Fed Officials Acknowledge Economic Weaknesses Yet Remain Upbeat
Chicago Fed President Charles Evans, appearing on a panel discussion with two other regional bank chiefs, pointed to growing skilled-labor shortages. Kansas City’s Esther George said pain in the agriculture sector has been exacerbated by the trade dispute with China.
Atlanta Fed President Raphael Bostic called his district a “microcosm of the U.S. economy,” with many cities booming, but with many other “pockets of distress” being left behind by the economic expansion. (…)
Earlier Tuesday at the same event, Fed Vice Chairman Richard Clarida restated his support for continued gradual interest-rate increases as U.S. monetary policy gets closer to its optimal longer-run setting. (…)
FORWARD LOOKING?
Since the summer months, we have seen corporate surveys being much stronger for “current conditions” than “expectations”. American consumers are in a similar state of mind as The Daily Shot illustrates. Look when we have been there before.
- US households are more upbeat about the current situation than the future. Here is the spread between “expectations” and “current conditions.”
Commodity Woes Run Deeper Than China Commodities are selling off again, but it isn’t exactly China’s fault—the signal this time is even more worrying.
(…) There’s little doubt that weaker seasonal demand from China is weighing on prices. But on a year-over-year basis, the fundamental drivers of Chinese commodity demand still look strong. Housing prices in medium-size cities, which drive the nation’s iron-ore and copper demand, are zooming along, rising nearly 10% in October, the fastest pace since at least 2010. Industrial growth accelerated in October, too. And steel inventories look comparable to their level this time last year: lower for rebar, slightly higher for hot- and cold-rolled coil. There’s still no sign of major problems in China’s critical construction sector, in part because until very recently, it was still receiving a major boost from housing subsidies. (…)
Weakness in copper and aluminum, first evident in January and February, lines up far better with the widespread decline in global PMIs this year than with China specifically. (…) And with the U.S. PMI and financial markets now also showing signs of strain, the outlook is set to worsen further. (…)
Speaking of commodities, here is how the debt-to-GDP ratios changed over the past decade in the US and Canada.
Source: CIBC Capital Markets (via The Daily Shot)
EARNINGS WATCH
Nothing new this week other than that corporate pre-announcements have turned slightly more positive
The Daily Shot posted this chart from GMP Securities which incited me to verify how annual multiple contractions have correlated with upward moves in inflation as would suggest the Rule of 20:
There were 9 years when P/E multiples contracted (I exclude 2001 and 2015). Each of these years saw noticeable increases in inflation rates during the same year except 2010 when earnings were strongly recovering amid strong investor scepticism. FYI, the inverse has also verified: inflation eased or stayed flat during years of expanding multiples.
Note that, in 2018, core inflation rose from 1.7% in November 2017 to 2.3% in August. It is now 2.1% per the CPI and 2.0% per the PCE deflator. This while P/Es have contracted…
Trump Threatens to Cut GM Subsidies President Trump threatened to cut subsidies for General Motors, including for electric cars, a day after the company said it was planning to cut up to 14,800 jobs in the U.S. and Canada and end production at several North American factories.
President Trump says he wants General Motors to stop building cars in China, its biggest market. That would make GM—already plagued by weak sales in the U.S.—vulnerable to setbacks in China too.
The Dangerous Rise of Sponsored Stock Research New securities-trading rules are having one pernicious side effect on European stock markets: Research is increasingly paid for by those being researched.
(…) The new rules try to improve market transparency by forcing brokers to charge specifically for equity research—a departure from the age-old model of covering its cost with commissions on trades. After Mifid II came into force in January, however, many asset managers opted to use less external research or source it from cheaper, specialized houses.
The result is now clear: The average number of analysts covering larger companies in the eurozone and the U.K. has dropped, according to FactSet data. The impact isn’t noticeable for companies in the U.S., where the rules don’t apply, nor to small-capitalization firms, which never had much scrutiny to begin with. (…)
This development may end up rewarding active investors who do legwork on companies themselves. But it could also generate a lot of misinformation, because a growing share of the research available will be paid for by companies that want to appear more actively traded. A provision in Mifid II allows this kind of research to be distributed free with the proper disclaimers, but these are often written in very fine print. (…)
Overall, the move toward sponsored research is a worrying one for the equity market, because less negative coverage of companies will filter into the public arena. The role played by ratings firms’ skewed incentives in the 2008 debt crisis is an ominous precedent.
European midcap companies are already less covered by analysts than their U.S. peers. Now investors need to take even more care when shopping in Europe.