U.S. RETAIL SALES STRONGER THAN PORTRAYED IN MEDIA
Retail sales climbed 0.2% in June, the smallest gain since January, the Commerce Department said Tuesday. Excluding autos, retail sales climbed a sturdier 0.4% last month.
Outlays at restaurants, clothing outlets and department stores picked up, while purchases of cars, furniture and building materials fell.
That reversed the performance seen in earlier months when sales of home goods and furniture rose, a reflection of Americans still making trade-offs while constrained by weak wage growth. (…)
Tuesday’s report did show retail sales were higher in May than previously estimated (+0.5% vs +0.3%), leading to a quarter of moderate growth after an abysmal winter. Many economists subsequently upgraded their estimates for second-quarter growth of gross domestic product. Most projections now hover around a 3% annual pace, which would serve only to reverse a first-quarter contraction of 2.9% that many economists blamed on severe snow storms and cold weather.
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 (Doug Short) shows.
Another good, revealing chart, this one from CalculatedRisk:
The momentum is continuing into July:
This is not in retail sales:
Christie’s Sells $4.5 Billion of Artwork Christie’s International said it sold $4.5 billion of fine and decorative art during the first half of the year, up 22% from the same period a year ago.
Yellen begins to see the reality:
Fed’s Yellen Hedges Her View on Rates
“If the labor market continues to improve more quickly than anticipated by the [Fed],” she told the Senate Banking Committee, “then increases in the federal-funds rate target likely would occur sooner and be more rapid than currently envisioned.” The Fed has held its benchmark short-term rate near zero since late 2008.
While continuing to stress that “a high degree of monetary policy accommodation remains appropriate,” Ms. Yellen’s acknowledgment that rates could rise sooner than planned marks a notable new hedge. She made a similar comment at a news conference in June, but without pointing out that the unemployment rate and other job-market measures were improving more quickly than officials expected. (…)
She pointed to low levels of labor-force participation and slow wage growth as signs of continued “significant slack” in the job market.
In answers to senators’ questions, she added the Fed has been fooled in the past during this economic recovery by “false dawns.” (…)
The Homeownership Rate for Millennials Has Hit Bottom
More millennials became homeowners last year, a sign that the homeownership rate among America’s young adults may have hit bottom, according to a new analysis of Census data published Wednesday.
While still historically very low, homeownership among 18-to-34-year-olds increased last year, even as it declined for 35-to-54 year-olds, according to a report by Jed Kolko, chief economist at Trulia Inc.TRLA -2.91%, the online real-estate information company.
Mr. Kolko’s analysis also says demographic changes among young adults, including delaying marriage and parenthood, account for nearly all of the declines in homeownership among young adults. Many of those changes, he says, were well underway even before the recession hit.
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.
The analysis, meanwhile, shows that homeownership rates for 35-to-54 year-olds remains at new post-crisis lows, even after adjusting for demographic changes.
The Trulia report calculates the homeownership rate slightly different from the Census. Where the Census counts the number of owner-occupied households divided by the number of total households, Mr. Kolko counts the number of owner-occupied households divided by the number of adults.
The Census tally shows the number of households that own instead of rent, which means that the homeownership rate can drop if the number of new renters outnumbers the number of new owners, even when both are increasing. For example, if more millennials move out of their parents’ basements, with the majority renting to rent apartments, this will lead to a decline in the homeownership rate.
Mr. Kolko’s adjusted version, what he calls the “true” homeownership rate, eliminates this distortion by looking at the entire population and not just those that have formed households.
The analysis shows that the “true” homeownership rate fell to 13.5% in 2012 from 17.2% in 2005. It ticked up slightly to 13.6% in 2013, though it is still lower than at any time since Trulia’s tally begins in 1983. The magnitude of the decline in the “true” homeownership during the housing bubble is actually larger than the decline reported by the Census’ published figures, which show the homeownership rate fell to 36.8% in 2012 from 44.1% in 2005.
The second part of Mr. Kolko’s analysis shows that almost all of the decline in the homeownership rate is due to demographic shifts and not the recent recession. For example, the marriage rate among young adults has dropped by more than a third since 1983. Deferring marriage means more Americans may also buy homes later in their lives. Young adults are more diverse. The share of non-Hispanic whites fell to 57% last year from 73% in 1983. (…)
The good news, he says, is that “there probably hasn’t been a huge shift in millennials’ attitudes towards homeownership…since today’s millennials are roughly as likely to own homes as people with similar demographics two decades ago.” The bad news, of course, is that these demographic shifts aren’t likely to reverse, leaving little room for young-adult homeownership to increase.
Finally, Mr. Kolko finds that the true homeownership rate for 35-to-54 year-olds is still declining. Moreover, after adjusting for demographics, which haven’t been as pronounced for this part of the population as they have for millennials, the homeownership rate is at its lowest level in at least two decades. “The real missing homeowners are the middle-aged,” says Mr. Kolko.
This shouldn’t be a huge surprise. Most millennials weren’t buying homes eight years ago, when the foreclosure crisis hit, but many Americans who are 35-to-54 years-old today were much more likely to be purchasing homes last decade.
Yet:
Mortgage Applications Decrease in Latest MBA Weekly Survey
The seasonally adjusted Purchase Index decreased 8 percent from one week earlier to the lowest level since February 2014.
China GDP shows progress on rebalancing Shoppers contribute more to growth than investment
China’s economy grew by 7.5 per cent in the second quarter, topping expectations and suggesting stimulus efforts to stabilise growth have succeeded in offsetting the impact of a weak property market. (…)
Fiscal spending rose 26 per cent year-on-year in June, according to government data.
Industrial production, a key driver of China’s economy, rose by 9.2 per cent in June, the strongest pace since December, the National Bureau of Statistics said.
Fixed asset investment grew at 17.3 per cent year-on-year in the first half of the year, up from 17.2 per cent in the five months to May. Real estate investment continued to suffer, however, with growth slowing to 14.1 per cent in the first half from 14.7 per cent in the first five months. The resilience of overall investment even in the face of falling property investment suggests that state-backed projects have helped to fill the gap.
The 3.6 percentage points of overall growth generated by investment in the first half, however, was less than consumption, which contributed 4.1 percentage points. (Net exports contracted 0.2 per cent.)
The flagging property market is expected to drag on growth in the second half: inventories of unsold flats was up 30 per cent year-on-year by end-May, according to a report by E-house China. (…)
On a seasonally adjusted basis, GDP expanded an annualized 8.2%, an acceleration from 6.1% in the first quarter
Chinese credit grows fastest in 3 months
New credit totalled Rmb1.96tn ($316bn) in June, the highest monthly total since March and nearly double the amount from the same period last year, according to Financial Times calculations based on data released by the People’s Bank of China on Tuesday.
Broad M2 money supply increased by 14.2 per cent in June, ahead of the consensus forecast of 13.5 per cent.
Local-currency bank loans rose by Rmb1.08tn in June, well above expectations of Rmb915bn. Off-balance-sheet credit also rose sharply. Trust loans, the largest component of China’s so-called shadow banking system, rose Rmb91bn, up from Rmb40bn in May.
Strong El Nino Seen Unlikely by Australia as Pacific Cools
EARNINGS WATCH
(…) J.P. Morgan and Goldman reported that some clients had turned more active in the quarter’s final weeks, helping the banks avoid a steeper drop. Both banks still posted double-digit trading-revenue declines, and neither offered investors much comfort that the June pickup would continue. (…)
Goldman became the first big U.S. bank to boast higher quarterly revenue than it reported for a year earlier. The New York firm said total revenue climbed 6% to $9.13 billion, while net income rose 5.5% to $2.04 billion, or $4.10 a share. Analysts polled by Thomson Reuters expected per-share earnings of $3.05 on revenue of $7.97 billion.
Goldman leaned heavily on other businesses to offset the trading decline. Its investment-banking arm reported revenue of $1.78 billion, up 15% from a year ago. The firm had a record quarter in underwriting revenue, and merger-advisory revenue climbed 4.1%. Goldman’s own portfolio of equity and debt investments surged in value.
Goldman, which hadn’t offered a specific forecast earlier, reported that trading revenue in fixed income, currencies and commodities, or FICC, fell 8.6% from a year earlier to $2.22 billion. Citigroup on Monday reported its own FICC revenue had dropped 12%. (…)
J.P. Morgan, the largest U.S. bank by assets, posted net income of $5.99 billion, or $1.46 a share, for the second quarter, compared with $6.5 billion, or $1.60 a share, a year earlier. Revenue declined 3% to $24.45 billion, but both figures beat analysts’ projections as tracked by Thomson Reuters of $1.29 a share in earnings and revenue of $23.76 billion.
Revenue from fixed-income markets fell 15% from the previous year on what the bank said was “historically low levels of volatility and lower client activity across products.” (…)
J.P. Morgan finance chief Marianne Lake added that June brought “generally higher levels of activity.” But that momentum hasn’t carried into July so far, she said. (…)
Like other banks, J.P. Morgan reported that its investment bankers are picking up some of the slack for trading desks that are dealing with a sluggish environment. The bank’s equity-underwriting revenue jumped about 4%, and advisory revenue jumped 31%.
The New York bank again showed weakness in its mortgage business as it, like its peers, continues to reel from a sharp slowdown in refinancing. Mortgage originations of $16.8 billion fell 66% from the previous year.
But the weakness doesn’t suggest that consumers and businesses are on their heels. Average loan balances in the commercial-banking unit were $140.8 billion, up 7% from a year earlier and 2% from the previous quarter.
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BofA’s Results Weaken Bank of America Corp. said second-quarter profit slid 43% as the banking giant was again weighed down by large one-time legal charges and a slump in mortgage originations.
(…) For the second quarter, Bank of America reported a profit of $2.29 billion, compared with $4.01 billion a year earlier. The results include a litigation charge of $4 billion, up from a year earlier charge of $471 million. On a per-share basis, earnings were 19 cents. Analysts polled by Thomson Reuters had expected seven cents a share including litigation. (…)
Excluding adjustments to the value of the bank’s debt, FICC trading revenue was $2.4 billion in the second quarter, up 5% from the year earlier, helped by a stronger performance from mortgage and municipal products, but partially offset by declines in foreign exchange and commodities.
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 presentation by Dr. David Kelly, Chief Market Strategist for JPMorgan funds.
Not that his views are close to mine, just that he presents them so well with great charts, some of which I include today. His main points are that
- The U.S. economy is set up for a rebound.
- The direction of interest rates is up.
- You should be cautiously over-weighted equities (my yellow light).
- Valuations, while pretty close to historic medians, are still cheap when compared to fixed income yields given the S&P 500’s earning’s yield of more than 6% (on forward earnings).
- International markets are improving on a cyclical and secular basis, with staying power looking ahead.
- The Federal Reserve is out of “running room.”
Some great charts. World economies are improving:Interest rates will be moving up in the not too distant future:
This chart breaks down the sources of EPS growth over 20 years. Note how buybacks have not been such a big factor.
Maybe we should put more money in EMs:
More charts on world markets from Ed Yardeni:
Action on ‘Inversions’ Is Urged The Obama administration joined the growing debate over U.S. companies reincorporating overseas for tax purposes, urging lawmakers to pass legislation to limit the moves.
In a letter to leaders of the congressional tax-writing committees, Treasury SecretaryJacob Lew said lawmakers “should enact legislation immediately…to shut down this abuse of our tax system.” (…)
So far, Republicans as well as some influential Democrats in Congress have favored limiting inversions through a comprehensive overhaul. Some of those lawmakers believe a quick fix could worsen U.S. companies’ position.
“I don’t want to be part of legislation that ramps up the competitive disadvantage of being a U.S.-based company or makes U.S.-based companies more attractive targets for foreign takeovers,” Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a recent statement.
Finance Committee Chairman Ron Wyden (D., Ore.) also hasn’t pushed for a quick fix. In a Wall Street Journal op-ed in May, he said that “this loophole must be plugged.” But he indicated that he is still hopeful for a comprehensive tax rewrite that would limit inversions on a retroactive basis.
In the Treasury letter, Mr. Lew criticized corporations that move overseas to avoid the relatively high U.S. corporate tax rate, while continuing to operate from U.S. soil and benefiting from U.S. legal protections, infrastructure and basic research.
“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Mr. Lew wrote. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”
In its letter, the administration also endorsed making the curbs retroactive, to May 2014.