SOFT PATCH
A steep fall in industrial production suggests the US economy is going through its worst growth patch since the financial crisis, dampening expectations of any imminent rate hike by the FOMC.
Industrial production fell 0.6% in March, according to official data from the Federal Reserve, missing expectations. Analysts polled by Reuters were anticipating production to have fallen by a mere 0.3%.
The decline was led by a 17.7% drop in oil and gas drilling, linked to the recent oil price slump. Manufacturing fared better, seeing a 0.1% increase in output, the first rise since November.
The data bode ill for gross domestic product. Looking at the three months to March, industrial production fell by just over 0.2% (an annualized decline of 1.0%), its worst performance since the second quarter of 2009. Sitting alongside a 1.3% quarterly drop in retail sales, which was the steepest decline since the first quarter of 2009, it’s becoming increasingly clear that US economic growth slowed sharply in the opening quarter of the year.
This slowdown effectively kills any chance of policy makers hiking interest rates in June, and adds to fears about the corporate outlook. Worries have intensified that, not only are lower oil prices damaging the energy sector, but also that the dollar’s strength is acting as a drag on the economy, hitting overseas earnings in particular. (…)
However, the possibility of interest rates rising later this year should not be completely ruled out. Both factory output and retail sales rose in March, suggesting the official data are starting to corroborate forward-looking survey data, which have strengthened in recent months. The big question is whether this nascent upturn will show further signs of gaining momentum.
The Empire State Factory Index of General Business Conditions declined to -1.19 during April after slipping to 6.90 in March. The figure, from the Federal Reserve Bank of New York, was the first negative reading since December and remained well below the 27.41 peak reached last September. The latest fell well short of expectations for 6.8 in the Action Economics Forecast Survey.
The weakest reading was employment which backpedaled into negative territory. During the last ten years, there has been a 71% correlation between the index level and the m/m change in factory sector payrolls. Also remaining negative were the new orders, unfilled orders, average workweek and delivery times figures. Improvement was evident in shipments and inventories.
The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo recovered to 56 in April (21.7% y/y) following a plunge to 52 in March, revised from 53. It was the highest level since January. During the last ten years, there has been an 80% correlation between the y/y change in the home builders index and the y/y change in single-family housing starts.
The index of single-family home sales recovered to 61 (22.0% y/y). The index of expected sales during the next six months jumped to 64 (14.3% y/y), its highest level this year.
Realtors reported that their traffic index bounced up to 41, the highest level in three months. The figure was one-third higher than twelve months ago.
Housing market activity improved in most of the country this month. In the Northeast, the reading recovered most of its March decline with a 16.2% rise (26.5% y/y). In the South, it increased 9.3% (22.9% y/y) and in the West activity rose 3.7% (24.4% y/y). The figure for the Midwest declined 8.3% (+22.2% y/y).
Registrations climbed 11 percent from a year earlier to 1.65 million autos, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said in a statement Thursday. First-quarter deliveries rose 8.5 percent to 3.64 million cars as a recovery from a two-decade low in 2013 picked up momentum. The March increase was the biggest since a 13 percent jump in December 2013.
Spain reported the strongest car-sales gain among Europe’s five biggest auto markets, as a government program encouraging trade-ins of old vehicles for scrap propelled a 41 percent surge. In the U.K., registrations rose 6 percent to the highest level this century. Germany, Europe’s largest economy, posted a 9 percent auto-sales gain, while demand jumped 9.3 percent in France and 15 percent in Italy, the ACEA said.
CHINA SLOW AND SLOWER
[Cornerstone Macro’s] indicator in question looks at many of the components shown above, such as retail sales, car sales, rail freight, industrial production, and several others, to determine an accurate indicator of the true state of China’s economy.
It finds that not only is China’s economic growth rate not rising at a 7.0% Y/Y rate, but is in fact the lowest it has been in modern history!
China: No Hard Landing
(…) Although slowing, worries about a hard landing still seem overplayed, and the economy may regain some momentum. Markit’s service sector PMI survey indicates that new orders in the services economy – a reliable leading indicator of retail sales – has remained elevated, pointing to stronger domestic consumption in coming months.
Both Markit and NBS manufacturing PMI surveys meanwhile point to stronger factory activity trends than the official industrial production data, suggesting some of the slowdown may prove temporary. However, both manufacturing surveys remain weak by historical standards, highlighting the new phase of slower growth that the Chinese industry appears to have moved into.
We must also remember, however, (as the government is keen to point out) that 7.0% growth is equivalent to 10% growth prior to the financial crisis in terms of the amount of extra output produced, given the economy is comparatively larger in absolute terms.
There’s also scope for further stimulus. China’s Premier Li Keqiang has noted that they are keen to step up their efforts to boost the economy if the slowdown shows signs of hitting the labour market, which is precisely what the PMI surveys are indicating. Markit’s manufacturing and service sector PMIs surveys collectively indicated the first drop in employment for six months in March, led by a further drop in factory payroll numbers and the weakest hiring trend in the service sector since May of last year.
In his first interview with a western media organisation, Mr Li was relaxed, gregarious and clearly in command of his brief during an hour of questioning in the Hong Kong room of the Great Hall, a highly symbolic venue to receive a British newspaper editor.
His main message to the world was China’s continued commitment to the current global financial order, particularly in the wake of Beijing’s move to set up the Asia Infrastructure Investment Bank. (…)
Nothing earth shattering from this interview other than this:
“It is quite easy for one to introduce QE policy, as it is little more than printing money,” he says. “When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.”
He warns that most countries have not yet undertaken the necessary structural reforms to address the root causes of the global financial crisis and compares the world economy to a patient on an “IV drip and antibiotics” who has not been allowed to strengthen their immune system to recover on their own.
And this:
“We don’t want to see further devaluation of the Chinese currency because we can’t rely on devaluing our currency to boost exports,” he says. “We don’t want to see a scenario in which major economies trip over each other to devalue their currencies. That would lead to a currency war. And if China feels compelled to devalue the renminbi in this process we don’t think this will be something good for the international financial system.”
Maybe there is a Chinese type of QE that has yet to kick in…
Over the past three months through March, bank loans are up at an annual rate of 16.9 trillion yuan ($2.7 trillion dollars), the highest since March 2009! Yet despite all that liquidity, real GDP growth continued to move lower. (Ed Yardeni)
OPEC: U.S. Oil Supply Boom to End The booming growth in U.S. oil supplies will end in 2015, OPEC said, citing a significant cutback in the number of drilling rigs.
In its closely watched monthly market report, OPEC said U.S. oil supplies would grow to about 13.65 million barrels a day in the second quarter of 2015 and then level off, beginning to decline in the second half of the year.
Meanwhile, OPEC said demand for its own crude would rise slightly to about 29.3 million barrels a day, while demand for non-OPEC supplies would fall by about 165,000 barrels a day.
The U.S. rig count decreased by 238 rigs over four weeks in March to 1,110 rigs, decelerating the pace from last month’s 335 rigs taken out of service, OPEC said, quoting data from Baker Hughes.
The Vienna-based organization kept global oil demand growth unchanged at 1.17 million barrels a day for 2015.
In reality, the decline is starting just about now:
U.S. CRUDE OIL OUTPUT ENTERING DECLINE STAGE
Data released earlier this week by the U.S. Energy Information Administration (EIA) revealed that the recent plunge in oil rigs is finally starting to negatively impact U.S. crude oil output. As today’s Hot Charts show, production from new wells is no longer keeping up with the ever rising depletion rate at existing wells. As a result, the EIA is now forecasting a decline of 57,000 barrels/day in U.S. crude oil output for the month of May. As shown, this would be the second decline in a row and biggest drop in over eight years. (NBF)
(…) The bottom line for the bank is that while the hit to jobs, growth and investment from lower oil prices came earlier than expected, it isn’t any larger. The bank now says the Canadian economy will grow 1.9 per cent for the year, down from the 2.1-per-cent pace it expected in January. (…)
The Bank of Canada has long called for a “soft landing” in the national housing market. It reiterated that prediction on Wednesday, but for the first time raised explicit concerns about the possibility of corrections in several key housing markets and warned of the risks to the broader economy should regional housing market downturns start spilling across provincial borders.
“The adverse impact of the oil price shock in Alberta and continued robust price growth in Toronto and Vancouver suggest a risk of a correction in these markets,” the Bank of Canada warned in its latest monetary policy report. “While historical experience suggests that localized Canadian house price cycles, both in terms of the factors behind the boom as well as the correction, have typically not spilled over to other regions, it would be a major event if it occurred.” (…)
The Federal Reserve’s first interest rate rise risks triggering a jolt to bond markets that could surpass the turmoil the central bank inadvertently set off in 2013, the International Monetary Fund has warned.
José Viñals, the director of the IMF’s monetary and capital markets department, warned of a “super taper tantrum” and spiking yields as the US central bank gets nearer to lifting rates from near-zero levels. “This is going to take place in uncharted territory,” he said in an interview. (…)
In the report, the IMF said a sudden rise of 100 basis points in 10-year Treasury yields was “quite conceivable” once the market wakes up to the possibility of the first rise in official rates in nearly a decade. “Shifts of this magnitude can generate negative shocks globally, especially in emerging market economies,” the IMF said.
Higher US interest rates could expose particular vulnerabilities in emerging markets where companies have issued large amounts of debt in dollars, the IMF said, adding that between 2007 and 2014 debt had grown faster than GDP in all major emerging markets. (…)
“Markets could be increasingly susceptible to episodes in which liquidity suddenly vanishes and volatility spikes,” it said, pointing to episodes including the price gyrations seen in US Treasury prices last October.(…)
SENTIMENT WATCH
(…) consider that the first-quarter total of permits issued for single-family homes shows a 5.6% increase from last year’s first quarter. In the same span, actual construction starts for single-family homes are up 4.4%. That’s not a gangbusters gain, but it is a healthy increase for a first quarter rocked by harsh weather in some regions.
Real estate website Zillow Inc. estimates that 5.2 million U.S. renters are interested in buying homes, based on its market surveys done earlier this year.
Moving target:
Our China Real Economic Activity Index Slowed To Just 1.6% YY In 1Q
