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$ (17 JUNE 2016): Stagflation? The Unfunny Joke…

U.S. Inflation Firms Amid Rising Gas Prices, Rents U.S. consumer prices rose in May for the third straight month as the damping effects of cheap oil and a strong dollar fade.

The consumer-price index, which measures what Americans pay for everything from car repairs to potatoes, increased a seasonally adjusted 0.2% in May from the prior month, the Labor Department said Thursday. It was the third straight monthly rise in overall prices as the damping effects of low oil prices and a strong dollar faded.

Consumer prices excluding the often-volatile food and energy categories also rose 0.2% in May, propelled by a 0.4% increase in shelter costs—the largest one-month jump since February 2007. (…)

Energy prices rose 1.2% from April, including a 2.3% jump in gas prices. But food prices fell 0.2% including a 0.5% decline in food purchased for home consumption. It was the fifth time in the past seven months that grocery prices had declined. Apparel prices rose, while prices declined for both new and used vehicles.

The overall price index rose 1.0% in May from a year earlier, slipping from 1.1% annual growth in April. Prices excluding food and energy climbed 2.2% on the year, marking the seventh consecutive month that annual core inflation matched or exceeded 2%.

The firming in core prices has largely reflecting a swift rise in the cost of shelter, especially rent. Shelter prices rose 3.4% last month from a year earlier, the largest annual gain for the category since September 2007. (…)

  • MEDIAN CPI UP 0.3% IN MAY

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.2% annualized rate) in May. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.1% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Over the last 12 months, the median CPI rose 2.5%, the trimmed-mean CPI rose 2.0%, the CPI rose 1.0%, and the CPI less food and energy rose 2.2%.

image
  • CPI last 3 months annualized: +2.8%
  • Core CPI last 6 months annualized: +2.6%
  • Median CPI last 3 months annualized: +3.2%.

Are we at 2.0%+ or not?

  • CLEVELAND FED INFLATION NOWCAST AS OF JUNE 16

image

Meanwhile, the Atlanta Fed wage tracker hit +3.5% in May…

image

…while PMI data suggest that the rebound reflected in some April data faded in May.

Stagflation?

Home-Builder Sentiment Rose in June, NAHB Says A gauge of home-builder sentiment rose in June, a sign of solid growth in the nation’s housing market.

The National Association of Home Builders housing market index rose to a seasonally adjusted level of 60 in June, the trade group said Thursday, up from 58 in May and the highest reading since January. (…)

The sales expectations component of the index climbed five points in June to 70, the highest level since October, indicating home builders are optimistic about the next six months.

Traffic has recovered and is showing some momentum, especially in the West and South. (Charts from Haver Analytics)

 large image large image

THE UNFUNNY JOKE

Note I started a joke which started the whole world crying
But I didn’t see that the joke was on me oh no
I started to cry which started the whole world laughing
Oh If I’d only seen that the joke was on me Note (The Bee Gees)

Mrs. Yellen went from “in coming months” to “I don’t know what the timetable will be”. This is becoming an unfunny joke.

imageBut the herd reaction from “market participants” is even more unfunny. These pundits seem to merely react to what the “Fed participants” say. No need to research and analyse what’s actually going on in the U.S. and the world, Mrs. Yellen and her FOMC folks do the job for them.

So the odds on rate hikes simply yo-yo along the Fed’s mood…which just changed radically even if its own economic projections declined by 0.2% for 2016 and 0.1% for 2017. Rounding errors! The end result is an economic electrocardiogram flat at 2.0% for 3 years. Why not? After all, it has averaged 2.1% since 2010…to everybody’s surprise.

image

After the low volatility ETF, here’s the low vol economy. The patient is more stable than ever…even though he’s nearly dying.

Funny thing, while investors are loading themselves with the “riskless” low vol ETF, they run away from normal equity funds like if it were …2008. YTD withdrawals are $73B, pretty close to 2008. Professional investors are not any more attracted by this low vol economy, their cash level being very high at the moment as this BoAML chart reveals:

Tempting for the contrarians!

But we soon have Brexit which is more a referendum on immigration and border management than on economics (hence the high “leave” odds). Then, in November, we have The Donald who is trying as hard as he can to give the USA a totally Democrat government, President, Congress and Senate. Wow! And we have Xi Jinping looking more and more like good old Mao. And Merkel fast losing support as 2017 arrives.

After drones and driverless cars, it’s only natural to get driverless everything. Why not Google in complete and irrevocable charge? These two guys seem to know what they are doing.

spy

NEW$ & VIEW$ (16 JUNE 2016): Quite An Uncertain Fed!

Wary Fed Rethinks Pace of Rate Hikes The Federal Reserve held short-term interest rates steady and officials lowered projections of how much they’ll raise them in the coming years, signs that persistently slow economic growth and low inflation are forcing the central bank to rethink how fast it can lift borrowing costs.

(…) “I can’t specify a timetable,” about when rates will next be raised, she said at a press conference following the Fed’s two-day policy meeting. “We are quite uncertain about where rates are heading in the longer term.”

Federal Reserve Chairwoman Janet Yellen on Wednesday cast doubt on a significant interest-rate increase in the near future, saying turmoil in global markets and a sluggish U.S. economy will likely keep rates low. Photo: AP

The uncertainty was striking in part because the Fed’s forecasts for the economy didn’t change much from the quarterly projections released in March. Officials still expect modest economic growth near 2% annually over the next three years, a rise in consumer-price inflation to 2%, and an unemployment rate below 5%. (…)

Ms. Yellen previously said she believed temporary headwinds were holding back the economy. She conceded Wednesday that such drags, such as slow productivity growth, might persist. Moreover, new ones, such as China’s slowdown, are emerging.

Notably, Ms. Yellen won a unanimous vote on Wednesday’s policy statement. Kansas City Fed President Esther George, who dissented in March and April in favor of a rate increase, instead voted with the majority. (…)

The new projections released Wednesday showed officials expect the fed-funds rate to rise to 0.875% by the end of 2016, according to the median projection of 17 officials. That implies they see two quarter-point rate increases this year, as they did in March.

However, a greater number of officials now see just one increase, rather than two moves. In March, just one official saw one rate increase this year and seven saw three or more. Now six officials see one increase this year and two see three or more. (…)

The new projections also show central-bank officials see the fed-funds rate at 1.625% by the end of 2017 and 2.375% at the end of 2018, both lower than their March estimates.

In the longer run, Fed officials now expect the benchmark rate to reach 3%, lower than the 3.25% they saw in March. (…)

Mrs Yellen said at the presser:

  • “Recent economic indicators have been mixed, suggesting our cautious approach to adjusting monetary policy remains appropriate,”
  • “We need to assure ourselves that the underlying momentum in the economy has not diminished”

From the Philly Fed yesterday (Last update: June 15, 2016, at 10:45 a.m. ET):

image

This is truly a quite uncertain Fed!

U.S. Industrial Production Fell 0.4% in May U.S. industrial output declined 0.4% in May amid a 4.2% drop in auto production, a reminder of the factory sector’s lackluster performance in recent months.

(…) Manufacturing output slid 0.4% in May, led by a 4.2% drop in production of motor vehicles and parts. Overall factory activity is down 0.1% from a year earlier. (…)

Capacity use, a measure of how much industries are making as a share of potential output, fell 0.4 percentage point to 74.9%. The rate is 5.1 percentage points below the historical average, suggesting there is still ample slack across the economy.

Overall industrial production was down 1.4% in the 12 months through May. Utility output is down 0.8% and mining output has plunged 11.5%.

IP declined in 3 of the last 4 months, 7 of the last 10. Chart from Haver Analytics.

large image

CEOs Turn More Bullish About Business Investment

The economic outlook among top leaders is improving and firmer investment plans are the primary driver, according to Business Roundtable’s second-quarter CEO Economic Outlook Survey, released Wednesday. The group’s members are chief executives at the country’s largest firms.

The survey found that 37% of CEOs polled plan to increase capital spending in the next six months versus 18% who plan to cut back. The first quarter survey showed 34% planned increases and 23% said they’d reduce such spending.

Companies’ hiring plans and sales projections also improved modestly, but the investment plans were the primary driver for the CEO outlook index rising to 73.5 in the second quarter from 69.4 in the first. Figures above 50 indicate expansion. The latest reading remains below the average of 79.8 since 2004.

Despite the recent outlook improvement, CEOs downgraded their view of 2016 economic growth to 2.1% from 2.2%. (…)

Global Intermediate goods output slides

(…) The data also suggest that the economic malaise at worldwide intermediate goods producers is likely to persist and that the road to recovery will be bumpy. Whereas new business inflows rose, the growth rate remained weak by historical standards, which in turn stymied hiring. Even with a reduced workforce size, firms were able to lower their outstanding business suggesting further layoffs in coming months. Buying levels also decreased in May, leading to the fastest contraction in pre-production stocks for five months.

Of concern, feeble demand for intermediate goods output points to hesitancy among investment and consumer goods companies with regards to intentions to build inventories and raise capital expenditure on plant & machinery.

We don’t get to see a chart on global retail sales often. Look at the downshifts in global sales growth from about 5.5% between 2010 and 2012 to 4.5% in 2013-14 and to 3% since 2015. So much for the expected boost from lower oil prices.

image