Travelling day. Actually, they will all be travelling days for a few weeks. Will post when possible.
Global Slowdown Spreads Across U.S. Economy Economists lower third-quarter growth estimates after household spending nudged up 0.1% in August
Consumers slowed spending and businesses cut back on investment in August, signs that a wobbling global economy and rising tariffs are sapping U.S. economic momentum.
Personal-consumption expenditures, or household spending, edged up a seasonally adjusted 0.1% in August from July, the Commerce Department said Friday. The modest growth marked a sharp pullback from the first seven months of the year, when spending rose an average of 0.5% a month. (…)
Another key source of demand in the economy, business investment, continued a stretch of weakness in August, according to a separate report Friday. Orders for long-lasting equipment and machinery, a proxy for business investment, fell 0.2% last month from July and 1.7% from August 2018. (…)
Macroeconomic Advisers’ closely watched model for gross domestic product showed growth slowing to 1.7% in the third quarter, down from a previous estimate of 2.2%. Pantheon Macroeconomics, meanwhile, cut its forecast for third-quarter consumer-spending growth to 2.9% from 3.6%. (…)
Much of the slowdown in consumer outlays in August could be traced to lower energy prices, which magnified a pullback in spending on gasoline and other energy goods. Expenditures on services slowed only modestly, while outlays on long-lasting consumer goods such as cars and furniture picked up. (…)
Incomes grew 0.4% in August from a month earlier, led by a 0.6% jump in employee compensation. Annual inflation also remained low, undershooting the Federal Reserve’s 2% target.
Consumer sentiment, a measure of household sentiment released Friday by the University of Michigan, rose to 93.2 in September, up from August’s 89.8, though it was down 6.9% from September 2018. That represents the largest year-over-year drop since April 2016. (…)
Haver Analytics’ table provides a good summary of the consumer economy. Wages and salaries jumped 0.6% MoM in August and are up 5.3% annualized in the last 3 months and YoY. American consumers have money. They also have real money as core PCE inflation slowed to 0.14% in August and is up 1.8% YoY, boosting real disposable income growth to +2.8% a.r. in the last 3 months and +3.0% YoY in August.
The risk to consumer spending is thus currently (see below re: jobs) limited to swings in the savings rate which jumped to 8.1% in August from 7.5% on year ago. The foundation is solid but a spending strike is always possible (remember last December).
U.S. Inflation Decelerated in August Sluggish price gains kept inflation well below Fed’s annual target of 2%
The Federal Reserve’s preferred inflation gauge, the personal-consumption-expenditures price index, rose a seasonally adjusted 0.03% last month from July, the Commerce Department said Friday, its smallest gain since January. The so-called core index, which strips out volatile food and energy components, rose 0.14% in August.
The sluggish gains last month kept inflation well below the Fed’s annual target of 2%. Compared with August 2018, the main index was up 1.44%—the same as in July—although core inflation stood at 1.77%, its highest level since January. (…)
Friday’s figures contrast with other data showing that inflationary pressures are building in the U.S. after a very weak start to the year. The core consumer-price index, a separate inflation measure published by the Labor Department, rose 0.3% a month between June and August, the largest three-month increase since 2006. (…)
However, last 6 months annualized, core PCE inflation was +2.1%, last 3 months: +2.5%. Core CPI: +2.5% last 6 months, +3.4% last 3 months.
SLOW AND SLOWER
I am watching various indicators curious to se whether the current soft patch is getting worse than the oil-collapse induced slowdown of 2015-16. New orders are the life blood of real demand while profits and corporate sentiment are the needed ingredients for rising capex and employment. Markit’s September Flash PMI shows
inflows of new business down to the lowest since 2009 and firms’ expectations of growth over the coming year stuck at one of the most subdued levels since 2012. Inflows of new service sector business almost stalled in September to register the smallest rise since the survey began in 2009.
Disappointing inflows of new work and gloomy prospects for the year ahead took their toll on hiring again. Firms have become more risk averse and increasingly eager to cut costs, resulting in the September PMI showing jobs being cut across the surveyed companies for the first time since January 2010. At current levels, the survey employment index is indicative of non-farm payroll growth falling below 100,000. That compares with signals of an average of 200,000 in the first quarter and 150,000 in the second quarter.
U.S. Pending Home Sales Rebound in August
The National Association of Realtors (NAR) reported that U.S. pending home sales rose a larger-than-expected 1.6% m/m in August (+2.5% y/y) following a 2.5% m/m decline in July. Meanwhile, mortgage rates continued to decline. The effective rate on a 15-year fixed-rate mortgage fell to 3.40% in August from 3.54% in July, the ninth consecutive monthly decline and the lowest level since November 2016. This declining trend in interest rates has had a positive impact on housing activity. Pending sales are up 8.7% since the four-and-a-half year low reached last December.
The August increase was spread across all major regions with each region experiencing both a monthly and an annual increase. The gains were particularly strong in the West where pending sales increased 3.1% m/m (8.0% y/y) in August. Pending sales rose 1.4% m/m (0.7% y/y) in the Northeast, edged up 0.6% m/m (0.2% y/y) in the Midwest and rose 1.4% m/m (1.8% y/y) in the South.
U.S. GDP Growth Is Unrevised; The Economy Continues to Increase at a Moderate Pace
Economic growth slowed in the second quarter at an unrevised 2.0% rate. The figure matched expectations in the Action Economics Forecast Survey. Last quarter’s increase compared to a 3.1% rise in the first quarter. GDP growth slowed during the last year to 2.3% from its recent peak of 3.2% during the four quarters ended Q2’18.
Growth in corporate profits before-tax with IVA & CCA adjustments was lessened to 3.8% (1.3% y/y) from 5.3%. The gain followed two quarters of decline. Domestic industry profits declined 1.1% y/y as nonfinancial earnings also fell 1.1% y/y. Earnings in the financial sector declined 3.8% y/y but profits earned abroad rose 8.7% y/y. After-tax earnings rose 3.3% (0.3% y/y), the first rise in three quarters.
Nonresidential fixed investment declined 1.0% (2.6% y/y) after a 4.4% Q1 rise. Growth in structures investment was revised to -11.1% (-4.8% y/y) from -9.4% while equipment investment was revised to 0.7% (+2.7% y/y) from 0.8%. Growth in intellectual property products investment was little-changed at 3.7%, and y/y growth of 7.5% compared to 9.6% in Q1.
Growth in personal spending also was lessened to a 4.6% surge (2.6% y/y) from 4.7%. That strengthening followed two quarters of modest rise. Spending on durable goods remained firm at an unrevised 13.0% (4.4% y/y). Strength was driven by a 16.1% advance (1.9% y/y) in motor vehicle outlays. Nondurable goods outlays were revised lower to 6.5% (3.5% y/y) from 6.8%. Spending on services was unrevised at 2.8% (2.1% y/y). Recreation outlay growth was strong at 6.4% (2.3% y/y).
U.S.-China trade negotiations set to resume on October 10: CNBC Trade talks between the United States and China are set to resume on Oct. 10 in Washington, CNBC reported on Thursday, citing three people close to the talks.
Its leash lengthened, China’s yuan flirts with trade war role China, having let the yuan cross the once sacred red line of 7 per dollar, will allow its currency to fall further and may even risk U.S. anger by using it as a bargaining chip in already thorny trade talks, market participants believe.
Shale Boom Is Slowing Just When the World Needs Oil Most The U.S. shale boom is slowing, as technology advances that helped unlock record amounts of oil and gas have begun to level off and productivity of even new wells begins to slow
U.S. oil production increased by less than 1% during the first six months of the year, according to the Energy Department, down from nearly 7% growth over the same period last year.
Unlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner than anticipated.
The challenges raise the prospect that the technological and engineering advances that have allowed shale companies to unlock record amounts of oil and gas from rock formations have begun to level off.
U.S. oil production is on track to hit an average of 12.2 million barrels a day this year, up from last year’s average of 11 million barrels a day, the Energy Department said earlier this month. But because output grew so quickly last year—from an average of 10 million barrels a day in January to 12 million barrels a day in December—that implies limited growth throughout 2019. Activity has slowed recently and employment has fallen in some of the hottest U.S. oil regions, according to a September report by the Dallas Federal Reserve. (…)
U.S. shale oil production now accounts for about 8 million barrels a day, or roughly 10% of oil world-wide, significantly boosting global supplies. (…)
One factor that could lead growth to continue is the increasing shale footprint of major oil companies such as Exxon Mobil Corp. and Chevron Corp. They are now among the fastest-growing producers in the Permian Basin of Texas and New Mexico, investing heavily in factory-style shale production.
But growth also could slow if financial support from Wall Street tightens further and oil prices continue to hover around $60 a barrel—factors that are leading many small and midsize shale producers to pull back and emphasize profitability. (…)
The slower rate of new wells means companies will need to wring more out of each well just to sustain current production, let alone increase it. But a growing body of data indicates the production gains from technological advances that many drillers have touted are leveling off, and older shale fields may have less oil left than originally thought.
Gains in oil production from U.S. onshore drilling rigs are declining rapidly, federal data show. In December, drilling rigs helped extract 25% more oil than they had a year prior. In August, they were producing about 14% more than last year, according to the Energy Information Administration.
Meanwhile, production in the first 90 days of an average shale well, its most productive period, declined by 10% in the first half of the year compared to the 2018 average, according to research by Raymond James. (…)
Now, here’s a potentially highly consequential development:
First solid bitumen test shipment on its way from Alberta to China
A test shipment of bitumen oil from Alberta is on its way to China, but it didn’t get to a British Columbia port by pipeline – it was moved by train through Prince Rupert in a semi-solid form commonly known as neatbit.
Melius Energy in Calgary is not the first company to propose moving bitumen through BC in a semi-solid form by train, but it appears to be the first to actually land a potential customer in China and start shipping semi-solid bitumen by train.
It has sent its first container, containing 130 barrels of bitumen, to China in a test shipment, and is currently building a new demonstration plant in Edmonton that turns diluted bitumen into a solid called TrueCrude.
Using existing rail infrastructure, Melius says it could potentially move 120,000 barrels per day of pure bitumen in 100-unit trains through the Port of Prince Rupert. (…)
Should a container of TrueCrude ever crack open and end up in the ocean, it would float in one large block that could easily be recovered, the company says.
Bitumen is a thick, tarry form of oil that has to be diluted with lighter oils – condensate – in order to transport it in liquid form. Melius developed a process, called BitCrude, whereby the diluent is taken back out of the diluted bitumen. The diluent can be recycled back to dilbit producers.
The pure bitumen is heated so it can be poured into modified shipping containers, where it then solidifies when it cools. It is then shipped by train and put onto container ships. When it reaches its destination, the bitumen is heated to allow to flow into a refinery. (…)
He said there is a huge demand in China for bitumen, largely because China’s Belt and Road project will require so much asphalt.
Because of its high asphaltene content, bitumen is a highly desired feedstock for making asphalt. Roughly half of a barrel of bitumen can be turned into asphalt, with the rest being turned into other petroleum products.
“The demand from Asia right now for heavy crude oil is growing and it’s almost insatiable, especially with what’s happening with Venezuela, and Iran and Saudi Arabia,” Butler said.
“They’re looking for supply, and right now they’re struggling to find it. Whereas here in Alberta we have quite a bit of supply and we’re trying to export it to the U.S., where we’re fighting to get a low dollar. If we can get this to the China, we can get a much better dollar and sell our premium product at a premium price.”
EARNINGS WATCH
Analysts keep marking down earnings as Q3 comes to an end:
But Q3 estimates still call for –2.2% (-2.3% last week) while Q4 are +4.1% (+4.2%).
Corporate preannouncements did not change last week and remain fairly good compared to Q2.
Trailing EPS have been revised down last week to $164.31 from $164.44 last week. The Rule of 20 P/E is now 20.4. Fair Value [164.31 x (20 – 2.4)] = 2892, down for the third consecutive month from 2951 at the end of June.
TECHNICALS WATCH
Fewer Stocks Are Participating in the Market’s Rally U.S. stock indexes are hovering near records, but many stocks are struggling to break out of a narrow trading range to hit new highs.
(…) Last week, 106 firms in the index set new 52-week highs, down from 293 in mid-June, according to FactSet. The lack of breadth in the stock market is concerning to some analysts who note the S&P 500 has broken out to fresh highs three times since early 2018, but each rally was short-lived. That marks a divergence from 2013 and 2017 when stocks notched a series of new highs in the wake of strong bouts of volatility. (…)
Investors have been selling higher growth technology companies including the popular FAANG stocks— Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. —that have propelled the decadelong bull market.
They are opting instead for beaten-down value stocks, often defined as companies whose shares trade at a low multiple of their book value, or net worth. That includes energy and financial stocks that have underperformed the broader market in recent years. (…)
Technical indicators have turned bullish after flashing red this summer. About 68% of the companies in the S&P 500 are now trading above their 50-day moving averages, up from less than 25% when the broad index came under pressure in early August. (…)
Some investors point to signs of improving market breadth as an encouraging sign. The NYSE advance-decline line, a popular indicator that tracks the number of stocks rising minus the number falling each day, hit a fresh high Sept. 23, according to Dow Jones Market Data. (…) (Chart above from Alpine Macro (via The Daily Shot))
Lowry’s Research reminds us that “rather than point to a single factor (time), our analysis evaluates the measurable actions of buyers and sellers in order to draw informed, probabilistic conclusions.” Speaking of breadth, Lowry’s says that “another sign of a robust, lasting market advance has historically been when breadth leads index prices. Since 1940, these positive divergences in the NYSE all-issues Adv-Dec Line subsequent to major drawdowns have led to new price index highs. In the early stages of the recovery from the Dec. 2018 market bottom, the NYSE all-issues Adv-Dec Line was able to achieve a new all-time high on Feb. 15, 2019 along with Lowry’s OCO Adv-Dec Line – ahead of prices. New highs in price and breadth since then reflect broad participation in the intermediate-term advance, reaffirming its viability. Lowry’s OCO Adv-Dec Line reached a new high as recently as Sept. 16.”
It concludes that “evidence of a recently rejuvenated bull market provides calming context to short-term gyrations. As such, investors should continue to view these periodic bouts of volatility as buying opportunities.”
The 13/34–Week EMA Trend Chart, courtesy of CMG Wealth, remains supportive:
But the IPO market looks tired:
Endeavor Pulls IPO After Peloton’s Poor Debut The IPO market took another hit Thursday as Endeavor Group Holdings yanked its planned offering and Peloton’s shares skidded on their first day of trading.
Alibaba unveils self-developed AI chip for cloud computing services
Alibaba Group Holdings Ltd said on Wednesday it has developed a new chip that specializes in machine-learning tasks and which will be used to enhance services for its cloud computing division.
Called Hanguang 800, the company’s first self-developed AI chip is currently being used within Alibaba to power product search, automatic translation, and personalized recommendations on the e-commerce giant’s web sites.
“The launch of Hanguang 800 is an important step in our pursuit of next-generation technologies, boosting computing capabilities that will drive both our current and emerging businesses while improving energy-efficiency,” Alibaba CTO Jeff Zhang said in a statement. (…)
Alibaba also released its first core processor IP in July based on RISC-V open-source chip architecture. RISC-V gives firms a potential alternative to the dominant architecture of Britain’s Arm Holdings Inc. Arm, a unit of Japan’s SoftBank Group Corp, charges licensing fees for its use. (…)
The chip was developed by DAMO Academy, a research institute Alibaba launched in late 2017, and T-Head, the company’s specialized semiconductor division. (…)