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 SEPTEMBER 2014)

Today (post internet outage): Strong retail sales, oil windfall? U.S. housing.
U.S. Retail Sales Rose 0.6% in August

Retail and food sales rose a seasonally adjusted 0.6% from July, the Commerce Department said Friday. Sales in July advanced 0.3% from June, up from an initial estimate that said spending had been unchanged. The revision largely dispelled earlier fears of a summer lull.

Hot smile I was right on that.

Friday’s report showed relatively broad-based gains. Even after excluding sales of cars, sales rose 0.3%. Retailers and restaurants also benefited from declining gas prices. Excluding both autos and gasoline, sales advanced 0.5%.

Total retail sales were up 5% from a year earlier, the largest such gain in more than a year.

The report showed sales grew across a range of retail sectors during the back-to-school season. Sales of building materials rose 1.4%, the largest monthly gain since April, while sales at furnishing and appliance stores rose 0.7%.

Pretty strong report, unsurprising given the strengthening consumer fundamentals. Read on. 

U.S. Import Prices Fall on Cheaper Oil Prices of imported goods fell sharply in August, a sign cheaper oil is helping keep a lid on inflation in the U.S.

Import prices fell 0.9% from July, matching the biggest decline since June 2012, the Labor Department said Friday. The drop fell in line with the forecast of economists surveyed by The Wall Street Journal.

Compared to a year earlier, prices fell 0.4%, ending three months of year-over-year gains.

Excluding petroleum, prices fell 0.1% but were up 0.8% from a year earlier. That marked the largest 12-month advance since the year ended in March 2012.

Oil Glut Ignites Gasoline Price Swoon Gasoline prices have tumbled 19% since June and markets are signaling further relief at the pump for consumers.

(…) The average retail price for a gallon of regular gasoline was $3.42 on Thursday, down 3.8% from the same period in 2013, according to motor club AAA. For this time of year, gasoline prices are at their lowest level in four years. (…)

Oil prices have broken the $100 floor that existed since 2010. Weak Chinese and Euro demand coupled with increased supply (U.S., Lybia) explain the recent slip from $115 to $100. However, the break below $100 is because Saudi Arabia has seemingly decided to preserve market share rather than protect its budgeted price level.

In the U.S., gasoline futures have plunged $0.28 to $2.50 since Labor Day, meaning that retail prices should drop to the $3.20 area over the next six weeks, another 6.4% decline. In all, gasoline prices are $0.35 (-10%) lower than at this time last year. This equates to a $37.5B quarterly saving for consumers, potentially boosting expenditures by 1.2% annualized.image

U.S. HOUSING

New applications for purchase mortgages declined another 2.6% w/w last week and are now down -11.7% Y/Y. That is in spite of mortgage rates being down 53 bps Y/Y. Raymond James notes that

(,,,) credit availability has seen little change since the beginning of the year, creating a meaningful deterrent to a more robust housing recovery. We note, relative to credit standards prior to 2007, mortgage availability is roughly seven times more difficult today according to this index. In a recent Federal Reserve Bank of New York survey, 65.6% of renters in the sample said it would be somewhat or very difficult for them to get a mortgage while only 5.5% thought it would be very easy.

Americans have no problem borrowing for cars and credit card offerings have been rising rapidly lately. Yet, mortgage availability remain significantly constrained. It must be just a matter of time given rising employment and incomes and improving bank balance sheets. Developers must be praying for a change given the rise in their inventory of unsold homes as this BloombergBriefs chart illustrates:

image

CURRENCIES
Dollar’s Rise Starting to Have Far-Reaching Effects After a lengthy period of inaction in currency markets, things have become interesting.
Ready or not – currency volatility is back

(…) But now the fortunes of major economies are diverging and a long-awaited rally in the dollar is shaking the market back to life. Since the start of July, the greenback has gained 5.5 per cent against the euro, as European Central Bank easing finally curbs the strength of the single currency. It has climbed 5 per cent to a six-year high against the yen; and gained 5.5 per cent against sterling as doubts grow over the timing of UK rate rises and the campaign for Scottish independence gains traction.

Just what the world needs now:  a weak yen and a weak euro where growth is too low, and a strong dollar to keep commodities and inflation contained.

NEW$ & VIEW$ (11 SEPTEMBER 2014)

Today: Oil prices tumble, French economy stagnates.
IEA Numbers Pile On to Prices It’s hard to look beyond oil prices as the main news for the energy sector again on Thursday, with yet more forecasts of declining demand growth.

Once again, the IEA has cut its estimate for oil demand growth for this year and next, saying the recent demand slowdown is “nothing short of remarkable.” (…) The IEA said Saudi output fell by 330,000 barrels of oil per day in August.

image

China Inflation Stays Subdued as Producer Prices Extend Decline China’s consumer inflation eased to a four-month low in August while factory-gate prices extended their decline to 30 months, adding room for government stimulus to support the economy amid a property slump.

The consumer price index rose 2 percent from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the 2.2 percent median estimate in a Bloomberg News survey and 2.3 percent in July. The producer price index fell 1.2 percent, compared with projections for a 1.1 percent drop.

PBOC to Drain Cash From System

China’s central bank is set to withdraw cash from the financial system this week for the first time since early August, reflecting concerns about accelerating inflows of speculative funds.

The move followed the yuan’s surprisingly strong gains in recent days and Chinese Premier Li Keqiang‘s repeated pledge to advance structural reforms and avoid relying on overly strong economic stimulus measures.

Speculative capital from overseas, known as hot money, has been drawn to China by a strong yuan and Beijing’s reluctance to use lower interest rates or other forms of aggressive monetary-policy easing to counter a slowing economy. Hot money inflates prices for property and other assets, and adds to risks in the nation’s banking system.

The People’s Bank of China will drain a net five billion yuan ($814 million) from the money market this week, traders participating in the operation said Thursday.

The PBOC previously withdrew funds from the market in the week of Aug. 3, draining a net 20 billion yuan. The PBOC injected a net seven billion yuan last week. (…)

French economy mired in stagnation

The French economy continued to stagnate in the second quarter of 2014, signalling an on-going lack of growth in the euro area’s second-largest member state. The data was accompanied by the French finance ministry slashing their 2014 growth forecast from 1.0% to 0.5%. However, a poor start to the third quarter suggests that even this lowered estimate may prove optimistic.

Right on cue today:

  • France Drops Growth Outlook France lowered its growth forecast again and warned it will need more time to bring its public deficit in line with European Union rules.

Finance Minister Michel Sapin said the French economy would grow just 0.4% in 2014, compared with the 0.5% growth forecast issued only a few weeks ago. In 2015, France’s economy will grow 1%, versus the government’s previous forecast of 1.7%, he said on Wednesday.

France will also have to push back its plans to get its budget deficit within 3% of economic output by another two years to 2017, he said, the latest sign of the economic challenges the French government faces.

Instead, Mr. Sapin projected France’s public deficit would stand at 4.4% of gross domestic product in 2014, rather than falling to 3.8%, as the government had previously projected. Spending cuts in 2015 should help the government cut the public deficit to 4.3% next year, and below 3% in 2017, he said. (…)

Nerd smile “We are not asking for any change in European rules, we are not asking for any suspension, or for any exception to be made for France or any country,” said Mr. Sapin. “We are asking for everyone to take into account the economic reality, growth that is too weak and inflation that is too low.” (…)