Edge and Odds

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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

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NEW$ & VIEW$ (18 MARCH 2016)

Philly Fed Surges

Following on a string of recent stronger than expected data in the manufacturing sector, today’s release of the Philadelphia Fed Manufacturing survey showed a surge for March.  While economists were forecasting the headline index to come in at a level of -1.5, the actual reading came in at +12.4.  That was the first positive reading since August, the highest reading since last February, the largest monthly increase since November 2014, and the strongest report relative to expectations since November 2014.  Concerns about weakness in the manufacturing sector that were so persistent in the beginning of the year are becoming more and more scarce by the day.

Philly Fed Chart 031716

Philly Fed Table 031716While the surge in the headline reading for the Philly Fed report was impressive, the internals were even more so.  The table to the right lists the m/m change for each category.  You may recall that last month, every component of the report besides the top line headline reading declined.  This month, nearly the opposite happened.  As shown in the table, every component increased this month, and some by a lot.  New Orders, for example, surged 21 points which is the largest monthly increase since October 2005!  Shipments haven’t seen such a large monthly increase since March 2014, and the last time every component of the Philly Fed report increased on a month to month basis was back in August 2009. (Bespoke Investment)

Haver Analytics relates the various Fed district surveys to the ISM:

The ISM-adjusted General Business Conditions Index constructed by Haver Analytics increased to 51.7 from 44.7. It also was the highest level since April and 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.

Doug Short averages out the last 3 months:

Meanwhile, the LEI has been flat for nearly a year…

Conference Board Leading Economic Index: Slight Increase in February

The Conference Board LEI for the U.S. edged up in February, driven mostly by large positive contributions from initial claims for unemployment insurance (inverted) and the yield spread. In the six-month period ending February 2016, the leading economic index increased by just 0.3 percent (about a 0.7 percent annual rate), much slower than the growth of 2.0 percent (about a 4.0 percent annual rate) during the previous six months. Despite a more modest pace of growth, the strengths among the leading indicators have remained slightly more widespread than the weaknesses. [Full notes in PDF]

Conference Board's LEI
Smoothed LEI

Hmmm…

Global Currencies Soar, Defying Central Bankers Efforts by many of the world’s central banks to weaken their currencies are failing, raising concerns about whether policy makers are losing the ability to wield control over financial markets.

Despite the Bank of Japan’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies. (…)

Even some central banks with less actively traded currencies are having a hard time guiding markets. Norway’s central bank on Thursday cut its main interest rate to a record low of 0.5%, and a bank governor said he wouldn’t rule out negative rates, in which central banks charge big lenders to hold deposits. The Norwegian krone gained more than 1% against the dollar and was up against the euro. (…)

“Central banks are experimenting in real time,” he said. “There is no lab for them to practice in.” Hot smile

Fewer Americans Got Hired or Quit Their Jobs in January The number of people hired into a new job or quitting an old job both declined in January, a sign that despite the overall 4.9% unemployment rate, the labor market has yet to regain its full vitality.

Five million people were hired in January, down from 5.4 million in December. The number of people quitting declined to 2.8 million from 3.1 million. The number laid off was little changed at 1.6 million. (…)

The decline in quitting in January represents a shift toward a less healthy mix of job separations. Among those who left a job in January, a smaller share did so voluntarily. (…)

And in a development that’s perplexed observers of the labor market, the number of job openings available at the end of the month continued to climb. Job openings are near their all-time peak, but for whatever reason, the pace of hiring is not following suit. Large numbers of jobs sit unfilled.

Auto U.S. Subprime Auto ABS Delinquencies Hit Highest Level Since 1996 Delinquencies on U.S. subprime auto ABS have eclipsed 2009 recessionary levels and are now at a level not seen in nearly two decades.

Subprime delinquencies of 60 days or more hit 5.16% for February reporting, marking the highest level observed since October 1996 (5.96%). During the most recent recession, delinquencies peaked at 5.04% in January 2009. February’s delinquencies are increased 11.63% year-over-year (YoY) and 3.63% month-over-month (MoM).

Subprime annualized net losses (ANL) have followed the rise in delinquencies, reaching 9.74% as of February, an increase of 34.10% YoY and 11.59% MoM from January reporting. Despite the increase, ANL remains below the recessionary peak of 13.14% experienced in February of 2009.

Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year. Subprime ABS issuance averaged just over $20 billion in 2013 and 2014 before ballooning to over $25 billion in 2015, the highest level since 2005-2006. The number of lenders issuing ABS also increased to 19 in 2015 compared to the previous high of 14 in 2005 and 2006. Increased competition has led to increases in loan-to-value (LTV) ratios and extended term lending. Additionally, lenders have marginally weakened credit standards, with particular increases in originations to borrowers with no FICO scores. (…)

In contrast, performance within the prime sector remains stable, albeit slightly weaker. 60+ day delinquencies stood at 0.46% for February reporting, up 9.27% MoM but flat compared to the same period a year earlier. Prime ANL has increased slightly in 2016, reaching 0.69% for February, increased 32.17% YoY. While representing the highest level since February 2011 (0.90%), losses are still well below the historical average of 0.92% and the recessionary peak of 2.23% in January 2009. (…)

Fitch expects both prime and subprime auto loan ABS asset performance to improve over the spring months with the onset of tax refunds. That said, typical seasonal benefits are likely to be more muted this year versus recent years given rising pressures on the aforementioned asset performance as well as anticipated weakness in the wholesale market. Both the prime and subprime sectors have been buoyed by strong used vehicle values over the past five years, contributing to lower loss severity on defaults. However, with new vehicle sales and expected off-lease vehicle supply levels at historical highs entering 2016, Fitch anticipates weakness in the wholesale market, as reflected by the Manheim Used Vehicle Value Index (Manheim), which recently dipped 1.4% in February. Any future declines in the Manheim, as well as other market indicators, will likely contribute to higher loss severity for defaults and drive losses higher.

Despite further weakness anticipated, Fitch continues to have a stable outlook for prime and subprime auto ABS asset and ratings performance in 2016. ANL is expected to rise at or near the 1% and 10% area for prime and subprime, respectively, both well within peak recessionary levels.

Fitch’s indices track the performance of $99.5 billion of outstanding auto loan ABS transactions, of which 61.68% is prime and the remaining 38.32% is subprime ABS as of February 2016 reporting.

February 2016 Was Warmest Month Ever Measured Globally

Property prices soar in top China cities Price increases in top cities expand, smaller cities bottom out

(…) Prices of new residential buildings in Shenzhen rose 57 per cent from a year earlier, up from January’s increase of 52 per cent, data from the National Bureau of Statistics showed on Friday. Meanwhile, the northern city of Dandong in rust-belt Liaoning province saw prices drop 3.9 per cent.

Nationally, prices rose at an average annual 2.8 per cent, the biggest one-month rise since June 2014, according to FT calculations based on government data. There are signs that price gains are also feeding through to increased construction activity. Growth in property investment accelerated in the first two months of 2016, breaking a two-year run of slowing growth.

Governments in Beijing and Shanghai are now concerned about housing-market overheating and undersupply, while other cities still face an overhang of unsold houses built in expectations of gravity-defying property inflation. (…)

Overall, 32 of 70 cities in the government’s official price survey posted annual price gains in February, up from 25 cities in January. Analysts expect local governments in major cities to adopt measures to tamp demand, while a slow-motion recovery in smaller cities will continue. (…)

Highlighting the contrasting fortunes of China’s two-tier property market, the central bank last month cut the minimum downpayment requirement on mortgages outside of top cities from 25 to 20 per cent, in a bid to boost demand. (…)

Strategists Now See Virtually No Europe Stock Gains in 2016

Hit by one of the weakest earnings seasons in at least nine years, combined with waning faith in central banks, the Euro Stoxx 50 Index is expected to advance 1 percent for all of 2016. Only a few months ago, those same strategists were calling a 12 percent rally. The most dramatic about-face: Societe Generale SA, which cut its estimate from a 22 percent surge to a 0.5 percent decline. (…)

Two-thirds of the Euro Stoxx 50 members are still trading below their Dec. 31 level. (…)

At least 10 of 12 strategists surveyed by Bloomberg have lowered their 2016 forecast since December, cutting the average year-end projection for the Euro Stoxx 50 to 3,301 from 3,646. Back then, the most pessimistic call, that of Bankhaus Lampe KG, forecast a 6.2 percent gain. (…)

Analysts expect profits for Euro Stoxx 50 members to grow by only 1.5 percent this year, down from 5.1 percent in December. (…)

Money Hedge fund closures back to crisis highs Clients became risk averse in 2015 as big names suffered losses

(…) Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter. (…)

The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show. (…)

So far, this year does not appear to be any kinder for the industry.

Between market losses and redemptions, assets in hedge funds fell by $64.7bn in January, bringing total money in the industry below $3tn for the first time since crossing that threshold in May 2014, according to data provider eVestment. Redemptions in January were the worst since January 2009.

In February — normally a big month for inflows — about $3bn of new money trickled in, compared with $18.6bn last year, eVestment data show. Investment losses dragged down total assets by almost another $20bn to $2.95tn. (…)

Herd mentality hurts hedge funds Markets are being whipsawed by the Fed, but it’s not working out for most hedgies

(…) Avoiding the crowd is difficult: iconoclasts miss the momentum on the way up and look bad by comparison, or they get caught in a short squeeze. But even those who play it safe may find the snapback painful when the mood turns. Last year, according to Novus research, returns dropped for hedge funds in “crowded” trades. That may be because the number of hedge funds hit a record last year — there are too many funds chasing too few ideas. Adding to the crowd are retail investment products, such as AlphaClone and Guru, that scrape hedge fund filings, mimic their investments, and now share their losses.

Trading in widely-held or widely-shorted names such as Facebook, Apple, and Netflix is already at the mercy of the view of hundreds of hedgies. Breaking away from them may lead to greener pastures.

NEW$ & VIEW$ (17 MARCH 2016): Inflation; Missing Barrels; Chinese Consumers.

Fed Dials Back Pace of Rate Hikes Federal Reserve officials reduced estimates of how much they expect to raise short-term interest rates in 2016 and beyond, nodding to lingering risks to the economic outlook posed by soft global growth and financial-market volatility.

Policy makers left short-term interest rates steady and said they expect to raise their benchmark rate just twice this year, after an initial increase in December, down from the four they previously predicted. (…)

“Caution is appropriate,” Fed Chairwoman Janet Yellen said at a press conference after the rate decision was announced, summing up her approach in handling a vulnerable economy, weak global growth and a central bank with few tools to respond if new threats derail the expansion.

(…) without committing to a timetable for rate increases, officials said the next move would depend on “realized and expected economic conditions” and reiterated that they plan to move gradually. (…)

She made clear the central bank is juggling mixed economic signals: a strengthening job market but surprisingly weak wage growth, and a resilient U.S. expansion amid global weakness.

Fed officials still expect the economy to grow briskly enough to cause unemployment to fall and inflation to rise toward their 2% target over time, Ms. Yellen said. If things unfold as forecast, they would likely continue raising interest rates gradually, she said. (…)

“Inflation picked up in recent months,” the Fed’s statement said, however Ms. Yellen cautioned that she is wary about the sustainability of the uptick since it was mostly driven by volatile categories. (…)

After the Fed’s Wednesday announcement, futures market participants put a 42% probability on just one quarter-point Fed rate increase this year and a 22% probability on two. (…)

U.S. Consumer Prices Fell in February U.S. consumer prices fell in February due largely to a slide in gasoline prices, but other evidence pointed to steadily building inflation pressures that could reassure the Fed as it considers raising rates.

The consumer-price index declined 0.2% over the month, the Labor Department said Wednesday. Overall prices haven’t risen since November and are up just 1% over the past year.

Outside of energy and food, so-called core prices rose 0.3% last month, as items like rent, medical care and apparel became more expensive. Over the past year core prices rose 2.3%, the strongest 12-month gain since May 2012. (…)

Shelter costs, reflecting home rent and mortgage payments, increased 0.3% over the month and 3.3% over the year. The cost of medical-care services climbed 0.5% over the month and 3.9% over the year.

Look at this Haver Analytics table: inflation is accelerating: last 3 and 2 months at annual rates:

  • Core +3.2%/+3.7%.
  • Core Goods: +2.4%/+3.0%
  • Core Services: +3.2%/+3.7%

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Now that Core Goods prices have joined Core Services on an accelerating trend, the last thing the Fed needs is rising oil prices.

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BTW:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.8% annualized rate) in February. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.6% annualized rate) during the month. The CPI less food and energy rose 0.3% (3.4% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.0%, the CPI rose 1.0%, and the CPI less food and energy rose 2.3%.

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Speaking crudely, the Fed is not alone in the dark:

Crude Mystery: Where Did 800,000 Barrels of Oil Go? There is mystery at the heart of the oversupplied global oil market: missing barrels of crude. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude.

Last year, there were 800,000 barrels of oil a day unaccounted for by the International Energy Agency, the energy monitor that puts together data on crude supply and demand. Where these barrels ended up, or if they even existed, is key to an oil market that remains under pressure from the glut in crude.

Some analysts say the barrels may be in China. Others believe the barrels were created by flawed accounting and they don’t actually exist. If they don’t exist then the oversupply that has driven crude prices to decade lows could be much smaller than estimated and prices could rebound faster. (…)

Barrels have gone missing before, but last year the tally of unaccounted for oil grew to its highest level in 17 years. At a time when the issue of oversupply dominates the oil industry, this matters. (…)

In the fourth quarter, the number of missing barrels reached as high as 1.1 million barrels a day, or 43% of the estimated oversupply. (…)

Demand data is derived from models rather than from real measured consumption and is often substantially revised, investment bank DNB Markets said in a research note. More than half of global oil demand also now comes from non-OECD nations where statistical gathering isn’t as well developed, the bank said.

“We hence suspect that demand in non-OECD in reality is meaningfully larger than what is reported by the IEA,” they said. (…)

U.S. Housing Starts Rose 5.2% in February

Housing starts rose 5.2% from a month earlier to a seasonally adjusted annual rate of 1.178 million in February, the Commerce Department said Wednesday.

Starts on single-family homes, which account for roughly two-thirds of the market, rose 7.2% in February to 822,000, their highest level since November 2007. Permits for single-family homes rose 0.4% to 731,000, the second-highest level since the end of December 2007. (…)

Multifamily units, which include apartments and condominiums, rose 0.8% to 356,000. (…)

But new applications for building permits fell 3.1% to 1.167 million, from a revised January rate of 1.204 million, driven by a 8.4% fall in multifamily units. Some of that slowdown could be due to rising prices for land; home builders have been reporting shortages of land and labor for months.

Brian Johnston, chief operating officer of Mattamy Homes, which operates in four U.S. states and Canada, said his company has slowed the pace of land purchasing because prices have gotten so high.

”There are more builders out there and everyone is feeling more positive,” Mr. Johnston said. “They see their land supply diminishing, and they’re getting into the market to replace it.” (…)

Home-starts figures are volatile and often revised. Wednesday’s report showed new-home starts revised up to 1.120 million in January, compared with an initial estimate of 1.099 million. (…) (Charts from Haver Analytics)

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U.S. Industrial Production Slips in February

Industrial production decreased a seasonally adjusted 0.5% in February from the prior month after surging a revised 0.8% in January, the Federal Reserve said Wednesday. Total production fell 1.0% in February from a year earlier, the fourth consecutive annual decline. (…)

The Fed said overall capacity utilization, a measure of industrial slack, slipped by 0.4 percentage point to 76.7% in February. It averaged 80% from 1972 to 2015. (…)

Last month’s weakness was concentrated in the mining sector and in utilities, where the Fed said in a statement that “unseasonably warm weather curbed the demand for heating.”

Manufacturing production rose by 0.2% in February after climbing 0.5% the prior month. It was up by 1.8% from February 2015, led by a 9.1% year-over-year increase in motor-vehicle production. (Charts from Haver Analytics)

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(…) When combined with the mere 0.2% rise signalled for recent core retail sales data, the industrial malaise adds to suggestions that the pace of economic growth could disappoint in the first quarter compared to widespread expectations among analysts of 2-2.5% annualised growth.

Markit’s PMI surveys, which provide a reliable advance indication of economic growth, have also indicated a poor start to the year. Growth weakened further in February after having already slowed in January as problems spread from manufacturing to services, raising the possibility of a stalling of the economy.

Markit US PMI surveys v GDP

 
Pointing up China’s consumers tighten belts while retailers cut jobs, offer discounts

Retailers in China are shedding staff, slowing expansion plans and seeing stocks pile up in warehouses as shoppers tighten their belts – a major headache for a country that has pinned its hopes on consumers to drive economic growth.

With that growth running at its slowest in a quarter of a century, China’s consumption patterns are changing, with wealthy middle-class households trading down to more affordable brands, and poorer families paring back on basic purchases.

China’s top 50 retailers saw sales fall 6 per cent at the start of the year, and sales of basic goods from noodles to detergent grew just 1.8 per cent at the end of last year, down from more than 9 per cent just three years ago, according to Kantar Worldpanel data. (…)

This is a problem for sectors from retail to luxury and even fast food, where many international names have banked on continued growth.

Procter & Gamble Co., whose China products include Pampers diapers and Tide laundry detergent, said in January its sales were “significantly down” compared with 2014. Infant formula maker Mead Johnson Nutrition Co. said price competition and a shift to smaller shops and online hit sales. (…)

Westpac Bank’s most recent consumer survey showed sentiment at its lowest since October. “The February update points to continued weak conditions and elevated job-loss fears again weighing on the consumer mood,” said senior economist Matthew Hassan, adding that any loss of momentum for consumer demand could raise the risk that growth stays weaker for longer.

Some firms are bucking the downturn.

International brands offering “affordable luxury,” such as coffee chain Starbucks Corp. and high-end sporting goods giants Nike Inc. and Adidas AG have still grown. Adidas says it has not seen an impact on its business and plans to open about 3,000 stores in China by the end of 2020.

But retail executives and consumer goods makers said China’s slow growth is punishing the sector and forcing many to cut back, focus on smaller, faster-growing cities and offer more discounts.

“We are struggling to adapt as sales move online or to small mom-and-pop stores,” said a senior sales executive at a major Western consumer goods firm. “At the moment, it’s carnage.”

He said inventory levels at some clients had jumped to as much as nine months, from a normal average of around two weeks. (…)

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