Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE (15 March 2018): Stagflation?

Weak Consumer Spending Presents a Puzzle The U.S. job market is booming and workers’ paychecks are growing thanks to a tax cut and raises. But Americans hunkered down on spending last month, a puzzle for an economy that leans heavily on their willingness to consume.

Sales at U.S. retailers fell 0.1% in February, marking a three-month slide. Much of the decline was tied to lower sales of cars and weak gasoline prices. Americans also reduced shopping for furniture, health products, groceries and electronics.

February was when many Americans saw the first tangible evidence of the $1.5 trillion tax cut that President Donald Trump signed into law late last year. Tax withholdings fell, increasing take-home pay. (…)

The lower spending has led economists to downgrade expectations for economic growth in the first quarter. J.P. Morgan now expects gross domestic product to grow at an annual rate of 2% this quarter, while the Atlanta Fed’s GDPNow model projects 1.9% growth. Each previously projected 2.5% growth. (…)

When excluding cars and gasoline—for which spending can swing wildly month to month—retail sales climbed 0.3% last month. Americans boosted spending on building supplies, clothing and restaurant outings. Despite weakness in recent months, retail sales have grown 4% over the past year. (…)

Haver Analytics provides the breakdown:

image

How could retail employment rise 50k in February as per the recent payroll numbers? What is wrong? Payrolls or retail sales? Or maybe inventories are rising and profit margins are getting squeezed?

(Bespoke)

Autos, retail and housing have been pretty weak in recent months…

U.S. Producer Prices Continue Upward Trend

The headline Final Demand Producer Price Index using new methodology increased 0.2% in February following a 0.4% gain in January. The year-on-year (y/y) growth edged up to 2.8%. The PPI excluding food & energy also increased 0.2% in February, in line with the Actions Economics median forecast. Year-on-year gains accelerated to 2.5% from 2.2% in January. This is the fastest y/y growth rate in six years. An updated measure of core producer price inflation — the overall index excluding food, energy and trade services jumped 0.4% for the second consecutive month. This took the y/y increase to 2.7%, the strongest reading since the series began in August 2013.

Using the old methodology for the Producer Price Index, prices fell -0.3% (+2.7% y/y) in February reversing some of January’s 0.7% gain. Excluding food & energy, the index was unchanged (1.9% y/y).

Final demand goods prices edged down 0.1% (+3.0% y/y) following a 0.7% gain. The goods price index excluding food & energy increased 0.2% for the third consecutive month (2.1% y/y). (…)

Prices for intermediate demand goods strengthened 0.7% (4.8% y/y). This is the seventh consecutive month of gains of 0.5% or greater. (…)

 large image large image

 large image large image

U.S. import prices rise more than expected in February U.S. import prices rose more than expected in February as the largest increase in the cost of capital goods since 2008 offset a drop in petroleum prices, bolstering views that inflation will pick up this year.

The Labor Department said on Thursday that import prices increased 0.4 percent last month after a downwardly revised 0.8 percent surge in January. Economists polled by Reuters had forecast import prices climbing 0.2 percent in February after a previously reported 1.0 percent jump in January.

In the 12 months through February, import prices increased 3.5 percent after rising 3.4 percent in the 12 months through January. (…)

Prices of imported consumer goods excluding automobiles rose 0.5 percent, the largest gain since January 2014, after edging up 0.1 percent in the prior month. These price increases likely reflected the dollar’s depreciation against the currencies of the United States’ main trading partners.

These higher prices will eventually filter through to core producer and consumer inflation. Imported petroleum prices fell 0.5 percent, the first drop in seven months, after rising 3.0 percent in January. Import prices excluding petroleum surged 0.5 percent after a similar gain in January. (…)

U.S. Home Prices Rise Almost 9%, the Biggest Gain in Four Years

Home prices in the U.S. surged 8.8 percent in February — the biggest monthly gain in four years — as buyers battled for an increasingly scarce resource: homes.

While sales were little changed amid the thin inventory, the median price across 172 large metropolitan areas jumped to $285,700, according to a report Thursday from brokerage Redfin Corp. It was the 72nd straight month of year-over-year increases since the market bottomed in 2012.

U.S. home prices are now 6.3 percent higher than their peak in July 2006 and 46 percent above their trough in February 2012, according to the S&P CoreLogic Case-Shiller national home-price index.

A strong job market is fueling the price increases even as the number of homes for sale fell 11.4 percent in February from a year earlier — and as mortgage rates hit four-year highs.

A Familiar if Ominous Sign in the US IPO Market

Kudlow Accepts Post as White House Economic Adviser, Replacing Cohn

(…) Mr. Kudlow, who grew up in a Republican family in northern New Jersey’s upwardly mobile suburbs, became a leader of the antiwar movement during the Vietnam War. He earned a bachelor’s degree in 1969 from the University of Rochester, where he majored in history. He later studied politics and economics in a graduate program at Princeton University’s Woodrow Wilson School.

He didn’t finish his degree but landed a job as an assistant to Paul Volcker, then the president of the New York Federal Reserve, before jumping to Wall Street. At 28, he became chief economist at Paine Webber, a prominent brokerage firm, and later took the same position at Bear Stearns, even though he lacked an economics degree.

After a turn through government—he served as the top economist to Reagan budget director David Stockman—he returned to Bear Stearns. In 1994, he resigned and subsequently acknowledged a drug and alcohol addiction. It isn’t clear whether that episode could complicate efforts to obtain security clearances.

For the last 17 years, he has appeared as a commentator and host on various CNBC and radio programs, and he has toyed with running for the Senate as a Republican. (…)

THE DAILY EDGE (14 March 2018): Inflation Watch

Subdued Inflation Data Ease Market-Volatility Worries 
U.S. Government Bonds Advance After Inflation Fails to Surge

U.S. government-bond prices bounced Tuesday after closely watched data on consumer prices signaled inflation remains muted, easing concerns among investors that rising prices could spark a fresh wave of volatility in financial markets.

(…) Unrounded, the CPI showed an even smaller increase: by 0.150% in February from 0.539% in January. Excluding the volatile food and energy categories, so-called core inflation slowed to a rate of 0.182% in February from January’s 0.349%, the biggest increase since March 2005. (…)

Recent data now show the economy in a sweet spot with moderate inflation in February, together with bumper job creation, a 4.1% unemployment rate and strong consumer sentiment readings. (…)

Again, the facts:

  • Total CPI: Last 7 months annualized: +3.8%. Last 4 months a.r.: +3.6%. Last 3 months a.r.: +3.6%. Last 2 months a.r.: +4.3%.
  • Core CPI: Last 7 months annualized: +2.2%. Last 4 months a.r.: +2.4%. Last 3 months a.r.: +2.8%. Last 2 months a.r.: +3.0%.

Some more facts:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.9% annualized rate) in February. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

image

  • 16% trimmed-mean CPI: last 3 months annualized: +2.4% vs +2.0% during the previous 3 months.

  • Median CPI: +2.8% vs +2.8%.

The Federal Reserve Bank of Cleveland provides daily “nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the consumer price index (CPI). “Nowcasts” are estimates or forecasts of the present. The Cleveland Fed produces nowcasts of the current period’s rate of inflation—inflation in a given month or quarter—before the official CPI or PCE inflation data are released. These forecasts can help to give a sense of where inflation is now and where it is likely to be in the future.

image

The Atlanta Fed’s sticky price index sorts the components of the consumer price index into either flexible or sticky (slow to change) categories based on the frequency of their price adjustment.

The chart below plots the 3-m annualized change in the core sticky CPI (red) and the core flexible CPI:

image
  • The prices charged by small businesses, as reported by the NFIB survey, point to higher inflation ahead. (The Daily Shot)

Source: Pantheon Macroeconomics

I am not making any forecasts here, simply laying the facts out. The danger with inflation is that we all get the boiling frog syndrome. What is obvious is that most media and pundits are now wearing rose colored glasses.

The average rent for apartments in multifamily buildings only increased $1 between January and February to $1,364, according a new report from real-estate data company Yardi. On a year-over-year basis, rental prices were only 2.7% higher, making it the weakest seasonal gain since the housing market recovery began.

Since last summer, rental prices have barely changed — hovering around the all-time high of $1,365 set in August, according to the Yardi analysis. But that could change in the months ahead as more people choose to continue renting thanks to the GOP-led tax reform that altered some deductions that benefited homeowners. (…)

image

Facts: CPI shelter: last 3 months annualized: +3.0% vs +3.1% during the previous 3 months.

Gundlach Says 10-Year Treasury Above 3% Would Drive Down Stocks

image

Measure of US borrowing costs flashes amber Widening spread between Libor and OIS may point to structural changes in the market
China’s Economy Grows Faster Than Expected on Strong Demand for Exports

Industrial production, a rough proxy for economic growth, expanded by 7.2% in January and February from a year earlier, the National Bureau of Statistics said on Wednesday, well above the 6.2% pace in December and forecasts for a 6.1% rise by economists polled by The Wall Street Journal.

China releases combined data for January and February to limit distortions caused by the timing of the Lunar New Year holiday, which fell in January last year and February this year. (…)

Fixed-asset investment, a closely watched indicator of construction activity, climbed 7.9% in the two-month period from a year earlier, quickening from a 7.2% increase in 2017 and beating forecasts for a 7% gain. Retail sales grew 9.7% from a year earlier, compared with a 9.4% rise in December and forecasts for 9.6% growth. (…)

Property investment, including in commercial and residential real estate, rose 9.9% in the first two months, compared with a 7% pace for the full 2017. Housing sales by value continued to grow at a double-digit pace, although the 15.7% rise was down from a 21.2% gain in December. (…)

Should Canada heed the BIS “warning”?

According to the Bank of International Settlements (BIS), risks are building in the Canadian credit market. According to the BIS, Canada, China stand out with their credit-to-GDP gap flashing red, i.e., an early warning indicator for stress in domestic banking systems. According to a recent paper by the Bank of Canada, the BIS warnings on Canada should be taken with a grain of salt.

For one, private credit in Canada includes Crown corporations, entities that are backed by the creditworthiness of federal or provincial governments. For another, the Bank of Canada argues for excluding lending between affiliated companies as this type of lending is not being extended directly by financial institutions. These adjustments alone reduce the Canadian credit-to-GDP ratio from 213% to a much less threatening 170%.

Finally, we would note that the BIS methodology does not control for demographics and the structure of labour markets that are so critical in assessing the longer-term sustainability of a domestic banking system. For example, employment surged 2.3% in 2017 in Canada, the largest increase in fifteen years. As today’s Hot Chart shows, the employment-to-population stands at 62% in our country, the second highest in the OECD. Meanwhile, the BIS report suggested that all was fine and dandy in Italy and Spain where less than 40% of the population is employed! (NBF)

image

Elderly in U.S. Are Projected to Outnumber Children Americans over 65 years old will outnumber children in the U.S. by 2035, a first in the nation’s history, according to updated Census Bureau projections.

The Census Bureau projects the country would grow to 355 million by 2030, five million fewer than it had estimated three years ago. That is an annual average growth rate of just 0.7%, in line with recent rates but well below historical levels.

Unlike many European nations, the U.S. would continue to grow, reaching 404 million by 2060. (…)

This year’s prime-age workforce—ages 25 to 54—is about 630,000 smaller than the Census Bureau projected it would be just three years ago. The bureau projects the prime-age workforce will grow 0.5% a year through 2030, down from a 2014 projected annual rate of 0.58% for the same period. (…)

The projections assume no major changes in immigration policies.

As the nation ages and birthrates remain historically low, immigration looms larger in shaping the future. The bureau projects that by 2030, net immigration would rival natural increase—the surplus of births over deaths—as a share of population growth. By 2040, immigration would be more than twice as large as the natural increase.

As a result, the share of Americans who are foreign-born, now about 13%, is expected to reach a record 14.9% by 2028, topping a mark set in 1890. That share would rise to 17.2% by 2060. (…)

Whites who aren’t Hispanic will begin shrinking as a group by 2024. They would drop below half of the population by 2045, two years later than the bureau estimated just a few years ago.

By 2020, less than half of those under 18 years old would be non-Hispanic white. (…)

Red rose Stephen Hawking, Physicist Who Reshaped Cosmology, Dies at 76