Q2 BOUNCE WATCH

U.S. Retail Sales Are Sluggish

Overall retail sales including food services & drinking places during April were little-changed (+0.9% y/y) following a 1.1% March increase, revised from 0.9%. A 0.2% rise had been expected in the Action Economics Forecast Survey.

Sales excluding autos gained 0.1% (-0.0% y/y) after a 0.7% advance, revised from 0.4%. During the last ten years, there has been a 92% correlation between the y/y change in retail sales and the change in real GDP.

Sales in the retail control group exclude autos, gasoline, building materials & food services and align with the consumer spending estimates in the GDP accounts. Sales in this grouping were unchanged last month (2.1% y/y) after a 0.5% rise.

A 0.4 decline in auto sales (+4.5% y/y) held back the rise in overall retail spending. It followed a 2.9% jump that was making up February’s 2.2% shortfall. The latest decline compares to a 4.0% drop (+2.5% y/y) in unit vehicle sales. Sales of building materials improved 0.3% (4.1% y/y) following a 2.3% jump.

Last 3 months annualized:

• Total retail sales: +2.4%
• Control retail sales: +0.4%
• Motor vehicles & parts: +1.2%

And recall that December and January were negative…

Doug Short’s great charts:

From the FT: Flat retail sales offer no spring bounce Lacklustre US data confound hopes for a rebound

The soggy numbers doused hopes that the freezing start to the year would give way to more robust spending data once better weather arrived. (…)

“We still aren’t really seeing the big recovery that was anticipated in the wake of the weather-depressed first quarter. This just really reinforces the view that a June hike isn’t happening and that September looks the more probable start point” said James Knightley, an economist at ING Bank.

I have been arguing for several months that the strong dollar and weak demand was causing deflation in U.S. consumer goods and was thus impacting nominal retail sales numbers:

U.S. Import Prices Decline Despite Petroleum Price Increase

Import prices declined 0.3% (-10.7% y/y) last month following a 0.2% March fall, revised from -0.3%.

Nonpetroleum import prices were off 0.4% (-2.7% y/y) for a second month. Industrial materials prices excluding petroleum continued downward by 1.1% (-8.6% y/y), about the same as during the prior three months. Building materials prices declined 1.1% (-3.4% y/y). Prices amongst the other end-use categories also continued to fall. Food, feed & beverage prices declined 0.9% (-2.4% y/y) and autos & parts prices were unchanged (-1.9% y/y). Nonauto consumer goods prices slipped 0.1% (-0.8% y/y) while capital goods prices were off 0.3% (-1.3% y/y).

To summarize the expected Q2 bounce, so far (chart from Zerohedge):

• Q2 GDP Forecast Cut To 0.7% By Atlanta Fed

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.7 percent on May 13, down slightly from 0.8 percent on May 5. The nowcast for second-quarter real consumer spending growth ticked down 0.1 percentage point to 2.6 percent following this morning’s retail sales report from the U.S. Census Bureau.

This will not help:

U.S. Business Inventory Growth Is Trimmed, but Still Outpaces Sales

Total business inventories nudged 0.1% higher during March following a 0.2% February rise, earlier reported as 0.3%. During the last three months, inventory growth slowed to 1.1% (AR) from its high of 7.3% late in 2013. Total business sales edged 0.4% higher (-2.1% y/y) following seven consecutive months of decline. It left the 3-month change at -8.2% (AR) versus +11.1% as of last April. As a result, the inventory/sales ratio for March rose to 1.36, its highest level since July 2009.

Inventories in the retail sector gained 0.3% (3.2% y/y) and left three-month growth at 3.1%, still well below the double-digit growth at the end of 2013. Auto inventories increased 0.6% (5.7% y/y). Clothing inventories rose 0.8% (4.5% y/y) and at a 7.1% annual rate during the last three months. Furniture inventories declined 0.5% (+1.6% y/y). General merchandise inventories also fell 0.5% and were down at a 1.0% rate since September. (…)

The 0.4% rise in business sales (-2.1% y/y) left sales declining at an 8.2% annual rate during the last three months. The latest increase reflected a 1.2% gain (0.9% y/y) in retail spending.

 

Can Italy’s nascent recovery be sustained?

(…) In large part, the Italian economy — like the rest of the eurozone — has been juiced up by external factors. Low oil prices have given households more disposable income and a drop in the value of the euro has bolstered exporters which form an important chunk of Italian business. The European Central Bank’s quantitative easing programme has also helped keep interest rates low, which may have spurred extra borrowing. But there are still doubts on the Italian economy’s ability to stand on its own two feet — especially if those factors begin to reverse, as they have partially in recent weeks. Both consumption and investment in Italy have shown some tentative signs that they are picking up, and may even accelerate. But it will take more months of data to be confident that they can truly drive a sustained recovery.

The Italian labour market has been a discordant note to the better economic mood-music in recent months. Unemployment actually rose back up to 13 per cent in March, marking the second consecutive monthly increase after what looked like the beginning of a steady decline. Youth unemployment, which is well over 40 per cent, also rose. The data has puzzled economists because it is not being driven by an expansion of the labour force, as discouraged workers finally believe they have a chance of finding jobs again, which would be consistent with the early stages of a recovery. Instead, it has been caused by a decrease in the number of employed workers, and an increase in the number of unemployed workers. Unemployment is often a lagging indicator, which may explain this, but eventually joblessness should begin to drop consistently, and for the right reasons.

The budding rebound may partially be attributable to political stability. Domestically, Mr Renzi does not appear to be facing major threats to his leadership — either within the ruling centre-left party, or from a fractured and weakened opposition. Combined with his generally business-friendly agenda of economic reforms, this has arguably created an improved climate for companies to put money into new projects. Internationally the situation has improved. Last year’s economic setbacks for Italy are often blamed on the Ukraine crisis given the deep business ties with Russia. But even if it is far from resolved, the Ukrainian conflict has at least stabilised. A new flare-up could be very destabilising economically for Italy, as could — for different reasons — a Greek exit from the euro or a default.

Hard economics hit Southeast Asia consumer dream

(…) Indonesia’s economy — Asean’s largest by far — slowed to its lowest pace of annual growth in more than five years in the first quarter of this year, driven in part by a fall in government spending and flat consumer demand.

Thailand, the region’s second-biggest economy, has seen consumer confidence steadily decline alongside rising household debt. Malaysia, number three in Asean, has recorded weak manufacturing wage growth and credit card spending. (…)

One big drag on consumer spending is rising household debt in countries such as Thailand and Malaysia. Rural income has also been falling sharply in some areas because of depressed prices for commodities grown there such as rubber and rice. Earnings in Thailand’s countryside fell 12.5 per cent year-on-year in the first quarter of this year, according to CLSA.

Cars have been one of the worst affected consumer sectors in the region, with sales tumbling 12.1 per cent year-on-year in March in Indonesia — the seventh straight fall. In Thailand, the industry has been hard hit by the end of generous government tax breaks on new purchases. Kevin Kwek, a senior analyst at Bernstein Research in Singapore, argues that Indonesia is suffering a “temporary fallback”, whereas in Thailand the decline is more serious because its population is ageing and the proportion of wage-earners falling. (…)

Changing of the guard?

Russia’s Economy Seen Contracting Again in 2016 Downturn to take greater toll than previously expected on neighboring countries

Lower oil prices, sanctions and weakening investor confidence will push the Russian economy into a deep contraction this year, the EBRD said, although it now expects output to fall by 4.5%, having forecast a decline of 4.8% in January. However, in its first forecasts for 2016, it sees the economy contracting again, by 1.8%. For both years, its forecasts are more gloomy than those of the government, which projects growth of between 1.5% and 2.5% in 2016.

While Russia’s economic contraction may not be quite as severe as expected at the start of the year, the EBRD now sees it having a more damaging impact on neighboring countries.

During its oil-boom years, Russia attracted migrant workers from Eastern Europe and Central Asia, and many of them have lost their jobs and are returning home. The EBRD estimates that “hundreds of thousands” are back in Tajikistan and Uzbekistan, while the numbers in the Kyrgyz Republic “may be significant.”

Combined with the ruble’s depreciation, that has reduced the flow of money those workers had been sending back to their families, and which accounted for a big chunk of foreign-exchange revenue in their home countries. The EBRD described the rate at which remittances from Russia are dropping as “alarming,” and close to the more than 20% collapse seen in 2009, following the onset of the global financial crisis. (…)

In addition to four countries in central Asia and four other countries in Eastern Europe, the EBRD also lowered its growth forecast for Ukraine, where it now sees output falling by 7.5% in 2015 as a result of the conflict in its eastern, industrial Donbas region, having previously forecast a decline of 5%. (…)

Saudis claim oil price strategy success World’s largest crude exporter seeks to douse US shale surge

The kingdom’s production rose to a record high of 10.3m barrels a day in April and there is no sign that it plans to reverse its policy at next month’s meeting of Opec, the producers’ cartel, in Vienna.

“There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils,” a Saudi official told the Financial Times in Riyadh, giving a rare insight into the kingdom’s thinking on oil strategy. (…)

The Saudi official said the price of oil had now “reached a bottom” and it “doesn’t look like it is going back”.

But experts say it is too soon to say whether Saudi Arabia is succeeding in increasing its market share. Data from 2011-14 show that while its share of imports to India and Japan has grown, in China it has lost out to Opec peers Iran and Iraq. (…)

Wait, wait:

Shale-Oil Producers Ready to Raise Production After slashing production for months, U.S. shale-oil companies say they may bring rigs back into service, setting up the first big test of their ability to quickly react to rising crude prices.

Last week, EOG Resources Inc. said it would ramp up output if U.S. prices hold at recent levels, while Occidental Petroleum Corp. boosted planned production for the year. Other drillers said they would open the taps if U.S. benchmark West Texas Intermediate reaches $70 a barrel. WTI settled at $60.50 Wednesday, while global benchmark Brent settled at $66.81. (…)

Twenty-two consecutive weeks of aggressive cuts have left the industry with 930 fewer rigs, a 58% cut from their 1,609 peak in October, according toBaker Hughes, which tracks drilling activity. (…)

Houston-based Occidental Petroleum raised its production growth outlook for this year by 20,000 barrels a day. It now expects to add between 60,000 barrels a day and 80,000 barrels a day to last year’s production average of 591,000 barrels a day. Continental Resources Inc. Chief Executive Harold Hamm said that a $70 a barrel for U.S. oil is a price “that turns it on for us.”

And Jim Volker, chief executive of the largest Bakken Shale producer Whiting PetroleumCorp., also said last week that the company would ramp up production at around $70 a barrel for WTI. (…)

Stan Druckenmiller Sees ‘Massive’ Problem Caused by Aging