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 (16 March 2018)

Empire State Manufacturing Index Rebounds

The Empire State Manufacturing Index of General Business Conditions jumped 9.4 points in March to 22.5 from 13.1 in February. This reading was well above the median expectation of 15.0 from the in the Action Economics Forecast Survey.

Based on some of these measures, Haver Analytics calculates a seasonally adjusted index that is comparable to the ISM series. The calculated figure rose to 57.5 from 55.3. During the last ten years, the index had a 69% correlation with the quarter-on-quarter change in real GDP.

The number of employees was the only index which deteriorated, declining to 9.4, though this followed a healthy gain in February. (…) The employee workweek reading increased to 5.9 from 4.6.

The new orders index rose to 16.8 in March from 13.5, while shipments more than doubled to 27.0 from 12.5. This is the highest level of shipments since October 2009. Delivery times jumped to 16.2 from 11.1, just besting the previous record of 16.1 in April 2017. The volatile inventories index edged up to 5.6.

The prices paid index continued its steady climb, up 1.7 to 50.3, its highest level since March 2012. Fifty-three percent of respondents indicated increased prices, while just three percent reported a decrease. Prices received rose 0.9 to 22.4, its peak since January 2012.

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Economists See Steeper Fed Rate Path, Stronger Inflation Economists nudged higher their forecasts for how much the Federal Reserve will raise short-term interest rates this year to keep inflation under control as the economy strengthens.

A Wall Street Journal survey this month found economists, on average, forecast the Fed’s benchmark federal-funds rate will end the year at 2.25%, up from 2.21% in the February survey and 2.17% in the January poll.

The survey respondents were roughly split into two camps, expecting the equivalent of either three or four quarter-percentage-point rate increases in 2018.

Economists also saw the equivalent of two rate increases in 2019. (…)

Economists in the latest survey saw annual inflation rising to 2.1% in the fourth quarter of 2018 and remaining relatively stable thereafter. (…)

Speaking of rate increases, American consumers have been taking advantage of low interest rates, borrowing based on monthly payments rather than actual indebtedness and leverage. Interest rates have yet to rise meaningfully but banks are getting worried and more careful.

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Smaller banks are already feeling the pinch:

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Here are the delinquency rates at some banks and other lenders courtesy of RBC:

BANK OF AMERICA

JP MORGAN

DISCOVER FINANCIAL

CAPITAL ONE

  • Auto Fitch: Macro Crosscurrents Cloud U.S. Auto Lender Credit Outlook

Loss frequency and severity ticked up slightly from historically low levels for the largest U.S. auto lenders, according to the latest U.S. Auto Asset Quality Review from Fitch Ratings. Excluding General Motors Financial Co. (GMF), whose credit performance continues to benefit from a significant portfolio mix shift, the average net chargeoff rate for lenders covered in this report increased to 0.95% in fourth quarter 2017 (4Q17) from 0.92% in 4Q16. Likewise, delinquencies increased in 4Q17, with the 30+ day delinquency rate up to 3.07% at YE17 from 2.86% at YE16.

“We continue to see a divergence in subprime credit relative to prime credit and expect performance to weaken further in 2018 due partially to the expansion in recent years of less-tenured, independent auto finance companies that have demonstrated higher-risk appetites and less underwriting discipline,” said Michael Taiano, Senior Director.
Underwriting for auto loans/leases continued to tighten for banks in 2H17, albeit at a more moderate pace, which Fitch views as a credit positive. The tighter standards are likely in response to deterioration in used vehicle prices and weaker credit performance in the subprime segment. After a respite in 2H17 that was partially due to increased vehicle demand stemming from the hurricanes in Texas and Florida, Fitch expects further deterioration in used car prices in 2018 to be driven by increases in off-lease vehicles, elevated new-car incentives, and tighter subprime lending. Lower used vehicle prices will put downward pressure on lenders’ recovery values and lease residuals, resulting in higher credit losses.

“The outlook in 2018 for auto asset quality is clouded to some extent by macro crosscurrents. Positive indicators including greater household net worth, low unemployment and increased wage growth are countered by rising consumer debt levels, weaker used vehicle prices and rising interest rates,” added Taiano.

The OECD unemployment rate is the lowest in decades.

Source: @jsblokland; Read full article (Via The Daily Shot)

SENTIMENT WATCH
Billions of Dollars Pour Into Tech Funds, Powering Stock-Market Gains Investors are increasing their bets on shares of technology companies, renewing concerns that the market is becoming too dependent on a few big stocks to power its gains.

Nearly $5 billion has poured into tech-focused stock funds so far this year, the most of any major sector, according to Thomson Reuters Lipper data. That figure represents nearly half of what the group pulled in for all of 2017. In January alone, tech funds received $3.9 billion in inflows, the most in a single month for such funds since March 2000—the peak of the dot-com bubble.

Tech shares have gained 13% since major indexes fell into correction territory on Feb. 8, compared with a 6.4% gain for the S&P 500 index. (…)

A half-dozen tech companies are responsible for much of the S&P 500’s gains so far this year:Microsoft Corp. , Apple Inc., Cisco Systems Inc.,Nvidia Corp. , Alphabet and Adobe Systems Inc.Including online retail giant Amazon and streaming service Netflix, both of which are tech companies that sit among other consumer-discretionary stocks, those eight companies have contributed more than half of the S&P 500’s gains in 2018. (…)

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:

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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. (…)

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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. (…)