U.S. Job Openings in June Fall a Bit From Record Highs

Job openings slipped to 5.25 million in June, down from a record 5.36 million in May, according to the Labor Department’s Job Openings and Labor Turnover Survey, known as Jolts.

Hires climbed to the highest level of the year at 5.12 million and the number of Americans voluntarily quitting their jobs climbed to 2.75 million from 2.73 million the prior month. The number of voluntary quits tends to rise when people are confident about job prospects.

Another 1.79 million people were laid off or discharged in June, down from 1.66 million in May.

Macy’s Cuts Guidance as Sales, Profit Slide

On Wednesday Macy’s reported a 2.6% drop in sales to $6.1 billion for the three months to Aug. 1. Sales at existing stores fell 2.1%. When licensed departments are included, sales declined 1.5%. (…)

It now expects no growth compared with a previous forecast of 2% growth. Total sales are now forecast to fall 1%, compared with an earlier estimate of 1% growth. (…)

The retailer has also been hurt by a fall in tourist traffic due to the strong dollar, the removal of a major promotional event and the delayed receipt of goods that had been held up in West Coast ports. Weakness in fashion jewelry and watches—two categories that had previously been growing strongly—weighed on results.

The average transaction size fell 1.3%, while the number of transactions also declined slightly. Gross margin narrowed to 40.9% from 41.4% a year earlier, because of delayed receipt of goods from the port slowdown and additional markdowns taken to spur sales. Ms. Hoguet said the gross margin rate was lower than the company had anticipated.

Inventory at the quarter’s end was up 3.8%, mainly because Macy’s brought in goods early to get ready for the back-to-school season, which Ms. Hoguet said had gotten off to a good start. (…)

Sears Holdings Corp. already reported an 11% decline in sales at existing stores in the second quarter.

Surge in Commercial Real-Estate Prices Stirs Bubble Worries Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating.

The valuations of office buildings sold in London, Hong Kong, Osaka and Chicago hit record highs in the second quarter of this year, on a price per square foot basis, and reached post-2009 highs in New York, Los Angeles, Berlin and Sydney, according to industry tracker Real Capital Analytics.

Deal activity is soaring as well. The value of U.S. commercial real-estate transactions in the first half of 2015 jumped 36% from a year earlier to $225.1 billion, ahead of the pace set in 2006, according to Real Capital. In Europe, transaction values shot up 37% to €135 billion ($148 billion), the strongest start to a year since 2007. (…)

Historically low interest rates have buoyed the appeal of commercial real estate, especially in major cities where economies are growing strongly. A 10-year Treasury note is yielding about 2.2%. By contrast, New York commercial real estate has an average capitalization rate—a measure of yield—of 5.7%, according to Real Capital.

By keeping interest rates low, central banks around the world have nudged income-minded investors into a broad range of riskier assets, from high-yield or “junk” bonds to dividend-paying stocks and real estate. (…)

CHINA: SLOW AND SLOWER

More indicators of China’s economic trends:

• China LEAP (leading economic activity pulse) fell to-3.9% YoY in July from -2.6% in June, as five of the seven LEAP components weakened.

Similarly, other macro activity data released in July worsened from a surprisingly strong June and disappointed the market. It suggests the foundation for a growth recovery is not solid, and economic growth faces more downward pressure as financial sector activity has slowed after the recent stock market slump. (BofAML via Zerohedge)

On the demand side, housing starts further declined to 16.4% yoy in July after dropping 14.3% in June. We think destocking could still be ongoing in tier 3-4 cities and the housing market recovery has yet to drive acceleration in housing starts. Auto sales growth slumped to -7.1% YoY from -2.3%, likely due to weakening consumer demand for some big-ticket items amid stock market turmoil while staple good sales remained resilient.

Production-side components were mixed, with weaker power and steel output growth but slightly better cement output growth. Power and steel output growth was particularly poor in July, likely due to plummet in commodity and raw material prices on a bearish growth outlook amid stock market turmoil.

• The CEBM Economic Activity Index remains at a very weak level, similar to the level observed during the 2008-2009 financial crisis. There is anecdotal evidence suggesting the job market is weakening due to deteriorating export demand and factory shutdowns in heavy industrial sectors.

Interestingly, Evercore ISI company survey of China sales declined to 38.7 last week, just below the level associated with Hard-Landing concerns in 2012 and approaching its 2009 low of 36.1. This confirms CEBM Research’s chart.

BTW, ISi’s U.S. company surveys are also pointing to weakness and an economy growing at 2.0%. Last week, all surveys related to the consumer showed significant weakness.

China Defends Handling of Yuan Chinese central bank officials offered a rare public defense after this week’s unexpected devaluation, saying the yuan will eventually resume its climb.

At a news conference in Beijing on Thursday, People’s Bank of China Vice Gov. Yi Gangsaid China has the financial firepower to defend the currency as needed. But officials also said the yuan’s underpinning remains firm and that its value should strengthen, and dismissed the idea that the move was made to help the country’s sputtering exports sector.

“In the long run, the renminbi remains a strong currency,” said PBOC Assistant Gov.Zhang Xiaohui, using the other name for the Chinese currency.

They also said the move—made through a mechanism that they said was intended to give markets more say in how the yuan was valued—gives the central bank more room to maneuver at a time when the U.S. dollar is appreciating against most other currencies.

“A fixed exchange rate looks stable, but it hides accumulated problems,” Mr. Yi said. (…)

The PBOC’s news conference was an unusual event for an organization that rarely puts forward a public face and typically communicates through lengthy messages on its website, sometimes posted well into the evening. Foreign reporters as well as state-controlled media were invited. It marks a rare public stepping out for Mr. Yi, the PBOC’s No. 2 official and the one responsible for day-to-day oversight of foreign exchange.

The FT has more interesting quotes from the PBoC:

“From the international and domestic economic and financial situation, we can see that there is no basis right now for continued depreciation of the renminbi exchange rate,” said Zhang Xiaohui, assistant governor of the PBoC. “The central bank has the power to maintain basic stability in the Rmb and ensure it remains at a reasonable and balanced level.” (…)

On Thursday, Yi Gang, deputy PBoC governor, said the central bank would continue to step into the market to guide the currency to an appropriate level when it felt it was becoming “too volatile”.

“This kind of managed exchange rate system is appropriate for China’s national conditions,” Mr Yi said. “When market fluctuations are too big, we can carry out effective management to provide the market with more confidence towards the exchange rate system and ensure greater stability in the market and the functioning of the economy.” (…)

“When necessary, the PBoC is fully capable of stabilising the market exchange rate by means of direct intervention in the foreign exchange market, in order to prevent the irrational fluctuation of the exchange rate caused by herd behaviour,” Ma Jun, the PBoC’s chief economist, said in a statement sent to the Financial Times on Wednesday night.

Mr Ma said that with $3.7tn in foreign exchange reserves, the world’s biggest, the PBoC’s “ability to stabilise the exchange rate in the short and medium term far, far exceeds that of most emerging market economies”. (…)

But even after Tuesday’s supposedly market-based reform, it remains unclear exactly how the central bank decides the daily fixing rate.

When pushed by the FT to explain how the new market-based fixing worked, Mr Yi refused to say exactly how many market makers there were, whether the central bank decided the daily fixing rate based solely on the quotes from market makers or whether the market makers were free to quote any rate they liked.

He did say there were “between 10 and 20” banks, some of which were international, that acted as market makers and that the daily fixing rate was an average of the quotes they sent to the PBoC each morning, once outlying quotes were discarded.

Briefly said, speculators beware. Beijing will make sure the Rmb gets to where it wants it at its own pace. I bet they will be tested on that.

“Right now Guangdong’s manufacturing industry is facing great challenges because of increasing costs,” adds Willy Lin, managing director of a Hong Kong knitwear company. “If the government wants to [help], they need to maintain the devaluation for at least six to 12 months.”

Real Effective Exchange Rate and Export Growth

Andy Hall Astenbeck Capital Q2 Letter: The Missing Barrels

(…) the perception of a large and persistent crude oil glut is now endemic and has triggered a massive shift in sentiment – one that we frankly did not anticipate. One reason for that is that we see fundamentals continuing to improve and believe there is something of a disconnect between perception and reality.

That perception is colored by the IEA’s most recent Oil Market Report (OMR) which estimates that global oil supply in (12 2015 exceeded demand by a staggering 3.3 million bpd. For 2015 the IEA is effectively predicting a surplus of supply over demand averaging more than 2 million bpd that continues through 2015 and 2016.

(…) the IEA forecast is the one used by most oil analysts on Wall Street as the basis for their own forecasts. For that reason the consensus view is now extremely bearish.

The latest data from the IEA is difficult to reconcile with what has actually been happening in the oil market however. If there had been a 3.3 million bpd surplus in OZ the contango would have exploded as oil would need to price itself to make it economic to carry in ever scarcer and therefore costlier storage. That did not happen. In fact the contrary was the case – contango narrowed for Brent and WTI and the Dubai market moved from contango into backwardation by the end of 02. This is not suggestive of a growing crude oil surplus.

Even more striking is the absence of an increase in observable inventories anywhere close to that suggested by the IEA’s supply/demand balance for OZ. Preliminary estimates show that OECD onshore inventories of oil built by a little over 700 thousand bpd last quarter. Inventories (government plus commercial) in China are estimated to have risen by about 400 thousand bpd. Oil in floating storage rose by about 600 thousand bpd. That all adds up to about 1.7 million bpd leaving 1.6 million bpd of oil unaccounted for. Where could it be? Oil in floating storage is monitored ship by ship in real time and data are available for most commercial entrepot facilities. It is hard to believe that over 140 million barrels of oil could go unobserved.

The more likely explanation for these missing barrels is that the current surplus is not nearly as big as the IEA is estimating. In the July OMR the IEA was still showing a balancing item for unaccounted oil of 1.4 million bpd for Q4 of 2014 and 900 thousand bpd for the first quarter of this year (they have yet to analyze the Q2 balance).

Historically, large balancing items are revised away by changes to initial estimates of demand. Since 2009, on average the IEA has revised its initial estimate of actual quarterly demand upwards by over 500 thousand bpd over the ensuing two to three years. On four occasions the cumulative revision to estimated – not forecast demand has been 1 million bpd or more.

It would hardly be surprising therefore if the IEA were to revise higher its initial estimate of Q2 2015 oil demand (and make further revisions to C11 2015 and Q4 2014). This would of course reduce the apparent ongoing surplus. High frequency data certainly supports the notion of above trend demand growth this year following the dramatic drop in prices in the latter part of 2014. Year to date demand in the U.S. is up over 600 thousand bpd or 3.4 percent. The latest four week average is up 1 million bpd or 5.7 percent. Lower prices together with more people working translates into more demand for oil. Europe will see growth in demand for oil in 2015 for the first time in years. Demand growth in China during H1 was higher year over year by almost 500 thousand bpd, or nearly 5 percent. Demand was particularly strong in June which should assuage concerns regarding the impact of the recent swoon of the stock market there.

It is not only on the demand side of the equation that we can question the scale of the apparent oil surplus predicted by the IEA. Compared to other credible forecasts, the IEA supply forecast for 2015 for NGLs produced by OPEC is higher by about 500 thousand bpd. OPEC NGL production is a notoriously difficult number to gauge accurately. Moreover it should be largely irrelevant to a discussion of crude oil prices as NGLs cannot be processed in oil refineries.

Crude oil inventories have already started to fall. Unsold West African oil that was floating on tankers until June has now been sold to refiners. Crude oil inventories in the Atlantic Basin – the epicenter of the global oil excess – have fallen 55 million barrels from their peak at the end of April. Based on the balances we look at, crude oil inventories should on average fall over the rest of the year – albeit with a hiatus during the fall turnaround season in October.*

But these green shoots have been trampled down by concern that Iran will now add to the glut of oil and that it will take much longer for the market to balance. These fears have been compounded by reports that Iraq and Saudi Arabia are setting new production records.

There is no question that the core OPEC producers in the Middle East are producing oil at historically high rates. But let’s examine this more closely.

First Iran: virtually all serious analyses suggest that sanctions on oil exports will not be lifted until sometime in 2016. Moreover these analyses indicate that Iran will not be able to increase its production by much more than 500 thousand bpd without substantial investment and the involvement of the international oil companies. That will not happen quickly. Also, the risk that the oil Iran currently has in floating storage will flood the market is being overstated. In all there are about 30 million barrels but the majority of this is highly corrosive condensate produced in association with natural gas from the South Pars field. This condensate was not covered by the current sanctions regime. The reason this oil is in floating storage is because Iran has been unable to sell it since its principal customer – Dragon Aromatics in China – suffered a plant failure in April. Moreover construction of a new refinery in Iran designed specifically to run this condensate has been delayed just as additional production from a new stage of South Pars came on stream.

As to Iraq, it is true that its production has reached record levels in recent months. But given the fall in capex there and the dramatic drop in rig counts in Iraq – down 45 percent since last summer – it is difficult to see how further growth in production can be sustained. Rather, there is a significant downside risk to Iraqi production given the persistent threat from ISIS and disaffection among the population over chronic electricity shortages. Renewed antagonism between Baghdad and the KRG threatens exports from the north as does sabotage of the Kirkuk-Ceyhan pipeline.

Dow ‘Death Cross’ Stirs Anxiety in Fragile Market

China’s currency problems may have finally pushed the U.S. stock market past the tipping point. But this is just one in a series of negative events that have dogged stocks for weeks. And true to form, the old saw that market tops are processes and not events is guiding the slow change from bull to bear.

Let’s start with the event that is in the financial headlines now – the moving average “death cross” on the Dow Jones Industrial Average. This occurs when the 50-day average, representing the short-term trend, crosses below the 200-day average, which represents the long-term trend. While moving averages are lagging indicators, following the crossover of these two averages tends to put investors on the correct side of the market for the bulk of a major trend.

Stated differently, a death cross has been a good indicator to tell us that investors should be out of the market.

Unfortunately, since the financial crisis and intervention by the Federal Reserve, death crosses and their inverse “golden crosses” have been less effective in predicting major trends. There have been several occasions when crosses are immediately reversed leaving investors with losses.

But even with its spotty track record over the past few years, investors should still pay attention because the signal is starting to propagate to other major indexes. The New York Stock Exchange composite, representing the average stock, also scored a death cross this week.

And although the Nasdaq, which we often call “tech heavy,” is still a long way from the signal, the Nasdaq-100 Technology Index does indeed sport a death cross. (…)

• No! The Dow Death Cross! (Oh, Never Mind)