Fed Raises Interest Rates, Sets Stage for Two More Increases in 2018
(…) It is their second rate rise this year, and they penciled in a total of four increases for 2018, up from a projection of three at their March meeting.
“The decision you see today is another sign that the U.S. economy is in great shape,” said Fed Chairman Jerome Powell at a press conference following the Fed’s two-day policy meeting. “Growth is strong. Labor markets are strong. Inflation is close to target.” (…)
Most Fed officials expect the central bank will need to raise rates at least three more times next year and at least once more in 2020, leaving rates in a range between 3.25% and 3.5% by the end of 2020, the same end point officials projected in March. (…)
Mr. Powell also said he expected temporary factors, such as a recent rise in oil prices, to push inflation above the Fed’s 2% target this summer, but he dismissed the development as a short-lived one that would have “little, if any, consequence for inflation over the next few years.” (…)
Rising Business Prices Point to Trend in Firming Inflation
The producer-price index, a measure of the prices businesses receive for their goods and services, rose a seasonally adjusted 0.5% in May from a month earlier, the Labor Department said Wednesday. (…)
When excluding the often-volatile food and energy categories, prices were up 0.3% in May from the prior month. (…)
Haver Analytics’ table help us see what’s going on. Core PPI is up 2.4% YoY and +3.2% annualized in the last 3 months. Core Goods prices, still deflating in the CPI, are inflating at an accelerating rate at the producer level: +3.6% a.r. in last 3 months while prices in the pipeline (Intermediate Demand) are +6.3% YoY and +7.0% annualized in the last 3 months.
Meanwhile:
U.S. to Move Ahead With China Tariffs
The Trump administration, deepening its global trade offensive, is preparing to levy tariffs on tens of billions of dollars of Chinese goods in the coming week, perhaps as early as Friday—a move that is likely to spark heavy retaliation from Beijing.
Senior trade officials in the White House, the Commerce and Treasury departments and the U.S. Trade Representative’s office met on the issue before President Donald Trump went to a summit of the Group of Seven industrialized nations in Canada on Friday—and agreed that the U.S. should proceed, said U.S. officials and others briefed on the talks.
Mr. Trump hasn’t given his final approval and could have second thoughts about applying heavy pressure on China, the officials said, particularly because the U.S. wants Beijing’s cooperation in its efforts to get North Korea to give up its nuclear weapons. (…)
Since Mr. Trump’s initial warnings of tariffs, China has done nothing to do address the president’s concerns about its trading practices, the official said, bringing the White House to this point. (…)
…and NAFTA…
Eurozone Industrial Production Continues to Falter Industrial production in the eurozone fell more sharply than expected in April, underlining doubts about the strength of the economy as the European Central Bank decides on the future of one of its key stimulus programs.
The European Union’s statistics agency Wednesday said the output of factories, mines and utilities across the 19 countries that use the euro was 0.9% lower in April than in March, although 1.7% higher than a year earlier. That marked the fourth month in five in which industrial production has fallen. It was a sharper decline than had been anticipated, since economists surveyed by The Wall Street Journal last week estimated that output fell by 0.7%.
Each of the eurozone’s five largest members saw a drop in output, with the Netherlands experiencing the sharpest decline at 4.4%. While a slump in energy generation was largely responsible for the overall contraction, most manufacturing also retreated, the exception being the production of tools and equipment. (…)
China’s Economy Is Slowing Just as Trump Readies a Trade Beating
(…) Both industrial output and retail sales rose less than expected in May compared to a year ago. Fixed-asset investment growth in the first five months was the slowest since the data began in 1999, as was the investment in the services sector. The decade-long decline in investment has intensified this year, as policy-makers act to reduce leverage at state-owned companies and local governments. While that’s a deliberate policy, officials risk a worse-than-desired deceleration in growth. (…)
The Daily Shot has the important charts:
(…) Their official loan–to-deposit ratio increased from 65.8 percent in June 2015 to 71.2 percent at the end of March. New deposits peaked in 2015 and have since failed to keep up with lending growth. Last year, new loans amounted to 100.1 percent of new deposits. Through the first five months of this year, they were running at 104 percent. (…)
Ultimately, China must confront a stark equation. It can have higher credit and faster GDP growth or reduced credit and slower growth. But it can’t deleverage and boost the economy at the same time. Even the PBOC’s financial engineers can’t avoid the tradeoffs demanded by economic reality.
This reminds me of Enron.
(…) China Energy blamed the delinquency on about $2 billion of notes on a “tightening in credit conditions” that most other borrowers have so far weathered while making their payments. The unlisted Beijing-based oil-and-gas company jolted investors with the news in a statement that appeared on the Hong Kong exchange on May 27, three months after it had pulled out of the $5.2 billion Hong Kong office-tower deal.
The default has spurred some investors to reassess risks with Chinese firms that had previously been seen as solid bets, amid signs that authorities are more comfortable with letting borrowers renege on payments both in the domestic market and offshore. (…)
The securities are now indicated at around 30 cents on the dollar. The default had broader implications as well — average yields on Chinese junk-rated dollar bonds have surged by about 1 percentage point since then, to around 9 percent, near a three-year high. (…)
More broadly, gauging government support for Chinese companies that claim links to the state has become “a very subjective task,” CreditSights Inc. strategists wrote this month. (…)
Bloomberg reports that China Energy tapped South Korean investors for a new $150 million bond on May 8,
three days before a principal payment of $350 million was due on May 11 [on its 2019 bonds]. On May 25, Lin Jianbang, China Energy’s executive president, spurred investor confidence saying the company’s offshore unit expected to receive funds from its onshore parent by noon, enabling it to pay the debt.
When those funds didn’t arrive, the securities tumbled that afternoon. Two days later, on May 27, China Energy declared it had indeed missed principal payments on the $350 million of bonds, triggering so-called cross-defaults on its other overseas notes. (…)
This house of cards is showing more and more signs of weakening at the base.
SYNCHRONY!
A few months ago, we seemed to be in a synchronized growth world. Here are the Citi economic surprise indices for the US, EM, and the Eurozone.
Source: @atalaveraEcon (via The Daily Shot)
Saudis Say Deal to Gradually Boost OPEC Output `Inevitable’
(…) “I think we’ll come to an agreement that satisfies most importantly the market,” Khalid Al-Falih told reporters in Moscow on Thursday, when asked about the outcome of the meeting between the Organization of Petroleum Exporting Countries and its allies in Vienna next week. “I think it will be a reasonable and moderate agreement” but nothing “outlandish,” he said. (…)
EARNINGS, INFLATION WATCH
With 499 companies in, trailing EPS are now $140.14 which I raise to $146.50 pro forma tax reform assuming 7% average accretion. Q2 estimates are holding so far which would bring pro forma trailing EPS to $151.00. This 3.1% QoQ increase is important since inflation is also rising during this race between earnings and inflation. Consider that inflation’s uptick from 1.7% last November to 2.2% in May is a 29% jump. Meanwhile, trailing EPS have risen 25% using pro forma numbers. This is why the Rule of 20 Fair Value (yellow line on chart) has levelled off.
The S&P 500 Index is currently trading at 21.2x the Rule of 20 P/E, 6% overvalued.
So far this cycle, the economy was weak enough not to worry much about inflation. The risk here is that American companies, seeing good demand, seek to pass their rising operating costs on to end users. Not a moot point when total inflation is 2.8% and rising, potentially pulling up core inflation trailing at 2.2%.
The Fed sees inflation steady at 2.0-2.2% forever, a highly unlikely scenario when resources are so tight. The Trump tax reform was very timely to keep earnings in the race with inflation but this effect will disappear in 6 months while the inflation threat will remain.
WOW!
With Time Warner Deal, AT&T Bulks Up on Content—and Debt AT&T’s $85 billion purchase of Time Warner is on track to go down as one of the largest acquisitions in history, but the deal will be dwarfed by an even larger figure: the combined company’s approximately $181 billion debt load.
Comcast Challenges Disney for Fox Assets With $65 Billion Bid Comcast made an unsolicited offer to buy most of 21st Century Fox for roughly $65 billion, kicking off a bidding war with Walt Disney as the two media titans jockey for position in a business undergoing tumultuous change.
(…) That is a premium of nearly 20% to Disney’s all-stock offer for the same set of assets. (…)
CMCSA is offering $35/sh. FOX is now trading at $44!
Here’s who owns everything in Big Media today
