier. Food prices fell 1.3% from May and 2.5% from a year earlier. Prices for food, machinery and consumer-related products all declined. (…)

Wednesday’s report showed U.S. export prices grew 0.8% in June from the prior month, registering the third straight monthly increase. In the second quarter, export prices rose 2.4%, the largest three-month gain since early 2011.

Over the past year, export prices declined 3.5%.

Amazon hails Prime sale as its ‘biggest day ever’ Global orders surged 60% compared with last year’s event
Euro Area IP Drops Like a Rock in May

Euro area industrial output fell by 1.3% in May, giving back most of the gains from April’s previously impressive 1.4% rise. However, April was preceded by a 0.8% drop so that on balance EMU area IP is lower at a 2.8% annual rate over three months. It is lower over six months and up by just 0.6% over 12 months, showing a deteriorating growth profile on the timeline. (…)

Japan posted a deeper drop in its IP today at -2.6%, down from -2.3% reported earlier. And in China exports fell by 4.8%.

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(Via The Daily Shot)

From Markit:

An upturn is signalled for June, with Markit’s Eurozone PMI pointing to a modest revival in the rate of factory output growth to the strongest seen so far this year, which suggests May’s fall in production may overstate the current weakness of the industrial sector. But the business outlook has since deteriorated, in part due to uncertainty created by the UK’s EU referendum.

Survey data from Markit, collected in June showed euro area business optimism about the year ahead dropping to the lowest since late-2014, with uncertainty created by ‘Brexit’ (and possible contagion to other countries) being the most commonly cited threat to future prospects by companies across the region.

In the USA:

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In Japan (From The Daily Shot):

Globally:

Business services activity rose at the joint-slowest rate since October 2012. This pointed to subdued demand from corporate clients – a sign that recent political uncertainty has led some customers to postpone orders. Expectations for growth were at a survey-record low.

Consumer service providers also struggled, with output increasing only slightly. Job losses were seen for the first time in over two years.

Investment goods: output vs new orders

Ghost Scary trends:

Global services: future expectations

Business services and GDP

Similar pessimism in China:image

Fingers crossed Peekaboo!image

Eurozone House Prices Rise at Fastest Pace in Eight Years

The European Union’s statistics agency on Tuesday said house prices in the eurozone were 3% higher in the first quarter of 2016 than in the year-earlier period, the largest increase since the first quarter of 2008, six months before the financial crisis. (…)

In Germany itself, the rise in house prices slowed to an annual pace of 4.4% from 5.9% in the final three months of 2015. The main exception was Austria, where prices rose by 13.4%, more than double the rate of growth recorded in that period. (…)

Foreign Investment in the U.S. Soars, Partly Because of a Tax Loophole

(…) The U.S. economy has been sluggish but still outperformed most of the developed world in recent years. Canada, Germany and Japan also invested heavily in the U.S. last year. Chinese investment is set to reach a new high in 2016 despite growing economic and security concerns from regulators and politicians.

The BEA said manufacturing accounted for more than half of total new investment expenditures, led by pharmaceuticals and medicines. Finance and insurance, real estate, and professional, scientific and technical services also were top targets for investors. (…)