Edge and Odds

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Edge and Odds

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THE DAILY EDGE: 16 JANUARY 2020

This a.m.:

Advance estimates of U.S. retail and food services sales for December 2019, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $529.6 billion, an increase of 0.3 percent (±0.4 percent)* from the previous month, and 5.8 percent (±0.7 percent) above December 2018.

Total sales for the 12 months of 2019 were up 3.6 percent (±0.4 percent) from 2018. Total sales for the October 2019 through December 2019 period were up 4.1 percent (±0.5 percent) from the same period a year ago. The October 2019 to November 2019 percent change was revised from up 0.2 percent (±0.4 percent)* to up 0.3 percent (±0.3 percent)*.

Retail trade sales were up 0.4 percent (±0.4 percent)* from November 2019, and 6.0 percent (±0.5 percent) above last year. Nonstore retailers were up 19.2 percent (±1.4 percent) from December 2018, and gasoline stations were up 11.3 percent (±1.2 percent) from last year. (…)

  • UNEMPLOYMENT INSURANCE WEEKLY CLAIMS

Back within the channel:image

Cass Transportation Index Report December 2019

Both the shipments and expenditures components of the Cass Freight Index marked their lowest reading of 2019 and took another step backwards in terms of y/y growth. (…) Shipment volumes dropped 7.9% vs December 2018 levels, as the index posted its lowest reading since January 2018. It was also the steepest y/y decline since the Great Recession of 2008-2009. Although there were the same number of working days in December 2019 and December 2018, some industry participants we’ve spoken with about the sluggish end to the year cited Christmas and New Year’s Day both falling on a Wednesday as the reason for soft volume and low productivity the last week or so.

Chart 1Regardless of the holiday effect, the freight market is weak, largely due to higher inventories and contraction in the manufacturing economy, as noted by December’s 2019-low ISM reading of 47.2 (its lowest level since June 2009). We saw corroborating evidence from the rail data (Chart 3), which showed deceleration through the end of the year as well. And while we expect comps to ease and volumes to flatten out, we are not forecasting much growth in terms of freight volumes in 2020. The U.S. industrial economy – rebound or no rebound – will likely be the biggest swing factor. And the tariff relief from the Phase 1 deal seems to be just that – a relief for some, but not a stimulus. (…)

U.S. rail y/y carload declines seen all year accelerated in 4Q19, reaching its lows in December

Chart 3

Trade Deal Aims High for Chinese Purchases Some are skeptical that Chinese purchases of American farm products, manufactured goods, business services and energy can hit the trade deal’s aggressive targets.

(…) The deal specified targets for Chinese purchases, measured against 2017 levels. In 2020, China must buy at least $77 billion extra of U.S. goods and services, and in 2021 at least $123 billion extra, for a two-year addition of $200 billion.

In 2017, the U.S. exported $186 billion in goods and services to China, and the most recent data for 2019 puts the figure at about $160 billion. To meet the targets, exports to China would have to rise to around $262 billion in 2020 and $309 billion in 2021, according to a Wall Street Journal analysis. For this year, that amounts to an increase of around 60%, in what would be an unprecedented jump in bilateral trade. (…)

Trade groups said the signing was a positive step, but that further tariff reductions are needed on both sides before U.S. companies can expect to realize big gains in exports. (…)

The biggest chunk of the $200 billion in increased purchases by China would come from U.S. manufacturers. The deal calls for manufacturing trade in 2020 to climb by $32.9 billion from the baseline level and be $44.8 billion above baseline in 2021.

President Trump has often touted the agricultural purchases in the deal as one of its centerpieces. To meet the goal for 2021, China would need to import a little over $40 billion in U.S. agricultural goods—a nearly 90% increase from 2017, according to the Journal’s calculations.

In addition to the purchase targets, China has agreed to steps that allow more market access for U.S. dairy products, poultry, beef, fish, rice and even pet food. (…)

In 2017, the U.S. exported to China about $7.6 billion of the energy products specified in the deal. Meeting its goals would require energy exports of $26 billion in 2020 and over $41 billion in 2021. That figure represents more-than-quintupling energy exports, the Journal calculated.

American capacity to export energy, especially liquefied natural gas, has grown in recent years, but accommodating that volume could require a significant investment in energy infrastructure.

Beyond 2021, the U.S. and China said their deal envisions continued rapid escalation in purchases. (…)

Source: @LizAnnSonders, @CapEconUS (via The Daily Shot)

Source: Scotiabank Economics (via The Daily Shot)

A China Trade Relief (The WSJ Editorial Board) The tariff truce is welcome, but the price has been high.

(…) Manufacturers that rely on Chinese imports are globally less competitive. Those that do sizable business in China have also been harmed. Ford reported a 26.1% drop in sales in China last year, and GM’s were down 15%. China is their biggest foreign market. Boeing last fall complained that China was delaying jet purchases because of trade tension. (…)

Damage to manufacturers has been especially acute in Pennsylvania, Ohio and Wisconsin. Beijing’s retaliatory tariffs also whacked American farmers, to whom the President paid $25 billion in taxpayer subsidies as political amends.

The tariff war has led to a decline of business investment, and a Federal Reserve study says trade uncertainty cut U.S. GDP growth by about a percentage point. Some say this is a price worth paying. But it’s simply false to assert that the President’s trade wars have been cost free. Americans have paid a high economic price in the hope that China will behave better in the future as the result of this deal. (…)

In the best case this initial deal offers a year or two of trade calm, China will honor its commitments, Mr. Trump will sheath his tariff sword, and he or his successor can move on to the thornier issues of Chinese subsidies for state-owned industries and high-tech protectionism in 2021 or 2022.

The phase-one deal is progress, but U.S.-China economic and political competition has decades to run.

For Economy, Climate Risks Are No Longer Theoretical Climate crises in the next 30 years may resemble financial crises in recent decades: potentially quite destructive, largely unpredictable and, given the powerful underlying causes, inevitable.

(…) Climate change can’t be directly blamed for any single extreme weather event, including Hurricane Maria, California’s wildfires or Australia’s bushfires. But it makes such events more likely. “They are starting to be more than tail events, they’re starting to affect economic outcomes,” Robert Kaplan, president of the Federal Reserve Bank of Dallas, told an economic conference earlier this month. (…)

Every year, the World Economic Forum asks business, political, academic and nongovernmental leaders to rank the most probable and consequential risks, from cyberattacks to fiscal crises. This year, ahead of its annual meeting next week in Davos, Switzerland, climate-related risks took the five top spots in terms of probability, the first time a single issue had done so in the survey’s 14-year history. (…)

This relationship is driven home in a study released Thursday by the McKinsey Global Institute. It estimated that “unusually hot summers” affected 15% of the Northern Hemisphere’s land surface in 2015, up from 0.2% before 1980.

McKinsey estimated that climate change made the European heat wave that in 2019 killed 1,500 in France 10 times more likely and the forest fires that devastated northern Alberta in 2016 up to six times more likely. (…)

Tesla says it plans to open China design and research center U.S. electric car maker Tesla plans to open a design and research center in China to make “Chinese-style” vehicles, the company said in a recruitment notice on its official WeChat account.
U.S. Producer Price Index & Core Prices Edge Higher

The Producer Price Index for final demand rose 0.1% during December (1.3% y/y) after having been unchanged in November. Producer prices excluding food & energy also rose 0.1% (1.1% y/y) following a 0.2% decline. The PPI excluding food, beverages and trade services, another measure of underlying price inflation, edged 0.1% higher (1.5% y/y) after holding steady in November. (…)

Finished consumer goods prices less food & energy rose 0.1% (1.6% y/y). Core nondurable goods prices held steady (1.8% y/y) and durable product prices improved a minimal 0.1% (1.1% y/y) for a second straight month. (…)

Services prices for final demand were unchanged (1.3% y/y) following November’s 0.3% decline. Trade services prices fell 0.3% (+0.4% y/y), off for the second consecutive month, as the cost of finished goods trade declined 0.5%. (…)

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What to watch as fourth-quarter earnings kick into high gear U.S. corporate reporting season is expected to show lackluster profit growth, and it has already gotten off to a bumpy start, with big banks kicking off the fourth quarter to mixed investor reaction so far on the stock market.
TECHNICALS WATCH

The 13/34–Week EMA Trend Chart (CMG Wealth):

THE DAILY EDGE: 15 JANUARY 2020

Target Says Holiday Sales Missed Its Forecasts Holiday sales were sluggish at Target, raising questions about the strength of the retailer’s turnaround plans and the health of the U.S. consumer.

Target’s sales rose 1.4% between Nov. 1 and Dec. 31 in stores and through digital channels operating for at least 12 months, the company said. It warned that growth for the full quarter, which includes January, would likely come in less than half the 3% to 4% growth it had predicted. (…)

While other traditional retailers have reported lackluster holiday results, Target has been held up as one of the chains that adapted to shifting consumer habits by ramping up its e-commerce operations and remodeling its stores.

Digital sales rose 19% in November and December compared with a year ago, down from 31% growth in the third quarter. (…)

The company had boasted a streak of eight consecutive quarters of at least 3% sales growth, including a 4.5% jump in the quarter ended Nov. 3. In November, Mr. Cornell said the company was gaining market share in the apparel, home and beauty categories. “We are starting to see the bifurcation of winners and losers” in retail, he told analysts a week before Black Friday. (…)

The company is maintaining its profit targets, in part because the categories with stronger sales earn high margins. (…)

Thus far Costco Wholesale Corp. is a lone bright spot, reporting comparable sales up 9% in the five weeks ended Jan. 5, including e-commerce and international sales. (…)

On Tuesday, market researcher NPD Group said holiday results were lackluster, estimating that total sales rose 0.2% compared with the previous year. The decline in the number of items sold was greater than the drop in dollars spent, NPD said, a sign that consumers gave higher-priced gifts this holiday. (…)

U.S. December retail sales will be released this Friday.

U.S. CPI Increases Moderately; Core Prices Rise Negligibly

The Consumer Price Index increased 0.2% (2.3% y/y) during December following a 0.3% November rise and a 0.4% October gain. The CPI excluding food & energy edged 0.1% higher (2.3% y/y), the weakest increase in three months. A 0.2% rise had been expected. (…)

Services prices rose 0.2%. The 3.0% y/y increase remained elevated from 2.7% early last year. (…) Medical care service prices rose 0.4% (5.1% y/y) for a second month and the cost of education & communications gained 0.2% (2.0% y/y). Shelter prices improved 0.2% (3.2% y/y) as rents of primary residences rose 0.2% (3.7% y/y). The owners equivalent rent of primary residences also improved 0.2% (3.3% y/y), but hotel costs fell 1.8% (-0.2% y/y). (…)

Goods prices excluding food & energy held steady (0.1% y/y) for the second consecutive month. (…) Used car & truck prices fell 0.8% (-0.7% y/y) but new vehicle prices edged 0.1% higher both m/m and y/y. Showing strength were medical care goods prices which increased 1.5% (2.5% y/y) after nudging 0.1% higher. Apparel prices rose 0.4% (-1.2% y/y) after a 0.1% uptick. (…)

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It is curious to see core PCE inflation (red) trend down when most other measures of core inflation have been trending up and stand above the Fed’s 2.0% target:

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Unlike the trends between CPI and PCE total inflation:

fredgraph (40)

  • Slower increases in hourly wages (chart) and fewer hours worked (chart) sent the growth in inflation-adjusted weekly wages to zero. (The Daily Shot)
U.S. Small Business Optimism Weakens

The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index declined 1.9% (-1.6% y/y) to 102.7 during December and mostly reversed its November rise. The reading was 5.6% below the high in August 2018.

Optimism declined last month as the percentage of firms indicating that now was a good time to expand the business fell to 25% from 29%. The labor market has softened. The percentage of firms planning to increase employment declined to 19% from 21%. A lessened 50% of businesses were finding few or no qualified candidates to fill job openings, down from 57% in August. The percentage of firms planning to make capital outlays also backed away from its November high. A weakened 28% planned to make capital outlays, reversing two months of increase.

Offsetting these declines, an improved 16% of respondents expected the economy to improve, the most since July, but it remained below the 48% high in January 2017. A slightly higher 16% of firms expected higher real sales, still significantly below the November 2017 high of 34%.

A slightly lessened 24% of firms planned to raise worker earnings, but that remained up from 22% in October. A reduced 29% of firms raised worker compensation, down from the August 2018 high of 37%.

Current pricing improved, as 14% of firms were raising prices now, the most in five months but below the 19% in May of last year. A lessened 20% of firms were planning to raise average selling prices.

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German Growth Falls to Six-Year Low, Hit by Manufacturing Recession Economic growth in Germany slumped to a six-year low in 2019, underscoring the vulnerability of Europe’s export powerhouse to tensions in the global economy.

The German economy grew by 0.6% last year, the slowest rate since 2013, at the height of the eurozone’s debt crisis. Output in the manufacturing sector excluding construction, which accounts for around a quarter of the overall economy, fell by 3.6%. Private consumption rose robustly, helping support growth. (…)

German car production fell to its lowest level in almost a quarter of a century last year, according to the VDA auto lobby group. Weakness in the auto sector likely trimmed German growth by 0.75 percentage points in 2019, according to the Ifo economic think tank. (…)

German exports fell 2.3% on the year in November, hurt by a fall in exports to China. (…)

  • Markit’s PMI showing green shoots?

imageGermany’s manufacturing sector ended 2019 deep in contraction, recording further marked decreases in output and employment, latest PMI® data from IHS Markit and BME showed. De-stocking remained prevalent, while the slowdown in the sector continued to translate into lower prices. More positively, however, December’s decrease in new orders was the slowest in the whole of 2019 and manufacturers’ output expectations showed a further – albeit marginal – improvement. (…)

Data showed inflows of new business at German manufacturers falling for the fifteenth month in a row in December. Reports from panellists highlighted that demand, and particularly investment, continued to be undermined by lingering uncertainties around trade and the global economic outlook. However, the rate of decline in new orders eased for the third month in a row to the weakest since December 2018, helped by export sales posting the smallest drop since last January.

Buoyed somewhat by tentative signs of stabilisation in new orders and hopes for a pickup in economic conditions in 2020, manufacturers recorded their strongest confidence for 15 months in December.

Markit also publishes a Europe Sector PMI which might temper hopes for now:

(…) The bottom end of the European sector league table told a similar story in terms of December performance versus 2019 trends. The bottom-six sectors in the final month of the year also fared the worst in terms of annual performance. (…) automobiles & auto parts registered the sharpest decline over the year as a whole. Moreover, the latter registered a faster drop in output in December, following a four-month period where the rate of  decline had continually eased.

Tech Tensions Simmer in Washington as U.S., China Near Trade Truce White House efforts to crack down on technology exports while easing tariffs reflects differing policy views within agencies

The Trump administration’s immediate focus is tightening restrictions on Huawei Technologies Co., the giant Chinese telecommunications company that the White House and Congress view as a national-security threat. The Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said. (…)

At the same time, a team of senior U.S. officials, including deputy national security adviser Matt Pottinger, lobbied the U.K. earlier this week to block local network operators from using equipment from Huawei and other Chinese vendors in their 5G networks. A British decision is expected shortly.

More broadly, the National Security Council asked the Commerce Department last week to suggest regulations to restrict sales of any U.S. technology to China, according to people tracking the early-stage discussions.

Should all the efforts bear fruit, nearly any technology exports to Huawei in particular, and China in general, would require export licenses. While Commerce could grant such licenses, U.S. companies fear their Chinese customers would turn to other suppliers. In 2018, about 36% of U.S. semiconductor company revenues, or $75 billion, came from sales to China, the Semiconductor Industry Association estimated. (…)

T-Mobile-Sprint Deal Concern Mounts on Wall Street Shares of Sprint are trading at a more than 40% discount to the value of T-Mobile’s proposed all-stock deal. The companies are preparing to make final arguments in a court battle with states led by California and New York.

(…) “The market’s getting more pessimistic,” said Ric Prentiss, an analyst at investment bank Raymond James. He said investors are waking up to the risk that “if this deal doesn’t go through, Sprint’s going to go down pretty hard.” (…)

Japan’s SoftBank Group Corp. owns more than 80% of Sprint’s shares (…).