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$ (12 JUNE 2015): Q2 Bounce!

Q2 BOUNCE WATCH
US retail sales upturn adds to optimism on economy

Sales surged 1.2% in May, and a flat April was revised higher to show 0.2% growth. The upturn pushes sales 1.7% higher so far in the second quarter. That compares with a 1.0% decline in the first quarter.

Over the latest three months, sales are 1.5% higher than the prior three months, which is the best performance since June of last year. (…)

The official data also showed core sales rising for a third month after declining in the first two months of the year. The 0.5% increase in May follows a 0.3% rise in April and lifts core sales – a useful guide to GDP trends – 1.0% higher than the first quarter.

Upward revisions to March core sales data also now means core sales rose 0.3% in the first three months of the year, suggesting GDP could be revised higher from its current estimate (which points to a 0.7% annualised decline).

US core sales and GDP final sales

Not only have Markit’s PMI data shown the economy to have fared better in the first quarter than the downturn signalled by the latest GDP data, but also point to GDP rising by a solid 2-3% in the second quarter alongside buoyant employment growth. The PMI’s Employment Index hit a post-recession high in May, correctly anticipating the upturn in non-farm payroll growth.

The steady corroboration of the buoyant survey data from the recent flow of official statistics builds the case for the Fed to start hiking interest rates, with September looking the most likely date.

The core figures of ex-auto sales and the retail control group both beat expectations and saw upward revisions to earlier months. This implies that the first quarter didn’t end quite as weakly as previously believed and that pent-up consumer demand is finally being released. (…)

Retail control, which is a direct input into GDP, rose 0.7 percent in May following an upward revision to April (0.1 percent vs. flat as previously reported). This bodes well for second-quarter GDP:

on an annualized rate, the growth in retail sales over the second quarter relative to the first stands at 3.6 percent versus 0.9 percent prior to this release. In addition, because the March control group was revised higher as well (to 0.9 percent vs. 0.5 percent), the prior quarter’s annualized growth rate was revised upward to flat from minus 0.6 percent. (…)

The latest retail sales data show that the U.S. consumer is back. The trend may be even more bullish if the effects of deflation are stripped down and spending on services is factored in.

The retail gain was broad-based, with 11 of 13 major categories rising, but it doesn’t show the full story. Retail sales are overwhelmingly goods-related. Other than restaurants and bars, there are very few services represented.

This is a problem for two reasons: First, Americans consume more services (65.8 percent of the total) than goods (34.2 percent). Second, there is more of a deflationary trend in goods than services.

Goods prices fell 3.1 percent in the 12 months to April, while services inflation rose by 1.7 percent. So while the Street focuses on retail sales as a proxy for consumer spending, it is not the best measure.

The other issue is that retail sales data are not adjusted for inflation, making interpretation of trends difficult. (…)

  • The WSJ:

The forecasting firm Macroeconomic Advisers now projects the first-quarter figure will be revised to a flat reading and estimates a 2.5% advance in gross domestic product for the second quarter. That forecast would put first-half growth at the same pace as last year. PNC projects the economy to grow at just above a 3% pace in the second quarter. J.P. Morgan Chase pegs the second-quarter rate at 2%.

Mortgage Rates Top 4% in Test for Housing

For the week ended Thursday, the average rate of a 30-year, fixed-rate mortgage rose to 4.04% from 3.87% the previous week to the highest level since last October, according to mortgage-finance company Freddie Mac.

The increase followed a Treasury-market selloff over the past week that drove yields higher on most kinds of bonds. Bond yields rise as prices fall.

Borrowers Underwater on Their Mortgages Decline

At the end of the first quarter, 15.4% of homeowners with a mortgage—or about 7.9 million—had mortgage balances that surpassed their homes’ value, according to real-estate information company Zillow Group Inc., down from 16.9% in the fourth quarter of last year.

But 4 million of the underwater borrowers owed at least 20% more than their homes were worth, Zillow said, leaving them little reason for cheer even as the housing market heats up around them. (…)

More than a quarter of owners with a mortgage on the least-valuable third of homes were underwater, Zillow said, compared with 8% in the most valuable third of homes. Housing markets with the highest levels of negative equity included Atlanta, Chicago and Las Vegas. (…)

On the other hand, some of the country’s hottest housing markets, including San Jose, Calif., Denver and San Francisco all had negative equity rates below 7%. (Chart from Bloomberg)

Underwater and Still Above Normal

Industrial production up by 0.1% in both euro area and EU28

Spotty but ok, especially when considering the weak energy data.image

image
 
Euro Slides Versus Dollar as Merkel Bemoans Currency’s Strength

The euro declined against the dollar as German Chancellor Angela Merkel said the common currency’s strength was making reforms hard in the region’s most-indebted nations, the latest official to comment on exchange rates this week. (…)

A too-strong euro makes it harder ‘‘for countries like Portugal, Spain, Ireland, but especially Spain and Portugal,’’ to harvest the fruits of their economic reforms, especially in terms of exports, Merkel said in a speech at a family-enterprise conference in Berlin. (…)

Emerging Markets Suffer Largest Outflow Since 2008 Global investors yanked $9.3 billion from stocks in developing countries over one week, the most since the 2008 financial crisis.

Asia has been particularly vulnerable with $7.9 billion pulled out of the region’s equity markets, the most in almost 15 years, according to data provider EPFR Global. (…)

“Currency is a major culprit,” Goldman Sachs analysts said in a note to clients this week. The U.S. bank forecasts another 4% drop in emerging-market currencies against the U.S. dollar over the next year.

Massive outflows from China have contributed to the selling in Asia and come in the wake of increased volatility in the domestic market. The Shanghai benchmark lost 6.5% in a single session on May 28, sparking worries about a potential selloff amid a clampdown on margin trading.

The Shanghai Composite Index is still up 12% month to date, bid up by local investors, compared with Hong Kong’s Hang Seng, which is down 1.4%. Broadly, the MSCI Emerging Markets Index is down 2.7% this month. Stocks in Indonesia and India have suffered most this month in Asia, with their benchmarks each down more than 5%.

Indonesia’s rupiah is down 8% this year against the dollar, while Malaysia’s ringgit is down 7.3%. Brazil’s real has lost more than 16% of its value so far this year, as has Turkey’s lira. (…)

NEW$ & VIEW$ (11 JUNE 2015): U.S. Sales Up, Production Not; China So-So, World Not.

U.S. Retail Sales Up 1.2% in May

Retail sales rose 0.2% in April, up from a previously estimated flat reading. Sales rose a revised 1.5% in March, marking the strongest monthly gain in five years.

The three consecutive monthly improvements helped offset declines from December through February.

From a year earlier retail sales are up 2.7%.

Strong auto and gas sales led the May advance, but the improvement was broad based.

Excluding autos, sales increased 1%. And excluding gasoline, sales also rose 1% in May. When excluding both categories, sales were up 0.7% last month.

U.S. Manufacturers Temper Expectations for Hiring and Investment

The National Association of Manufacturers in a quarterly outlook survey found its members now expect capital investment to grow 1.9% over the next 12 months, down from a 2.3% forecast in March. Full-time employment is expected to expand only 0.8%, down from 1.9%, and wages are seen rising 1.6%, down from 1.9%.

And in a new measure of manufacturers’ outlook, NAM debuted an index, now pegged at 51.7, down from 59.9 in March and 61.7 in December. Numbers greater than 50 suggest the manufacturing sector is expanding.

Reflecting the stronger dollar, manufacturers now expect exports to grow only 0.4% over the next 12 months, down from an expected rate of 2.3% in March.

Los Angeles Boosts Minimum Wage

The City Council on Wednesday approved a raise in the minimum wage to $15 an hour by 2020, giving a boost to similar efforts elsewhere but prompting objections from business groups that said it could lead to job losses.

The move will increase the city’s minimum wage in increments from California’s current $9 an hour, ultimately making it more than twice the current federal floor of $7.25. California’s minimum is set to rise by a dollar next year. (…)

The wage boost is part of a shift toward local jurisdictions taking a lead on a policy once considered the province of the federal government. Los Angeles joins Seattle and San Francisco in pushing the wage level to $15 within the next three to five years.

Minimum-wage proposals are being evaluated in at least seven cities, including Portland, Me., Sacramento, Calif., and Olympia, Wash., according to the National Employment Law Project, an advocacy organization that promotes the increases. Last year, 14 states raised their wage floors. (…)

Advocates in Oregon, California and Washington, D.C., have moved to place voter measures on 2016 ballots that call for a $15-an-hour minimum. (…)

In one of the first independent analyses on the impact of rising wages on restaurant companies, Moody’s estimates operating profit margins could shrink by one to four percentage points as a result of more cities and states raising starting pay for hourly workers.

Casual dining chains such as Olive Garden or Applebee’s, which provide table service, are likely to feel the biggest impact because they generally require more servers than fast-food restaurants, and have to make up for shortfalls between the minimum wage and tip wages in certain states.

For casual dining companies with 20% of their labor pool affected by the minimum wage, for example, Moody’s said operating margins could narrow by 2.3 percentage points, to an average of 9.7% from 12%, if the minimum wage rose to $10.10. (…)

Moody’s analysis was based on the federal minimum wage rising to $10.10 an hour from $7.25, as President Obama proposed last year in an effort that ultimately failed in Congress. If more cities or states follow the lead of Los Angeles and Seattle—where $15-an-hour minimums have been approved—restaurant companies could experience more than double the margin declines Moody’s projected.

China Economy: Slowdown Eases, But Slog Remains

Industrial production grew 6.1%, faster than previous months but still near the slowest pace since the global financial crisis. Fixed-asset investment grew 9.9% in May, better than in April, but still well below historical standards.

The all-important property market also continues to mend. Housing sales in May were up 30% from a year earlier. And notably, inventories of unsold homes fell for the first time in over two years, though the levels remain remarkably high, especially in the industrial northeast of the country.

(…) New construction starts remain in contraction territory. (…)

Auto sales grew just 1.2% in May, the slowest pace in four years, notes ANZ.

Total financing in the economy in May was up just 12.2% from a year earlier, the slowest pace in years. (…)

Global Oil Demand Rising, IEA Says Low oil prices and economic growth have helped drive up consumer demand for energy across the world in 2015, the International Energy Agency said, a phenomenon seen from U.S. gasoline stations to Chinese auto dealerships.

(…)The IEA said world demand for oil would increase 1.4 million barrels a day this year, 300,000 barrels a day faster than it previously forecast, to a daily average of 94 million barrels this year. Global demand in 2014 was about 92.6 million barrels a day, the IEA said.

That was driven in part by gasoline demand growth of 4.2% in the U.S., where the IEA noted an “increased willingness of U.S. drivers to put additional ‘miles on the clock.’” American vehicle miles traveled statistics, the IEA said, were up 3.9% in the first quarter of 2015.

In the other giant consumer of oil, China, the IEA said consumer confidence levels were expanding despite a slowing economic engine there. The agency cited “slowing but still relatively buoyant car sales data” in China, along with “resurgent sales” of gas-guzzling sport-utility vehicles. (…)

Some of the demand growth won’t likely be repeated, the IEA said, including colder-than-expected winter conditions in Europe that forced residents to spend more on heating. Gasoline prices in the U.S. have risen 33% to an average of $2.67 this week since a low of $1.98 in January, according to the U.S. Energy Information Administration.

And crude oil prices have rebounded to about $66 a barrel in recent days, from lows of less than $47 a barrel in January, which could put a brake on demand.

“This partial rebound lessens, at least for now, support to demand across much of the world,” the IEA report said, noting that demand would grow by only 1.2 million barrels a day in the second half.

Part of the reason:

Problem is, supply has also increased…

Iraq pumped about 3.8 million barrels a day in May, according to a monthly report by the Organization of the Petroleum Exporting Countries, a level that, if sustained, would set a national record. Saudi Arabia said it put out 10.3 million barrels a day, a historically high figure up almost 600,000 barrels since its pivotal decision last year to abandon its usual strategy of defending oil prices by cutting production.

Overall, OPEC said its 12 nations produced 30.98 million barrels a day in May—the highest level since September 2012 and a nearly 4% increase since May 2014. Together, Saudi Arabia and Iraq accounted for over three-quarters of that growth. (…)

Pointing up Even if prices were to fall to $20 a barrel, “we don’t think we will reduce exports. We will increase production,” Falih Alamri, director general of the state-run Iraqi State Organization for Marketing of Oil, said at an Iraq oil conference in London.

Iraq has no choice, he said. The country owes foreign investors who have pumped billions of dollars into its fields, Mr. Alamri said. Iraq currently exports 3.2 million barrels a day but wants to average 3.3 millions barrels a day this year, he added.

Production could reach 6 million barrels a day by the end of the decade, he said in a speech read on behalf of Iraq’s oil minister, Adel Abdel Mahdi. (…)

Meanwhile

World Bank Cuts 2015 Global Growth Forecast to 2.8%

The development institution on Wednesday said that it now expects the world economy to grow by 2.8%, 0.2 percentage point slower than it estimated in January. (…)

Sharp contractions in Brazil and Russia, alongside weaker growth in Turkey, Indonesia and scores of other developing economies are offsetting healthier growth in Europe and Japan, the bank said in its Global Economic Prospects report.

The bank expects global economic growth in 2016 to accelerate to 3.3%, barring trouble in emerging markets as the U.S. Federal Reserve moves toward raising rates. The forecast also assumes recoveries in the eurozone and Japan take hold.

Although the U.S. economy is gathering steam, a brutal winter sapped output in the first quarter and prompted the bank to downgrade prospects for this year by 0.5 percentage point to 2.7%. (…)