Edge and Odds

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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

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THE DAILY EDGE: 30 JANUARY 2019: Recession Warnings

U.S. Consumer Confidence Deteriorates, Led by Bleaker Expectations

The Conference Board Consumer Confidence Index deteriorated 5.1% to 120.2 during January (-3.3% y/y) from 126.6 in December, revised from 128.1. It was the lowest confidence level since July 2017, down 12.8% from the peak just three months ago. During the past 10 years, there has been a 69% correlation between the level of consumer confidence and the y/y change in monthly real PCE.

Leading the overall decline was a 10.6% drop (-16.1% y/y) in the expectations component to the lowest level since October 2016. This measure was down by roughly one-quarter during the last three months. In contrast, the reading of confidence in current conditions eased just 0.2% (+9.6% y/y) and has moved just 1.9% lower since the August peak.

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The decline in the expectations component was paced by a collapse in the business conditions reading, where just 16.0% of respondents expected an improvement, down ten points in the last three months. Expectations for improvement in the labor market soured to a 2016 low, down sharply in the last three months. Rounding out the deterioration in expectations was a collapse in the percentage of respondents expecting an improvement in income.

The deterioration in the reading of current economic conditions was led by a lessened 37.4% of respondents who felt that business conditions were good. That remained up, however, during the last twelve months. The labor market was deemed good as a higher 46.6% of respondents felt that jobs were plentiful, just off the 19-year high. Jobs were viewed as hard to get by just 12.9% of respondents, down from nearly 50% at the 2009 high. (…)

This month’s deterioration in overall confidence was greatest amongst individuals aged 35-54 years old. Their confidence fell to nearly a two-year low and was down sharply in the last three months. Confidence amongst individuals under age 35 also fell sharply. Confidence amongst individuals over age 55 held fairly steady m/m after falling sharply at yearend.

Fingers crossed The WSJ adds these important items:

The data showed Americans are eager to continue spending in the next six months. Plans to buy a home rose to their highest level since the end of 2017. Other categories of planned spending, including car and TV purchases, also remained solid.

Hope from CalculatedRisk:

High five Interesting observation by The Daily Shot:

This chart shows the gap between the indices of “expectations” and “present situation.” This spread tends to trough shortly before recessions.

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This suggests that consumer are good recession sniffers and that the –30 to –40 area is a good warning signal. In 1996, the growth slowdown stopped after the Fed back pedaled and in 2016 pessimism reversed after the elections. Hmmm…

BTW:

The most recessionary signal at present is consumer future expectations relative to current conditions. It’s one of the worst readings ever. (Jeffrey Gundlach @TruthGundlach)

The shutdown prevented the release of crucial stats on consumer spending, the only solid pillar for the economy in recent months. Talk about flying blind at dusk.

  • Ghost Credit card data suggests a substantial slowdown. (The Daily Shot)

Source: @TeddyVallee

Beijing tells cadres to prepare for the worst amid uncertainties of its high-stakes trade war with the US Top official tells cadres to arm the country for a tough fight against external uncertainty

The Communist Party wrapped up a four-day study session on risk controls on Thursday, an event analysts said underlined the leadership’s deep concern about growing external volatility and uncertainty amid its high-stakes trade war with the United States.

At the session’s closing ceremony, which was attended by hundreds of top officials from across the country, Wang Huning, the party’s ideology guru and its fifth most powerful member, called on the cadres to fight “a tough battle” in controlling risks, according to state news agency Xinhua.

Chinese President Xi Jinping and Wang both told cadres that they must develop “bottom-line thinking” or be prepared for the “worst-case situation”. (…)

Xi specified “unpredictable international developments and a complicated and sensitive external environment”, a phrase invoked by Chinese leaders to refer to rising threats from China’s trade war with Washington. (…)

[Zhu Lijia, from the Chinese Academy of Governance] said Xi’s references to external uncertainties were in response to a growing atmosphere of confrontation between China and the US as well as its allies. (…)

Simultaneously, according to J Capital, China’s local governments have been instructed to use a special funding mechanism to ramp up spending on infrastructure in Q1. Issued by local governments, SPB are for discrete infrastructure projects whose revenues will allegedly service the bonds. SPBs’ fiscal beauty is that they don’t show up in local governments’ budgets. J Cap informs us that, in 2018, ¥1.35trn ($190 bln) in SPBs were issued, representing 81% of the incremental increase in infrastructure spending. Indications are that RMB ¥2-2.5 trn will be issued in 2019, potentially boosting fixed asset investments. J Cap anticipates that the first statistical effect of SPBs will appear in Marc/April.

The big question mark is whether these incremental infrastructure investments will be large and timely enough to offset a potentially nasty slowdown in China’s hugely important housing market.

Meanwhile,

Trump Warns Europeans Not To Defy US Sanctions Against Iran

“The choice is whether to do business with Iran or the United States… I hope our European allies choose wisely.”

  • Europe Opens Channel for Trade With Iran France, Britain and Germany, defying threats from Washington, established a special payments company intended to secure some trade with Iran and blunt the impact of U.S. sanctions.
AMERICA CURSED

The luxury bellwether, which owns some of the world’s most valuable brands including Christian Dior and Givenchy, said Tuesday that demand from Chinese consumers strengthened in the three months through December. (…)

Most surprising is the pickup in spending by Chinese shoppers mentioned by management on a call with analysts. While LVMH doesn’t break out figures for mainland China, sales in Asia grew 15% in the three months through December, better than the 11% recorded in the previous quarter. (…)

Another indication that Chinese consumers are shunning American brands. Now this:

  • Foxconn reconsidering plans to make LCD panels at Wisconsin plant  Foxconn Technology Group is reconsidering plans to make advanced liquid crystal display panels at a $10 billion Wisconsin campus, and said it intends to hire mostly engineers and researchers rather than the manufacturing workforce the project originally promised.

Announced at a White House ceremony in 2017, the 20-million square foot campus marked the largest greenfield investment by a foreign-based company in U.S. history and was praised by President Donald Trump as proof of his ability to revive American manufacturing. (…)

Now, those plans may be scaled back or even shelved, Louis Woo, special assistant to Foxconn Chief Executive Terry Gou, told Reuters. He said the company was still evaluating options for Wisconsin, but cited the steep cost of making advanced TV screens in the United States, where labor expenses are comparatively high.

“In terms of TV, we have no place in the U.S.,” he said in an interview. “We can’t compete.” (…)

Surprised smile Anybody surprised?

Europe Stays in Gloomy Mood as Germany Slashes Its 2019 Outlook

(…) In its German outlook, the government in Berlin downgraded its 2019 prediction to 1 percent from 1.8 percent, citing in part the deteriorating global trading environment. (…)

Earlier on Wednesday, France, the euro area’s second-largest economy, reported disappointing domestic performance in the fourth quarter. A surge in exports boosted economic growth to 0.3 percent, but household expenditure stagnated. A separate report showed a huge plunge in December alone, when retailers were dogged by violent Yellow Vest protests. (…)

EARNINGS WATCH

If the American consumer is the only solid pillar for the economy, American companies’ earnings are the only solid pillar for the stock market. So far, so good:

Of the 135 companies having reported, 74% beat expectations with a surprise factor of +2.0% with only 2 sectors (Utes and Materials) showing a negative surprise factor with only 7 of 45 reports in.

Companies having reported aggregate a 15.9% earnings growth rate on a 6.3% revenue growth rate.

The blended growth for Q4 earnings remains steady at +14.2%. However, companies are guiding Q1’19 lower and analysts are now at +1.8%, down from 5.3% on Jan. 1. Full year 2019 estimates are +5.6%, down from +7.3%.

Trailing EPS are now $162.02, still above the full year estimate of $161.33.

This a.m.:

At Least 20 Companies in China Issued Profit Warnings in One Day

At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value. (…)

More gloomy signals are likely before a deadline Thursday, when many Chinese companies must report whether they expect any substantial changes in their financial results. More than 1,800 firms have announced preliminary data, with those in the tech, communications and financial sectors suffering the most. (…)

1 thought on “THE DAILY EDGE: 30 JANUARY 2019: Recession Warnings”

  1. Retail Dump:

    I posted a story maybe 6 weeks ago +/- about department stores having trouble with storage for unsold holiday inventory — I recall that trailer trucks were parked, filled with merchandise that had no place to go. Nothing like stuffing the channel or playing games!

    As such, can’t find that link, but there does seem to be mounting evidence of decreased consumer demand and retailers who are having capacity utilization distortions:

    ==> Foot traffic in the past year fell as customers eschewed crowded shop floors in favor of online shopping, or lower-cost offerings elsewhere, a challenge hitting a wide array of “fast fashion” retailers. On Tuesday, the company said the pile of unsold stock had grown 7 percent in the past year and was now worth nearly 35 billion Swedish kronor.

    https://www.nytimes.com/2018/03/27/business/hm-clothes-stock-sales.html

    The GDP report, whose bottom line was a dismayingly tiny growth of 0.2%, included another stunner. During the first quarter, privately held, unsold inventories of stuff increased by $122 billion. Without the activity generated by putting all that stuff in storage somewhere, the GDP would have been down by 3% and all hell would have broken loose. The question now is, with consumer spending anemic and getting weaker, who is going to buy all that crap?

    ==> In the nearly 40 years she has spent in trade, Amy Magnus has never seen retailers hoarding so much inventory.

    Warehouses throughout the United States are at record capacity with Chinese imports of all kinds – microwaves, vacuum cleaner filters, swimwear, furniture – stacked to the ceiling, according to Magnus, who heads the National Customs Brokers & Forwarders Association of America, whose members work with over 250,000 importers and exporters.

    She is one of over a dozen customs brokers, retailers, vendors, analysts and supply chain experts who told Reuters that retailers have been stockpiling inventory from China to avoid higher tariffs that may kick in next year.

    The buying binge is also evident in recent data from the National Retail Federation (NRF) and Hackett Associates, which show imports at major U.S. retail container ports surged 13.6 percent to a record 2.04 million containers in October. This helped push the U.S. trade deficit with China to a record high.

    The strategy could mean heavy discounts for shoppers next year if retailers are stuck with an overhang of unsold merchandise. Already, it has driven up transportation and warehousing costs, which is adding pressure to quarterly results for retailers, according to the sources.

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