Edge and Odds

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Edge and Odds

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NEW$ & VIEW$ (16 NOVEMBER 2015)

Quiet Ports Spur Slowdown Fears America’s busiest ports reported a decline in imports during the key peak shipping season for the first time in at least a decade.

For the first time in at least a decade, imports fell in both September and October at each of the three busiest U.S. seaports, according to data from trade researcher Zepol Corp. analyzed by The Wall Street Journal. Combined, imports at the container terminals at the ports of Los Angeles, Long Beach, Calif. and around New York harbor, which handle just over half of the goods entering the country by sea, fell by just over 10% between August and October. (…)

Some say the slump is being driven by businesses that have cut back on imports because of a weak economic outlook, which could point to sluggish global growth ahead. Others say it is a side effect of a massive inventory buildup that took place earlier in the year.

Despite the weak peak, imports in the first 10 months of the year at the nation’s busiest ports are still up 4% from a year earlier, Zepol data show. Rather than ordering huge shipments of goods in the late summer and early fall, more businesses are stocking up throughout the year and holding on to inventories for longer. (…)

Last week, the consumer goods-focused ports of Long Beach, Calif. and Oakland, Calif., both reported year-to-year declines in imports in October, another sign that retailers have scaled back their orders from overseas after seeing inventories pile up earlier in the year. (…)

There clearly is an inventory correction going on.

Businesses Are Stockpiling. What Does It Mean?

In September, overall business sales were flat but inventories climbed 0.3%. That pushed the inventory-to-sales ratio to its highest level since the waning months of the recession, the Commerce Department said on Friday.

If they keep piling up, outsized inventories could even be a harbinger of economic slowdown or recession. (…)

What’s driving the surge in inventories? It’s mostly retailers, which includes auto dealers, but manufacturers’ and wholesalers’ inventories also have been creeping up. But the figures aren’t wildly out of line with prerecession norms. (…)
Consumer Sentiment Climbs as Americans Buoyed by Price Discounts

The University of Michigan’s preliminary consumer sentiment index for this month rose to 93.1, a four-month high, from 90 in October, a report showed Friday.

The gain in confidence was propelled by those in the bottom two-thirds of the pay scale as a firming job market and cheap fuel costs made for the most-favorable income expectations in almost nine years. That bodes well for the holiday-shopping season after retail sales were weaker than projected last month.

“Confidence rose in early November mainly due to a stronger outlook for the domestic economy,” Richard Curtin, director of the Michigan Survey of Consumers, said in a statement. “Buying plans remained very favorable in early November due to low prices and currently low interest rates.”

The Michigan sentiment survey’s index of expectations six months from now increased to 85.6, a five-month high, from 82.1 in October. The gauge of current conditions, which measures Americans’ views of their personal finances, rose to 104.8, the highest since August, from 102.3 last month.

Japanese Economy Contracts Again Japan’s economy shrank again in the third quarter, entering a second technical recession in two years.

(…) Gross domestic product—the broadest measure of a nation’s economic activity—shrank at an annualized pace of 0.8% in the July-September period from the previous quarter, government data showed Monday. That followed a revised 0.7% contraction in the second quarter. (…)

A drop in inventories cut 2.1 percentage points from total growth, outstripping positive contributions from private consumption and exports. That could turn into a positive in coming months, though. When inventories are low, companies usually increase output, leading to faster growth in subsequent quarters.

Business investment shrank an annualized 5.0% during the quarter, a second-straight decline, as a global slowdown weighed on corporate earnings. (…)

Private consumption, which accounts for some 60% of Japan’s GDP, grew 2.1% after contracting 2.3% in the previous quarter. But few economists see this as heralding a sustained recovery. Sluggish wage growth continues to burden consumer sentiment. (…)

Thai Economy Turns a Corner as Junta Starts to Boost Investment

Gross domestic product expanded 1 percent in the three months through September from the previous quarter, the National Economic and Social Development Board said in Bangkok Monday. That compares with the 0.6 percent median estimate in a Bloomberg News survey of 20 analysts. GDP climbed 2.9 percent from a year earlier, more than the median forecast of 2.5 percent in a separate survey. (…)

The agency predicts GDP growth this year will be 2.9 percent, the fastest in three years.

Annual inflation up to 0.1% in the euro area

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Call me Trivia question: What was the annualized rate of core inflation in the Euro area during the last 3 months:

  1. 0.0%
  2. –1.0%
  3. +0.7%
  4. +4.1%

Hint for you: Just last week, European Central Bank President Mario Draghi expressed concern that core inflation in the eurozone may be backsliding.

The right answer is 4: +4.06% with the last 3 months being +0.3%, +0.5% and +0.2% MoM respectively.

True, if you add July’s –0.7% print, core inflation is back to tame area. But then, maybe, we should add February to June which was +5.8% annualized. But add January’s –1.8% and first half core inflation is but +1.2%.

In all, first 10 months of 2015: two big down months (Jan. and July), three big up months and five so-so months. Total first 10 months annualized: +1.1%.

Erratic. But certainly not “backsliding”. In fact, November-December better be quiet on that front…

Lagarde: Yuan Should Be IMF Reserve Currency China’s yuan should be included in the elite basket of currencies that comprise the International Monetary Fund’s lending reserves, IMF head Christine Lagarde said.
Yuan Set to Join IMF Basket in Step Toward Currency Big Leagues
Oil Slump May Prompt U.A.E. Spending Cuts, Central Bank Says

The United Arab Emirates may cut government spending as a result of the slump in oil prices, Central Bank Governor Mubarak Rashed Al Mansoori said.

The decline in the government’s oil revenue “may trigger further fiscal consolidation, albeit at a gradual pace, to preserve priority spending in support of non-oil growth,” Al Mansoori said at a conference in Dubai on Monday. Oil accounted for almost a third of the nation’s gross domestic product last year, government data show.

NEW$ & VIEW$ (13 NOVEMBER 2015): Credit Cycle Ending?

FED SPEAK

The best summary of the 6 speeches yesterday by Fed officials is on Zerohedge:

  • *BULLARD: NO REASON TO CONTINUE EXPERIMENT WITH `EXTREME’ POLICY
  • *BULLARD WANTS TO RETURN TO 1984-2007 U.S. MACROECONOMIC SETTING
  • *YELLEN: MUST BE MINDFUL OF NEW POLICY TRANSMISSION CHANNELS
  • *YELLEN DOESN’T DISCUSS OUTLOOK FOR FED POLICY, ECONOMY IN TEXT
  • *LACKER SAYS NOT SURPRISED BY `POPULIST ANGER’ AGAINST FED
  • *LACKER SAYS `PLAUSIBLE’ QE HAD SCANT REAL EFFECTS ON ECONOMY
  • *EVANS SAYS U.S. FUNDAMENTALS LOOK `PRETTY GOOD’ AT THE MOMENT
  • *EVANS: TIMING OF FED LIFTOFF LESS IMPORTANT THAN RATE PATH
  • *EVANS FAVORS `SOMEWHAT LATER LIFTOFF’ THAN MANY FED COLLEAGUES
  • *EVANS SEEKS SLOWER RATE-RISE PATH THAN 25 BPS EVERY OTHER MTG
  • *DUDLEY: IT’S POSSIBLE LIFTOFF CONDITIONS MAY SOON BE SATISFIED
  • *DUDLEY: RISKS OF MOVING TOO FAST VS TOO SLOWLY NEARLY BALANCED
  • *FISCHER: U.S. ECONOMY WEATHERING HEADWINDS FROM STRONGER DOLLAR
  • *FISCHER: OCT. FOMC SIGNALED DEC. RATE RISE MAY BE APPROPRIATE

Gift with a bow Split emerges among US holiday shoppers Stores still expect growth but poorer families are cutting back

(…) Steven Barr, PwC’s US retail and consumer leader, says the consultancy’s holiday survey is the first “in several” years to show that most families earning $50,000 or less, like Mr Arriola, plan to reduce Christmas spending compared with last year. (…)

The NRF expects spending to rise 3.7 per cent to $630.5bn this season, compared with 4.1 per cent growth in 2014. While researchers measure the Christmas shopping season differently, many others expect a similar slowdown, with NPD forecasting the weakest spending increase since 2009.

This slowdown comes even as lower petrol prices should put an additional $35bn into consumers’ pockets in the fourth quarter, by Nomura’s estimate. (…)

Job Openings Rise Above 5.5 Million, But the Hiring Rate Remains Little Changed

The U.S. economy had over 5.5 million job openings as of the last business day of September, the second-highest tally of available jobs in the 15 years the Labor Department has collected this data.

Yet what once would have been hailed as unambiguously good news has been confounded in recent years—even as job openings rise, the rate of hiring has not risen to match it. That trend continued this month, with the level of hiring declining slightly from 5.1 million to 5 million.

(…) The number of people who voluntarily quit their job and the number of people who were laid off or fired was little changed. (…) The percent of workers who voluntarily quit their job has held at 1.9%. In the years prior to the recession, the rate was typically above 2%.

In better news, the rate of layoffs was 1.2%, near the lowest rate ever measured in the 15-year-old survey of 1.1%. This fits with other reports from the Labor Department showing that weekly filings for jobless benefits are hovering near a 40-year low.

Eurozone Economy Slows as Exports Weaken The eurozone economy slowed in the three months to September as exports to large developing economies weakened, making it more likely the European Central Bank will expand its stimulus programs in December.

The slowdown was led by Germany, the currency area’s exporting powerhouse, while Italian economic growth also eased. There were fresh contractions in Greece and Finland, while Portugal’s economy stagnated. By contrast, France’s economy returned to growth, having stagnated in the previous quarter.

The European Union’s statistics agency Friday said gross domestic product in the 19 countries that share the euro was 0.3% higher than in the three months to June, and 1.6% higher than in the third quarter of 2014. The quarter-to-quarter growth rate was down from 0.4% in the second quarter, and translates into an annualized growth rate of 1.2%, the weakest since the third quarter of last year.

The FT provides details:

Consumer spending picked up pace, growing by 0.3 per cent, up from 0 per cent in the previous quarter. Manufacturing production expanded by 0.3 per cent, after retreating by 0.6 per cent, while services advanced by 0.6 per cent, from 0.3 per cent in the previous quarter. However, the construction sector continues to suffer, contracting by 0.8 per cent.

Growth in the eurozone’s largest economy, Germany, slowed between the second and third quarters on the back of weaker foreign trade, expanding by 0.3 per cent — in line with economists’ expectations but down from 0.4 per cent in the previous three months.

Italy’s economy, the third largest, grew by 0.2 per cent, down from 0.3 per cent in the second quarter and falling short of expectations.

A brighter spot was France where growth took off, moving up to 0.3 per cent, after grinding to a halt in the second quarter, boosted by domestic demand from consumers and industrial production. (…)

France’s return to growth after a 0.7 per cent rise in the first quarter and virtually no growth in the second, means it is on course to achieve its target of at least 1 per cent growth this year. That would end three years of stagnation in the eurozone’s second-largest economy.

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India Reports Weaker Industrial Production, Rise in Inflation
GM to Import Chinese-Made Buick General Motors, fresh from agreeing to a new four-year union contract that is expected to drive up its U.S. labor costs, plans to become the first U.S. auto maker to sell a Chinese-made car in America.
Global Oil Demand Growth to Slow in 2016 Global oil demand will ease next year on the weaker outlook for the world economy and oversupply in the market, the International Energy Agency said.

The IEA said global demand growth is forecast to slow to 1.2 million barrels a day in 2016 after surging to 1.8 million barrels a day this year. (…)

Commercial stocks from countries in the Organization for Economic Cooperation and Development stood at a record near 3 billion barrels by the end of September, even as the global oil market adjusts to oil trading at $50 a barrel oil. (…)

Despite the resilience of producers such as Russia, non-OPEC supply is forecast to contract by more than 600,000 per day next year. U.S. light tight oil, the driver of non-OPEC growth, is expected to decline by 600,000 barrels a day in 2016, the IEA said.

Supply from the Organization of the Petroleum Exporting Countries held steady in October at 31.76 million barrels a day, with declines in Iraq and Kuwait offset by higher supply from Libya, Saudi Arabia and Nigeria, the IEA said.

A tightening in fundamentals has lifted next year’s demand for OPEC crude from the IEA’s report last month by 200,000 to 31.3 million barrels a day. (…)

Sad smile The Credit Cycle Wanes

To date, the US high-yield credit rating changes of 2015’s fourth quarter show 57 downgrades far exceeding 18 upgrades. In addition, the accompanying revisions of investment-grade ratings include 11 downgrades and only one upgrade.

The final quarter of 2015 is shaping up to be the second straight quarter of substantially fewer high-yield rating upgrades relative to downgrades. A convincing negative trend may be emerging.

As long as high-yield downgrades well outnumber upgrades, any extended narrowing by the high-yield bond spread is suspect. For example, first-half 2007’s narrowing by the high-yield spread amid a distinctive upturn by net high-yield downgrades would prove to be a big mistake. (Figure 1.)

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After falling from Q2-2015’s 49% to Q3-2105’s 39%, upgrades’ share of the number of US high-yield credit rating revisions approximates an even lower 24% thus far in 2015’s final quarter. Third-quarter 2015’s high-yield upgrade ratio of 39% was the lowest since Q2-2009’s 30%, while Q4-2015’s might be the worst since Q1-2009’s 13%.

In a manner that indicates a fading credit cycle, the high-yield upgrade ratio of 2015’s unfinished second half now equals 35%. This is on track to be the lowest two-quarter ratio since the 34% of the span ended September 2009. During the Great Recession, the two-quarter upgrade ratio bottomed at the 13% of the span-ended March 2009.

When the previous two economic recoveries were well established, the moving two-quarter version of the high-yield upgrade ratio first broke under 40% in Q4-2007 (at 37%) and in Q4-1998 (at 29%). Both episodes constituted important turning points in the corporate credit cycle. Thereafter, not only did high-yield bond spreads remain relatively wide, but both projected and actual default rates trended higher. (Figure 2.) (…)

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Pointing up According to the Federal Reserve’s latest survey of senior bank loan officers, the net percent of surveyed officers tightening standards on commercial and industrial (C&I) loans increased from the -7.0 percentage points of Q3-2015 to the +7.4-points of Q4-2015.

The final quarter of 2015 marked the first such firming of business loan criteria since Q3-2012. By contrast, in each quarter from Q4-2012 through Q3-2015, the net percent tightening standards was less than zero, which implies standards were eased, on balance.

In the context of a mature recovery, the net percent of bankers tightening C&I loan standards previously switched from negative to positive by a similar amount in Q3-2007 and Q4-1998. Both changes coincided with the start of a declining phase for the corporate credit cycle.

Tighter lending standards should not impact small biz however. These simply have no need for financing as the NFIB surveys show: 53% explicitly said they did not want a loan (67% including those who did not answer the question, presumably uninterested in borrowing as well). Only 2% reported that financing was their top business problem.

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