SOFT PATCH WATCH
Retail Sales Fall, Point to Slowing Growth Retail sales fell sharply in January, marking the second straight monthly decline and the latest sign the U.S. economy stumbled into 2014.
An economic recovery that looked poised to lift off is reverting to its characteristic sluggishness as gauges of shopping activity, job creation, wage growth and factory output flash yellow.
And it’s more than just the weather that’s behind the malaise.
The latest warning sign came Thursday in a Commerce Department report showing a 0.4% drop in retail sales in January from a month earlier, the sharpest decline in a year and a half. Americans cut back on a broad swath of goods including cars, furniture and clothing.
I will come back to this next Monday as it looks like more than a soft patch…
Euro-Zone Recovery Picks Up Slightly GDP growth in the final quarter of 2013 remained below the pace needed to make a dent in high unemployment or alleviate debt burdens in southern Europe.
Gross domestic product increased 1.1% at an annualized rate during the fourth quarter, the European Union’s statistics office said, the third-straight quarter of growth. GDP was up 0.3% from the third quarter on a nonannualized basis. For 2013 as a whole, GDP fell 0.4%.
German GDP, which accounts for 30% of the euro-zone total, expanded 1.5% at an annualized rate. The region’s second-biggest economy, France, expanded at a 1.2% annualized rate after stagnating the previous quarter. Italy’s GDP expanded for the first time since 2011, though just barely—0.5% at an annualized rate.
Wells Fargo edges back into subprime as U.S. mortgage market thaws
The bank is looking for opportunities to stem its revenue decline as overall mortgage lending volume plunges. It believes it has worked through enough of its crisis-era mortgage problems, particularly with U.S. home loan agencies, to be comfortable extending credit to some borrowers with higher credit risks.
The small steps from Wells Fargo could amount to a big change for the mortgage market. After the subprime mortgage bust brought the banking system to the brink of collapse in the financial crisis, banks have shied away from making home loans to anyone but the safest of consumers. (…)
So far few other big banks seem poised to follow Wells Fargo’s lead, but some smaller companies outside the banking system, such as Citadel Servicing Corp, are already ramping up their subprime lending. To avoid the taint associated with the word “subprime,” lenders are calling their loans “another chance mortgages” or “alternative mortgage programs.” (…)
It is looking at customers with credit scores as low as 600. Its prior limit was 640, which is often seen as the cutoff point between prime and subprime borrowers. U.S. credit scores range from 300 to 850. (…)
INFLATIONARY SUPPLY DYNAMICS
Central bankers and many economists are beginning to think that the decline in the labour participation rate may be a secular phenomenon. If so, the actual supply of labour is much less than generally believed. Inflation is not exclusively demand-pull, it can also be the result of diminished supply. Here’s a real world example, happening right now:
Truckload linehaul rates paid in January increased 2.9% year over year, resulting in the largest year-over-year increase in linehaul rates since last February. Recent spot market data, combined with increasing demand and high number of trucking companies exiting the market, all seem to indicate that rates – both contracted and in the spot market – will continue to rise.
In his January analyst report, Donald Broughton stated: “We believe that persistent cost pressures, relatively tepid demand, soft pricing, increasing regulatory pressure, and a less robust used truck market have taken their toll on smaller carriers over the last two years.” As a result, the number of trucking companies that went out of business in 2013 exceeded that of the prior two years combined.
The Association of American Railroads reported that intermodal volumes rose 6.8%, 7.8%, and 8.0% in Oct, Nov, and Dec respectively. Truckload costs are increasing. Inevitably, then, intermodal costs will also rise. In January, total
intermodal cost per mile was 1.7% higher than in January 2013.
“Although we expect the pricing dynamic in intermodal to remain competitive and see linehaul rates remaining relatively flat in the near term, we do believe that intermodal pricing could increase modestly in 2014 if truckload capacity continues to be squeezed,” stated the most recent Cass Intermodal Price Index report from Avondale Partners.
It added that there is a high degree of correlation between truckload and intermodal pricing.
To be monitored because transportation costs tend to filter through retail pricing.
China Inflation Holds Steady
China’s consumer-price index rose 2.5% year-over-year, data released by the National Bureau of Statistics on Friday showed, matching December’s pace.
Meanwhile the producer-price index, which represents prices paid for finished goods at the factory gate, registered deflation for the 23rd consecutive month. The index fell 1.6% year-over-year after a 1.4% drop in December.
Mixed Signals From Central Bankers on Long-Term Jobless
Central bankers aren’t telling a consistent story about the relationship between long-term unemployment, slack in the economy and inflation.
In her testimony to Congress Tuesday, Federal Reserve Chairwoman Janet Yellen said high levels of long-term U.S. unemployment signaled high levels of slack in the economy which will keep inflation low. “The fact that we have very long spells of unemployment — almost 36 percent of those unemployed who are in very long spells of 26 weeks or more — really suggests that the job market is not strong enough to be able to provide people with jobs who want to work,” she said. “It’s a mark that there’s a great deal of slack in the labor market still that we need to work to eliminate.”
In presenting the Bank of England’s quarterly inflation report on Wednesday, Gov. Mark Carney said falling levels of long-term unemployment in the U.K. was a sign there was more slack in the economy than previously thought.
“A substantial share of the fall in unemployment has been driven by a fall in the number of long-term unemployed,” he said. “That means a lower level of unemployment is consistent with stable inflation.” In its report, the BOE reasoned that people who have been out of jobs for a long-time tend to become disconnected and disappear from the labor force altogether. The fact that they’re now coming back in the U.K. suggests there is a greater supply of labor than previously thought and that the economy can tolerate a lower unemployment rate than thought without causing inflation.
Let’s get this straight. On one side of the Atlantic a central banker says high levels of long-term unemployment points to slack. On the other side of the Atlantic a central banker says falling levels of long-term unemployment points to slack. It’s a complicated story they’re telling, and suggests economists don’t well understand the relationship between long-term unemployment, labor supply and its connection to inflation. (By Jon Hilsenrath)
Norway’s Central Banker Urges Shift in Sovereign Wealth Fund Investments.
Norway’s central bank governor said Thursday the nation’s huge sovereign-wealth fund should be allowed to increase exposure to assets such as equities and infrastructure and trim back on bonds to find a better balance between improving returns and hedging against risk. Øystein Olsen said in an interview that cutting the bond exposure of the fund, also known as the oil fund, to between 20% and 25% of its holdings from the current 35% could be appropriate.
SENTIMENT WATCH
Big Turnaround in Market Sentiment as Week Closes
The week seems to be ending with an almost complete turnaround in sentiment. After the gloom of January and the first week of February, markets have rallied around the world. Going into Friday, the mood continues to be lifted, this time with positive GDP data in Europe and news that Italy has gotten itself a new government the driving forces.
Bears Go Back Into Hibernation
Did you notice that bears are down near the lows while the bulls are midway? Here’s another way to look at it: “Dunno”!”
For the four weeks ended last week, survey respondents expecting little change in stock prices amounted to 59 percent of those calling for gains or losses. The figure, based on the market outlook for the next six months, was the highest since March 2003. (ZeroHedge)
And these guys fly us all over! Airbus Buys Bank The European aircraft maker said it has bought a small German lender, part of its plan to create an in-house bank to improve its access to credit.