THE DAILY EDGE (10 July 2018)

Small Business Optimism Remains Historically High as Sales and Profits Maintain Strength

The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May. Since December 2016, the Index has averaged an unprecedented 105.4, well above the 45-year average of 98 and rivaling the all-time high of 108.0 in July 1983.

“Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits,” said NFIB President and CEO Juanita Duggan. “The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow.”

Trade uncertainties are curbing the enthusiasm:

Lower tax rates more than compensate for margin squeeze from labor:

Actual and planned capex not paced with profit trends:

U.S. Consumer Credit Usage Strengthens

Consumer credit outstanding rose $24.56 billion during May following a $10.27 billion April increase, revised from $9.26 billion. The $8.80 billion March increase was sharply lower than reported last month. The May gain was the strongest monthly increase in six months. During the past ten years, there has been a 50% correlation between the y/y gain in consumer credit and y/y growth in personal consumption expenditures.

Nonrevolving credit usage strengthened $14.81 billion (4.6% y/y) during May after a $9.19 billion April rise. (…)

Revolving consumer credit balances increased $9.76 billion in May (5.2% y/y) following a $1.10 billion rise in April. (…)

It looks like Americans have recently aligned their borrowings with the trend in their payrolls, both growing in the 5% range after years of credit outgrowing income.

Hence the importance of this:

Conference Board’s Employment Trends Increased in June

The index grew to 108.94 in June from 107.72 in May. The June reading was 5.2% higher than it was a year earlier.

“The labor market will continue to tighten in the coming months, with strong employment growth outpacing the number of people entering the labor force,” said Gad Levanon, North America chief economist at the Conference Board, in prepared remarks.

June’s results were driven by positive contributions from all eight components, according to the report. (…)

Hmmm…

Source: Scotiabank Economics (via The Daily Shot)

• Bank of Canada widely expected to get back on its rate-hiking path

FIBER: Industrial Commodity Prices Continue to Fall

The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) declined 2.1% during the last month, but rose 9.8% in the last year. It has fallen for three straight weeks. Despite the recent shortfall, the index has risen by roughly two-thirds since the January 2016 low. (…)

  

Chart of Century Gives Powell Gloomy Glimpse of Trade-War World

Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeables — hospital stays and college tuition, to name two — have surged. (…)

Just as globalization has been a headwind holding back inflation, its unraveling could end up being a tailwind in the years ahead, pushing costs higher as countries and companies retreat from the international marketplace. That would be on top of the one-time effect that Trump’s tariffs will have on prices of selected imports, putting pressure on the Fed to raise interest rates at a faster pace than the gradual path it has currently mapped out. (…)

TRADE

Trade Dispute Threatens Exports of American-Made Cars BMW and Daimler have contributed to the U.S.’s emergence as an auto exporter, but the Trump administration’s trade battle with China could blunt their efforts.

(…) Big auto [and parts] makers have built global manufacturing and supply networks that depend on the free flow of goods across borders. These are now threatened by the trade dispute, which could force companies to cut back manufacturing for export and make more vehicles and components in the markets where they are sold.

“The strategy is going to continue to be global, but execution is going to be more and more local,” said Carlos Ghosn, chief executive of the global Renault-Nissan-Mitsubishi alliance, which is vying to overtake Volkswagen AG as the world’s biggest car maker by sales.

• Tesla moves first to hike prices in China as trade war hits car makers

• Tesla Plans China Plant With an Annual Capacity of 500,000 Cars

• China raises tariff rates for some U.S. optical fiber products, from July 11

‘Very Serious’ Global Synchronized Growth Downturn Seen, ECRI Says

Achuthan also says the economy is “not vulnerable to a recessionary shock at the moment. That can change, but right now, no recession risk.”

Chinese Auto Sales Run Into a Lending Roadblock Beijing’s crackdown on shadow banking has made it harder for car buyers to get the loans they need. That could hit domestic auto-maker shares.

(…) About 10% of all P2P loans in China were made to car buyers last year, often to young people: That translated into roughly 9% of total industry sales, according to Bernstein.

But P2P car loans are down 18% this year, and this is feeding into fewer auto sales. As lending dwindles, the volume of auto insurance sold for new cars—a proxy for end-user demand—dropped year-over-year for the third month in a row in May, according to Bernstein. (…)

Things are getting dicey in China:

Last week, the FT reported that

AC Milan, one of European football’s most successful clubs, is close to being taken over by the Elliott Management, after its Chinese owner failed to repay debt owed to the US-based hedge fund. Li Yonghong, who acquired the Italian club last year, has failed to make a €32m payment which was due to paid to Elliott this week, according to people close to AC Milan’s leadership. The Chinese entrepreneur acquired the club for €740m from Silvio Berlusconi, the media mogul and former Italian prime minister last year. But Mr Li also required high-interest loans worth more than €300m from the hedge fund founded by billionaire Paul Singer in order to fund the acquisition.

Grant’s Interest Rate Observer observes that

China’s banking assets exceed full-year 2017 GDP by more than 300% (for comparison, U.S. banking assets are less than 100% of GDP), Li’s money troubles serve as a reminder of the thin margin for error that accompanies high leverage. According to data from the People’s Bank of China, there have been at least 20 bond defaults through May, nearly matching 2017’s full-year total of 22.

Grant’s adds that

Yesterday, the FT reported that an executive from the China Development Bank told listeners to a recent teleconference that the CDB was tightening loan approvals for its “slum redevelopment” policy, a program which has provided some $1 trillion to homebuyers since 2016. For context, total Chinese GDP last year was $12.2 trillion, according to the World Bank.

and notes that the Shanghai Composite Property Index is down 20% year-to-date.

The health of China’s housing sector is crucial given its weight on the Chinese economy, the debt pile supporting it and the necessity to keep confidence in housing high given the overcapacity in that sector.

Hence the Bank of China’s juggling with the need to slowly reign in indebtedness while keeping the economy humming amid the trade war with the U.S.. Tough act.

Supply Crunch Lifts Oil Close to 3½-Year High

SENTIMENT WATCH

• NED DAVIS RESEARCH: Downgrading Equities to Marketweight

US economy losing momentum, strategist says. Tim Hayes, chief global investment strategist at Ned Davis Research, discusses weakness in the U.S. economy.

But the talking heads would have none of that. Watch an excerpt http://spr.ly/6013DoIcN

NDR’s cautiousness comes right when bearish David Rosenberg is having second thoughts

• A U.S. Recession Indicator Flashes Red for Leuthold’s Paulsen A gauge of recession risk with a “pretty good” track record has raised a cautionary signal.

For the first time since just prior to the 2007-2009 recession, premiums on the lowest-rated tranche of investment-grade U.S. corporate bonds have risen to 2 percent after being below that level, according to data compiled by the Minneapolis-based research group. The analysis looks at the gap in yields between corporate debt rated Baa by Moody’s Investors Service and those on 10-year Treasuries.

“We are not sure why a 2 percent credit spread has been so prescient in predicting recessions since 1970,” Jim Paulsen, Leuthold’s chief investment strategist, wrote in a note to clients Monday. That happened either during or prior to six of the past seven recessions, he said. (…)

In last Friday’s Daily Edge:

OMINOUS SIGNS?

The spread between High Yield and Investment Grade bonds has been at its historical low for over a year, showing no signs of widening like prior to previous recessions, high yield investors seeing no need to ask more yield for the lesser protection:

In both 2001 and 2007, yields diverged prior to the economic downturn:

More recently, however, High Yield rates have spiked without reaction from IGs. Somebody sniffing something from trade issues, labor tightness, rising inflation

EARNINGS WATCH

The Q2 earnings season will get in overdrive in the next 2 weeks. So far, so good:

Source: @biancoresearch (via The Daily Shot)

• Stronger fundamentals have been driving the latest improvements in earnings revisions.

Source: Credit Suisse (via The Daily Shot)

FYI:

New Yorker Magazine to Recognize Newly Formed Union

When is the last time we heard about a new union?

Meanwhile, socialism is gaining ground, especially among younger voters who know nothing about history other than that capitalism has failed them.

• With blunt talk and compelling stories, viral videos are turning unknown women candidates into political sensations The ads create buzz and draw in money from far beyond the district’s borders.

SAD CHART:

Opioid use vs. labor force participation by state:

Source: Deutsche Bank, @RobinWigg

HAPPY ENDING

Thai cave rescue ends in triumph as final four boys, soccer coach are freed The dangerous three-day mission to rescue 12 young soccer players and their coach from a flooded cave in northern Thailand has ended, officials said.