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

U.S. SERVICES PMIs POINT TO SLOWER GROWTH

The Fed will not like these reports showing that the important U.S. services sector is slowing and showing little momentum in new orders. Services employment is about to slow down, perhaps significantly.

Markit:

January data highlighted that U.S. service providers started the year with a further slowdown in output and new business growth. At the same time, survey respondents indicated a relatively subdued degree of confidence about their prospects for growth over the next 12 months, with firms linking this to heightened uncertainty about the wider economic outlook.

Employment growth was nonetheless sustained in January and the latest rise in payroll numbers was the fastest since September 2015. Input cost inflation remained marginal, helped by falling fuel prices, which in turn led to only a slight increase in service sector output charges during the latest survey period.

Adjusted for seasonal influences, the final Markit U.S. Services Business Activity Index registered 53.2 in January, down from 54.3 in December, to indicate the weakest pace of activity growth since the current period of expansion began in late-2013. Although still above the crucial 50.0 no-change value, the latest index reading was also below the average recorded since the survey began in October 2009 (55.8).

image

The seasonally adjusted final Markit U.S. Composite PMI™ Output Index registered 53.2 in January, down from 54.0 in December, to signal the weakest rise in private sector business activity since October 2013. The overall slowdown in January largely reflected a more subdued expansion of service sector activity, as manufacturing output rose at a slightly faster pace than December’s 26-month low.

image

Reports from survey respondents suggested that softer new business growth was the main factor weighing on service sector output in January. Moreover, a number of firms noted signs of a cyclical slowdown in client demand, driven in part by greater caution about the economic outlook. Reflecting this, January data pointed to a moderate increase in new work across the service economy, with the rate of expansion easing to a 12-month low.

Slower growth of incoming new business contributed to a drop in backlogs of work for the sixth consecutive month in January. A further solid expansion of staff hiring helped to reduce capacity pressures at the start of 2016. Rising payroll numbers were linked to new product launches and ongoing business expansion plans. That said, the latest survey indicated that service providers’ overall degree of business confidence was up only slightly since December and still close to its lowest recorded for three-and-a-half years.

Meanwhile, service sector firms continued to experience subdued cost inflation in January, despite reports of rising salary pressures. Prices charged by service providers increased for the fourth month running, but the rate of inflation remained marginal.

The ISM:

The NMI® registered 53.5 percent in January, 2.3 percentage points lower than the seasonally adjusted December reading of 55.8 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 53.9 percent, which is 5.6 percentage points lower than the seasonally adjusted December reading of 59.5 percent, reflecting growth for the 78th consecutive month at a slower rate.

020316 ISM SVCS Chart

The New Orders Index registered 56.5 percent, 2.4 percentage points lower than the seasonally adjusted reading of 58.9 percent in December. The Employment Index decreased 4.2 percentage points to 52.1 percent from the seasonally adjusted December reading of 56.3 percent and indicates growth for the 23rd consecutive month.

The Prices Index decreased 4.6 percentage points from the seasonally adjusted December reading of 51 percent to 46.4 percent, indicating prices decreased in January for the third time in the last five months.

According to the NMI®, 10 non-manufacturing industries reported growth in January. The majority of the respondents’ comments are positive about business conditions; however, there is a concern that exists relative to global conditions, stock market volatility, and the effect on commercial and consumer confidence.

image

image

image

NEW$ & VIEW$ (3 FEBRUARY 2016)

U.S. Consumer Spending Flat in December U.S. consumers curbed their spending in December even as incomes rose, showing caution as the year wound to a close amid signs of global economic turmoil.

Personal spending, which measures consumption on everything from sodas to haircuts, was flat in December from a month earlier. Spending climbed an upwardly revised 0.5% in November and was flat in October. Some of the spending weakness came from lower prices for staples such as gasoline and food, while utility bills were unseasonably low in December due to warm weather in much of the country.

Spending on durable goods —items designed to last at least three years—fell 0.9%. Spending on nondurable goods, like clothing and food, fell the same amount. Instead, much of Americans’ spending is going to essentials such as housing, medical care and education.

Incomes rose 0.3% during the month, the Commerce Department said Monday, but those extra earnings were socked away or used to pay down debt. The personal saving rate, or the share of income saved, rose to 5.5% from 5.3% a month earlier, matching a three-year high.

The price index for personal consumption expenditures, the central bank’s favored inflation measure, fell 0.1% from November and was up just 0.6% in December from a year earlier.

Core prices, which strip out food and energy costs, were flat from November and up 1.4% from a year earlier, as prices were slow to climb even without the effect of cheap oil.

Q4’15: real wages: +5.2% a.r.; real disposable income: +3.2% a.r.; real expenditures: +2.0% a.r. (charts from Haver Analytics)

 large image large image

U.S. Light Vehicle Sales Edge Higher

Total sales of light vehicles during January improved 1.4% m/m to 17.58 million units (SAAR) from 17.34 million in December. The 5.2% y/y increase was prompted by the decline in gasoline prices, strong consumer confidence and low unemployment. Nevertheless, sales remained below the cycle peak of 18.24 million reached in October.

Sales of light trucks continued to pace the market with a 2.1% advance (12.2% y/y) to 10.15 million units. Domestic light truck sales improved 3.2% (7.8% y/y) to 8.62 million. The gain lifted trucks sales to a record 57.7% of the light vehicle market, up from 54.1% in January 2015.

Auto purchases edged 0.4% higher to 7.43 million, but were down 3.1% y/y. Domestic auto sales gained 0.5% (-0.0% y/y) to 5.54 million.

Cyclical peak?

Bespoke Investment has this interesting chart:

Sample

US recession risk haunts markets Indicators show most severe US ‘growth scare’ since Great Recession in 2009

(…) The litany of market indicators that make no sense unless there is a clear and imminent danger of a recession is growing longer.

Long-term inflation expectations are their lowest since the crisis; the spreads on corporate and particularly low-quality high-yield credit are widening; the yield curve — as shown by the gap between two- and 10-year Treasury yields — is the flattest it has been since 2007, showing scant belief that inflation or interest rates will be rising in the years ahead. And of course the stock market is down, while within it defensive stocks like Walmart or Procter & Gamble are far outperforming cyclical stocks that would fare worst in an economic downturn.

These are all market-generated indicators. They show that we are now in at least the most severe US “growth scare” since the Great Recession in 2009, and these financial conditions in themselves heighten the risk of a recession, by making life harder for companies and consumers. Should the recession fears be averted, this also implies that there is a nice rebound to be had from stocks and from betting against bonds.

So what is the possibility of a recession, and how can it be calculated?

According to the US fund manager John Hussman, who writes a widely followed weekly commentary and has been notably bearish in recent years, a recession is now an “imminent likelihood”. He suggests financial markets generally act as leading indicators — which they are doing — followed by data from the industrial economy. Industrial production has fallen in 10 of the last 12 months; historically, going back to 1919, every time it has fallen as many as eight times in such a stretch, there has been a recession.

Over the past 12 months, Alan Ruskin of Deutsche Bank points out, no country’s ISM index has fallen more than that of the US — casting grave doubt on its ability to play the role of the world’s growth locomotive that many had put aside for it.

Mr Hussman adds weakness in retail sales as further evidence, while confirmation would come from worsening unemployment data and from big falls in consumer confidence.

Financial conditions are also important. When banks are making it harder to borrow, it is usually a good sign that a recession is coming — and that is what they are doing. The latest survey of senior loan officers by the Federal Reserve, produced this week, showed a growing majority of banks saying they were tightening their lending standards for commercial and industrial loans, in a way unseen since the crisis, which is a worrying sign — although there was no such tightening for real estate loans or for consumer loans.

Corporate profits provide ample cause for concern. Companies are finding it hard to maintain their profit margins or increase their revenues — again possibly a testament to the strength of the dollar.

However, the evidence that the US is not yet in recession remains strong. Aneta Markowska, of Société Générale, puts the chance that the US was already in recession in December at 3 per cent, using a model based on private employment, real income, real sales and industrial production. Only the last is anywhere near recession territory.

SocGen’s model of recession risks based on economic fundamentals suggest the risk is almost negligible; wage pressures are only just beginning, monetary policy is still very easy and profits made on domestic businesses are still high, while corporate balance sheets are healthy, outside of energy. All of this points to a cycle that does not turn into a downturn until 2018 or 2019.

Credit Suisse conducted a similar exercise, with a similar result as it concluded that the US is not in recession now, and will not be later this year either.

A clear signal that these forecasts were wrong, that would move the models towards a recession signal, would come from the labour market, where the rate of improvement has slowed in recent months.

The labour market provides the strongest evidence that the US is not heading for a recession and forthcoming data will be critical in determining whether this is a growth scare that will blow over — bringing a nice rally with it — or the start of the recession that markets are signalling.

Eurozone Retail Sales Rise for First Time in Four Months

Eurostat said retail sales rose by an expected 0.3% in December from November, and by 1.4% from the final month of 2014. It was the first increase since August. The statistics agency also revised its figures for November, and now estimates that sales were flat, rather than down 0.3%.

image

image

‘No limit’ to Japan easing, says Kuroda BoJ governor signals readiness to take rates further below zero
Oil rises after Russia says open to OPEC meeting

(…) Russian Foreign Minister Sergei Lavrov said if there is consensus among the Organization of the Petroleum Exporting Countries and non-OPEC members to meet, “then we will meet.” (…)

“Russia yesterday reported a rise in its oil production in January to just under 10.9 million bpd (barrels per day), which is a new high since the break-up of the Soviet Union,” Commerzbank said in a report.

“This underlines the need for talks on coordinated production cuts, as OPEC also expanded its oil production in January to a multi-year high.”

EARNINGS WATCH
  • 244 companies (66.0% of the S&P 500’s market cap) have reported. Earnings are beating by 4.9% while revenues have surprised by 0.3%.
  • Expectations are for a decline in revenue, earnings, and EPS of -3.2%, -4.9%, and -3.1% (-2.3% last Friday). EPS is on pace for -1.4% (-0.1%), assuming the current 4.9% beat rate for the remainder of the season. This would be +4.6% (+6.2%) excluding Energy.