U.S. Small Business Optimism Recovers Modestly

The percentage of companies indicating that now was a good time to expand the business remained low at 10%, the least since August. The percentage planning to add to inventories remained negative for a second straight month while the percentage planning capital expenditures in the next 3-6 months improved m/m to 26%. Nevertheless, it remained below December’s recovery high of 29%.

On the pricing front, a steady 2% of firms were raising average selling prices last month. The percentage planning price increases, however, ticked higher to 17%. Labor’s pricing power improved slightly as the percentage of firms raising worker compensation gained to 23%, up from none early in the recovery. The percentage planning to raise compensation also edged higher m/m to 14%, up from none at the end of the recession.

Chart on the right: looks like a developing margin squeeze, no?

• Household, Small Business Sentiments Seem to Diverge

Eurozone GDP Growth Accelerates, Boosted by France, Italy GDP growth in Germany, eurozone’s largest economy, eases to 0.3%

For the first time since the first half of 2010, all four of the eurozone’s largest economies recorded growth. And for the first time since the first quarter of 2011, the currency area’s economy grew more rapidly than both the U.S. and the U.K.

The combined gross domestic product of the 19 countries that shared the euro was 0.4% higher in the first quarter than in the final three months of 2014, the European Union’s statistics agency said Wednesday. That marked a pickup from the 0.3% growth recorded in the final quarter of last year, but was a slightly weaker outcome than the 0.5% rate forecast by many economists.

On an annualized basis, the economy grew 1.6%.

Germany’s economy, the eurozone’s largest, slowed more sharply than expected, recording growth of 0.3% compared with 0.7% in the previous period. But France and Italy both exceed expectations, growing 0.6% and 0.3% respectively, having stagnated in the previous period.

Outside the eurozone, there was most positive news for the growth prospects of Central and Eastern Europe. Romania recorded the fastest expansion of those European nations that have released growth figures, with its economy expanding 1.6%. Bulgaria’s economy also accelerated to record growth of 0.9%.

Composite leading indicators point to stable growth momentum in the OECD area

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to stable growth momentum in the OECD area as a whole as well as in Japan, Germany and the United Kingdom. The outlook is also for stable growth momentum in India.

In the euro area, growth momentum continues to strengthen, particularly in France and Italy.

Signs of easing growth momentum are emerging in the United States, although these may reflect transitory factors. The CLIs continue to point to easing growth in Canada and China and to a loss in growth momentum in Brazil and Russia.

I question the use of “stable growth momentum” in OECD area. One, the LEI has been slowly fading since November. Two, any strength based on better data from France and Italy cannot be trusted.

BTW, Mario Draghi’s QE is not producing the desired effects. Since the March 9 launch, 10-Y yields are up 40 bps in Germany and France, 57 bps in Italy and Spain and 68 bps in Portugal and Greece while the euro has gone up nearly 4%.

China Cranks Up Stimulus China is launching a broad stimulus to help local governments restructure trillions of dollars in debts while prodding banks to lend more.

In a directive marked “extra urgent,” China’s Finance Ministry, central bank and top banking regulator laid out a package of measures to jump-start one of the government’s most-important economic-rescue initiatives: a debt-for-bond swap program aimed at giving provinces and cities some breathing room in repaying debts.

Central to the directive, which was issued earlier this week to governments across the country and reviewed by The Wall Street Journal, is a plan by the People’s Bank of China that will let commercial banks use local-government bailout bonds they purchase as collateral for low-cost loans from the central bank. The goal is to provide Chinese banks with more funds to make new loans.

(…) new local bonds can be used as collateral to tap a wide variety of loans from the central bank, be they short-term, medium-term or long-term. (…)

Data released Wednesday show investment in factories, buildings and other fixed assets rose 12% in the first four months this year from a year earlier, the slowest pace since December 2000. The bigger-than-expected drop was driven by anemic investment in property, which has been a drag on the economy. Meanwhile, factory output and retail sales in April also came in below expectations. (…)

In its biggest restructuring initiative, the Finance Ministry is allowing heavily indebted local governments to sell new bonds with explicit government guarantees to replace their existing debts: mostly bank loans. The aim is to reduce localities’ financing costs while giving them more time to pay off debts. (…)

To give banks more incentives to purchase the bonds, the new directive from the Finance Ministry and other agencies requires localities to raise the yields on the bonds, saying the returns should not be lower than the prevailing Chinese treasury yields. At the same time, according to the order, yields on the new local bonds are capped at 30% above the treasury yields. Currently, one-year Chinese treasury bonds yield about 3.2% while 10-year treasurys yield 3.5%. (…)

China Housing Market Shows Signs of Life

China’s housing sales in the first four months fell 2.2% to 1.49 trillion yuan ($240.3 billion) from the same period a year earlier, marking an improvement from the 9.2% decline in the first quarter, according to the National Bureau of Statistics Wednesday.

In April alone, housing sales rose 16.0% from a year earlier to 485.4 billion yuan, according to calculations by The Wall Street Journal based on the official data. (…)

New construction starts for residential and commercial property in the first four months fell 17.3% from a year earlier to 358 million square meters. That compares with an 18.4% decline recorded in the first quarter.

From the latest CEBM Research survey:

According to survey feedback, policy easing conducted at the end of March 2015 has had a greater impact on secondary market sales than it has had on new home sales. Developers surveyed believe that sales activity will continue to experience a seasonal rebound, but they do not believe that the current sales momentum is sustainable. Survey respondents reported that the market response to interest rate cuts made last November is already fading. (…)

Property developers believe that the full effects of policies announced on March 30th, 2015 were not completely realized due to lending and administrative constraints, such as the lengthy approval process for first-time home buyer mortgage subsidies; tight funding quotas for the Housing Provident Fund in second-tier cities; and unwillingness by commercial banks to lower the down deposit ratio for purchases of a second home to below 40%.

At the same time, these developers expressed the belief that continuation of interest rate easing is unlikely to have a strong impact as banks remain hesitant to increase property related lending and as potential homebuyers refrain from purchasing in expectation of further rounds of policy easing.

U.S.: Downtrend in oil production is accelerating

The downtrend in U.S. oil production is accelerating. Data released by the Energy Information Administration (EIA) expects crude oil production from new wells to fall to 263 thousand barrels per day in June, the lowest level in two years. As today’s Hot Charts show, this impact is magnified by the continued rise in the depletion rate of existing wells, now running at record 349 thousand barrels per day. As a result, the EIA now expects U.S. crude oil production to drop by 86,000 barrels/day in June, the largest reduction since 2007. Though some people may still fret about potential production stickiness due to the inventory of drilled but uncompleted wells, the opinion of NBF energy analysts is that the backlog is not large enough to be an impediment for continued production declines. Our colleagues estimate that even if the pullback in rig counts was to reverse today and move higher as quickly as it dropped, U.S. crude oil output would still likely decline through the rest of the year.

IEA: Battle for Oil Market Share Just Beginning A global battle for market share between OPEC and non-OPEC producers that has fed into the biggest slump in the price of oil since the financial crisis is just getting started.

In its closely watched monthly oil market report, the IEA said that the producer group’s tactic is working to some extent. U.S. shale oil producers have undergone months of cost-cutting that has halted their relentless increase in production. The IEA expects U.S. shale oil output growth to slow by 80,000 barrels a day this month.

However, other non-OPEC producers continue to ramp up production. Russia’s output jumped an unexpected 185,000 barrels a day year-on-year in April and Brazilian production was up 17% in the first quarter, the IEA said. Meanwhile, production in China, Vietnam and Malaysia has also shown persistently strong growth. The IEA expects Chinese oil production to increase by 100,000 barrels a day this year to 4.3 million barrels a day. A recent rally in oil prices could also give U.S. shale oil producers a fresh lease on life. (…)

“It would thus be premature to suggest that OPEC has won the battle for market share. The battle, rather, has just started,” the IEA said.

In its Wednesday report, the Paris-based energy watchdog raised its forecast of 2015 non-OPEC production growth by 200,000 barrels a day to 830,000 barrels a day. (…)

So far though, [OPEC] shows no signs of departing from its current strategy. Its output rose to 31.2 million barrels a day in April, its highest level since September 2012 and an increase of 1.4 million barrels a day compared with a year earlier, the IEA said.

Indeed, the group’s November decision not to cut output in defense of prices was only “the first step in a plan that includes actually ramping up output and aggressively investing in future production capacity,” the IEA said. While non-OPEC producers are cutting costs, Kuwait, Saudi Arabia and the United Arab Emirates are all expanding their drilling programs. Iraq’s oil production hit its highest level since 1979 in April and Iranian supplies hit their highest since July 2012.

The aggressive push to increase output flies in the face of the IEA’s forecast of demand for OPEC’s oil, which it lowered by 300,000 barrels a day in response to higher expectations of non-OPEC supply. It sees demand for OPEC’s oil at 29.2 million barrels a day this year, well below the group’s current production levels. OPEC itself, on the other hand, upped its expectations of demand for its oil earlier this week to 29.3 million barrels a day.

Via FT Alphaville:

Hmmm…