The OECD said the combined gross domestic product of its members increased by 0.4% in the first quarter from the final three months of 2013. That marked a slowdown from the 0.5% rate of growth recorded in the fourth quarter of last year, and the 0.7% rate of growth recorded in the third quarter.
The first-quarter slowdown was largely due to the U.S., where severe weather left output unchanged, following an expansion of 0.7% in the fourth quarter. Economic growth was unchanged at a modest 0.2% in the euro zone, and while Japan’s growth rate surged to 1.5% from 0.1%, that was driven by households front-loading purchases head of an April hike in the sales tax.
Momentum may diverge but this sure looks like synchronized growth, doesn’t it?
Currently, the global economy is showing relatively slow but improving growth, with global industrial production up 3.9% y/y during February. That’s up from a recent low of 1.1% during February 2013.
Output growth has slowed to around 4.5% among the emerging economies over the past year. However, industrial production growth among the advanced economies has rebounded smartly from a recent low of -1.2% during January 2013 to 3.3% in February.
Interestingly, industrial production indexes have been stalled at their record highs for the past two to three years in Brazil, India, Mexico, South Korea, and Taiwan. Still ascending to new highs are Indonesia, Malaysia, Poland, and Singapore.
China’s output, of course, continues to set record highs. However, the country’s economy seems to have slowed much faster during Q1-2014 than widely recognized. China’s real GDP growth is reported on a y/y basis because the underlying data aren’t seasonally adjusted. Haver Analytics, our data vendor, provides a seasonally adjusted quarterly series. While the y/y growth rate was 7.4% during the first quarter, the q/q growth rate (saar) was only 5.7%, the lowest since Q4–
Prince Street’s Ari Merenstein also thinks thant China’s economy is weaker than official numbers suggest:
Given what’s happening on the ground, the 7.4% YoY and 1.4% QoQ GDP growth reported for Q1 looks too high, and some are suggesting that the deflator may be inflated by as much as .5%. Therefore, GDP momentum QoQ could have fallen below 4% in reality.
If the current events were occurring four years ago, global financial markets would be panicking. China is now the second largest economy in the world, and if the current slowdown becomes structural and not just a 3-6 month hiccup, it would have large consequences for the world as a whole. But given how many times in the past four years people have lost their shirts betting on a Chinese hard landing, there is a Pavlovian response to believe that the leadership has it under control this time, as they have done in the past.
I am not sure. I think the Chinese leadership is doing, to my surprise and to their credit, the right things to set China on a development course that doesn’t end like Japan circa 1989. However, we are in the midst of that adjustment at the moment, in a country with over one billion people, with a very complicated economy, with lots of leverage, and what seems to be a rapidly deteriorating property market. As in the late 1990s when SOE reform was implemented, I would not be surprised if China is forced in to two very weak years of GDP to make the transition into the new growth model. Bullish? Long term absolutely, short term absolutely not.
So I would suggest not to focus on the policy “stimulus†response which has begun, and is likely to continue doing so, but instead on whether you believe China can get through the next twelve months in one piece.
My level of conviction on anyone, including the Politburo, being able to predict how this adjustment process will unfold is quite low. So instead of betting for or against it, I would just not be taking any positions on it at all. Unfortunately, given that this is the world’s second largest economy, this is not very realistic – if China goes, it will touch everything. (Via John Mauldin)
TRUCKING INFLATION
Just about everything we buy needs trucking at some point. From Cass Informations Systems:
Truckload linehaul rates rose 5.7% year over year in April – and since February they have increased 4.6%. For the second month in a row, our truckload linehaul cost index reached a new high. Demand continues to improve while capacity tightens (due to the increase in demand as well as freight carriers exiting the industry). Avondale Partners continues to predict increases of 4-6% in contracted linehaul rates in 2014.
All-in intermodal costs (linehaul, fuel and accessorials) reached a new high for our index (tracked since 2005), increasing 1.4% year over year in April and 1.0% from March. Intermodal rates are expected to remain relatively flat in the near term, but rising intermodal volumes, combined with increasing truckload rates, should ultimately lead to further increases in intermodal costs.
Mortgage, Home-Equity Woes Linger Nearly 10 million U.S. households remain stuck in homes worth less than their mortgage and a similar number have so little equity they can’t meet the expenses of selling a home.
Nearly 10 million U.S. households remain stuck in homes worth less than their mortgage and a similar number have so little equity they can’t meet the expenses of selling a home, trends that help explain recent sluggishness in the housing recovery.
At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage—9.7 million households—were “underwater” on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc. While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem.
In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings. Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can’t sell. (…)
In the report, Zillow notes that the least expensive homes—those in the lower third of the price spectrum, which first-time home buyers are most likely to be shopping for—are much more likely to be underwater than higher-priced homes. Nationwide, about 30% of homes in the bottom third of the price range were underwater in the first quarter, compared to 18% of homes in the middle third and 11% of homes in the top third. (Zillow derives its underwater data by matching its database of estimated home values with loan balances from TransUnion, the credit reporting agency.) (…)
After reaching a trough in August of 2013 of 375,000 properties, the number of real estate owned (REO) properties increased 15 percent to 430,000 as of March 2014. The increase in REO properties was broad based, rising in 46 states.
The rise in REOs across most states reflects several inter-related factors. (…) Not surprisingly, the rise in the number of REO properties coincided with the National Mortgage Settlement, which was signed in February 2012 and provided more clarity and standards on foreclosure resolutions which led to the rise in REO properties.
(…) investor demand began to drop off last September partly in response the twin impact of rapid price increases and the rise in mortgage rates. In addition, short sale activity reached its peak in late 2012 and early 2013 and began to decline in subsequent months due to the Mortgage Forgiveness Debt Relief Act of 2007. Some properties that may have avoided foreclosure as short sales are instead being foreclosed upon and contributing to the rise in the REO stock.
The combination of all these major factors began to coalesce during the fall of 2013 and led to a rise in the inventory of REO properties. While the level is lower than the peak in the crisis, it signals that the rapid improvement in the REO stock during the last two years is over and the market has entered a new phase as it continues to process the legacy of the foreclosure crisis.
(…) In her first 100 days, she has emphasized the central bank’s full-employment goal, stressing the need for progress on the broadest measures of joblessness, including the number of people out of work long-term and those who can find only part-time positions.
“This is a huge change — a new definition,†said Allen Sinai, president of Decision Economics Inc. in New York, who has known five Fed chairmen personally in a Wall Street career spanning 40 years. “Yellen will be aggressive in the pursuit of full employment more broadly defined.†(…)
The premiums demanded by investors to hold Spanish, Italian and Portuguese bonds rather than German Bunds rose to two-month highs amid growing nervousness about this week’s European Union elections.
The upcoming elections will be the first time since the euro zone debt crisis began that the European electorate will get a chance to voice its opinion, said Kelly Craig, a global macro strategist at J.P. Morgan Asset Management.
“The polls are suggesting that 25 to 30 percent of seats could go to the Eurosceptic parties … that shows that a lot of people aren’t really happy with the way things are going,” he said. But that “may actually force the more center right and center left parties to work more closely and not have the feared big impact on the policy direction at the European level.”
SENTIMENT WATCH
Chasing Yield, Investors Plow Into Riskier Bonds Investors are rushing into the riskiest corporate bonds, frustrated by low interest rates on safer investments and convinced that even companies with shaky finances are in little danger of default.
One sign of that rush: Investors have been buying up corporate bonds with a triple-C rating, a grade that analysts and investors consider highly speculative.
That buying is driving up prices on those bonds and pushing down their yields, which this month fell to 8.187% on a closely watched Bank of America Merrill Lynch index—the lowest level on record. Yields fall when prices rise.
Demand for those and other bonds rated below investment grade—so-called junk bonds—is helping fuel corporate merger-and-acquisition activity. (…)
The yield gap between junk bonds and U.S. government debt—a measure of the premium investors receive for taking on the risk of junk bonds—has narrowed. On triple-C-rated debt, that gap recently hit 6.97 percentage points, the lowest since November 2007. The all-time low of 4.14 percentage points was hit earlier that year.
The 12-month trailing default rate from low-rated corporate borrowers edged up to 1.7% in April, from a six-year low of 1.57% in March, according to Standard & Poor’s Ratings Services. (…)
China! “Some people believe in a hard landing… some people believe in a softer landing,” said Roubini. “I worry about a bumpy, tougher landing.” What does that mean? Growth of 6% or less by 2016 and the continuation of bad investment policies. Roubini does not believe the market is pricing this in yet.
A policy mistake by the Fed. For example, lets say the Fed decides to set the Fed Funds Rate at 3% rather than too, and that turns out to be too high. Maybe the Fed exits QE too soon.
Roubini sees a “secular stagnation in advanced economies,” thanks in part to income inequality. Right now companies are rich but they’re not spending any of that money on capital expenditures. They don’t see the demand. Why? Because of income equality. “High debt and inequality are slowing down consumption.” In consumption based, advanced economies, “that’s a problem,” said Roubini.
There are six new countries that are fragile for political and economic reasons — Argentina, Venezuela, Thailand, Ukraine, Russia, and Hungary.
An expansionist Russia. “Putin is not just after Ukraine, he wants to create a Eurasian union,” said Roubini. It’s a 20 year process that would join a bunch of countries in Eastern Europe politically and economically.
Japan and China are really getting angry at each other.”I was quite disturbed at the World Economic Forum… senior officials were talking about relations between China and Japan being like Britain and Germany before WWI.” You’ve got nationalist governments in both countries, and xenophobic elements that could be exacerbated if either country’s economy goes sour. This conflict would spill out to the rest of Asia too — to Korea and India at the very least.
10 warning signs of a stock market crash Stock Markets are at a record high but Questor editor, John Ficenec warns there are signs that we could be in for a crash
1. China credit bubble – Is it a new economic model? Or the emperor’s new clothes? The economy is slowing and the central bank is attempting to rein in loose monetary policy by allowing bad loans to default.
2. IPO fever – Professional investors always exit at the top and it is no coincidence we have a record number of overvalued companies listing on stock markets.
3. Technology valuations – Companies that have only been around for a few years, barely make a profit, and are valued at billions of pounds? That’s almost evidence enough that people have taken leave of their senses.
4. Markets don’t rise forever – Studies show that the average length of a bull market was just over three years, with the longest bull market being about five years. From the lows in March 2009, we are now more than five years into a bull market.
5. End of easy money – For five years every time the markets have wobbled more money has been pumped into the economy, but that can’t go on for ever, the US and China are both tightening monetary policy at the same time.
6. Bitcoin – This is a symptom not a cause, the rise of a currency backed only by the trust of those who use it is evidence that central banks have destroyed faith in the monetary system through a concerted period of devaluation.
7. Gold – It was written off at the start of the year, but has risen by 8pc during the past three months as investors seek a safe haven, easily outpacing the FTSE 100, which has fallen by 1.3pc.
8. Credit markets – Years of low interest rates in advanced economies have encouraged global investors to seek higher yields in fast-growing developing countries. Credit investors are always much better at pricing risk than equity investors.
9. Earnings misses – There are signs the five year run of growing profits is coming to an end. We have had big earnings misses right across the sectors. Oil giant shell issued its first profit warning in 10 years, engine maker Rolls-Royce warned on profits, along with banking giant Citigroup, Pearson, the owner of the financial times, and online retailer Amazon.
10. Commodity market – Another sign of the end to easy money is falling commodity prices. Iron, oil and copper are all cheaper than they were at the start of the year
Investors have been piling into equities to get a better return as loose monetary policy has crushed interest rates around the world. But in the race for returns many have forgotten how to price risk; for these 10 reasons the coming nine months could prove to be a painful reminder.
But CEBM Research is not seeing a severe slump, yet: 
Another proof that national affordability ratios can be deceiving.
Last Time S&P 500 Fell 15% This Took Place, Same Patterns Are Back!
OECD Economies Slow Again
Global Economic Growth Is Picking Up