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

NEW$ & VIEW$ (18 MAY 2016): Fed Up?

Rite of Spring: U.S. Economy Warms Up After Winter’s Chill Economic gauges released Tuesday showed a pickup in industrial output, continued momentum in the housing sector and firming inflation all pointing to stronger—though still unspectacular—growth in the second quarter.

(…) Forecasting firm Macroeconomic Advisers on Tuesday estimated GDP would expand at a 2.3% pace in the current quarter. The Federal Reserve Bank of Atlanta put its estimate for second-quarter growth at 2.5% after Tuesday’s data. (…)

The Fed said industrial production—a measure of everything made by factories, utilities and mines—surged 0.7% in April, the biggest jump for a single month since November 2014.

Utilities drove the increase, boosting output by nearly 6% to respond to higher demand for electricity and natural gas. The Fed attributed the jump to a return to normal weather in April after a warmer-than-usual March.

Factory output grew 0.3% in April after falling by the same pace in March. Demand for big-ticket items like machinery and cars picked up last month. (…)

Housing starts rose 6.6% in April from a month earlier, the agency said Tuesday, and building permits climbed 3.6% from March. Over the first four months of 2016, starts rose 10.2% compared with a year earlier and permits were up 2.9%. (…)

Fed Officials Flag Potential for June Rate Increase Three influential Federal Reserve officials said the central bank could raise short-term interest rates at its meeting next month, pushing back against investors who put low odds on such a move.

San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart both said Tuesday that the central bank’s June meeting is “live,” meaning officials could consider lifting rates. (…)

Dallas Fed President Robert Kaplan later during an event in Midland, Texas, called for rate increases “in the not-too-distant future” and said he may advocate for a move in June or July.

Their comments are significant because all three men tend to represent the consensus view among policy makers, even though they aren’t currently voting members of the Fed’s rate-setting committee. While they didn’t call for raising rates in June, their remarks suggest that they want to keep their options open and that markets are underestimating the possibility of such a move. (…)

Last week, Boston Fed President Eric Rosengren, a longtime supporter of low rates, reiterated a warning that financial markets are likely underestimating how many rate increases lie ahead. (…)

One potential hurdle to Fed action next month is the U.K.’s June 23 referendum on whether to leave the European Union. The vote falls the week after the Fed’s June 14-15 meeting, which has raised questions over whether the Fed might delay a rate increase pending the outcome. (…)

Let’s see what this “data dependent” Fed got from the U.S. economy in recent weeks:

Hmmm…Not much to hang one’s hat on. And since the Fed now cares about the ROW, the JP Morgan PMI sums up Q2 so far: Global economy stuck in low gear at start of Q2

Global economic growth ticked higher for a second successive month in April, according to the JPMorgan Global PMI™, compiled by Markit, but was still one of the weakest rates seen for over three years. The PMI is broadly consistent with global GDP growing at an annual rate of just 1.5% (at market prices) compared with a long-run average of 2.3%. Developed world growth continued to edge higher from February’s recent low, though remained weaker than at any time seen since early-2013, while emerging markets returned to stagnation.

So, when John Williams says that

I think that the data to my mind are lining up to make a good case for rate increases in the next few meetings, not just June, which means it’s very live in terms of that, (…)

…he must have other data in his mind than what has been officially reported…I wonder if he has this data:

JOB CUTS JUMP 35% IN APRIL TO 65,141 More Than 250,000 Cuts in 2016; Most Since 2009

The pace of downsizing increased in April, as US-based employers announced workforce reductions totaling 65,141 during the month, according to the latest report released Thursday from global outplacement consultancy Challenger, Gray & Christmas, Inc.

The April figure represents a 35 percent increase over March, when employers announced 48,207 planned layoffs. Last month’s job cuts were 5.8 percent higher than the 61,582 recorded in April 2015.

Employers have announced a total of 250,061 planned job cuts through the first four months of 2016. That is up 24 percent from the 201,796 job cuts tracked during the same period a year ago. It is the highest January-April total since 2009, when the opening four months of the year saw 695,100 job cuts.

“We continue to see large scale layoffs in the energy sector, where low oil prices are driving down profits. However, we are also seeing heavy downsizing activity in other areas, such as computers and retail, where changing consumer trends are creating a lot of volatility,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas.

Layoffs announcements total 250k after 4 months, up 24% YoY. Announced new hirings are 38k, down 12% YoY.

Eurozone Slides Back Into Deflation

The European Union’s statistics agency confirmed on Wednesday a preliminary estimate that showed consumer prices were 0.2% below their year-earlier levels in April, making it the second month this year in which the eurozone was in deflation.

Core inflation was unchanged MoM in April and +0.7% YoY from +1.0% in March and +0.8% in February.

Japan’s Rebound Blunts Push for New Stimulus A 1.7% quarterly GDP rise complicates Abe effort to boost economy, giving fuel to Japan’s deficit hawks.

(…) Growth in the first quarter was lifted by unexpectedly strong household spending and government demand, rising 0.5% and 0.7% on quarter, respectively. But economists at BNP Paribas said in a note that without the extra day in February, private consumption would have been flat, leaving public demand as the driver of growth.

But business spending remained weak. Companies cut investment 1.4% compared with the previous three months. That was the first decline in three quarters. (…)

Ninja US raises duties on Chinese steel Cold-rolled variety slapped with 500% levies as global backlash deepens

(…) China’s Ministry of Commerce expressed “strong dissatisfaction” with the decision by the US, which it said had employed “unfair methods” in assessing the tariffs. (…)

Cold-rolled steel accounts for about a 10th of the $2bn in Chinese steel the US imported last year.

US regulators are also in the midst of a number of investigations of other Chinese products, including other categories of steel.

SENTIMENT WATCH
Goldman Downgrades Stocks Over Next 12 Months Due To Risk Of Sharp Market Drop

“we downgrade equities to Neutral over 12 months on growth and valuation concerns. Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis.”

NEW$ & VIEW$ (17 MAY 2016)

Consumer Prices Rise by Most Since 2013

Consumer prices increased 0.4 percent, the biggest gains since February 2013, following a 0.1 percent advance in March, a Labor Department report showed Tuesday in Washington. The so-called core measure, which strips out food and energy costs, rose 0.2 percent after a 0.1 percent gain the prior month. (…)

The CPI climbed 1.1 percent in the 12 months ended April after rising 0.9 percent in the previous period.

The increase in core prices matched the median estimate of economists surveyed. Projections ranged from no change to a gain of 0.3 percent. At a year-over-year rate, core prices rose 2.1 percent in April after climbing 2.2 percent the prior month. (…)

Empire State Factory Sector Activity Index Reverses Earlier Improvement

The Empire State Factory Index of General Business Conditions indicated deterioration in business activity during May. The New York index declined to -9.02 following unrevised positive readings in the prior two months. Nineteen percent of respondents reported a higher level of business activity while 28% reported a decrease. Expectations had been for 7.3 in the Action Economics Forecast Survey. The data are reported by the Federal Reserve Bank of New York and reflect business conditions in New York, northern New Jersey and southern Connecticut.

Based on these figures, Haver Analytics calculates a seasonally adjusted index that is comparable to the ISM series. The adjusted figure declined to 48.1 from 51.9, and also indicated that business activity deteriorated this month. Since inception in 2001, the business conditions index has had a 65% correlation with the change in real GDP.

Deterioration in the component series was broad-based. The new orders reading declined -5.54 following two months above break-even. Shipments also returned to negative territory, indicating that shipments levels fell, while delivery times shortened. The level of unfilled orders declined at the quickest pace in three months. Inventory decumulation continued at a fairly steady pace. Running counter to these indications was the employment figure which rose to 2.08. It was the highest level since July, and suggested positive job growth for a second straight month. During the last ten years there has been a 69% correlation between the index level and the m/m change in factory sector payrolls. The workweek index declined to the lowest level this year.

The prices paid index declined to 16.67, but remained near its highest level since early last year. It remained down, however, from the 2011 high of 69.89. Twenty two percent of respondents paid higher prices while 5% paid less. The index of prices received fell back into negative territory, where it has been for three months this year.

large image

NAHB Index Unchanged, Pointing to Steady Housing Growth A gauge of home-builder sentiment was unchanged in May— coming in at 58 for the fourth straight month—in a sign of steady growth for the housing market.

 large image large image

(Haver Analytics)

Housing Starts in U.S. Rose in April, Extending See-Saw Pattern

Residential starts increased 6.6 percent to a 1.17 million annualized rate from 1.1 million in March, Commerce Department data showed Tuesday in Washington. The median forecast of 79 economists surveyed by Bloomberg projected an increase to a 1.13 million rate. Permits, a proxy for future construction, also climbed. The March figure was previously reported as a 1.09 million pace. (…)

Permits rose 3.6 percent to a 1.12 million annualized rate, indicating little scope for further gains in starts. They were projected to rise to 1.14 million. The March reading in applications was 1.08 million.

Construction of single-family houses climbed 3.3 percent to a 778,000 rate from 753,000 in March. (…)

U.S. Economic Slowdown Reflected in Freight Volumes

From CASS FREIGHT INDEX REPORT:image

  image  image

One Measure of U.S. Wage Growth Just Hit a New Post-Recession High

The median U.S. worker is enjoying their highest wage growth since 2009, according to the Federal Reserve Bank of Atlanta’s wage growth tracker.

This metric showed that the median employee saw pay rise 3.4 percent year-over-year as of April, setting a new record for this expansion. (…)

One key difference between the Atlanta Fed’s measure and the commonly-reported BLS metric is that the latter is plagued by composition effects, according to the analysts.

That is to say, the BLS print would show that average hourly earnings declined in the event that a baby boomer retired and was replaced by a millennial working for three-quarters of that pay. The Atlanta Fed, meanwhile, tracks how wage pressures for the same individuals evolve over time, thereby removing this cohort effect. (…)

American Farmers Face Oversupply of Cheese and Meat, Pushing Down Prices Growing stacks of cheddar and other cheeses—three pounds per person in America—are the tip of a surplus of U.S. agricultural products that is swamping markets for grains, meat and milk.
Grains trade sets record volumes Total value falls as production rise outruns growth in demand
Oil rallies near $50 on rising supply threat

Militant threats to production in Nigeria, a key Opec producer, are the latest fillip for an oil price that has also benefited from a booming gasoline market and rising demand in India. (…)

Anxiety over supply has also been fanned after Venezuelan president Nicolás Maduro on Friday announced plans to extend his government’s emergency powers — a reminder to investors of the deepening political instability in another oil producer.

Supply disruptions around the world are likely to average more than 3m barrels a day this month, with Nigerian output at its lowest level in decades. On Monday its oil minister said output had fallen by 800,000 barrels a day to 1.4m b/d. (…)

The spectre of diminished supply and strengthening demand was enough to prompt analysts at Goldman Sachs, arguably the most influential bank in commodity markets, to lift their forecast for WTI. It now thinks the US benchmark will average $45 per barrel during the second quarter, up from an earlier estimate of $35 in March. (…)

U.S. dynamics remain supportive of higher oil prices. According to the most recent data released by the U.S. Energy Information Administration (EIA), gasoline demand in the U.S. rose to a new cyclical high in May while crude oil output dropped to a 2½-year low of 8.8 million barrels per day. As today’s Hot Charts show, this development has led to the first uptrend in U.S. oil imports in six years. Canada has benefitted from this situation by recently becoming the single-largest exporter of crude oil to the U.S., surpassing OPEC. We see more upside for Canadian exports. Though the recent fires in Alberta will reduce Canadian shipments, the impact will only be temporary as production facilities were spared. (NBF)

image

US companies step up share buybacks Market tumult spurs first-quarter moves by likes of Apple and GE

Based on preliminary data, share repurchases are 20 per cent higher in the first three months of the year versus the fourth quarter and 31 per cent above the year-ago period, according to S&P Dow Jones Indices. (…)

“They spent more on shares that cost less and the result was more companies reducing their share count than previously,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Almost 27 per cent of the companies in the index have already reduced their year-over-year share count by at least 4 per cent, increasing earnings per share by the same amount. (…) (Chart from BofAML via Zerohedge)