THE DAILY EDGE: 30 MAY 2019

U.S. First-Quarter Growth Revised Down to 3.1% Pace From 3.2%

U.S. economic growth last quarter was revised down by less than expected amid stronger consumption and exports than initially reported, suggesting the expansion was on relatively firm footing before President Donald Trump’s escalation of the trade war with China.

(…) Consumer spending, which accounts for the majority of the economy, grew 1.3%, topping projections for an unrevised 1.2% though still the slowest in a year. (…)

Excluding the trade and inventories components that gave a boost to GDP, final sales to domestic purchasers increased at a 1.5% pace — the slowest since 2015, though revised from 1.4%. (…)

Pretax corporate profits fell 2.8% from the prior quarter, the biggest drop since 2015, and were up 3.1% from a year earlier, the least since 2017. (…)

The personal consumption expenditures price index, excluding food and energy, rose at a 1% pace — the slowest in three years and revised from 1.3%. (…)

Trade added 0.96 percentage point to GDP growth, revised down from 1.03 point, as the upward revision to imports outstripped higher exports. The inventory contribution was revised to 0.6 point from 0.65 point (…)

• The Richmond Fed region’s factories are increasingly boosting wages and expect the trend to continue. (The Daily Shot)

Fed’s Patience Faces Test if Trade Spats Chill Growth Outlook The recent escalation of President Trump’s trade dispute with China is putting the Federal Reserve in a bind. Officials see trade tensions as a rising risk to the U.S. expansion that complicates their make-no-moves policy posture.

(…) Generally speaking, the Fed will want to move more quickly than it has in previous cycles to shore up growth at the first sign of any economic contraction because with its short-term benchmark at a historically low range, between 2.25% and 2.5%, it doesn’t have as much room to cut rates as in previous downturns. (…)

“Confidence, especially business confidence, is fragile. It’s our job as policy makers to try to support it,” said Richmond Fed President Tom Barkin in a speech earlier this month. (…)

“There’s a cost to the Fed moving rates around a lot. We can add our own uncertainty and volatility to the markets and the economy,” said Minneapolis Fed President Neel Kashkari. (…)

Upbeat Bank of Canada Pours Cold Water on Rate Cut Speculation

(…) In a decision Wednesday, policy makers in Ottawa left interest rates unchanged for a fifth straight time and continued to indicate they see no need to move borrowing costs anytime soon. They said recent data has “reinforced” their view a slowdown at the end of 2018 and early 2019 was temporary, while acknowledging mounting global trade risks were “heightening uncertainty” around the outlook.

Poloz has clung to the idea that his next step is probably higher, even as investors question the health of the global economy and bet the world’s central bankers are poised to cut in coming months. (…)

David Rosenberg slams the BoC, arguing it is looking in the rear view mirror while dismissing its own Business Outlook Survey which is clearly negative in its assessment of the immediate future.

As U.S.-China Trade War Drags On, Risk to Trump and GOP Grows Some Republicans on Capitol Hill have grown increasingly critical of the president’s trade strategy

(…) A Monmouth University poll this month found that 47% of respondents thought Mr. Trump’s tariffs on U.S. trading partners hurts the economy, up from 38%. (…) The Monmouth poll found that 62% of Americans are either very or somewhat concerned that the trade war with China could harm their local economy. That same share of respondents also reported fearing that American consumers will bear the brunt of the tariffs’ cost. (…)

A Wall Street Journal/NBC News poll conducted between April 28 and May 1, when a deal with China seemed likely, found that 51% of respondents approved of Mr. Trump’s handling of the economy.

China Puts U.S. Soy Buying on Hold as Tariff War Escalates

(…) State-grain buyers haven’t received any further orders to continue with the so-called goodwill buying and don’t expect that to happen given the lack of agreement in trade negotiations, said the people, who asked not to be named because the information is private. (…)

While U.S. Agriculture Secretary Sonny Perdue said in February that China had pledged to buy an additional 10 million tons of American soy, purchases have now stopped. (…)

U.S.-EU Talks Struggle, Threatening a New Front in Trade War

(…) Ten months after Trump and European Commission President Jean-Claude Juncker struck a Rose Garden truce meant to clear the way for negotiations to reduce tariffs on industrial goods and eliminate regulatory hurdles, those talks are showing few signs of going anywhere meaningful. (…)

As he made clear during his recent trip to Japan, Trump is eager to see at least some rapid deals going into his 2020 re-election run.

With Japan he may have some luck. People close to those talks see the very real possibility of a deal being struck by the end of the year with negotiations due to accelerate after Upper House elections in Japan in July.

For Europe, though, the signs are more ominous. The auto deadline will hit just as a new European Commission, the bloc’s executive arm, is due to take over from the Juncker-led one that has governed for the past five years. (…)

In talks in Washington and Paris this month the two sides again made little progress. (…)

Banks Report Growth in Sour Loans, Led by Credit-Card Deb FDIC report also shows 22.8% surge in commercial- and industrial-loan balances that are 90 days or more past due

(…) Banks also wrote off $12.7 billion in uncollectible loans, a 5.5% increase from the same time last year.

Net charge-offs for credit-card debt increased by $543.4 million over the last year, the largest such dollar increase relative to other loan categories.

The net charge-off rate has crept up in recent years, prompting large lenders such as Capital One Financial Corp. COF 0.78% and Discover Financial Services DFS 0.42% to tighten credit limits. It has increased in eight of the past 10 quarters, the FDIC said, reaching 3.97% in the first quarter.

FDIC officials attributed the most recent sour credit card debt increases to a few banks that have lowered their underwriting standards. “There have been some banks that have relatively recently pursued a little bit more of an aggressive [approach],” said Pat Mitchell, a deputy director at the FDIC.

Banks have said they are wary of newer credit-score data that excludes some borrowers’ performance during the financial crisis. Capital One’s chief executive Richard Fairbank said during an earnings call last month that the bank was on the lookout for “degradation of performance of consumers for a given FICO score,” referring to the widely used credit score.

Credit-card delinquencies are also becoming a growing issue for older borrowers, according to research by the Federal Reserve Bank of New York.

“Transitions into serious delinquency for credit card accounts increased again,” the Fed said in a February report on household debt and credit. “It has risen sharply among older borrowers over the last two years.” (…)

The noncurrent loan rate remained relatively steady, with less than half of all banks reporting an increase in their balance of loans that are 90 days or more past due or troubled.

Banks saw an increase in noncurrent commercial and industrial loans, which increased by $3.3 billion in the first quarter — the largest quarterly dollar increase since 2016. In its April survey of senior loan officers, the Fed found that banks had eased some terms for these types of loans to large and midsize firms, while keeping standards steady for smaller firms. (…)

To better weather credit risk, banks allocated $13.9 billion in loan-loss provisions, a nearly 12% increase from a year earlier. A large portion of the annual increase came from the largest banks, the FDIC said.

Nothing too serious just yet, except for smaller banks’ credit cards operations:

Brazil’s shrinking GDP fuels recession fears

TECHNICALS WATCH

Two indicators turned negative yesterday: Lowry’s Research Demand/Supply gauge crossed with Supply taking over. Sentimentrader’s Dumb Money/Smart Money gauge did the same with Dumb money taking over. Both indicators had done the same last October…

The 13/34–Week EMA Trend remains positive but threatens a repeat of its late 2018 reversal. This indicator turned officially negative the first week of December 2018. The S&P 500 Index subsequently lost 13%.

Are Stocks as Expensive as Shiller’s Measure Says? A valuation tool popularized by Robert Shiller is affected by corporate losses that occurred more than a decade ago

The sharp losses companies experienced following the 2008 financial crisis are now a distant memory, yet they cause ripples. A widely cited stock-market-valuation measure popularized by Nobel Prize-winning economist Robert Shiller looks different as a result. Perhaps it shouldn’t. (…)

But it wouldn’t be quite so elevated if it weren’t for the steep losses companies in the S&P 500 experienced in the final quarter of 2008. That is especially odd since the fourth quarter of 2008 was more than 10 years ago. Yet, in the way Mr. Shiller has put together the spreadsheet he maintains on his website, the CAPE isn’t actually an average of the past 10 years earnings but a 10-year average of the previous year’s earnings. (…)

As a result, though, his CAPE figure residually reflects those late-2008 losses. Recalculating the CAPE to remove this residual effect brings it down to 27.2. That is still high, but it is about 6% lower than Mr. Shiller’s CAPE.

Of course, the fact that Mr. Shiller’s CAPE calculation reflects 11, rather than 10, years’ worth of data is true across the entire history of his data, so his CAPE always has tended to be a bit higher than it might otherwise be. The difference now is that, because of the distortions introduced by the financial crisis, the gap between his figure and the true 10-year CAPE is far wider than it has been in at least the past 73 years. (…)

I have been writing about the flaws in CAPE since early 2012 (The Shiller P/E: Alas, A Useless Friend). One of CAPE’s main flaw during this cycle:

(…) many of the companies that recorded huge losses in 2008-09 either went bankrupt or were substantially restructured or acquired. A conceptually valid valuation method like the Shiller PE, measuring 10-year average earnings against a current index, is thus including in its denominator, during 10 years, the huge losses recorded by companies that are no longer included in its numerator, these companies having in fact been replaced by other, profitable, companies. (…)

The losers are long gone but their losses remain!

This is like assessing a baseball team’s current batting line-up using 10-year data that includes the dismal stats of now deceased players. How useful is that?

The 2009 huge losses will disappear in 2020 but we now have another problem: the 2018 tax reform has significantly cut tax rates starting in 2018. CAPE’s averaging will carry the lower rates for 9 years.

The Dollar Underpins American Power. Rivals Are Building Workarounds. Iran sanctions have spurred Europe and India to devise systems to trade with Tehran without using the U.S. currency. The alternative methods diminish the power of the U.S. to impose its policies around the globe.