CHINA’S CHINESE

China Posts Weak Trade Data An unexpected drop in both China’s exports and imports in March threw more doubt around the country’s growth prospects, though the real picture may not be as bleak as the numbers suggest.

A 6.6% drop in exports compared with last March confounded economists, many of whom had expected growth of more than 4%. Imports also fell 11.3% in March.

The data are difficult to interpret, economists warned, with a strong base of comparison last year making the numbers look especially weak.

Analysts suspect that China’s reported exports were exaggerated in early 2013 by a practice known as overinvoicing, by which companies use fake export invoices to dodge China’s capital controls and get money into the country, often for investment. (…)

Stripping out goods sold to Hong Kong and Taiwan, exports to other nations grew about 7%, said Julian Evans-Pritchard, a China analyst at Capital Economics. (…)

Even without such distortions, trade statistics can fluctuate widely from month to month. China’s trade statistics in the first quarter are often skewed by the Lunar New Year holidays, which this year fell in late January and early February. (…)

But the latest data still came in well below expectations, adding to the signs that China’s economy has been struggling since the end of last year. (…)

It is now all but certain that China’s growth in the first quarter was slower than in the final quarter of last year, Ms. Ma added.

China’s Metal Imports Defy Slowdown

Iron ore imports rose 15% from a year earlier to 74 million metric tons, according to customs data. Copper shipments rose 31.4% on year to 420,000 tons. Overall, imports into China fell 11.3% on year in March, signaling weakness in manufacturing as economic growth moderates.

Volumes of iron ore and copper imports were off record highs in January. But growth in import demand has remained robust, despite signs China’s economic growth is likely to slow this year from a 7.7% expansion in 2013. (…)

Analysts say steelmakers are bracing for a period of lower output as the government pushes environmental and industry-consolidation policies, but are continuing to stock up on cheap, high-quality foreign ore—particularly the cleaner-burning pellets that meet Beijing’s tougher new environmental standards for steelmaking.

Imports in March also were likely underpinned by deals in which Chinese investors were locked into buying metals like copper to back bank loans.

Copper imports have for years been widely used as collateral in China’s shadow banking system, as a means of circumventing official curbs on conventional lending. Analysts say copper financing declined last month as falling copper prices prompted a reassessment of collateral balance sheets. However, some pre-committed shipments may have continued to come through, they say. (…)

The data comes in the wake of a report from the International Monetary Fund which said China’s demand for commodities is far from peaking. The fund, in its latest global economic report, said China’s demand in the years ahead is likely to switch from iron ore and copper toward higher-value commodities like zinc.

There was a sharp rise in China’s soybean imports during March. They rose 20% on-year to 4.6 million tons, and were up 34% in the first quarter. A comprehensive breakdown of import volumes of most other commodities won’t be released by the Chinese authorities until later in April.

China, which imports more than half the oil it uses, imported 2% more crude oil in March than a year earlier, bringing in an average of 5.56 million barrels a day during the month.

Chinese to me! This next piece is clearer:

LVMH Hit by China Slowdown LVMH said first-quarter sales rose 4% as the group, a bellwether for the luxury-goods industry, struggles to adapt to a slowdown in China.

Excluding currency fluctuations and acquisitions, such as the purchase of cashmere maker Loro Piana, sales would have grown 6%. Currency fluctuations shaved 5% off the quarter’s growth, LVMH said. (…)

Sales at LVMH’s wines and spirits division, which includes champagne and cognac, fell 8% in the quarter. The company explained the drop by retailers destocking (…).

From the horse’s mouth (hey!, it’s the year of the horse):

China rules out stimulus despite trade woes

(…) “The upturn of the Chinese economy is not yet on a solid footing. Downward pressure still exists and difficulties in some fields must not be underestimated,” Mr Li said. But “there are conditions in place for the Chinese economy to achieve sustained sound growth”, he added. “We have the capabilities and confidence to keep the economy functioning within the proper range.” (…)

Mr Li said the government’s target of “about” 7.5 per cent GDP growth this year was flexible, and Beijing would not act to pump up growth as long as “there is fairly sufficient employment and no major fluctuations”. (…)

“We will not resort to short-term stimulus policies just because of temporary economic fluctuations and we will pay more attention to sound development in the medium to long run,” Mr Li said on Thursday. (…)

Plainly, they will wait for more data, just like the Fed. CEBM Research has some clues from its regular surveys:

According to our survey, export activity in March exceeded respondents’ expectations and most respondents expect export demand to gain momentum in April.

According to the results of our most recent grassroots survey, domestic economic activity slowed across the board in March. Moreover, the March PMI employment index reading reached a three-year low. Based on these indicators as well as downbeat monthly data during 1Q14, we expect the 1Q14 GDP growth figure to fall to 7.3%.

In a recent report issued after a regular meeting of the PBoC, the central bank stated that the economy was in a “reasonable range”, whereas in 4Q13 the central bank commented that the economy was “stable”. This adjustment in wording likely reflects the deterioration in economic activity observed in 1Q14.

Recently, the government unveiled several measures it intends to use to support growth. These measures fall under three basic categories: 1) acceleration of project investment; 2) preferential tax policy; and 3) approval of reforms in pilot program cities. The announcement of these measures signal that another round of stabilization policies has officially begun.

Meanwhile, the Party has to deal with this internal fight:

China bank regulators caught in turf war PBoC and CBRC at odds as financial system comes under strain

The China Banking Regulatory Commission and the People’s Bank of China, the central bank, have always been rivals, but now rising tensions are obstructing reforms and efforts to tackle risks in the financial sector, according to officials from both agencies. (…)

“One of the biggest roadblocks to financial reforms in China now is the fact the PBoC doesn’t think the banking regulator is capable of handling the risks associated with that reform,” said one person familiar with the matter. (…)

Meanwhile, CBRC officials feel they are being unfairly blamed for not managing risks that were created by the PBoC and which they have warned about for years. (…)

Another CBRC complaint has been the PBoC’s aggressive promotion of “financial innovation”, which some officials at the banking regulator say is more accurately described as “interest rate arbitrage” or “regulatory arbitrage”.

They argue that having forced the banks to carry the burden of the stimulus the PBoC then encouraged the creation of the vast shadow banking sector that it now blames the CBRC for not regulating properly.

FED’S CHINESE

Fed Shows Growing Worry About Low Inflation Federal Reserve officials are growing concerned the U.S. inflation rate won’t budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

(…) Fed officials believe the U.S. economy was soft in the early months of the year in part because of the weather, and they are now expecting a pickup. But if that doesn’t happen, they could wait longer to start raising interest rates. Many central-bank officials and market participants don’t expect rate increases until well into 2015.

“In light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully,” the Fed minutes said. (…)

In the U.S. and Europe, signposts of soft consumer demand also are evident. In Switzerland, executives at Swatch Group AG told The Wall Street Journal earlier this month that consumers were switching to lower-cost timepieces. In the U.S., companies such as Procter & Gamble Co. and Georgia Pacific Corp., among others, have been blitzing consumers with deals and coupons to lift sales.

Carnival Corp. is filling cabins on its cruise ships by reducing ticket prices—a situation the Miami-based company hopes is temporary. “As the economy improves and as demand is there, we should be able to get the pricing back without any problem,” Chief Financial Officer David Bernstein told analysts last month.

Are they monitoring rents?

Brooklyn Apartment Rents Jump to a Record as Leases Surge

The median monthly rent was $2,900, up 13 percent from a year earlier and the highest since appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate began tracking the market in January 2008. (…)

Across the East River in Manhattan, the median monthly apartment rent was $3,200 in March, up 0.2 percent from a year earlier, according to Miller Samuel and Douglas Elliman. It was the first month without a year-over-year decline since August.

It’s not only Brooklyn and San Francisco. Nationally, CPI-Rent is up 2.8% YoY and has increased at a 3% annualized rate in the past 4 months. And CalculatedRisk reveals that apartment vacancies are near a cyclical low:

Anyway, they sure are concerned by communications:

Fed Officials Worried About Misleading on Rates

Federal Reserve officials were concerned at their latest policy meeting they might unintentionally signal they had grown more eager to raise interest rates—a worry that was well-founded.

Some officials fretted their individual projections for short-term interest rates could be misleading, according to minutes from the Fed’s March 18-19 session, which were released Wednesday after the usual three-week lag.

The projections chart, which uses dots to indicate where each of the members of the Fed’s policy committee thinks interest rates will be in the next few years, showed some officials expecting higher rates in 2015 and 2016 than they predicted in December.

Noting the upward shift, some Fed officials at the meeting expressed concern “that this component of the [projections] could be misconstrued as indicating a move by the Committee to a less accommodative reaction function,” the minutes revealed.

I.e. the sum of the committee’s individual views was not the view of the committee.

Investors and analysts initially viewed the Fed’s March session as marking a turn toward more “hawkish” or restrictive policy despite contrary assurances in the central bank’s policy statement and from Fed Chairwoman Janet Yellen at a March 19 news conference following the meeting.

The minutes underscore that Fed officials had not become more impatient to raise rates, a message Ms. Yellen and other members of the Fed’s policy committee have reinforced in public remarks since the meeting.

But why did Yellen say what she said on March 19? Anyway, we now know that the sum of the parts is not at all representative of the official view.

Traders on Wednesday cheered the minutes’ positive tone. Stocks, which already had been moving higher Wednesday, extended their gains after the documents were released at midafternoon. The Dow Jones Industrial Average, which had been up 76 points earlier in the day, finished with a gain of 181.04 points, or 1.1%, to 16437.18.

The minutes also gave a lift to bond prices, which in turn pushed yields down slightly. In late-afternoon trading, the yield on the benchmark 10-year note was 2.688%, down from 2.721% before the release, according to Tradeweb. (…)

BloombergBriefs believes that what looked like a loose cannon was in fact a straight shooter:

We continued to learn about Yellen in these minutes. They reveal that her performance at the post-FOMC press conference was as transparent and plainspoken
as her opening Congressional statement in February. When she was forceful — pushing back on the short-term unemployment debate, dismissing the
interpretation of staff projections as policy guidance — it was based on confidence that the committee stood behind her. Her tentativeness with the now-infamous definition of “considerable time” as about six months, appears to have been a genuine gaffe, without support in the minutes.

More than ever, Yellen looks like a straight shooter. If she and the FOMC still need to refine their first-round communications, they can at least take comfort in the cumulative effect of the minutes and recent Fed speeches: Treasury yields have nearly retraced their rise since the FOMC meeting.

From the minutes:

A few participants, however, highlighted factors other than weather that had likely contributed to the slowdown during the first quarter, including slower growth in net exports following its unusually large positive contribution to growth in the fourth quarter of 2013. Moreover, it was noted that some of the pickup in economic growth that had appeared to have been indicated by the data available at the January meeting had been reversed by subsequent data revisions. For many participants, the outlook for economic activity over coming quarters had changed little, on balance, since the time of the December meeting.

Only “a few” think that it was not only the weather. And even though revised data pointed to slower growth than originally reported, “many participants” remain upbeat.

Yesterday’s wholesale sales report showed sales down 2.8% annualized between December and February. Even if the weather was indeed a factor, retailers are stuck with winter inventories that have increased at a 6.1% annualized rate during the same period. And they moved Easter in Q2 this year.

MORE ON SLOW EMPLOYMENT GROWTH

Only about 476,000 new U.S. businesses started up each month in 2013, down 7% from 2012 and 12% from 2011, according to a study by the Ewing Marion Kauffman Foundation, a Kansas City, Mo., advocacy group for entrepreneurship. The Kauffman study counts new incorporated and unincorporated businesses, including those with and without employees, based on data from the U.S. Census Bureau and the Labor Department.

In January, another study found that U.S. business creation among people who start companies because they can’t find satisfying jobs held stable at 21% from 2011 to 2013 and was down from nearly 30% in 2010. That study, based on a survey of 200,000 entrepreneurs world-wide, including about 5,700 in the U.S., was conducted by researchers in 70 countries and sponsored by Babson College in Wellesley, Mass. (WSJ)

OPEC Says Its Oil Output Tumbled in March OPEC’s oil output tumbled to its lowest level this year in March, the cartel of some of the world’s biggest oil producers said

Production by the Organization of the Petroleum Exporting Countries—which supplies more than a third of the oil consumed globally each day—fell by over half a million barrels a day last month to 29.6 million barrels a day, the group said in its monthly oil market report.

A steep drop in Iraq’s oil output of nearly 300,000 barrels a day led the decline, though there was also a substantial downturn in Angola, Libya and Saudi Arabia last month.

The sharp pullback in Iraq’s oil production to 3.2 million barrels a day is a disappointing decline after the country’s oil output rose to its highest level in 35 years in February. (…) infrastructure constraints have slowed the development of several oil fields and led many analysts to question whether February’s surge in output was sustainable.

Elsewhere, Angola’s oil production fell by 150,000 barrels a day in March. Libya’s oil output declined by 118,000 barrels a day as blockades of key ports in the country’s east by rebels seeking greater autonomy continued to take their toll on the country’s oil sector.

OPEC kingpin Saudi Arabia also cut its production by 81,000 barrels a day to 9.7 million barrels a day last month. (…)

OPEC tweaked higher its forecast for non-OPEC supply growth this year to 1.37 million barrels a day, an addition of 60,000 barrels a day from its previous forecast. The cartel also lowered the amount of demand it expects for its oil this year by 100,000 barrels a day to 29.6 million barrels a day.

Big Car Makers in Race to Recall

Major car makers are accelerating recalls and ordering dealers to stop sales of vehicles with potentially dangerous defects amid an aggressive safety clampdown by auto regulators and others in the U.S., Japan and China.

The latest move: Toyota Motor Corp. TM -1.26% on Wednesday issued a massive recall of nearly 6.4 million vehicles world-wide. The action covers five separate problems and 27 different models including such globally popular cars as the Corolla, Yaris and Matrix compacts, and RAV4 and Highlander sport-utility vehicles.

All told, BMW AG, Fiat Chrysler Automobiles, Ford Motor Co., General Motors Co., Toyota and Volkswagen AG have recalled nearly 15 million vehicles since the start of the year. Industry experts say a landscape that once allowed auto makers to negotiate terms with regulators has been transformed because of the potential for huge fines and criminal prosecution now hanging over executives.

SENTIMENT WATCH

U.S. start-ups raise $9.99 billion, hit outsized valuations in first-quarter

Venture capital funding for U.S. start-ups hit its highest mark since 2001 during the first three months of the year and 11 companies were valued at $1 billion or more, underscoring the increasingly pricey environment for entrepreneurs, according to a report on Thursday from consultancy CB Insights.

Venture capitalists invested $9.99 billion across 880 deals in the first quarter of 2014. The dollar amount jumped by 44 percent compared with the same quarter in 2013, while the number of deals rose by 5 percent.

The large number of companies that won funding last quarter with billion dollar valuations is the same as for all of 2013. The year before, just eight companies were funded at valuations of $1 billion or more.

The technology companies that venture capitalists valued at over $1 billion last quarter include payments company Stripe, online home-furnishings company Wayfair and enterprise-data management company Cloudera.

About 10 percent of the deals, by volume, were late stage, meaning a fifth funding round or later, fitting with the tendency of many venture-backed companies to delay initial public offerings. (…)

Goldman Warns 67% Odds Of A 10% Market Decline In Next Year

While quick to explain how next year will be better (even though he keeps his year-end 1900 target for the S&P 500), Goldman’s chief US equity strategist David Kostin warns there is a good chance of a 10% drop sometime in the next 12 months. The recent 6% pullback (sparked by EM concerns) is only one-third of typical historical corrections and as Kostin notes, the market has gone way too long without a so-called correction (10% from peak to trough). It’s been 22 months (and 50% gains) since the last 10% drop and, based on Kostin’s quant work, there is a 67% probability that we’ll see that correction – which would take the S&P to around 1700.

But BloombergBriefs is reassuring:

The recent selloff in global equities hit only the “high-flying” stocks and doesn’t indicate a looming bear market, Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., said. A rotation from bonds to stocks is also unlikely, she said.

U.S. stocks will rally further as the doubling of the Standard & Poor’s 500 Index from its 2009 low has yet to stretch valuations, according to Holland & Co. “This is not a bear market,” chairman Michael Holland said. “The bull market still has some significant legs to it before this is over. We had valuations that were screamingly attractive five years ago. Fast forward to today, they are reasonably valued. These things normally don’t end until we get overvalued and we’re not there yet.” Holland

This is generally true, although equities have so far refused to cross the fair value line in this cycle. The bull may have some significant legs but who knows where they will take us.