Today: What oil windfall? Fed communications. Plummet in Chinese, Greek and Russian. Crude stuff.
NORTH POLE, WE HAVE A PROBLEM!
With booming employment and lower gasoline prices, one would expect consumers to rush to the stores and spend liberally. Yet, weekly chain store sales are not showing any strength up to last Saturday. The 4-week m.a. is up 2.4% with only 18 days to go. Unless everybody is shopping online now.
Pretty similar with last year when sales jumped in the last 17 days. Nevertheless, one has to wonder why sales are not stronger given the oil windfall.
BTW, gasoline futures are now $1.71; retail prices heading towards $2.41 in January.
McDonald’s Decline in U.S. Sales Accelerates Burger Chain in November Posts Biggest Same-Restaurant Drop in More Than 14 Years
The U.S. slide was the largest, with sales falling 4.6% from the same month a year ago, far more than the 1.9% drop analysts had projected and more than September’s 4.1% sales slide in what was then the company’s biggest monthly drop since early 2003.
Fed Aims to Signal Shift on Low Rates Federal Reserve officials at their meeting next week are likely to affirm their plan to start raising short-term interest rates in 2015 and could begin by dropping their assurance that rates will stay low for a “considerable time.”
(…) The big challenge Fed officials face at next week’s meeting is communicating the prospect of rate increases without locking themselves into a timetable or severely unsettling markets. A key decision is when to remove the “considerable time” pledge in their policy statement, which has been in the Fed statement since March. (…)
Consistent gains in hiring and declines in unemployment suggest the labor market is getting closer to a state Fed officials call “full employment,” in which slack is gone and no longer holding back wage growth. Moreover, growth appears to have accelerated a bit.
At the same time, a stronger dollar and falling commodities prices—including the sharp decline in oil prices—are putting downward pressure on inflation. (…)
Ms. Yellen has a news conference after the policy meeting ends Dec. 17 to explain the central bank’s decision. The Fed doesn’t have another news conference scheduled until March. If officials wait to change the words until then, the market could take it as a signal officials are pushing off planned rate increases until the second half of next year.
At the same time, they don’t want to appear to be locked into moving at midyear or to suggest rate hikes are coming earlier. (…)
Mr. Dudley—a part of Ms. Yellen’s inner circle of advisers—has suggested recently that the Fed could replace the assurance of low rates for a considerable time by stating more vaguely that it expects to be patient before moving. Such a move would be an attempt to build a long runway for rate hikes that would give officials room to shift strategy as their forecasts evolve. (…)
Fed signals rate guidance likely to stay for now
The Federal Reserve’s vow to keep interest rates near zero for a “considerable time” is likely to remain in place for now, with the U.S. central bank set to take a slow and steady approach to its first rate rise in a decade.
Goldman’s take:
Although it is still a close call, the strong employment numbers suggest that the FOMC will make some changes to its “considerable time” forward guidance at the December 16-17 meeting. This forecast is based on three considerations. The first is our reading of the leadership’s own expectations for the liftoff date, which still seem clustered around mid-2015 judging from NY Fed President Dudley’s speech last week. The second is our translation of the “considerable time” phrase as “no hikes for a minimum period that might be on the order of six months, subject to the recovery proceeding broadly in line with expectations.” Together with the first consideration, this suggests that the committee would want to change the language before the March meeting. And the third is that it might be awkward to make significant changes to the language at the January meeting which does not feature a press conference (at least based on the current schedule).
Good chart from ISI:
China Markets Plummet China’s stocks, currency and corporate bonds suffered their largest tumbles in years after Beijing took fresh steps to rein in growing risks in the country’s debt-laden financial system.
The selloff started in the bond market, as traders rushed to sell and raise cash after a regulator banned investors from using low-grade corporate debt as collateral to borrow cash. The turmoil then spread to the yuan, which recorded its biggest two-day tumble ever. Later, the benchmark Shanghai index slumped 5.4% to record its biggest fall since 2009. (…)
The Tuesday selloff was triggered when China’s securities clearing house said late Monday it raised the threshold for corporate bonds qualifying as collateral for repurchase agreements, or repos, which are short-term loans with maturity spanning from overnight to 182 days. These are used as a key channel of short-term funding for bond investors. (…)
According to estimates from Shenyin Wanguo Securities, the total value of corporate bonds disqualified as repo collateral under the new rule exceeds 1.25 trillion yuan, or 60% of all outstanding corporate bonds listed on China’s two stock exchanges.
Policy makers gathering in Beijing this week for a key summit are signaling to the investing public that they should prepare for a lengthy period of slower economic growth after years of amassing debt to fuel high growth levels. (…)
The People’s Daily, the Communist Party’s flagship newspaper, gave prominent treatment to a report proclaiming that slower growth is the “new normal” and it published a lengthy commentary from a top government think tank saying structural reforms and better-quality growth were key economic objectives.
“As the economy begins to lose momentum, an appropriate amount of stimulus may be required. … But it should be made clear that stimulus should only be used to regain economic balance and should not be seen as a way to solve medium and long-term structural problems.”
One target of restructuring has been to reduce air and water pollution by tightening environmental regulations and to make more efficient use of energy.
The theme was echoed in an opinion piece in the English language China Daily, where Li Wei, the director of the Development Research Center argued that economic growth needed to be environmentally friendly and sustainable. He noted that China’s energy consumption per unit of gross domestic product was 2.1 times the global average.
That follows a series of measures taken by the Chinese authorities to impose tougher financial discipline on local governments and keep their debt levels in check. In early October, China’s cabinet said Beijing won’t bail local governments out when they fail to repay their debts and will impose ceilings on their borrowing.
Local Chinese governments have taken on massive debt in recent years to fund infrastructure projects since Beijing opened the credit spigot to fend off the global financial crisis.
They have had a tough time this year repaying debt as fiscal revenue growth has slowed in the face of a weaker national economy and China’s property market downturn.
Nearly 40% of the 17.9 trillion yuan in local government debt and guarantees will mature by the end of this year, placing huge pressure on local governments to make repayments, according to a report released by the state auditor late last year.
Greek shares tumble 10.7% on snap election Investors spooked by possibility of Syriza party gaining power
Russian retailers feel the rouble pinch Tourists downgrade holiday plans amid growing economic crisis
On the back of a growing economic crisis in Russia, western sanctions and a rapidly devaluing rouble, Russian tourists are downgrading their holiday plans. Those who once splashed out on holidays at upmarket European resorts are now reverting to mass-market options in Turkey and Egypt. Instead of Paris or London, customers are now choosing “budget” stand-ins such as Prague and Tallinn. (…)
“The impact on travel demand has been quite negative because hotels and goods abroad for Russians have almost doubled in relative price over the past year, and discretionary income has been reduced due to day-to-day imported goods being more expensive,” said Kirill Makharinsky, an internet entrepreneur and co-founder of the Russian travel site Ostrovok. (…)
According to property consultancy Knight Frank, Russian retailers saw a 5-10 per cent drop in revenue in October compared with the previous year.
Crude Rebounds From Five-Year Low Amid Shale-Oil Spending Curbs Brent and West Texas Intermediate rebounded from the lowest closing levels in more than five years amid signs that U.S. oil producers were curbing investment as price competition intensified between OPEC’s largest members.
(…) U.S. shale oil production growth is at risk of slowing in the second half of next year and in 2016, Amrita Sen, chief oil market analyst at consultant Energy Aspects, said at a Platts conference in Dubai. Market fundamentals don’t warrant a price as low as $60 a barrel, even with an oversupply, and WTI will average in the “high sixties” in the first half of next year, with Brent in the “low seventies,” she said. (…)
Kuwait Sees Oil Stuck at $65 for Six Months Until OPEC Moves
Crude Drop Hits Energy Megaprojects Crashing oil prices have put some of the world’s biggest energy companies under pressure to reconsider multibillion-dollar expenditures.
(…) ConocoPhillips said its capital spending would fall to $13.5 billion next year, down 20% from this year’s level. Included in next year’s total is $4.8 billion, or 36% of its capital budget, to start up marquee oil and gas projects in the North Sea, in Australia and Canada’s oil sands.
Ryan Lance, ConocoPhillips’s chief executive, said the spending reduction “is prudent given the current environment.” The Houston-based company will spend less on some large projects that are nearing completion, and cut back on exploring for new sources of oil and gas. It estimates it will pump 3% more oil and gas in 2015 than this year. (…)
For Shell to consider pursuing a new project, it “must be able to break even at $70” a barrel, a spokesman said. A BP PLC spokesman said it uses “a long-term planning price of around $80” a barrel when considering new investments. Exxon Mobil Chief Executive Rex Tillerson recently said in a television interview that the company tests projects “across a range that’s all the way down to $40” when considering projects. A Chevron spokesman said the company has based its “2017 production forecast on a Brent price of $110” and that it conducts a “stress test” of projects at lower price levels. (…)
Even before oil prices began falling earlier this year, companies have been delaying or canceling projects for cost worries. Chevron and BP are reviewing plans for offshore projects in the U.K. and U.S. that could cost billions of dollars. (…)
Bernstein on Monday estimated that a 35% drop in oil prices would result in a 25% decrease in industry cash flow. But it forecast that crude prices would eventually rise as companies cut back on drilling.
Oil Rout a Distant Dream for European Drivers
The CHART OF THE DAY compares gasoline in Europe and the U.S. since Brent crude oil began a 42 percent collapse on June 19, when it peaked for the year at $115.71 a barrel. Europe’s is down just 8 percent while in the U.S. the slide at pumps is 27 percent over the same period.
Friday’s survey did show that the number of full-time workers ticked down in November from October, but that survey tends to be volatile from month to month. Over the past three months, there are 866,000 more full-time workers, compared with 27,000 more part-time workers. 
And after a 10.0% collapse in August. That means orders for all manufactured goods is off 11.2% in the last 3 months, that is a 53% annualized rate! Total orders are up 1.8% YoY, a sharp slowdown from +4.0% YTD. 
On the inflation front, the GSCI made a new low this week and is down a huge -24.4% y/y. Inflation is really MIA around the world and are likely to slow significantly in Dec from China CPI to the EZ CPI and the US core PCE deflator given the plunge in commodity prices. Lower gasoline prices are likely to decline to $2.50 by Jan. (ISI)
Don’t Count on Oil Drop Greasing Global Growth
The BIS noted that the sharp, intraday fall in US Treasury yields on October 15 coincided with no negative economic news other than “somewhat weaker than expected” US retail sales data. 
Mamma Mia! 