Chinese power consumption slows down, Eurozone charted and history lesson(s).
Americans Borrow for Cars, Less So for Homes
Americans displayed a selective willingness to borrow money during the spring, taking out new auto loans at the fastest pace in nearly eight years while fresh home loans tumbled to the lowest level since 2000.
Total outstanding household debt—including mortgages, credit cards, auto loans, student loans and home-equity lines—sank $18 billion between April and June to $11.63 trillion, according to a report released Thursday by the Federal Reserve Bank of New York. It marked the first decline after three quarters of increases.
According to the report, student-loan balances increased $7 billion, bringing the nation’s student-loan tab to $1.12 trillion. Credit-card debt outstanding rose by $10 billion to $669 billion, slightly below year-ago levels.
The trends suggest Americans continue to recover from the recession by paring existing debt and taking on new loans judiciously. Defaults are generally at low levels, with the share of Americans’ debt that was seriously overdue falling to 4.5%, the lowest level since the start of 2008. (…)
Auto lenders made $101 billion in new loans in the second quarter, the highest since the third quarter of 2006. Total auto-loan balances grew by $30 billion to $905 billion. (…)
By contrast, the amount of new mortgage loans extended in the quarter fell to $286 billion, the lowest level since 2000, and half the $589 billion in the second quarter of 2013.
Total mortgage debt outstanding fell by $69 billion from the prior quarter to $8.09 trillion. Home-equity lines of credit fell by $5 billion on a quarterly basis to $521 billion. (…)
Banks Load Up on Cheap Debt Banks and other financial companies world-wide are issuing bonds in the U.S. at a record pace, taking advantage of this year’s surprising slump in interest rates and a brightening outlook for the sector.
These firms’ debt sales hit $391 billion this year through Thursday morning, a 32% jump from the same period last year and a 19% rise from the same span of 2007, a year of record issuance, according to data provider Dealogic. That is a higher year-over-year increase than in the broader U.S. corporate-bond market. Sales by companies overall have exceeded $1 trillion so far this year, a 5% rise from the year-ago period.
Fixing costs low, just before interest revenue begin to lift. Smart move.
CHINA POWER CONSUMPTION SLOWS DOWN
July power consumption was up 3.0% Y/Y after +5.7% in June and +5.3% in the first half 2014.
EUROZONE CHARTED
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U.K. Keeps Momentum in Second Quarter With 0.8% GDP Growth The U.K. economy maintained its momentum in the second quarter as output finally surpassed the level seen before the global financial crisis.
Meanwhile,
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EU raises fears over Russian aid convoy Concern trucks could be diversion while military crosses elsewhere
“I am very alarmed by reports Russian military vehicles may have crossed the border this morning,” Philip Hammond, Britain’s foreign minister, said.
“If there are any Russian military vehicles in eastern Ukraine, they need to be withdrawn immediately or the consequences could be very severe.”
Linas Linkevicius, Lithuania’s foreign minister, said he had reports of “70 pieces of military equipment” crossing the border from Russia into Ukraine overnight. “We see that the escalation continues,” he said.
Mr Linkevicius’ complaint came after journalists from The Guardian and The Telegraph newspapers reported seeing some two dozen military personnel carriers cross the border into Ukraine.
The Telegraph witnessed a column of vehicles including both armoured personal carriers and soft-skinned lorries crossing into Ukraine at an obscure border crossing near the Russian town of Donetsk shortly before 10pm local time.
The Ukrainian and Western governments have long accused Russia of filtering arms and men across the border to fuel the separatist insurgency in Ukraine’s Donetsk and Luhansk regions, but such an incident has never before been witnessed by Western journalists.
The convoy, which included at least 23 vehicles, appeared to be waiting until sunset near a refugee camp just outside Donetsk, before moving towards the crossing without turning off headlights or making any other attempt to conceal itself.
While the force did not seem to be a substantial invasion force, it confirms that military supplies are moving across the border. While the APCs carried no visible markings the fuel tankers and soft-skinned trucks in the convoy bore black Russian military number plates.
Stocks Could Ignore Rate-Rise History Lesson Federal Reserve rate increases offered little more than a stiff headwind to the stock market In 1994. But after years of ultralow rates, stocks may not so easily weather another rates storm.
(…) In The Wall Street Journal’s August economic forecasting survey, 75% of respondents said they expect the Fed to tighten by the first half of next year, up from 56.5% who thought so in May.
For anyone trying to gauge how rate increases might affect markets, 1994 offers a natural analog. Back then, investors had become accustomed to low rates—it had been five years since the Fed had tightened policy—and so were caught offsides when the central bank made its move. But while bonds got trounced, the damage to the stock market was short-lived. At its worst point, the S&P 500 was down all of 5.9% from the start of that year, but it finished out 1994 with a loss of just 1.5%. And with dividends reinvested, it posted a gain of 1.3%.
But an important consideration is how much lower interest rates are now, and how those low rates have led investors and companies to behave.
The yield on the 10-year Treasury note at the start of 1994, at 5.8%, was about 3.2 percentage points above the rate of inflation. The current yield of 2.4% is just 0.3 percentage points higher than inflation. That creates a stark calculus for anybody trying to generate income in the bond market. So ordinarily risk-averse investors have pushed into stocks—particularly yield-generating issues, such as real-estate investment trusts. And companies have done their part to attract those investors. (…)
If stocks are more bond-like than they were heading into 1994, the risk is that they will have a more bond-like reaction to rising rates, and fall. Adding to the risk, valuations may not be as supportive.
The S&P 500 now trades at about 17.3 times the past year’s earnings, a little bit lower than the 18.3 price/earnings multiple it had heading into 1994. An important difference is that in 1994 profits accelerated, with S&P 500 earnings increasing by 18%. Such a gain seems unlikely now, when profit margins are at record highs and labor and equipment costs are primed to rise. Analysts, who are typically overoptimistic about companies’ future growth, expect S&P 500 earnings to grow by 12% next year, according to Thomson Reuters I/B/E/S.
Indeed, Yale University economist Robert Shiller‘s cyclically adjusted price/earnings ratio, which seeks to smooth away temporary swings in earnings, now stands at 25.6. That is a historically rich valuation and is one-fifth higher than the 21.2 it carried at the end of 1993.
Interestingly, the Rule of 20 P/E started the year 1994 at 20.2 (S&P 500 at 482). It declined all year long as profits rose 18% and equities essentially marked time while inflation stabilized around 2.5-2.7%. The Rule of 20 P/E reached a low of 17.1x in December 1994, deep into the “lower risk” area. This is when the steady climb in equity prices began. Much more useful than straight or CAPE P/E, isn’t it?
Investors Pour $680 Million Into U.S. Junk Bonds
Investors poured $680 million into funds dedicated to low-rated corporate debt in the week ended on Wednesday, according to fund tracker Lipper, snapping four weeks of declines that included the previous week’s record $7.1 billion weekly outflow.
Observers pointed to a change in sentiment in early August for so-called junk bonds, as institutional buyers stepped in hunting for bargains.
I mean, just to get to neutral, not tight, would mean at least 200 basis points of rate moves.
