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 DECEMBER 2015): Yielding to High Yield

Conference Board Leading Economic Index: Slight Increase in November

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.4 percent in November to 124.6 (2010 = 100), following a 0.6 percent increase in October, and no change in September. [Full notes in PDF]

No recession in sight based on the 6-m rate of change…

Smoothed LEI

…and on the leading/coincident ratio:

fed(Bespoke Investment)

China Beige Book Shows ‘Disturbing’ Economic Deterioration

China’s economic conditions deteriorated across the board in the fourth quarter, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country’s slowdown.

National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012. (…)

The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.

The survey shows “pervasive weakness,” Miller wrote in the report. “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.” (…)

In contrast to the gloomy Beige Book report, data Friday showed China’s home-price recovery spread to more smaller cities in November, after Chinese authorities rolled out easing measures targeting regions with a surplus of unsold homes. New-home prices increased in 33 cities among the 70 cities tracked by the government, compared with 27 in October, the National Bureau of Statistics said.

The Beige Book report was based on surveys of more than 2,100 firms across China and interviews with bankers, managers and executives. CBB began the series in mid-2012, when its inaugural survey indicated a pick-up in growth from early that year, a forecast later borne out.

Geographically, the three most high-profile regions performed the worst, with Shanghai’s “dismal” showing outpacing Guangdong’s and Beijing’s. Every region weakened on-quarter except for the Center and West, the report showed.

“More concerning than overall growth weakness was degradation of two components of the economy that were previously overlooked as sources of strength: the labor market and the impact of inflation,” Miller wrote. Given growth in input prices and sales prices slipped to record-lows while firm performance metrics fell, “it looked like firms were encountering genuinely harmful deflation,” he wrote.

Pointing up If labor market weakness persists, policy makers in Beijing will feel “increasing pressure” to ramp up the policy response, according to the report.

With official indicators picking up in November, Bloomberg’s monthly China gross domestic product tracker rose to a 6.85 percent estimated growth pace for the month, the best reading since June. Shares have rebounded, with the Shanghai Composite Index climbing 4.2 percent this week. The benchmark equity gauge has rallied 22 percent since tumbling to the low of the year in August.

In a worrying sign for the effectiveness of monetary easing to date, the share of companies borrowing declined to a record low, the survey showed.

“The interest of firms in both borrowing and spending continues to decline, suggesting it’s past time the ‘stimulus mafia’ rethinks its Pavlovian responses,” Miller wrote. “Reform or bust.”

Fed rate rise is first step to rebalance US financial system Yellen will need skill and luck to handle present distortions without sparking another crisis

(…) For a different perspective on the challenge facing the Fed, it is worth looking at another corner of Washington: the Office of Financial Research. Just before the Fed announcement, the OFR published its first Financial Stability Report on the health of US finance. (…)

In finance, there are at least three areas investors need to watch. The first is the fact that the ultra-loose policy has created credit bubbles that could now deflate. (…) debt has increased significantly since 2008 in emerging markets.

Also, the OFR observed this week: “In our assessment, credit risk in the US non-financial business sector is elevated and rising” — to a point where “higher base rates may create refinancing risks . . . and potentially precipitate a broader default cycle”. Thankfully, banks seem fairly well placed to absorb losses. But an outbreak of defaults could spark contagion and market volatility, particularly since post-crisis regulations mean banks are less willing to be market makers in the non-business sector — standing ready to buy or sell when investors want to trade — making it harder to trade the instruments in question.

A second area to watch is the state of American investors’ portfolios. In recent years, asset managers have tried to chase yield by buying longer-term assets with more credit risk. This has now raised the “duration” of bond portfolios — or their vulnerability to higher rates — to historic highs. Indeed, the OFR calculates that a mere 100bp rise in long-term US rates could generate unhedged losses of $214bn for US-based bond mutual funds and exchange traded funds. Once again, the system as a whole could probably absorb such a blow; but it could also spark contagion, particularly since banks, too, have increased their duration profiles.

A third area of concern is that in recent years there have been stealthy shifts in the opaque world of money markets. Before the crisis many asset managers, companies and banks placed spare cash in money-market instruments. Recently, however, this money has flooded on to the balance sheet of banks and the Fed itself. This has made it much harder for the Fed to control the price of money with its usual policy tools.

Another consequence of these little-noticed flows in the money markets might cause a Fed rise to spark further upheaval. Zoltan Pozsar, an analyst at Credit Suisse, thinks hundreds of billions of dollars could soon move back from banks to money market funds — with potentially destabilising consequences that the Fed (and others) are scrambling to understand. (…)

Withdrawals hit US corporate bond funds Market shows cracks as investors pull record $5.1bn from high-grade funds

Investment grade bond funds in the US have been hit with a record wave of redemptions, a week after two high-yield funds announced they would shutter and another barred withdrawals as the credit market showed further cracks.

Investors withdrew $5.1bn from US mutual funds and exchange traded funds purchasing investment grade bonds — those rated triple B minus or higher by one of the major rating agencies — in the latest week, according to fund flows tracked by Lipper.

The figures, the largest since Lipper began tracking flows in 1992, accompanied another week of $3bn-plus withdrawals from junk bond funds.

Lipper put the total investor withdrawals from taxable bond funds in the week to December 16 at $15.4bn. (…)

Leverage has risen rapidly over the past five years as US companies issued debt to fund acquisitions, raise dividends and buy back stock. While banks have largely repaired their balance sheets since the financial crisis, the corporate debt burden in the US has climbed to $5.6tn, up 59 per cent from December 2010, according to Barclays Indices. (…)

Punch HIGH YIELD MARKET: The best analysis from Moody’s:
  • Wide Spreads May Block Future Rate Hikes

(…) Never before in the modern era of the speculative-grade has bond market had the Fed hiked rates when the high-yield bond spread was wider than 625 bp.

Going forward, if the high-yield spread remains wider than 650 bp, the Fed may opt not to hike rates at the March 2016 meeting of the FOMC. Moreover, if the spread averages more than 700 bp during the next three months, a weakening of credit conditions may force the Fed to reconsider its current strategy.

Moreover, current outlooks for defaults and profits weaken the case in favor of a percentage point climb by fed funds over the next 12 months. Following the recessions of 2001 and 1990-1991, the Fed began to hike rates in June 2004 and February 1994. The latter two starts to a series of Fed rate hikes were accompanied by declining trends for the high-yield default rate and lively profits growth.

After dipping by a prospective -0.2% annually in 2015, the Blue Chip consensus projects a below-trend 4% rebound by 2016’s pretax profits from current production. An acceleration of labor costs vis-a-vis business sales may squeeze margins considerably in 2016.

The sharp ascent by the average EDF (expected default frequency) metric of US/Canadian below-investment-grade companies from December 2014’s 3.2% to a recent 6.7% highlights the worsened outlook for high-yield defaults.

Nevertheless, a fast rising high-yield EDF metric does not necessarily rule out another Fed rate hike. For example, fed funds was lifted from May 1999’s 4.75% to May 2000’s 6.50% notwithstanding an ominously elevated average high-yield EDF metric of 7.9%, whose then rising trend could be inferred from its average yearly increase of a full percentage point. However, it should be added that by January 2001 the Fed was forced to quickly slash fed funds to 5.5%. Yet the latter was not enough to prevent March 2001’s arrival of a recession.

But this time the Fed may not be indifferent to a worsening default outlook. Today’s macro backdrop compares unfavorably with that of 1999 and early 2000. The 4.5% annual surge by real GDP during the year-ended Q1-2000 towers over the 2.5% growth expected of real GDP for 2015 and 2016.

In addition, the labor market was much tighter according to how payroll employment’s 62.3% share of the working-age population was much greater than the recent 56.7%. Further, unlike the 3.7% year-over-year increase by the average hourly wage for the 12-months-ended March 2000, the average wage now rises by a much slower 2.3%. Thus, it’s doubtful that policymakers will shrug off another extended stay by the high-yield EDF metric of 6.5% or greater. Unless credit conditions improve, the current series of prospective rate hikes may be cut short.

Pointing up Contrary to conventional wisdom, the yield spreads over Treasuries of investment- and speculative-grade bonds are highly correlated. For a sample beginning with July 1991 and ending in November 2015, the high-yield bond spread shows surprisingly strong correlations with Moody’s long-term industrial company bond yield spreads of 0.93 for Baa-grade bonds and 0.90 for single-A-rated securities.

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  • High yield woes extend beyond commodities

At this time a year ago, corporate credit risk concerns were largely concentrated around the energy sector. Yet now distress is evident among all commodity related firms, while declines in the value of high yield corporate credit have extended more broadly. The market value of high yield energy and basic material sector debt now trades at 72% of the par value or value at maturity (Figure 5). That is down from last year’s high of 107%, when the steady decline in yields lifted the value of high risk debt. Given that the par value of energy and basic material debt accounts for a hefty 24% of the par value of the overall high yield market in the Barclays index, the travails of these sectors cannot be quarantined from the broader high risk market.

But even excluding these sectors, the rest of the high yield market has also lost a large amount of value. High yield bonds excluding energy and basic materials are now trading at 90% of par value, down from last year’s high of 107%. These stronger performing sectors have lost a combined $59 billion in market value in the past year before accounting for a net increase in the outstanding amount of issuance. With such a large portion of the high yield market in distress, the better performing sectors will not be able to fully rally.

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Call me The troubles evident in the high yield commodities sector find a parallel in the credit market bust that occurred in the telecom industry over a decade ago. Booming investment in the telecom sector in the late 1990s helped finance the build out of the nation’s internet infrastructure. This involved a mountain of high yield debt, with the telecom sector accounting for as much as 26% of the US high yield market by 2000. Yet as a wave of failures subsequently flooded the overinvested telecom sector, the rest of the high yield market remained out of favor for several years amid a rising default rate (Figure 6).

After the market value of high yield bonds excluding the telecom sector exceeded 100% of par value during much of 1997, it went on to average 89% over the next five years. During that five-year period ending 2002, the default rate rose from 2.1% to as high as 11.1%. Back in the present, the existence of severely distressed sectors and prospects of a rising default rate are also now obstacles to a recovery in high yield bond valuations.

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Adding to the challenges now faced by the high yield bond market is the heavy concentration of issuers at the lowest rating classes. Marking an inexorable multi-decade rise, the share of global high yield issuers rated B3 or lower is 57%, up from 21% from twenty years ago (Figure 7). Issuers at these low levels hold substantial default risk, with annual average historical default rates ranging from 5.2% at B3 to 38.0% for Ca and C rated firms. A once marginal class of borrowers has exploded, with the count of issuers rated B3 or lower, numbering under 100 as recently as 1987, rising to 1,799 at the beginning of 2015. Moderating the risks posed by the low rated skew among high yield borrowers has been the general decline in defaults at specific rating classes over time (Figure 8).

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The peak annual default rates during the worst three years of the most recent market downturns for Caa to C rated debt has slid from annual averages of 45% from 1990 to 1992, 28% from 2001 to 2003, and 21% from 2008 to 2010. Yet given that default rates at the riskiest rating categories will not continue to trend to zero, the heavy concentration of low-rated borrowers gives an upward bias to the default rate amid extended market stress. With such a shakeout now underway, the spread on high yield debt will remain above 550 bp throughout 2106, as credit markets continue to point to substantial risks to the business sector and economic outlooks.

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Just kidding YIELDING TO HIGH YIELD

Wednesday’s rally brought the Rule of 20 P/E back to the “20” fair value level. Yesterday’s setback brought it back nearly to its 2-year support level of 19. The “hope” was that valuations would clearly break above 20 like it has in all previous cycles. The high yield market woes coupled with continued low commodity prices and rising probabilities that low oil prices may be with us for a while suggest caution. Going back to 2 stars on my rating.

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Money Hedge funds cut fees to stem client exodus Pressure mounts in crowded sector after another mediocre year

NEW$ & VIEW$ (17 DECEMBER 2015): Now What? ECB Next?

Greg Ip: As Fed Finally Raises Rates, Pent-Up Risks Emerge

Seven years of near-zero interest rates caused investors to pour money into corporate debt, emerging-market bonds and commercial real estate, all in search of higher returns. Now that money has started to leave, borrowing costs are climbing, and markets have turned treacherous. (…)

But history counsels caution: The scale and nature of the distortions brought on by easy monetary policy can take time to show up. (…)

The harm from financial disruptions is much less predictable than from inflation, because it involves linkages that are apparent only under stress.

(…) a gusher of credit has flowed to companies in the U.S. and in emerging markets. Banks’ loans to leveraged companies have been pooled into “collateralized loan obligations.” A large chunk of the leveraged loans held in CLOs are rated just above CCC, at which companies are considered vulnerable to default. If even a fraction is downgraded, the CLOs’ demand for new loans will contract sharply, a report by Ellington Management Group, a hedge-fund manager, recently warned. “Access to credit for weaker companies would be significantly diminished,” says Rob Kinderman of Ellington.

Between 2009 and 2014 investors poured $973 billion into corporate bond mutual funds and $219 billion into exchange-traded funds that hold corporate debt, according to Thomson Reuters Lipper. Some of those flows are now reversing.

Companies have for the most part used the money not to expand their business operations, but to buy one another and their own stock. This year alone, U.S. companies have borrowed $327 billion to finance mergers and acquisitions, according to Thomson Reuters, more than double the previous full-year high in 2012. Business debt now equals 70% of annual gross domestic product, surpassing its pre-recession peak.

This alarms regulators. The Treasury, in its annual financial-stability report released Dec. 15, warned higher rates and widening spreads between corporate and Treasury rates “may create refinancing risks, expose weaknesses in heavily leveraged entities, and potentially precipitate a broader default cycle.” The extent of borrowing since the crisis means “even a modest default rate could lead to larger absolute losses than in previous default cycles.” (…)

Low rates have had an even bigger impact in emerging markets than the U.S.; their companies have racked up $3.4 trillion of U.S. dollar-denominated debt, more than double the pre-crisis level, according to the Bank for International Settlements. As those countries’ currencies fall, those debts become harder to repay. (…)

And now, ‘When Is the Next Hike?’

(…) New projections show officials expect the fed-funds rate to creep up to 1.375% by the end of 2016, according to the median projection of 17 officials, to 2.375% by the end of 2017 and 3.25% in three years. That implies four quarter-percentage-point interest rate increases next year, four the next and three or four the following. It depends on whether the Fed’s forecasts for the economy—which have frequently been wrong in this expansion—hold up.

The pace of rate increases projected by officials is somewhat slower than what they saw in September and much slower compared with earlier cycles of Fed rate increases. In the 2004-06 period, for example, the Fed raised rates 17 times in succession, a staccato approach Fed officials don’t intend to repeat. (…)

The central bank focused on the inflation outlook in its policy statement, and Ms. Yellen suggested it might alter its course if its projection of a gradual rise in inflation doesn’t materialize as expected. Fed officials don’t want inflation to run below their 2% goal for long periods because they see that as a sign that the broader economy isn’t living up to its potential.

“We do need to monitor inflation very carefully,” Ms. Yellen said. If it doesn’t pick up, “we would need to take further action to reconsider the outlook and to put in place appropriate policy.” (…)

Officials predicted the economy would expand at an annual pace between 2.4% in 2016 and 2% in 2018, which would take the expansion to a decade in length. They saw their preferred measure of inflation rising from 0.4% in 2015 to 1.6% in 2016 and then to 2% by 2018. The jobless rate is seen stabilizing at 4.7% during the next three years. These projections were largely in line with earlier estimates. (…)

Call me Confident and clear, Yellen says rate path will be well signaled
As Fed fog lifts, central bankers keep puzzling over China

(…) By raising interest rates on Wednesday the Fed removed one major source of uncertainty, leaving developments in China at the top of investors’ and policymakers’ watch lists, alongside the Fed’s next steps.

China accounts for more than 10 percent of global trade and remains the single biggest contributor to global growth. A financial market selloff in China sent ripples around the world and caused the Fed to stay its hand when it considered a rate hike in September.

If anything, China’s influence is growing. If Beijing allows the yuan to weaken further and re-pegs it to a basket of currencies instead of just the dollar, it could end up exporting deflation that might delay or reverse rate hikes globally.

“We try to get the best information we have… and we talk to everybody. But I don’t think we have any better information than anybody else,” James Bullard, President of the Federal Reserve Bank of St Louis told Reuters. (…)

“I don’t think the Chinese government has that good information,” said Bullard. (…)

Former and current Fed officials say there is no official hotline with China, although there is formal interaction. (…)

An examination by Reuters shows the Fed relies on the same publicly available China data that other economists do, and U.S. central bankers acknowledge both publicly and privately that they cannot say they have any firmer handle on how shifts in the Chinese economy affect the United States than anyone else. (…)

Officials from Fed Chair Janet Yellen down do have regular contact with Chinese central bankers and other government officials. On Oct. 8, for instance, Yellen spent 30 minutes with the deputy governor of the People’s Bank of China at the G-20 meeting in Lima, Peru, her schedule shows. The Fed would not comment on what was said.

San Francisco Fed President John Williams, who makes an annual swing through Asia with Board Governor Jerome Powell, has said his meetings with Chinese officials give him greater confidence the authorities there will engineer a smooth transition from an export-led economy to a domestically driven one, even if that pivot is faster than expected.

“The shift is happening quickly,” Williams said last month. (…)

Senior staff at major central banks in Europe say they have built up competence on China in recent years, but that gaps in data, plus the sheer pace of change make it a challenge.

They point to a lack of an import price index or comprehensive demand side data for national accounts as some of the obstacles.

The Reserve Bank of Australia has 10 analysts in its Beijing office churning out research on everything from wealth management to capital flows. The Bank of Japan also an office in the Chinese capital. (…)

While the Reserve Bank of Australia and the Bank of Japan have offices in Beijing, the U.S. Federal Reserve and the European Central Bank appear to rely on the same data – that may be flawed – as everyone else. (…)

One of the first things the new Dallas Fed President Rob Kaplan did after taking office in September was to get his researchers to crunch numbers on China.

His staff estimates that each percentage point decline in China growth trims 0.2 percentage points from U.S. GDP growth.

“Understanding China’s slowdown is essential because China is still the largest individual contributor to global growth,” Kaplan said in his first speech in the new role.

Emerging Markets Face Rate-Increase Pressures The Federal Reserve’s expected first rate increase in almost a decade is stirring fears of another wave of turmoil in emerging markets that have already been hit by financial squalls, rising debt levels and anemic demand.
Thumbs up Thumbs down The Fed Hike Will Unleash A Monster Dollar Rally Goldman Predicts; Merrill Disagrees
U.S. Housing Starts Rebound M/M; Building Permits Reach Five-Month High

Housing starts during November recovered 10.5% to 1.173 million (SAAR) from 1.062 million in October, last month reported as 1.060 million. Starts were 18.5% higher than one year earlier. The latest figure surpassed expectations for 1.133 million starts in the Action Economics Forecast Survey.

Single-family starts increased 7.6% (14.6% y/y) to 768,000, the highest level since June. A 15.1% rise (-7.3% y/y) in the West paced the gain followed by the South where single-family starts rose 8.8% (13.3% y/y). In the Northeast, single-family starts increased 1.7% (9.1% y/y) but they declined 4.4% in the Midwest (-0.9% y/y).

Starts of multi-family homes jumped 16.4% last month (20.2% y/y) to 405,000 and recovered roughly half of the prior month’s decline. Multi-family starts in the South rebounded 57.3% m/m and more than doubled y/y. In the Midwest, multi-family starts increased 8.2% (4.8% y/y) but in the West they fell 13.7%, off by more than one-half y/y. In the Northeast, starts of multi-family home declined 15.7% (+34.6% y/y).

Building permits in November increased 11.0% (19.5% y/y) to 1.289 million following a 5.1% gain. A 26.9% rise (36.1% y/y) in multi-family permits led the advance. Single-family building permits edged 1.1% higher (9.0% y/y).

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Steady but slow growth. Here’s why:

  • The Mortgage Credit Availability Index (MCAI) decreased 0.8% from October’s eight-year high, meaning mortgage credit availability diminished. Despite the sequential decline in November, the MCAI has increased on a m/m basis for 11 of the past 13 months and is at the second highest level since December 2007. For reference, from 2006 to 2007 the MCAI would have registered readings in the 800 range, roughly six times higher than current availability. Mortgage credit availability decreased in November due to a tightening in adjustable-rate mortgage programs. Underwriting requirements remain tight for borrowers with credit blemishes (or those with irregular/cash-based income), which continues to impact the recovery of first-time and entry-level homebuyers.

The CoreLogic Home Price Index for the lowest-priced homes is up 10.1% YTD (through October) and is the only price tier to pass its pre-housing downturn peak. Furthermore, entry-level inventory levels remain tight, as many homeowners are still underwater on their mortgages and fewer homes at lower-price points are being built. Further reductions in FHA premiums or g-fees may spur increased demand, but tight underwriting standards, declining affordability, and the inability to save a down payment remain the biggest headwinds to the recovery of entry-level and first-time buyers. (Raymond James)

Nearly 95% of renters 34 years old or younger want to own a home in the future and overall 83% of renters said they have a desire to own, according to NAR’s new quarterly survey of renter and owner households.

But only half of all households polled—renters and homeowners—said they believe the economy is currently improving and 44% said they believe the country is in a recession. Renters were slightly more optimistic, with 57% saying the economy is improving.

More than half of renters said they haven’t yet bought a home because they couldn’t afford one, while just 19% said they prefer the flexibility of renting. (…)

An earlier survey by NAR of people who recently purchased a home found that the share of first-time buyers fell to its lowest level in almost three decades. First-time buyers fell to 32% of all purchasers in 2015 from 33% last year, the third straight annual decline.

Sharon Voss, president of the Orlando Regional Realtor Association, said a shortage of inventory and intense competition from investors have locked first-time buyers out of the sub-$200,000 market in her area. Orlando’s median home price has increased 17% since the beginning of the year, while the inventory of single-family homes below $200,000 dropped 23%. (…)

U.S. Industrial Production Down 0.6% in November

Industrial production, a broad measure of everything produced by American factories, mines and utilities, fell a seasonally adjusted 0.6% from a month earlier, the Federal Reserve said on Wednesday. That was the sharpest drop since March 2012.

Capacity utilization, which measures slack across industrial firms, fell in November to 77% from 77.5% in October. That was the lowest level in two years. Before the 2007-2009 recession, capacity use typically hovered above 80%.

Manufacturing output, which accounts for almost three-quarters of overall industrial production, was flat last month, as falling production of autos, electrical equipment, metals and appliances canceled out increases for food and other nondurable goods.

Mining output declined 1.1% in November and was 8.2% below its level from a year earlier. The index for oil and gas well drilling was less than half its November 2014 level.

Output at utilities fell by 4.3% in November, a reflection of warm weather. (Table from Haver Analytics)

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German-U.S. Yield Spread Shows Growing Chasm Between Fed and ECB

In the wake of the Fed’s decision, the yield on U.S. two-year notes climbed above 1 percent for the first time since 2010. German two-year yields, in contrast, haven’t been above zero since August 2014, and the securities currently yield minus 0.35 percent. Euro-area government bonds rose Thursday, with benchmark German 10-year bunds advancing for the first time in four days, as the Fed said the pace of further U.S. rate increases would be gradual. (…)

The yield difference has widened as the Fed and European Central Bank move in opposite policy directions. Earlier this month, the ECB boosted its stimulus program by cutting the deposit rate and extending its asset-purchase program by at least six months. While the measures announced on Dec. 3 fell short of the expectations of some investors, they signaled an extension of accommodative monetary policy until at least March 2017.

“This cements the idea that policy will be divergent,” said Elwin de Groot, a senior market economist at Rabobank International in Utrecht, Netherlands. “Even on a modest rate hike path” the Fed is still tightening policy while the ECB is easing and “that should be sufficient to cause a further widening” in shorter-termed rate differentials, he said.

Hmmm…Such a strong consensus should make us all cautious.

Nerd smile Divergence in monetary policies may not last very long

Core inflation has started to perk up in Europe as well: Eurozone core CPI is up at a 2.0% annualized rate in the last 3 months and +2.4% in the last 4 months. The forward inflation swap rate is reflecting the upturn…

…even though Markit’s surveys are not signalling too much pressure yet.

However, Markit also says that “the recent strength of the PMI business activity readings are broadly consistent with a neutral ECB policy stance and go some way to perhaps explaining why the ECB held back from more aggressive stimulus at its December meeting.”

Add that employment growth is accelerating…

…particularly in inflation-wary Germany:

The survey data suggest GDP growth picked up in Germany during the fourth quarter, rising to 0.5% as strong domestic demand and rising exports drove a broad-based upturn in manufacturing and services.

German unemployment is around post-reunification lows, and real wages are growing at the fastest pace in more than 20 years (Jawad Mian, Stray Reflections).

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The 25% drop in the euro is clearly effective as Markit’s December PMI survey reveals:

  • German manufacturers reported a fifth successive monthly increase in new export orders, with the pace of expansion little-changed from November’s 21- month record.
  • German private sector companies raised their staffing levels further in December. Moreover, the rate of job creation was the most marked in four years, which panellists linked to strong demand and planned expansions. Employment growth was particularly strong in the service sector.
  • The latest increase in workforce numbers was insufficient to relieve pressure on operating capacity, however. This was highlighted by a further rise business outstanding. The rate at which backlogs of work accumulated was equal to September’s 52-month record.

While France is not there yet, Italy and Spain are also enjoying stronger growth. Germany’s weight will surely make the ECB more and more hesitant in priming the engine even more.

Investors have been going long Draghi and short Yellen in 2015. Looks smart given a flattish S&P 500 vs the 6% rise in the Stoxx 600 (chart via John Mauldin).

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“Smart” assumes they also hedged the euro which dropped 13% during the year.

China Stocks Rise to Two-Week High as Yuan Weakens for 10th Day

BTW, China’s electric power usage rose 0.7% MoM in November (+0.6% YoY) after Oct –0.4% and Sep –0.2%.

Putin Says Peak of Economic Crisis Over President Vladimir Putin said the government may have to cut the federal budget as the price of oil falls, but he tried to assure Russians that the worst of the economic crisis is over.

(…) “We’ll probably have to adjust something here,” said Mr. Putin, speaking at his annual news conference. But he played down the problem, saying the government wouldn’t have to do so in haste.

“Volatility is very high,” he said, referring to the crude price. “We won’t rush with recalculations and making adjustments in the budget, because that brings with it a reduction in the volume of financing for social spending, the nonfinancial sector.”

Mr. Putin reiterated previous statements that the peak of the crisis in Russia was over. He rattled off economic statistics, forecasting that the economy would shrink 3.7% this year, but return to growth next year. (…)

Putin also said that a price of $50 per barrel for 2016 is “very optimistic”, according to Bloomberg which adds:

The government sees gross domestic product growing by 0.7 percent next year and it won’t rush to alter the budget. (…)

Millions of Russians are sinking into poverty after the government allowed household finances to bear the brunt of the country’s first economic contraction in six years. This year, 21.7 million people, or about 15 percent of the population, are living beneath the subsistence level, according to the Federal Statistics Service.

Eighty percent of Russians agree that the country is in economic crisis and 58 percent say they’ve cut spending on food, according to a survey of 1,600 people published Thursday by the independent Levada Center. The poll, conducted Oct. 23-26 and Nov. 20-23, had a margin of error no greater than 3.4 percentage points.

Gift with a bow FedEx Profit Boosted by Online Holiday Shopping

FedEx Corp. on Wednesday said that this year’s peak holiday season is its busiest ever, and the pace has been consistent since Cyber Monday.

“There’s no sign it’s going to let up,” FedEx Ground Chief Henry Maier said during the company’s quarterly earnings call following the announcement of a 4% increase in profit for the quarter ended Nov. 30. (…)

Fed Increase Is the Most Important Thing Ever. Oh, Wait.

Barry Ritholtz lists what made the 2015 wall of worry (tks Fred):

Here’s a sampling of some of the things that were going to kill the economy and crush your portfolio:
     Strong U.S. dollar
     Ebola
     Falling oil prices
     Another government shutdown
     Commodities crash
     Rising minimum wages
     Euro weakness
     New York Stock Exchange credit at record highs
     Grexit
     Peak earnings to gross domestic product
     Shanghai market crash
     Standard & Poor’s 500 Index death cross
     European austerity
     Shiller CAPE ratio
     Japanese recession
     Downed Russian jet
     ISIS
     Donald Trump
     And now you can add to the list the Fed raising interest rates.

The S&P 500 Index had a so-so year being flat overall. It only had a 6-week period of weakness in spite of all the above. However, excluding Energy, the S&P 500 is up 4.5% YtD, just about in line with earnings ex-Energy (+6.5% according to S&P). (Chart from Gluskin Sheff)

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This morning:

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