Edge and Odds

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LEADING ECON. INDIC.

NEW$ & VIEW$ (23 OCTOBER 2015): ECB, PBoC, Earnings Lift Equities

U.S. Existing Home Sales Rebound as Prices Fall Again

Sales of existing homes increased 4.7% (8.0% y/y) during September to 5.550 million and recouped the August decline to 5.300 million, revised from 5.310 million. The latest figure beat expectations for 5.35 million sales in the Action Economics Forecast Survey. Single-family home sales recovered 5.3% last month to 4.930 million (8.6% y/y). Condo and co-op sales remained unchanged (3.8% y/y) following two months of decline.

The median sales price of an existing home fell 2.9% to $221,900 (+6.1% y/y) and was down from June’s record $236,300. The average sales price fell 2.3% to $265,000 (3.9% y/y).

By region, sales in the Northeast were strongest m/m and rose 8.6% to 0.760 million (10.2% y/y) after remaining unchanged in August. Sales in the West improved 6.7% (8.5% y/y) to 1.270 million following a 7.8% fall. In the South, sales rose 3.8% (5.5% y/y) to 2.210 million after a 7.0% August decline. In the Midwest, sales rose 2.3% (10.9% y/y) to 1.310 million and recovered the August drop.

The composite index of home affordability rose 2.1% to 157.7 (-1.6% y/y) in August but remained near its low for the economic recovery. Payments as a percent of income eased to 15.9%, up from 11.7% in January 2013.

The inventory of unsold homes declined 3.1% y/y to 2.210 million. The months’ supply of homes on the market declined to 4.8 months, down from the 11.9 month high in July 2010.

The existing housing market is back to normal if one considers the 2004-05 period as abnormal.(Charts from CalculatedRisk)

 

From the WSJ:

  • The share of such purchasers fell to 29% of sales in September from 32% in August.
  • Redfin said sellers of 25% of homes on the market in September dropped their asking prices, up from 20% a year ago, suggesting the strong market has swelled sellers’ expectations.
RECESSION WATCH

Really no sign of that:

The Latest Conference Board Leading Economic Index (LEI) for September is now available. The index decreased 0.2 percent from a revised August 123.5 to today’s 123.3. The latest indicator value came in below the 0.0 percent forecast by Investing.com.

Here is an overview from the LEI press release:

The Conference Board LEI for the U.S. decreased in September with stock prices, building permits and average weekly hours making large negative contributions. Despite the slight decline in the LEI, in the six-month period ending September 2015, the leading economic index increased 1.5 percent (about a 3.0 percent annual rate), slower than its growth of 1.9 percent (about a 3.9 percent annual rate) over the previous six months. The strengths among the leading indicators remain more widespread than the weaknesses. [Full notes in PDF]

For additional perspective on this indicator, see the latest press release, which includes this overview:

“Despite September’s decline, the U.S. LEI still suggests economic expansion will continue, although at a moderate pace,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The recent weakness in stock markets, the manufacturing sector and housing permits was offset by gains in financial indicators, and to a lesser extent improvements in consumer expectations and initial claims for unemployment insurance. The U.S. economy is on track for moderate growth of about 2.5 percent in the coming quarters, despite the mixed global economic landscape.”

Smoothed LEI

The Chicago Federal Reserve reported that its National Activity Index (CFNAI) during September remained fairly constant at -0.37. The last two months were down sharply, however, from July. For Q3 as a whole, the index remained steady with Q2 at -0.09. During the last ten years, there has been a 77% correlation between the Chicago Fed Index and the q/q change in real GDP.

The Production & Income component improved to -0.18 following its sharp August deterioration to -0.21. The Sales, Orders & Inventories series rose to neutral from -0.03. Moving lower, the Personal Consumption & Housing series eased slightly to -0.08 from -0.06. The Employment, Unemployment & Hours was much weaker as it declined to its lowest point since February 2010. The Fed reported that 26 of the 85 component series made positive contributions to the total while 59 made negative contributions.

From Doug Short:

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

CFNAI and Recessions

CHINA WATCH

China’s home prices rose in September in more than half of the 70 major cities monitored by the government for the first time in 17 months, as home-purchase restrictions were loosened and interest rates cut.

New-home prices rose in 39 cities, compared with 35 in August, the National Bureau of Statistics said Friday. Prices dropped in 21 cities, fewer than the 25 in August, and were unchanged in 10.

The recovery in prices last month extended to a larger number of smaller cities, underpinned by five rate cuts since November and easing of property curbs as the government is dealing with the slowest economic expansion since 2009. To further boost the recovery in less prosperous regions, China cut the deposit for first-time homebuyers in those cities for the first time in five years on Sept. 30, as it tries to revive property investment that’s been a drag on growth.

“More second-tier cities saw prices reversing a decline last month, as a string of policies to boost the market start to show accumulated effects,” Bai Yanjun, Beijing-based director of research at consultant SouFun Holdings Ltd., said before the data. “However, we are unlikely to see prices rise in almost all 70 cities next year. There is still a vast inventory overhang in the third- and fourth-tier cities.”

New-home prices in the southern business hub of Shenzhen jumped 4 percent from a month earlier, slower than the 5.1 percent increase in August. Shanghai trailed Shenzhen to gain 1.6 percent, the second-fastest pace in China. The pace of growth in China’s financial hub prompted the city government to halt land auctions earlier this month in an effort to rein in the market.

Prices gained 0.9 percent in Beijing, slowing from the previous month, while they increased 1.4 percent in Guangzhou, faster than in August.

Nationwide, price growth is weakening as values in first-tier cities that have led the recovery are softening, the statistics bureau said in a statement released with the data. The strong sales in the May-to-August period, after some home-purchase rules were eased in March helped release pent-up demand, may be hard to sustain, according to some analysts. (…)

China excluded first-tier cities including Shenzhen, Beijing and Shanghai when on Sept. 30 it cut the minimum down payment first-time homebuyers in a bid to prop up the residential market. (…)

Housing sales nationwide gained 16 percent in September from a year earlier, narrowing from monthly growth of more than 30 percent in the May-August period, according to Bloomberg calculations based on official data released Oct. 19. The stock of unsold new homes increased 13 percent to 425 million square meters (4.6 billion square feet) as of Sept. 31, the statistics bureau said on Monday.

Year-on-year, new-home prices rose in 12 cities in September, compared with nine in August. Prices surged 38 percent in Shenzhen, the fastest year-on-year pace since 2011 when the statistics bureau changed the way it compiles the data.

The average price of the 70 cities rose 2 percent in September from August, gaining for a fifth consecutive month, according to Bloomberg calculations based on official data. Existing-home prices rose last month in 39 cities, compared with 43 in August. They dropped in 18 cities and were unchanged in 13.

China’s central bank cut interest rates for the sixth time since November on Friday in another attempt to jump start a slowing economy.

The People’s Bank of China (PBOC) said on its website that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.35 per cent, effective from Oct. 24.

The one-year benchmark deposit rate was also lowered by 25 basis points to 1.50 per cent. (…)

The central bank on Friday also cut the reserve requirement ratio (RRR) for all banks, for the fourth time this year.

The bank said it would cut the RRR by 50 basis points for all banks, taking the ratio to 17.5 per cent for the country’s biggest lenders.

South Korea GDP rebounds in third quarter

Gross domestic product rose 1.2 per cent quarter on quarter — slightly higher than market forecasts, the Bank of Korea said on Friday.

That was the strongest quarterly growth since 2010, reflecting a rebound from the second quarter in which it slumped to 0.3 per cent, with consumer spending and tourism depressed by concerns about an outbreak of Middle East Respiratory Syndrome.

Private consumption rose 1.1 per cent in the third quarter, buoyed by tax breaks on cars and a nationwide government-organised sale event as well as an increase in the number of workers.

A further boost came from rising government spending as part of a fiscal stimulus package, as well as a 4.5 per cent quarterly rise in construction investment spurred by a strong property market. House prices have risen for 25 consecutive months, according to Kookmin Bank. (…)

However, the quarter’s year-on-year growth of 2.6 per cent means the economy will have to expand about 3.4 per cent in the fourth quarter to hit the BoK’s full-year forecast of 2.7 per cent — a highly unlikely prospect, economists said on Friday. (…)

Investors Bet on More ECB Easing Investors doubled down on bets that the European Central Bank will beef up its stimulus efforts later this year after the strongest hint yet that the central bank is prepared to do more to boost sagging inflation.

The Dow Jones Industrial Average rose 320.55 points, or 1.9%, to 17489.16 after ECB chief Mario Draghi said Thursday that “monetary policy accommodation will need to be re-examined at our December policy meeting.” The euro tumbled, while stocks and bonds in the eurozone surged. (…)

The euro fell 2% against the dollar to $1.1110, its biggest one-day drop since Jan. 22. (…)

Mr. Draghi’s language Thursday about a reassessment in December was more direct than many expected.

In a news conference following the ECB’s regular policy decision, Mr. Draghi also said officials have discussed pushing interest rates further into negative territory.

“The expansion of QE is certainly not a surprise, but the fact that they discussed further cuts in negative interest rates suggests that the internal economic analysis is worsening,” said Sanjay Joshi, head of fixed income at London & Capital, which oversees $3.6 billion in assets. (…)

“We are in a kind of silent currency war,” (…)

(…) The first was from weak demand, which has left what central bankers dub “the output gap” wide open. This gap threatens to fuel deflation as lacklustre trading forces businesses to respond by cutting prices. Falling oil prices, which the ECB now thinks may reflect weak demand and not just oversupply, were another concern — as was the euro’s appreciation in value against the US dollar.

The ECB is also concerned by the degree to which falls in headline inflation — mostly driven by lower oil prices — are adversely impacting expectations for eurozone inflation over the medium term of two to three years from now. The interconnectedness between the headline rate, now minus 0.1 per cent, and those expectations suggests markets are doubtful the ECB can return inflation to its target any time soon.

“Given the fragile state of the economy and inflation expectations . . . wait and see would be the far more risky strategy than erring on the side of doing too much,” said Richard Barwell, economist at BNP Paribas Investment Partners.

Mr Draghi gave a clear signal the ECB was likely to bolster its €1.1tn quantitative easing programme in December. The 25-strong governing council could also break a promise to keep borrowing costs unchanged by pushing one of the central bank’s key interest rates further into negative territory. (…)

“The credibility of a central bank is measured by its ability to comply with its mandate [on inflation],” he said.

An advantage of a rate cut is that it would almost certainly weaken the euro, raising prices for imported goods and helping out the region’s exporters.

SENTIMENT WATCH
Rally in Stocks on Shaky Ground

The S&P 500’s most beaten down sectors are leading October’s revival and that doesn’t bode well for stocks heading into year end.

Major indexes have rallied in October after a tumultuous end to summer. The biggest winners this month are the S&P 500’s worn down energy and materials sectors, both up about 12%.

Over the last year, energy stocks have fallen 18% and materials stocks have slipped 7%, marking the two biggest sector declines.

“This is not a rally that’s driven by fundamental improvement,” said Mike O’Rourke, chief market strategist at JonesTrading. That gives him less confidence that stocks can push significantly higher, he added.

A brighter profit picture is not behind the rally in the energy sector. Earnings from energy companies in the S&P 500 are on track to slump 65% from a year earlier, according to FactSet. (…)

So what’s changed since August when the major indexes fell into correction territory, defined as a drop of 10% from a recent high? The increasing belief the Federal Reserve won’t start tightening this year. (…)

Punch Something more fundamental has changed after nearly half the S&P 500 companies have reported:

  • 161 companies (42.7% of the S&P 500’s market cap) have reported. So far, companies have reported earnings upside of 4.1% (3.6% yesterday, 2.8% the previous day). Results for Financials have been lackluster, beating by just 0.3%, while the rest of the market has surpassed expectations by 5.7%.
  • The beat rate on EPS is 68%, 74% ex-Financials.
  • Expectations are for a decline in revenue, earnings, and EPS of -3.9%, -4.1%, and -3.0% (-3.5% yesterday). Ex-Energy, these would be +1.6%, +3.2%, and +4.5% (+3.9% yesterday, +3.4% two days ago). This excludes the likelihood of beats, which have been above 4% over the past three years.

NEW$ & VIEW$ (8 OCTOBER 2015): China’s Slowdown Near End?

OECD Leading Indicators Point to Continued Slowdowns

The Paris-based research body said its gauges of future economic activity—which are based on information available for August—point to slowdowns in the U.S., China and Japan, as well as the U.K. and Canada. (…)

The most pressing concern for policy makers is the outlook for the Chinese economy, amid signs that its slowdown may turn out to be sharper than expected. The OECD’s leading indicator for the world’s second-largest economy fell again in August, to 97.2 from 97.6. (…)

The leading indicators suggest things won’t get any worse for Brazil and Russia, but neither is growth set to pick up. The OECD’s leading indicators continued to suggest India will be the main exception, with growth set to accelerate. (…)

But the OECD’s leading indicators suggest the eurozone economy will avoid a slowdown, and signal a pickup in France and Italy, both of which have lagged behind other members of the currency area.

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CHINA WATCH
Pointing up China jumps off its own fiscal slide

Noted China bear Zhiwei Zhang, once of Nomura and now at Deutsche, is talking up China’s near-term economic prospects.

The reason? He thinks its fiscal slide — predicated on falling land sales which accounted for 22 per cent of general government revenues in 2014 — has come to an end. (…)

From Zhang on Thursday, with our emphasis:

We believe the fiscal slide is now coming to its end, because the recovery of land sales seems to have firmed up and gathered momentum in recent months.

While growth of land sales had hit the bottom in 2014Q4, the recovery did not show much momentum until May/June 2015. For instance, the yoy growth in value terms was still at -36% in April, but it turned positive in July to 3% (Figure 5). The preliminary data of September now shows a yoy growth of 30%, which could be even higher due to the lag in land sales reporting. (…)

Apart from a cyclical aspect (land sales were low for a long time and thus are due a rebound, essentially) Zhang says the boost to land sales is mostly down to China’s recent bout of fiscal easing. That and the stock market:

On monetary front, with 5 interest rate cuts (1.25 pp in total) and 4 general RRR cuts (2.5 pp in total) within 12 months’ time, corporate financing costs have come down significantly. For instance, the RMB5 billion bonds issued by China Vanke in Sep 2015 carried a face interest of only 3.5%, while a year ago the rates on such corporate bonds were mostly in the range of 5% to 10%. The recent surge of bond issuance, especially by property developers, shows that the corporates are indeed trying to take advantage of current low cost environment. On fiscal policies, the shift from tightening to stimulus, in particular the loosening of financing restrictions on LGFVs, also played a role. (…)

The poor equity market performance is perhaps another contributing factor. Shanghai and Shenzhen stock markets experienced one of their worst quarters in 2015Q3 by dropping 28.6% and 30.3%, respectively. This has made property investment a more attractive alternative, which in turn helped to restore property developers’ interest in purchasing lands.

(…) If investment can rebound on the back of lift in land sales then GDP will do so too. For a while, at least. (…)

A final chunk from Zhang to close:

Recovery of land sales and loosened fiscal stance will help to boost government spending in 2015H2. For instance, there have been clear indications of fiscal expansion following the policy u-turn in May. Growth of budgetary expenditure averaged 25% yoy in July and August, more than doubling the 11.8% in 2015H1. Total government expenditure, including that by government funds, also accelerated. The extrapolated yoy growth for Q3 based on July and August data is 11.9%, much faster than the 3.4% in H1 (-0.2% in Q1 and 6.2% in Q2). Another indication of fiscal expansion is the spike of funds available for investment from the state budget, whose yoy growth was only 9% in May, but then jumped to 17%, 29% and 34% in June, July and August, respectively.

There are other indications of a likely pickup in investment as well, such as the strong recovery of property sales and the pickup of investment amounts for both projects under constructions and newly started projects (…).(…)

Together these indications have reinforced our view that, led by accelerated government spending and an investment recovery, there will be a moderate growth rebound in Q4 from 7.0% yoy in Q3 and Q2 to 7.2%, with 7.0% full year growth for 2015.

The momentum will likely carry on to 2016Q1, but growth beyond that remains uncertain. Our baseline case is that growth returns to a downward trend, with the full year GDP growth dropping modestly to 6.7% in 2016 from 7% in 2015. The key underlying assumption is that the government will be willing to tolerate the slowdown and refrain from further fiscal and monetary stimulus once growth rebounds in Q4. The Communist Party Plenum in October and the Central Economic Working Conference in December will likely shed more light on policy stance in 2016. (…)

Interestingly, CEBM Research’s October survey confirms the pick up in land sales:

Land sales activity showed continued signs of improvement in September, especially in 1st and 2nd tier cities. Local governments have boosted efforts to sell land in response to better housing sales in prior months. In addition, after many months of refraining from restocking land banks some developers have started to restock.

However, that was the only positive from the recent survey:

  • Steel: Order activity remains low. A broad-based decline in demand was observed in September. Respondents reported that demand from key sectors such as auto manufacturing, real estate, machinery equipment and shipbuilding was stagnant or in some cases contracted, putting downward pressure on effective contract pricing for steel products. Given the anemic domestic demand situation, steel export volume remained at a healthy level in September.
  • Cement: In some regions, such as Southern China, respondents reported a pickup in construction activity. Respondents expect stable or slightly better sales activity in October as the market enters a traditional peak sales season. September also saw a coordinated price hike by producers.
  • Property: Survey respondents reported that transaction volume during September (traditionally a peak month for property sales) fell flat.
  • Exports: Container Freight Exporters: Anticipated Surge in End-of- Month Shipments Fails to Materialize; October Looking Weak,
Americans spend savings from cheap petrol Research clashes with reports that consumers were paying down debt

New analysis of the spending patterns of 25m people shows that households spent about 80 per cent of the windfall they received as a result of lower fuel prices — higher than suggested by some early government estimates.

The data from the JPMorgan Chase Institute suggests that the spending kick from lower gas prices has already been significant in a wide range of categories including dining out, entertainment and purchases of electronics and appliances — and that a rise in the price of oil could deliver a palpable blow to these areas.

“Consumers report that they are using their gains at the pump to pay down debts and save. Our data show they are spending most of them,” said the report, published on Thursday. (…)

Nerd smile Americans typically save 4-5% of their income so saving 20% of the oil windfall is significant.

BTW: Oct 7 (NYT) — Energy Department predicts lower winter fuel bills by roughly 18%

U.S. Consumers Show Signs of Caution with Debt Americans added to their debt at a slower pace in August—with outstanding consumer credit rising 5.6% versus July’s 6.6% increase—suggesting some caution on the part of consumers.

Outstanding consumer credit, a reflection of all debt besides mortgages, rose $16 billion or at a 5.6% annual rate in August, the Federal Reserve said Wednesday. That’s less than in July, when it increased at an annual rate of 6.6%, a slight downward revision from the initial estimate of 6.7%. In June, it rose at an annual rate of 9.6%.

Revolving credit, mostly credit cards, rose at an annual rate of 5.3%, a bit less than in July, when it rose at a downwardly revised annual rate of 5.5%.

Nonrevolving credit, made up largely of auto or student loans, rose at an annual rate of 5.7%, its lowest percentage increase since July 2012. (Charts from Haver Analytics)

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UAW Strike Averted at Fiat Chrysler

The United Auto Workers said shortly after midnight Thursday that it reached a revised deal with Fiat Chrysler Automobiles NV that secures “significant gains” for its members,averting a strike that would have shut down production at U.S. plants and sent thousands of workers to the picket line.

The UAW didn’t offer any further details on the proposed deal, but in a statement, UAW President Dennis Williams says the new accord “addresses our members’ principal concerns about their jobs and their futures.”

More signs that recent employment data looked strange:

U.S. Job Creation Index Steady at Seven-Year High

Gallup’s U.S. Job Creation Index registered +32 in September for the fifth consecutive month. This is the highest score Gallup has recorded since it began measuring employees’ perceptions of job creation at their workplaces in early 2008.

SeptemberJobCreation1

EM slowdown hits German exports Data show sharpest monthly fall since the financial crisis

Exports in August were 5.2 per cent lower than July, their sharpest monthly fall since the financial crisis, according to Germany’s national statistics office. Imports also fell 3.1 per cent. (…)

Exports were up 5 per cent in comparison with August 2014, while imports were 4 per cent higher. Exports to non-EU countries climbed fastest, rising 6.8 per cent, while sales to EU member states were up 3.5 per cent. (…)

As Europe’s biggest exporter, Germany — which sends 6.5 per cent of its exports to China — is particularly exposed to such trends, and German companies have been warning for a while of a Chinese slowdown. (…)

Thursday’s export statistics predate the emissions-rigging scandal that has engulfed Volkswagen, Germany’s largest carmaker.

High five From Markit’s Germany Manufacturing PMI:

German manufacturing companies reported a further improvement in operating conditions in September. Despite falling from 53.3 in August to 52.3, the average PMI reading for the third quarter (52.5) was the best in over a year.

September data signalled a further solid rise in new business placed with German manufacturers. The rate of new order growth eased slightly since August, but was nevertheless the second-strongest in 17 months. New export business also increased further during the month, with companies commenting on the weak euro and improved demand from the US.

EARNINGS WATCH

The Q3’15 earnings season officially kicks off this afternoon with Alcoa. But the season has actually started with 17 off-fiscal companies having reported as of Oct. 2nd. For what it is worth, 14 beat and 2 missed.

Zacks Research tallies all NYSE companies

Deutsche Bank Sees Big Loss on Write-Down in Corporate Banking Deutsche Bank warned it will take a $6.5 billion charge on assets in its investment and retail- and private-banking operations for the third quarter and said it could cut its dividend.

Germany’s largest bank said the bulk of the write-downs were sparked by tougher regulatory requirements, which are driving down the value of its investment-banking business and other assets.

For Deutsche Bank, constraints on earnings coupled with regulators’ demands that the bank set aside more capital mean that its investment bank—notably including the Bankers Trust business it bought in 1999—isn’t expected to generate the profits it had in the past.

Also included are charges related to its Postbank retail unit, which Deutsche Bank plans to shed. The bank also set aside an additional €1.2 billion for legal reserves. (…)

As part of companywide cost cutting and a realignment of its businesses, Deutsche Bank said its management board will recommend “a reduction or possible elimination” of its common-share dividend for 2015. The company has paid a dividend of €0.75 a share the past six years. (…)

Warning for M&A: Another Debt Deal Struggles

Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are struggling to sell $1.2 billion of loans backing the leveraged buyout of online clothing retailer FullBeauty Brands, investors said, the latest sign that global economic turmoil has forced a broad reassessment of risk.

The setback is the latest for firms seeking to raise funds in corporate-debt markets, as prices have declined recently and several large deals have had to be scaled back. (…)

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