Home-Price Growth Slows
A survey covering 10 major U.S. cities increased 9.4% in the year ended in May, said theS&P/Case-Shiller Home Price Index survey released Tuesday. The 20-city price index increased 9.3%.
On an unadjusted basis, the 10-city index and the 20-city composite each increased 1.1% in May over April. Seasonally adjusted, both indexes declined 0.3%.
Consumer Confidence Surges
Generally pretty useless because it is coincident but these breakdowns are interesting:
U.S., EU Turn Up Heat to Punish Russia Over Ukraine The U.S. and the European Union adopted sweeping economic sanctions against Russia to punish Moscow’s unbending stance in the Ukraine conflict.
The trade and investment restrictions that EU governments, after much agonizing, agreed upon mark a major escalation of sanctions against Russia, which so far have been mostly token measures targeting individuals. New measures hitting Russia’s banks, oil industry and military could increase financial strains in its already sluggish economy while withholding technology that the nation’s modernization relies on.
The U.S. followed the EU’s move by announcing similar sanctions against Russian banks as well as the energy, arms and shipping sectors.
(…) Despite the growing economic squeeze on Russia—with its unpredictable fallout for the EU’s own markets, trade and growth—many EU officials believe they have only limited influence over the Kremlin.
Some EU officials voiced fears on Tuesday that Mr. Putin appears to be preparing Russians for international isolation. In Russia too, analysts said Mr. Putin was more likely to increase aid to the rebels in Ukraine in response to Kiev’s military offensive than he was to back down.
“There are no signs that we will soon get another chance to find a political solution” to the Ukraine conflict, said Gernot Erler, the German government’s coordinator for Eastern European issues. The governments in Moscow and Kiev are both “digging in,” he said.
Banks in Euro Zone Ease Credit Standards
According to the ECB’s quarterly bank-lending survey, credit standards on loans to businesses eased for the first time since 2007. The difference in the percentage of banks reporting tighter lending standards and those reporting looser ones was -3%, the ECB said. That compared with a slight net tightening in the first quarter.
Bank lending to households and businesses was down 1.7% compared with a year earlier, the ECB said last week. That compared with a 2% annual decline in May. The improvement from May was due to a slight pickup in lending to households and a more modest drop in business lending.
According to Wednesday’s survey, banks continued to make it easier for households to obtain loans. Meanwhile, “net demand continued to be positive for loans to both enterprises and households and recovered further,” the ECB said.
Spain Growth Beats Bank of Spain Estimate Even as Prices Fall Spanish second-quarter growth beat the Bank of Spain’s estimate as economists say domestic demand supported a recovery in the euro region’s fourth-largest economy even as prices fell this month.
The Madrid-based National Statistics Institute today said that gross domestic product rose 0.6 percent from the first quarter, more than the forecast of 0.5 percent released last week by the Bank of Spain. Consumer prices fell 0.3 percent from a year ago in July, INE said in a separate release.
Households had no savings in the first quarter for the first time since the start of the series in 2000, INE data showed on July 2. Gross available income fell 2.7 percent from a year ago while spending rose 1.9 percent, it said.
Spanish retail sales rose in June from a year ago by 0.2 percent, INE said yesterday. That’s the third straight month it’s increased, and the longest period of gains since 2007.
But Spanish retail sales sank 0.7% M/M in June after jumping 2.1% in the previous 2 months. (Chart from Haver Analytics)
Bonds Surge From U.S. to Germany on Outlook for Record-Low Rates Bonds are rallying from the U.S. to Germany to Australia amid speculation the Federal Reserve will disappoint investors looking for signals it’s moving closer to raising interest rates from a record low.
David Bowers: 3 reasons why the bond bull market is ending
(…) First, we believe that a major regime shift in the conduct of monetary policy is under way, with negative implications for bonds. (…)
They now need central banks to adopt “debtor friendly” monetary regimes committed to robust nominal GDP growth, and tolerant of higher wage growth. This is no longer a world where inflation is capped at 2 per cent; it is one where 3-4 per cent inflation is openly discussed .
The second reason why yields may have troughed is that the US labour market is tightening faster than expected. (…)
True, payrolls have not grown as rapidly or as dramatically, which suggests some impact from a declining participation rate. But what is striking is how the short-term unemployment rate (people out of work for less than six months) is just 0.7 percentage points away from its all-time low.
This has been an important leading indicator of wage growth. It would not surprise us if wages grew in excess of 3 per cent in 2015 – consistent with recent National Federation of Independent Business surveys that show US firms under growing pressure to raise compensation.
Stronger wage growth and an unemployment rate below 5.5 per cent are likely to bring forward expectations of a normalisation of US monetary policy. The more the Fed drags its feet, the more twitchy bond investors could get.
The third reason is that bond yields are starting to be constrained by their historical relationship to trend core inflation and to trend nominal GDP. Over the past 40 years, 10-year yields have never gone below trend core inflation (defined as its five-year compound average growth rate) apart from a brief moment in 2012.
With trend inflation currently 1.7 per cent and rising, it looks unlikely that yields will fall back to 2012’s 1.4 per cent trough. But, more importantly, yields are starting to be constrained by trend nominal GDP. For 45 years they have rarely traded below 70 per cent of trend nominal GDP, or more than 40 per cent above it.
This relationship has survived five years of quantitative easing, and currently indicates a floor for yields at around current levels. Should trend nominal GDP head towards 5 per cent, we would expect that “floor” to move up towards 3.5 per cent. (…)
Mohamed El-Erian: Preserve gains against market shakeouts
(…) However, high market valuations render investor portfolios more vulnerable to policy mistakes, market accidents and exogenous shocks. To help protect themselves, investors should consider enhancing the resilience of their portfolio management, in four ways.
First, when it comes to continuing to generate attractive risk-adjusted returns, sector- and security-specific portfolio differentiation (or what is known as “alpha” in the marketplace) is now even more important given the more limited scope for positive market-wide moves (“beta”). Investors need to be more event driven, including opportunities related to M&A (which will continue to grow to levels not seen since the global financial crisis) and disruptive technologies.
Second, rather than benefit from Fed actions, some foreign markets have struggled to navigate adverse spillover Fed effects. Within this group, the better-managed emerging economies (such as Mexico), as well as those likely to respond better after initial slippages (such as Brazil) remain attractive, warranting greater global diversification of equity portfolios with excessive home bias.
Third, and more generally, investors need to resist the temptation of adding risk based only on relative valuations. They also need to ensure the risk they are taking is warranted by current market prices. If they fail to do so, they will end up exposed to what investors in high-yield bonds have discovered the hard way in recent weeks – namely, how an obsession with relative values leads to overextended absolute valuations and, subsequently, discomforting market corrections.
Finally, this is the time to build greater flexibility in asset allocations. This can take the form of larger cash buffers, cash equivalents and other short-dated liquid bonds, all of which facilitate portfolio repositioning to exploit what is likely to be a series of quite indiscriminate market shakeouts.
For more sophisticated investors, this can be achieved through option positions that monetise as market volatility picks up and valuations dip.
EARNINGS WATCH
We are now two-thirds into the season as 66% of the S&P market cap have reported (281 companies). RBC Capital now sees EPS up 8.9% Y/Y (8.8% yesterday). Ex-Financials: +3.9%.
Consensus was +4.9% heading into the quarter.
The truth is that sales are pretty strong. Non-auto sales less gasoline & building materials, which go into the GDP calculations, gained 0.5% (+4.2% Y/Y) after gaining 0.3% in each of May and April. That is a 4.5% annualized rate in Q2. Ex-autos, sales rose 0.4% after advancing 1.0% in the previous 2 months. That is a 5.7% annualized rate. Core retail sales have been accelerating smartly since December as this chart (
This undercuts the popular narrative that millennials have been irrevocably scarred by the housing bust. Rather, it suggests the subprime-mortgage bubble of the past decade fueled purchases that otherwise wouldn’t have taken place due to demographic changes that were already well underway.
So far, 36 companies (11.3% of the S&P 500’s market cap) have reported. The beat rate is 64% per RBC Capital. So far earnings ex-financials are up 14.4% Y/Y, beating by 3.4% while revenues have surprised by 0.9%. Cum-financials but ex-Citi legal expense, S&P 500 EPS are up 6.5% Y/Y.
30 MINUTES, that’s all it takes to listen to this excellent 
Action on ‘Inversions’ Is Urged