Today: The U.S. consumer, ROW slows, the dreaded September…

U.S. Consumer Spending Declines 0.1% in July Personal Spending Falls for First Month Since January

Personal consumption expenditures edged 0.1% lower last month (+3.6% y/y) following an unrevised 0.4% June increase. It was the first decline in six months. When adjusted for price inflation, spending was off 0.2% (+2.0% y/y).

Real spending on motor vehicles led last month’s decline with a 2.0% drop (+6.7% y/y) following two months of strong increase. Home furnishings outlays gained 0.3% (5.5% y/y) after a 0.1% rise and spending on recreational goods jumped 0.6% (8.0% y/y) after a 0.7% increase.

Personal income notched 0.2% higher during July (4.3% y/y) following a 0.5% June rise, revised from 0.4%. It was the weakest gain this year. Wages & salaries rose 0.2% (5.3% y/y) following two months of 0.4% increase. Disposable personal income gained 0.1% (4.2% y/y) following three consecutive 0.5% increases. In real terms, disposable income ticked 0.1% higher (2.6% y/y) after three straight 0.3% increases.

The personal saving rate improved to 5.7%, the highest level since the end of 2012. The amount of saving in July increased 4.2% (15.7% y/y).

July income data is a little suspect since most sources slowed down measurably from the previous months: wages and salaries rose 0.2% M/M following +0.6% on average since January; current taxes jumped 0.6% M/M following +0.3% on average. As a result, disposable personal income rose only 0.1% in July after average monthly gains of +0.55% since January. Very strange slowdown given the continued strength in employment.

Meanwhile, the 15-percenters seem to feel a little better…

Food-Stamp Use Starting to Fall After soaring in the years since the recession, use of food stamps, one of the federal government’s biggest social-welfare programs, is beginning to decline.

There were 46.2 million Americans on food stamps in May, the latest data available, down 1.6 million from a record 47.8 million in December 2012. Some 14.8% of the U.S. population is on the Supplemental Nutrition Assistance Program, or SNAP, down from 15.3% last August, U.S. Department of Agriculture data show.

Food-stamp use remains high, historically speaking. The share of Americans on the benefit—which lets them buy basics like cereal and meat and treats like cookies, but not tobacco, alcohol or pet food—is above the 8% to 11% that prevailed before the financial crisis. (…)

“More people are starting to report that they have just recently been hired” and have pay that is reasonable enough to make them ineligible, said Alba Brookins, who helps run Jefferson County’s SNAP program. (…)

 

CHINA DOMESTIC DEMAND STABILIZING

CEBM’s September survey results indicate continuing economic stabilization. (…) The Industrial Sales vs. Expectations Index rebound was driven by improvement in property, banking and exports. New housing and second-hand housing sales have rebounded in August, mainly due to discounted housing prices, which also means that house prices will continue to fall. Looking at credit conditions, our commercial bank survey indicates that loans have increased from their lowest point in July, and our export survey shows increased overseas demand. Upstream industries except cement are generally weak, and demand for machine tools and construction machinery have seen continued weakness as well.

Looking to September, the forward-looking CEBM Industrial Expectations Index (SA) was essentially flat compared to August. Most industries will enter a traditional peak season in September, but uncertainty in sales expectations is increasing. Steel products are expected to continue on their downward trend due to low government infrastructure procurement and forecasted weakness in steel exports. An increase in shipments seems unlikely in September. Consumer industries in September began to enter a season of strong promotional activity, but many of our respondents expect sales to be lower than last year due to competition among online retailers.

Briefly stated, no change in generally sluggish momentum. See also CHINA MANUFACTURING PMI EASES TO 50.2

Bad Loans Soar at China State Banks

The five biggest state-owned banks— Industrial & Commercial Bank of China Ltd.601398.SH +0.58% , China Construction Bank Corp. 601939.SH +0.50% , Agricultural Bank of China Ltd. 601288.SH +0.83% , Bank of China Ltd. 601988.SH +1.90% and Bank of Communications Co. 601328.SH +1.21% —wrote off and transferred out of their books a total of 46.91 billion yuan ($7.64 billion) of bad loans in the first half, according to calculations by The Wall Street Journal. That is more than twice the 22.07 billion yuan from a year earlier and marks an effort to clean up their books amid the prospects of more bad loans.

The five lenders also reported a total of 423.49 billion yuan of nonperforming loans outstanding at the end of June, up 21% from a year earlier. They also reported a slowdown in profit growth. (…)

In the first half, new bad loans throughout the banking system had already exceeded the increase for all of last year, according to official data.(…)

Italy struggles with triple-dip recession

Italy Posts Biggest Consumer Price Decline on Record Amid Slump

Italy’s economy contracted for a second quarter in the three months through June sliding into its third recession since 2008, Istat said in a separate report today. Data also showed unemployment at a record high in the second quarter.

Brazil’s economy slips into recession GDP contraction deals blow to Rousseff’s re-election bid

Gross domestic product declined 0.6 per cent in the second quarter, when Brazil hosted the start of the 2014 soccer World Cup, compared with the previous three months, while the first quarter was revised down from positive 0.2 per cent to negative 0.2 per cent, said IBGE, Brazil’s national statistics agency.

The IBGE said most major categories declined during the second quarter compared with the first three months of the year, with investment down 5.3 per cent, industry down 1.5 per cent and services 0.5 per cent.

Agriculture was one brighter spot, expanding 0.2 per cent, and private consumption 0.3 per cent.

India grows at fastest rate in two years

It grew 5.7 per cent year on year in the three months to June. The figures exceeded analysts’ expectations and the reading from the same period in 2013, when India produced its worst quarterly growth performance in four years, expanding at just 4.4 per cent.

India’s performance in the quarter to June was helped by a strong rebound in industrial production, following nearly two years of stagnant output, helped by robust exports and increases in manufacturing and construction.

To Tell the Truth: Canada’s Labour Market

The Labour Force Survey isn’t having a good summer. The report’s volatility this year had already raised questions about the survey, but Statistics Canada’s recent bungling of the July numbers arguably hurt the survey’s credibility the most. And now, the Survey of Employment, Payrolls and Hours (SEPH) ― a survey of
establishments (unlike the LFS which surveys households) ― is pouring salt on the LFS’s wounds. Recall that the LFS showed a drop in paid employment in the second quarter this year.

The SEPH unequivocally disagrees, and suggests instead that Canada created 83,000 paid jobs in the quarter. As today’s Hot Charts show, the solid SEPH employment gains were complemented by strong growth in wages (+6.1% annualized), the biggest increase since 2012. Incidentally, the SEPH’s results, unlike the ones from the LFS, are consistent with the sharp gains observed in the quarter for real retail spending. So, the subsequent LFS employment surge in July (in the re-published results) should be interpreted with caution as it may be more of a statistical correction than a suggestion of a suddenly booming labour market in the third quarter. (NBF Economics and Strategy)

Heady U.S. IPO Market Rolls Into Autumn The anticipated flood of IPOs in coming months would cap off the busiest period for new U.S. share listings in decades.

Chinese e-commerce giant Alibaba Group Holding Ltd. plans this month to begin a marketing roadshow for what could be the largest IPO ever, potentially raising more than $20 billion. New York office landlord Paramount Group Inc. filed preliminary paperwork last week for what may be the largest-ever debut by a real-estate investment trust. Online-storage startup Box Inc. and consumer-credit upstart LendingClub Corp. also are expected to price offerings in coming months.

The anticipated flood would cap off the busiest period for new U.S. share listings in decades. Companies this year have raised $46.4 billion, the most in the first eight months of any year since 2000, according to data provider Dealogic. (…)

SENTIMENT WATCH

SEPTEMBER ARRIVES ON MONDAY, and, with apologies to T.S. Eliot, for the stock market it is the cruelest month. According to the Stock Trader’s Almanac, authored by Jeffrey A. and Yale Hirsch, September has been a winner for stocks 28 times since 1950 and a downer 34 times, ranking it 12th among the months. (Barron’s)

Some Stock Strategists Brace for September Swoon

The big crashes of 1929 and 1987 came in October, but on average, October shows gains over the past 20, 50 and 100 years. The only month that shows an average decline in all three periods is September.

“I am a little worried,” said James Paulsen, chief investment strategist at Wells Capital Management (…) he says U.S. stocks could fall as much as 15% some time this autumn. (…)

Russ Koesterich, chief investment strategist at BlackRock Inc., BLK +0.51% which oversees $4.32 trillion, also is nervous about the outlook this autumn for similar reasons. (…) “If you get another strong employment number, that will focus investor attention on the impending monetary tightening,” Mr. Koesterich said. “It could cause volatility in the fall.”

“We are expecting an 8% to 10% correction for the S&P 500 over the next two months. There is a good chance that it would wipe out all the gains for the year,” said Doug Ramsey, chief investment officer at Leuthold Group (…)

(…) major market collapses usually come when investors are overly optimistic, not when so many are bracing for a pullback. That leads analysts to expect a decline but not a disaster. Some contrarians said that with so many people hunkering down, the stock market could continue rising, confounding the skeptics once again. (…)

There’s No Need for Investors to Fear September

Over the past century, September has been by far the worst month on the calendar for the Dow Jones Industrial Average, with an average loss of 0.8%. That contrasts with an average gain of 0.8% in the other 11 months. (…)

But a closer look shows that a drop is no more probable this September than it was earlier this year—or will be in coming months.

One reason not to make changes to your portfolio just because Labor Day is approaching is that September’s reputation derives mainly from years in which the market already was declining—which it isn’t this year. Over the past century, when the Dow was sporting a year-to-date loss through the end of August, it proceeded to lose 2.7% on average in September and fell in the month more than two-thirds of the time.

By contrast, when the Dow had a year-to-date gain through August, it gained an average of 0.3% in September, and rose as often as it fell. This year, the Dow is up 3.1%, through Friday. Last year, the Dow was also up through August, and it rose 2.2% in September. (…)

THE SWOONER?

Putin raises the stakes in Ukraine Russian incursion demands a tough western response

Western governments have long wondered whether President Vladimir Putin would order a Russian assault on eastern Ukraine. That such an attack is under way is no longer in doubt. Mr Putin may be conducting a creeping “stealth” offensive against his neighbour rather than a conventional invasion. But the Nato alliance estimates that there are at least 1,000 Russians operating in Ukraine, using tanks, artillery and armoured personnel carriers. This is a dangerous escalation of the crisis – and one that demands a response from the west.

Mr Putin’s actions demonstrate that he has no intention whatsoever of abandoning his ambition to dismember Ukraine. He wants to thwart any chance of Kiev’s new pro-western leadership taking the country into the Nato alliance. To frustrate Ukraine’s hopes of greater integration with the west, Russia’s leader is determined to foment a “frozen conflict” in the east of country. He knows, too, that by prolonging the mayhem in the Donbas, Ukraine’s industrial heartland, he sabotages his neighbour’s chance of economic recovery. This can only increase Moscow’s leverage.

Russia’s intervention is a serious danger for European security and the global order. (…) When western leaders convene at two summits in the next few days – the EU on Saturday and Nato next week – they must press home the need for a diplomatic solution to the Ukraine crisis. But this requires a determination on their part to take the actions necessary to push Mr Putin towards meaningful negotiations. (…)

Nato must also act. The 28-member alliance needs to boost its military presence in eastern Europe, committing more combat troops to the defence of Poland and the Baltic states. The Russian leader must realise that if he destabilises Nato’s eastern European member states as he is doing in Ukraine, there will be a firm response from the alliance as a whole. (…)

Mr Putin must realise the irony of his position. He has made it his goal to roll back Nato’s presence in eastern Europe. Yet his conduct in Ukraine illustrates why so many eastern European states – including Ukraine itself – value Nato’s protective shield. For years the alliance has faced doubts over its role. Mr Putin’s achievement is to have given it a renewed sense of purpose.

Kiev accuses Russia of ‘direct aggression’

Nato states create new multilateral force British-led unit of 10,000 formed in response to Ukraine crisis

The force will be one of the boldest steps taken by any group of Nato members in response to the crisis. The aim is to create a fully functioning, division-sized force for rapid deployment and regular, frequent exercises. Officials involved in the planning say it will have the capacity to increase significantly in size.

BTW:

Russia is the EU’s third largest trading partner. Trade between the two is valued at nearly 300 billion euros a year, and roughly 75% of total foreign direct investment (FDI) in Russia comes from the EU.7 About 30% of the EU’s natural gas comes from Russia as well. Germany in particular has close trade ties with Russia, with nearly 300,000 jobs dependent on exports to Russia.

While the sanctions are damaging the Russian economy and perhaps forcing Russia to think twice about its policy toward Ukraine, they have also had the unintended consequence of pushing Russia into a closer alliance with China – which is contrary to the long-term geopolitical interests of the United States and Europe. (NBF Financial)

Britain raises terror threat level to ‘severe’ Government says groups in Syria and Iraq are planning attacks