The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in May on a seasonally adjusted basis after rising 0.2 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.8 percent before seasonal adjustment.
The indexes for gasoline and shelter were the largest factors in the seasonally adjusted increase in the all items index, as they were in April. The gasoline index increased 1.7 percent, more than offsetting declines in some of the other energy component indexes and led to a 0.9-percent rise in the energy index. The medical care index rose 0.2 percent. The food index was unchanged over the month.
The index for all items less food and energy rose 0.2 percent in May. The shelter index rose 0.3 percent in May. The indexes for new vehicles, education and communication, and tobacco increased in May, while the indexes for household furnishing and operations, and used cars and trucks fell. The indexes for apparel, recreation, and personal care were unchanged.
The all items index rose 2.8 percent for the 12 months ending May, continuing its upward trend since the beginning of the year. The index for all items less food and energy rose 2.2 percent for the 12 months ending May. The food index increased 1.2 percent, and the energy index rose 11.7 percent.
Core CPI now +2.2%. Core Goods (20% of total CPI) still deflating 1.2% annualized but Core Services (60%) accelerating north of +3.0%. Lucky that Food inflation (13.3% of CPI) remains so tame.
The Small Business Optimism Index increased in May to the second highest level in the NFIB survey’s 45-year history. The index rose to 107.8, a three-point gain, with small businesses reporting high numbers in several key areas including compensation, profits, and sales trends.
• Reports of compensation increases hit a 45 year record high.
• Views about expansion are the most optimistic in survey history.
• Reports of positive earnings trends at a survey record high.
• Reports of positive sales trends are the highest since 1995.
• Concerns about labor quality second highest in survey history.
• Reports of price hikes the highest since 2008 (Oil $140/bbl.).
• Plans to raise prices are the highest since 2008.
(…) by focusing so intensely on U.S. political developments, investors risk missing a silent shift in what has arguably been the strongest driver of global reflation in the last five years: Chinese credit. This driver is now moving sharply in reverse.
China’s “credit impulse,†the change in the growth rate of aggregate credit to GDP, bears close watching: It has tended to lead the Chinese manufacturing Purchasing Managers’ Index (PMI) by a year (see Figure 1) and the U.S. Institute for Supply Management’s (ISM) manufacturing index by 14 months.
The relevance of the Chinese credit impulse to global reflation cannot be overstated (see Figure 2). China’s massive credit stimulus starting in 2014 initially put a floor under commodity prices and emerging market (EM) growth. Then, the unexpected acceleration in Chinese real estate investment drove both commodity prices and volume demand higher. EM growth subsequently bounced, and with it, global trade volumes. The key driver of realized global reflation, then, has been China – not the promise of fiscal stimulus and deregulation that has helped boost confidence and other soft data in the U.S.
The sharp downturn in the Chinese credit impulse starting in 2016 portends a material drag on Chinese growth in the year ahead. (…)
The question now is not if China slows, but rather how fast. Equally important perhaps is the extent to which commodity prices will correct lower, especially in light of the current enthusiasm about the potential strength of the global growth cycle. The impending slowdown in China could be compounded by ongoing government efforts to rein in shadow bank credit; the cost of policy mistakes rises once the credit impulse goes into reverse.
Expectations for slower Chinese growth cannot be separated from China’s overarching political desire to underwrite stability ahead of the 19th National Party Congress this autumn. Chinese growth is not likely to fall off a cliff between now and then, regardless of what happens to commodity prices. Just as a less hawkish Federal Reserve is the backstop to market volatility, the Chinese growth “put†ahead of the Party Congress is ultimately the backstop to EM- and commodity-related credit risk.
Nonetheless, the complacency over China’s potential deceleration, combined with the greater likelihood that strong U.S. confidence indicators will now move more in line with the lackluster real economy data, suggest that some of the froth will come out of the most growth-oriented segments of the global markets.
BTW:
France Tightens Bank Capital Requirements French regulators said they would toughen banks’ capital requirements to mitigate the risks of a future credit crunch, an early sign of tighter borrowing conditions emerging across Europe.
France’s High Council for Financial Stability—which brings together market and financial regulators, France’s central bank and finance ministry—said it would apply a “countercyclical†capital buffer to oblige banks to hold capital amounting to 0.25% of risk-weighted French assets. Foreign banks also will be obliged to hold a buffer of 0.25% of their assets in France. (…)
French private-sector debt rose above 130% of the country’s economic output at the end of 2017, overtaking the level in Spain to become the highest among the four largest eurozone economies, which also include Germany and Italy. French regulators are particularly concerned about corporate-debt levels, which have risen faster than in most large eurozone economies. (…)
Banks will have until July 2019 to comply with the new capital buffer rules. All French banks, officials said, already hold sufficient capital to cover the new requirements. (…)
The nation’s central bank said on Monday that output will probably rise 0.3 percent in the three months through June. While a modest improvement on the 0.2 percent pace seen in the period through March, that’s still less than half the average quarterly rate of 2017.
The Bank of France published the estimate alongside new data showing business confidence fell in May. The reading of 100, down from 102 in April, is the weakest since October 2016 and coincides with strikes and blockades that have hampered transport. The gauge reached a six-year high in 2017, and its decline mirrors weakness in other measures of activity across the euro region. (…)
- The slowdown is hitting all of the E.U.:
PMI numbers registered the slowest euro area expansion for one-and-a-half years in May, though the rate of growth remained relatively robust and strong price pressures persisted. Official eurozone industrial production data are expected to show a decline, while inflation numbers are set to confirm a marked increase in May.
Global Investment in Wind and Solar Energy Is Outshining Fossil Fuels Spending on renewable energy is outpacing investment in electricity from coal, natural gas and nuclear, driven by falling costs of producing wind and solar power.
In 2016, the latest year for which data is available, about $297 billion was spent on renewables—more than twice the $143 billion spent on new nuclear, coal, gas and fuel oil power plants, according to the IEA. The Paris-based organization projects renewables will make up 56% of net generating capacity added through 2025. (…)
Renewable costs have fallen so far in the past few years that “wind and solar now represent the lowest-cost option for generating electricity,†said Francis O’Sullivan, research director of the Massachusetts Institute of Technology’s Energy Initiative. (…)
China invested heavily in a domestic solar-manufacturing industry, creating a glut of inexpensive solar panels. Innovation helped manufacturers build longer wind-turbine blades, creating machines able to generate substantially more power at a lower cost.
Renewable-energy plants also face fewer challenges than traditional power plants. Nuclear-power plants have been troubled by mostly technical delays, while plants burning fossil fuels face regulatory uncertainties due to concerns about climate change. And pension funds, seeking long-term stable returns, have invested heavily in wind farms and solar parks, allowing developers to get cheaper financing.
“It is just easier to get renewables built,†said Tony Clark, a former member of the Federal Energy Regulatory Commission. “There is that much less opposition to it.†(…)
Last year, the percentage of electricity from renewable sources reached 12.1%, more than double that of a decade earlier, according to a joint report by the Frankfurt School of Finance & Management and the United Nations Environmental Program. These figures don’t include electricity from large hydroelectric dams. (…)
About 17% of the [U.S.]’s electricity last year came from renewable sources, including wind, solar and hydroelectric dams, according to federal data. The government said that just under half of large-scale power generation added was renewable last year.
Last week, Xcel Energy Inc. announced a $2.5 billion plan to add 1,800 megawatts of new wind and solar generation, plus a substantial amount of batteries to store the power. The plan, which needs to be approved by state regulators, would retire 660 megawatts of coal-burning generation and result in savings for consumers, the Minneapolis-based utility said.
“I think, across the nation, you could get to 40% renewable energy,†said Xcel Chief Executive Ben Fowke. “Ten years ago, I would have told you 20% was the max.â€
Renewable-energy prices are now competitive with fossil-fuel generation in many places. In 2017, the global average cost of electricity from onshore wind was $60 per megawatt hour and $100 for solar, toward the lower end of the $50 to $170 range for new fossil-fuel facilities in developed nations, according to the International Renewable Energy Agency. (…)
Earlier this year, an auction in Saudi Arabia awarded a contract to build a 300-megawatt solar facility for $17.90 a megawatt hour. Very low labor costs in the Middle East and India are resulting in record-breaking low bids for solar.
A Mexican auction last year drew international bids for power at an unsubsidized price of below $21 per megawatt hour. That was substantially below the spot market price for electricity, which averaged around $70 per megawatt hour last year, said Veronica Irastorza, an associate director of economic consulting firm NERA and a former Mexican undersecretary of energy planning. (…)
In Canada, an auction in Alberta in December awarded four wind contracts for an average of $37 a megawatt hour, subsidy-free. The Albertan government planned to award contracts for only 400 megawatts, but bumped it up to 600 megawatts when it saw the prices offered, which were slightly below the average price for electricity on the province’s grid in 2018. (…)
June 11 speech by SEC Commissioner Robert J. Jackson Jr.:
Today, I’d like to share a few thoughts about corporate stock buybacks—and some research produced by my staff that raises significant new questions about this activity. As Neera mentioned, I’m a recovering researcher. (…)
So when I first took this job, I worried that 14 years later history would repeat itself, and the tax bill would cause managers to focus on financial engineering rather than long-term value creation. Sure enough, in the first quarter of 2018 alone American corporations bought back a record $178 billion in stock.[4] On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs.[5] And, because we at the SEC have not reviewed our rules governing stock buybacks in over a decade, I worry whether these rules can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.[6]
Even more disturbing, there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay.[7] We give stock to corporate managers to convince them to create the kind of long-term value that benefits American companies and the workers and communities they serve. Instead, what we are seeing is that executives are using buybacks as a chance to cash out their compensation at investor expense.
(…) That’s why I’m here today to call on my colleagues at the Commission to update our rules to limit executives from using stock buybacks to cash out from America’s companies. (…)
Basic corporate-finance theory tells us that, when a company announces a stock buyback, it is announcing to the world that it thinks the stock is cheap.[8] That announcement, and the firm’s open-market purchasing activity, often causes the company’s stock price to jump, so the SEC has adopted special rules to govern buybacks. (…)
In the wake of the financial crisis, Congress realized the importance of keeping executives’ skin in the game, so the Dodd-Frank Act included several provisions designed to give investors more information about whether and how managers cash out.[19] Unfortunately, as you all know too well, those rules have still not yet been completed, keeping investors in the dark about executives’ incentives.
Nearly eight years since that landmark legislation, it is completely unacceptable that the SEC has still not promulgated these and other rules required by law. But it’s not just that the regulations haven’t been finalized. It’s that the problem itself keeps getting worse. You see, the Trump tax bill has unleashed an unprecedented wave of buybacks, and I worry that lax SEC rules and corporate oversight are giving executives yet another chance to cash out at investor expense.
That’s why, when I was sworn in a few weeks after the Trump tax bill took effect, I asked my staff to take a look at how buybacks affect how much skin executives keep in the game. I was worried that lax corporate practices and SEC rules might lead to buybacks that give executives yet another chance to cash out at investor expense.
So we dove into the data, studying 385 buybacks over the last fifteen months.[20] We matched those buybacks by hand to information on executive stock sales available in SEC filings.[21] First, we found that a buyback announcement leads to a big jump in stock price: in the 30 days after the announcements we studied, firms enjoy abnormal returns of more than 2.5%.[22] That’s unsurprising: when a public company in the United States announces that it thinks the stock is cheap, investors bid up its price.
What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement. In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day.[23] So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.[24]
And, in the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement:
Now, let’s be clear: this trading is not necessarily illegal. But it is troubling, (…)
More importantly, policymakers, advocates, investors and corporate boards have spent decades, and billions of dollars of shareholder money, trying to tie executive pay to long-term corporate performance. But the evidence shows that buybacks give executives an opportunity to take significant cash off the table, breaking the pay-performance link. SEC rules do nothing to discourage executives from using buybacks in this way. It’s time for that to change.
There are two steps we can and should take right away to address the practice of executives using buybacks as a chance to sell their shares.
First, (…), SEC rules should encourage executives to keep their skin in the game for the long term. That’s why our rules should be updated, at a minimum, to deny the safe harbor to companies that choose to allow executives to cash out during a buyback.[25] (…)
Second, corporate boards and their counsel should pay closer attention to the implications of a buyback for the link between pay and performance. In particular, the company’s compensation committee should be required to carefully review the degree to which the buyback will be used as a chance for executives to turn long-term performance incentives into cash. If executives will use the buyback to cash out, the committee should be required to approve that decision and disclose to investors the reasons why it is in the company’s long-term interests. It is hard to see why a company’s buyback announcement shouldn’t be accompanied by this kind of disclosure.[27]
Executives who can’t sell their holdings in the short term—but instead have to create real value over time—have far fewer incentives to manage to quarterly earnings and pursue the kind of short-term thinking that dominates our economy today. (…)
Stock Buyouts and Corporate Cashouts