NFIB: Small Business Index Declined in November

“During this holiday season, small business owners are finding little to be hopeful or optimistic about including the economy in the New Year. This month’s Index continues to signal a lackluster economy and shows that the small business sector has no expansion energy whatsoever.” — Bill Dunkelberg, NFIB Chief Economist

Fifty-five percent reported hiring or trying to hire (unchanged), but 47 percent reported few or no qualified applicants for the positions they were trying to fill. Sixteen percent reported using temporary workers, up 2 points. Twenty-seven percent of all owners reported job openings they could not fill in the current period, unchanged over the past 2 months. This is a solid reading historically and suggests no significant change in the unemployment rate.

Hiring, Firing and Quitting Have Finally Gotten Close to Where Janet Yellen Wants Them Since 2013, three indicators have improved the way now-Chairwoman Janet Yellen had hoped.

(…) In March of 2013, about 2.1 million workers quit their jobs, a rate of about 1.5%. Those numbers have improved slowly enough that the improvement is hard to notice from one month to the next (in this month’s report, all the key measures were “little changed”). But over the course of the past two and a half years, the improvement has been considerable. In October, 2.8 million people quit their jobs, a rate of 1.9%—roughly the same as in December 2007, the month the economy began to decline into recession. Ms. Yellen had said in her speech “a pickup in the quit rate, which also remains at a low level, would signal that workers perceive that their chances to be rehired are good–in other words, that labor demand has strengthened.” Put another way, just under half of the people who left a job in March 2013 did so voluntarily. The majority of job separations were still involuntary layoffs or departures due to retirement, death or disability. Among people who left a job in October, by contrast, 57% did so voluntarily. (…)

MEMO TO YELLEN

It’s hard to be bullish about the global economy these days. Besides China’s tricky rebalancing, which continues to have repercussions across the globe, there’s the growing threat posed by the surging US dollar. The trade-weighted greenback’s over 12% appreciation this year (2015 average versus 2014 average) is the biggest annual appreciation in over thirty years, and that raises the odds of corporate defaults worldwide. According to the latest Quarterly Review from the Bank for International Settlements, the stock of dollar-denominated debt held by non-financial entities outside the US grew to $9.8 trillion in the second quarter of 2015. As today’s Hot Chart shows, that’s a record not just in absolute terms but also as a percentage of GDP. The latter, at almost 18% of World GDP excluding the US, suggests global exposure to a strengthening USD is now twice as large as it was 20 years ago. (NBF)

From Deutsche Bank:

EM’s increased issuance of the previous years, and thus building debts have been under increasing scrutiny. The charts below show that this leveraging has been concentrated in corporates. In fact, as we discuss in “EM: Cornered” in this publication, rising sovereign debt levels is hardly a systemic issue. While EM government debt levels have only moderately increased over the past few years, nonfinancial EM corporate debt has seen a dramatic rise after the GFC of 2008. Specifically, it rose from a level of around 60% of GDP in 2008 to the current level of close to 90% of GDP (see graph below).

We have followed the case of corporates closely and – although it does not yet seem to pose serious systemic risks either – shrinking liquidity buffers and reduced
EBTDAs could lead to more funding stress if 2016 ends with still gloomy prospects for EM economies and commodities. (…)

  

Interest coverage (EBITDA to interest expense) has been declining among EM corporates due to declining EBITDA (on lower growth and weaker commodity prices). However, interest coverage remains above 2x for most of the universe of EM corporates – in other words, EM corporates’ solvency is unlikely to be challenged as an asset class in 2016, in our view. (…)

Further weakness in commodity prices and EMFX, coupled with a 38% spike in EM corporate bond maturities, could lead to increased stress in 2017
The liquidity picture for EM corporates in 2017 looks less appealing, due to a 38% yoy increase in USD bond maturities (to USD122bn) and lingering uncertainty on commodity prices (an important component of the corporate sectors’ cash flow) and FX (a headwind for domestic-oriented players). A further depletion in cash buffers and reduced appetite for certain portions of the EM corporate universe may lead to increased refinancing stress in 2017 – especially if inflationary pressures build and domestic liquidity conditions also have to be tightened. (…)

Within Asia, China is the biggest contributor with corporate debt at over 110% of GDP. While we are concerned about China’s growth slowdown and leveraged corporate balance sheets, we note that onshore liquidity remains strong and that is unlikely to change in 2016 with our economists forecasting two rate cuts and four RRR cuts. FX is also an important point to monitor, given the lack of USD revenue among a good chunk of Chinese corporates.

CHINA

CEBM Research November survey:

The steel market continued to deteriorate in November, with prices falling sharply by an average of about 200 RMB per ton. Weather factors including low temperatures, rain, and snow have curtailed demand for construction materials and placed downward pressure on steel prices. With the market entering the traditional low season, survey respondents were generally pessimistic.

Real estate survey respondents reported a healthy level of sales activity during November. Looking at new starts activity, a majority of respondents expect the low level of starts activity observed in previous months to persist in December due to inventory overhang.

Autos: survey respondents reported a second consecutive month of better-than-expected sales driven by the September purchase tax cut on small autos, the upcoming expirations of new energy vehicle subsidies, and seasonal factors. Survey feedback reveals that inventory levels at dealers selling small-engine domestic vehicles has fallen considerably, with some dealers reporting stock shortages. Among this month’s survey respondents, November sales grew by a range of 10% to 15% on an annual basis. A majority of respondents have further upgraded their 4Q15 sales forecasts from last month and have also upgraded their full year 2016 forecasts.

Container freight: the yearlong 2015 slump for container freight exporters continues with few signs of improvement in external demand.

Bank loans: based on survey feedback, the scale of loan issuance in November changed very little from the previous month.

China’s Inflation Stabilizes as Stimulus Helps Support Demand

The consumer-price index rose 1.5 percent in November from a year earlier, the National Bureau of Statistics said Wednesday, compared to the 1.4 percent median estimate in a Bloomberg survey and 1.3 percent in October. The producer-price index fell 5.9 percent, compared to a projected 6 percent drop, extending declines to a record 45 months. (…)

Inflation firmed with help from a 2.1 increase for services, while slower declines in imports signal demand is stabilizing after six central bank interest rate cuts since November last year and expanded government spending.

The increase for services was offset by a 1.2 percent gain for consumer goods. Food prices climbed 2.3 percent while non-food items rose 1.1 percent, continuing their rebound from January’s 0.6 percent gain that was the slowest in five years.

 

China Sets Yuan at Four-Year Low in ‘Stress Test’ Facing currency outflows and a weakening economy, Beijing guided the yuan to its weakest level against the dollar in more than four years.

The central bank is testing how far it can let market forces go in determining the yuan’s value without setting off a sharp selloff and incurring wrath from trading partners, according to people familiar with the matter. (…)

The yuan has lost as much as 3.4% of its value since Aug. 10, the eve of the 2% devaluation. (…)

Mr. Zhang and other analysts now think the yuan is overvalued relative to its purchasing power, forcing Chinese companies to cut prices and lower wages to stay competitive, which could raise the specter of deflation.

“At the same time, the central bank should attach high importance to the risks associated with depreciation, such as Chinese companies’ abilities to repay dollar-denominated debts and its potential impact on currencies of China’s trading partners in Southeast Asia,” he said. (…)

CANADA HOUSING

Much has been written on the speculative nature of the Vancouver and Toronto residential markets and the threat it poses to the Canadian economic outlook. For some pundits, the current divergence in home price inflation between these two major cities and the rest of the country cannot be warranted by fundamentals, i.e. how could housing demand continue to strive in Toronto and Vancouver against a backdrop of uninspiring job creation at the national level if not for speculative forces?

But before putting the blame on speculators, consider latest labour market trends at the municipal level. As today’s Hot Chart shows, job creation has actually been quite strong in Toronto and Vancouver in recent quarters when compared to the national average. Large inflows of permanent immigrants (about 240,000 in the past year) coupled with the misfortune of commodity-producing regions have redirected inter and intra-provincial population migration flows towards Toronto and Vancouver. The good news is that these productive resources have for the most part been absorbed by the job market. So long as this situation endures, home prices in those two cities are unlikely to weaken significantly. (NBF)

Poloz Says Canada Quite Far From Extraordinary Stimulus

Bank of Canada Governor Stephen Poloz said the nation’s economy remains “quite far” from needing unconventional policies such as quantitative easing to spur growth, with a weaker Canadian dollar and recent rate cuts accelerating the recovery.

“We believe there’s a reasonable probability that two years from now we’ll be back at 2 percent inflation, the economy operating at full capacity,” Poloz said in the interview. “So if something were to happen that pushed us significantly outside that zone, that’s when we’d need to look at, well, what are our options,”

Canadian financial markets were rattled this week by fresh signs of weakness in China and growing concerns a global oil glut will keep prices low. Still, Canada remains on track for faster growth in the next two years, and the economy will return to full capacity by mid-2017, Poloz said in a speech and press conference in Toronto. (…)

Poloz also refused to characterize Canada’s economic contraction in the first half of this year as a recession, arguing the economy was growing outside of energy. Canada’s economy expanded again in the third quarter.

“We still wouldn’t call it a recession, it’s a mild contraction, because it was really a very pinpointed kind of thing, and we could see the other sources of growth continuing to gather momentum,” he said. (…)

OIL

Rifts test Opec’s co-operative worth

(…) Although Mr Zanganeh said he hopes for agreement at the next meeting, even he, in private, is aware of the reality.

“The minister often uses a Persian proverb saying ‘You can wake a person who is sleeping, but not a person who is pretending to’,” said the former Opec official of Iran’s inability to convince Saudi Arabia of its position.

When Oil Turns 40, the Aches Turn Into Real Pain Crude oil prices below $40 mean more pain, but also a stronger eventual rebound for those who can survive that long

(…) Compared with the summer of 2014 when prices last peaked, forecasts of earnings before interest, tax, depreciation and amortization for the world’s five largest, private integrated oil and gas companies have dropped by eye-popping $232 billion in 2015 and 2016 combined—or about 42%—according to FactSet. The five largest exploration and production companies have seen that proxy of cash flow drop by $83 billion, or close to 60%.

And those assumptions still are based on forecasts that Brent prices will bounce back to a less painful average of $60 a barrel or so in 2016. They might, but a producer wishing to lock in a price for a barrel a year from now will receive barely $48 in the futures market. Complicating matters, some large companies remain committed to stable or, in the case of Exxon Mobil and Chevron, rising dividends. (…)

Bloomberg:

(…) U.S. shale producers have so far escaped much of the fallout from lower oil prices thanks to the willingness of banks to keep the credit spigots open and the companies’ use of price hedges that have helped to cushion the blow. But those hedges are widely expected to end next year and seem unlikely to be replaced on such favorable terms. Meanwhile, the most recent discussions between oil producers and their lenders saw the companies’ average borrowing base slip 5 percent, according to a Citigroup analysis titled “Stayin’ Alive.” Stripping out the 42 percent of oil companies that saw their borrowing bases stay the same and the lucky few who saw it increase, the average drop was a staggering 19 percent and is only expected to decline further next year. U.S. shale producers may be stayin’ alive for now, but it seems increasingly likely that next year will not be all right, or ok.

Energy Sector’s Junk-Bond Pain Spreads Investors prepare for a wave of defaults next year

(…) Bonds from electric utilities including Dynegy Inc., AES Corp. and NRG Energy Inc.have declined in recent days, reflecting concerns that falling natural-gas prices will drag down electricity prices as well. A Dynegy bond is down 10.9​ cents on the dollar over the past week to 85.6 cents, an AES Corp. bond is down 4.8 cents to 85.3 cents and a bond from NRG Energy is down 8.9 cents to 84 cents, according to trading data fromMarketAxess Holdings Inc.

“Sentiment is awful,” said Henry Peabody, who helps oversee the $1 billion Eaton Vance Bond Fund. “We’re flirting with credit-crisis energy prices, and we’re probably flirting with credit-crisis bond prices to some degree in these sectors.” (…)

Analysts React to Oil’s Fall: Current Prices ‘Fundamentally Unsustainable’

Here’s a roundup of what analysts are saying about the oil patch right now.

Citi: Saudi’s current oil policy, that has in-part accelerated oil’s collapse, has driven prices far lower and for far longer than the Kingdom expected. Commitment to this strategy hasn’t wavered and looking ahead to 2016, the key question is will the Saudis be faced with similar disappointments come end-2016 or will they be exiting the year in the belief that they’ve “won.”

In any case, a victory for the Saudis will surely be a Pyrrhic one given the crippling effect on their fiscal balances in addition to the potentially huge effects that the sharply lower oil price is having on deflating production costs. The negative feed-back loop that lower oil prices are having is another adverse unforeseen consequence. The lack of 2016 producer hedging, and a WTI futures curve entirely sub-$60/bbl (out to 2024), leaves the Saudis with a clear incentive to keep prices low near-term. (…)

Julius Baer: Today’s oil price levels seem fundamentally unsustainable and can only be justified with a severe slowdown in world oil demand or significant productivity gains i.e. cost improvements of U.S. shale. Either seems unlikely. However, as the oil market transitions into a new normal out of the past decade’s super cycle, the rebalancing of supply and demand usually takes longer than expected. Instead, the steepness of the futures curve suggests that sentiment and technical selling momentum have been the key drivers of oil’s downward move as of late. The market is in surplus but not at risk of hitting capacity constraints due to recent storage expansions. (…)

TAC Energy:  WTI…has traded below the $37 mark three times before in the past decade – all during the Great Recession of 2008/2009 – but was never able to settle a month below the $40 mark.

While crude oil futures have reached multi-year lows, both Bakken and WCS cash prices remain above their August lows.  This could spell bad news for U.S. refiners as their regional crude advantage seems to be diminishing as more of the globe sinks under the weight of excess supply.

Commerzbank: A high oversupply is weighing on prices on many energy markets. This should change next year, above all on the oil market, because non-OPEC supply is falling more sharply than at any time in over twenty years. As the oversupply should have been erased by year-end, the oil price is likely to recover significantly in the second half of the year.(…)