Conference Board Leading Economic Index Increased in February
The Conference Board LEI for the U.S. increased for the second consecutive month in February. Large positive contributions from the yield spread and building permits more than offset the negative contributions from weekly hours worked in manufacturing and consumer expectations for business conditions. In the six-month period ending February 2014, the leading economic index increased 2.7 percent (about a 5.4 percent annual rate), faster than the growth of 2.0 percent (about a 4.0 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have been more widespread than weaknesses in recent months.
No recession in sight as per the best recession indicator, courtesy of Doug Short:
Philly Fed Beats Expectations
On the heels of a weaker than expected Empire Manufacturing report Monday, manufacturing conditions in the Philadelphia area came in better than expected early Thursday.
As shown, while the majority of components are in positive territory, more declined in March than gained. That being said, the only two components that remain in negative territory are Delivery Times and Inventories. Of the five categories that declined this month, Inventories (-10.4) and delivery Times (-5.6) were the only significant decliners. To the positive, the biggest increases in this month’s report were in Shipments (+15.6), New Orders (+10.9), and Average Workweek (+10.1). The fact that the gains came in these components would point in the direction of weather playing less of an impact on economic activity. Happy Spring!
U.S. Existing Home Sales Ease but Prices Firm
Sales of existing single-family homes in February slipped 0.4% (-7.1% y/y) to 4.600 million (AR) versus an unrevised 4.620 million in January. Sales were down 14.5% versus the July high and roughly equaled expectations for 4.620 million in the Action Economics Forecast Survey. Sales of existing single family homes also slipped 0.2% last month to 4.040 million (-6.9% y/y). Sales of condos and co-ops declined 1.8% (-8.2% y/y).
The median sales price of an existing single-family home edged up 0.6% to $189,000 last month (9.1% y/y) but remained 11.7% lower than the peak this past June. Prices also remained 17.9% below the 2006 all-time peak.
Home affordability improved during January to its highest level since last May as soft home prices offset the rise in mortgage rates to 4.54%.
The inventory of unsold homes rose 6.4% last month but remained down by 50.5% since the 2007 peak.
A February survey of buyer traffic from Credit Suisse showed a marked drop from January, with declines in 42 of the 50 markets it tracks. Unlike data from real estate agent groups, which measure closings, the Credit Suisse data give a sense of where demand will be 30 to 60 days down the line — the heart of the spring selling season. (WSJ)
Part of the problem:
According to Labor Department data out Tuesday, real weekly pay fell in December and has stayed down in the following two months. One reason for the drop was a decline in real hourly pay back in December when the nominal pay raises couldn’t keep up with inflation.
But another drag on pay has been the decline in the workweek, caused in part by weather-related plant closings and traffic disruptions. The February workweek shrank to the shortest reading since January 2011, another month that experienced extreme winter weather.
With about 60% of the U.S. workforce paid hourly, the loss of work time is a drag on personal income, offsetting the lift coming from job growth.
The good news: expect the workweek to return to more normal times in coming months. Overtime may also increase as businesses try to make up for production time lost in the snow.
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Uneven Wage Gains Restrain Recovery Wages are booming in some of the hottest segments of the economy, but those gains are masking an otherwise bleak picture for American incomes five years after the recession ended.
(…) Throughout the recovery job creation has largely been driven by low-paying industries like retail and food services, which has also helped to keep lid on wage pressures. Average hourly earnings for all retail employees increased by 1.6% in the 12 months through February. (…)
To be sure, there are some signs of upward wage pressure, which could boost economic growth. A narrower measure of wages for production and nonsupervisory employees, which captures about 80% of the private-sector workforce, has climbed for several months. It accelerated to a 2.5% annual gain in February from 2.3% in January.
If sustained, the increase would support the argument that wages are on the cusp of a broad-based surge.
Forecasters who are most bullish on the wage outlook argue February’s 6.7% unemployment rate overstates the supply of available labor because many of these jobless people are long-term unemployed who are unlikely to find jobs.
Other economists believe the unemployment rate misses the millions of Americans who want full-time work but gave up looking or are stuck in part-time jobs. They attribute February’s acceleration in wages, the largest improvement in nearly a year, to distortions driven by unusually cold weather. And even that uptick leaves wage growth at a modest pace, far below the 4% recorded at a similar point in the prior business cycle.
A survey of economists released last week by The Wall Street Journal shows forecasters expect the year-over-year increase in average hourly earnings for all employees to rise modestly to 2.4% in December from 2.2% in February.
Most Fed officials have indicated they see few signs of upward wage pressures. Though one gauge of wage growth “suggests some uptick,” Ms. Yellen said Wednesday, “most measures of wage increase are running at very low levels.”
But a debate is emerging within the Fed. “Broader concepts of the unemployment rate” suggested “considerable labor-market slack remained,” several officials said at the central bank’s January meeting, according to minutes of that gathering. Others warned of “worker shortages in specific regions and occupations” and “emerging labor-cost pressures” in one region. (…)
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Few of US long-term jobless find work Research raises fears of structural problems
America’s long-term jobless face huge obstacles in returning to steady full-time employment, with just 11 per cent succeeding over the course of any given year, according to new research that raises alarm bells about structural problems in the US labour market.
The study by Alan Krueger, a Princeton University economist who served as a top economic adviser to Barack Obama between 2011 and 2013, shows that even in good times and in healthy states the long-term jobless are “at the margins” of the labour market with little hope of regaining their footing. (…)
“After 15 months, the long-term unemployed are more than twice as likely to have withdrawn from the labour force than to have settled into steady, full-time employment,” the paper reads. (…)
This means that short-term unemployment – stripping out the long-term jobless – may be a better predictor of when prices could start to rise, possibly leading Federal Reserve officials to increase interest rates sooner than expected. (…)
Epsilon Theory: Surely You Can’t Be Serious
Ben Hunt on Yellen’s presser:
Yellen’s press conference was a disaster. Why? Because she said too much. (…)
I mean, you really can’t make this stuff up. Did the Fed learn nothing from last summer? This isn’t an academic exercise, where statements are qualified and softened by exhaustive footnotes and asides so that no one is ever wrong. The market is a beast, not the review committee for the Quarterly Journal of Economics. Of course the market is going to leap at and devour a statement like Yellen’s 6 months comment, and you’d think that the Fed Chair would know that.
All together now, one more time with feeling: ambiguity is good; transparency is bad. You might think that transparency would be helpful in “shaping market expectations” the way you like, but you would be wrong. That’s not how the game is played. Can I nominate Bill Belichick for the Fed, at least as far as press conferences are concerned?
(…) The problem is actually that the Fed is too credible, and that Yellen’s remark about raising rates within 6 months of stopping QE3 takes on far more import than was intended.
Sigh. Look, maybe I’m over-reacting here. (…) But my fear is that we’ve set the stage for, if not an inflection point in the path of the stock market, then another rate shock similar to but smaller than last summer’s … an aftershock, in geological terms.
What am I looking for to see how this plays out? I think we are now even more strongly in a good-news-is-bad-news (and vice-versa) world. If we start seeing some strong economic data come out over the next few weeks and months, then I think the market – particularly the bond market and emerging markets – could get pretty squirrelly. Not that US stocks would be immune from this. Remember, the modern day Goldilocks environment for stocks has nothing to do with a happy medium between growth and inflation, but everything to do with growth being weak enough to keep an accommodative Fed in play. Strong growth data would augment a Common Knowledge structure that the Fed is on track to raise rates sooner and more rather than later and less, and that’s no fun for anyone. Then again, if global growth data remains weak – and you really can’t look at what’s coming out of China, Europe, or Japan and think that the global growth story is anything but weak – that creates enough uncertainty about the Fed’s path (not to mention the cover for political and economic Powers That Be to wage a full-scale media war to keep monetary policy in QE la-la land forever) to support the markets. Sounds a lot like Freedonia to me. Rufus T. Firefly for President?
CHINA
China Beige Book Says Economy Slowing
China’s economy slowed this quarter, with industries including retail and mining showing weaker revenue growth while loans through non-traditional channels became more expensive, according to a private survey.(…)
The report adds to signs that Premier Li Keqiang may face difficulties reaching an expansion target of 7.5 percent this year without stimulus. The State Council, or cabinet, said this week it will speed up construction projects and other measures to support the economy after data showed moderating growth in industrial production and investment.
“The pace of Chinese economic expansion has plainly slowed,” Leland Miller, president of survey publisher CBB International, said in a statement with Craig Charney, director of research and polling. “A weaker retail performance is the principal driver of the aggregate trend.” (…)
The report, modeled on the U.S. Federal Reserve’s Beige Book business survey, is based on responses from about 2,300 executives and 160 bankers from Feb. 10 to March 3, and 27 in-depth interviews conducted from March 10 to March 14.
CBB International began releasing the China Beige Book reports in 2012. The previous survey showed the world’s second-largest economy strengthening in the fourth quarter, while official data showed a slowdown from the third quarter’s pace of expansion. The China Beige Book report for July-to-September indicated a slowdown, compared with government data showing a pickup.(…)
The proportion of retailer respondents reporting revenue growth fell 7 percentage points from the previous period to 54 percent, according to the CBB survey. There was a 7-point drop, to 39 percent, in the proportion of mineral producers reporting increased sales. Fewer companies in services and real estate said revenue rose.
Sales gains were reported by 56 percent of manufacturers, down 1 percentage point from the previous quarter and up 5 points from a year earlier, according to the survey. Fewer manufacturers reported revenue declines, it said.(…)
Companies reported labor availability, hiring growth and wage gains that were little changed from the previous quarter, according to the survey.
Chinese Consumers’ View on Prices Brightens Fewer consumers in Chinese cities found property prices are too high in the first quarter compared with the previous quarter, a central bank survey showed.
Property prices are “high and unacceptable,” according to 64.3% of respondents in a People’s Bank of China survey for the January-March period released Friday. That is down from 66.5% in the fourth quarter. There was no year-over-year comparison.
Gains in property prices in 70 Chinese cities continued to moderate in February after slowing in January for the first time in a year, as lending limits and concerns about more unsold homes hit demand, according to official data released Tuesday.
Price levels in general are “high and unacceptable,” said 55.8% of respondents in the PBOC survey, down from 61.6% in the fourth quarter.
The survey polled 20,000 residents in 50 cities.
Meanwhile, bankers polled by the PBOC are less confident in the broader economy in the quarter—down 3.7 percentage points to 67.6% compared with the fourth quarter
Businesses polled by the central bank said they had fewer new-export orders in the first quarter and they are less optimistic about the economy than in the previous quarter.
Grim Earnings Add to China’s Bleak Corporate Outlook
Profits at some of China’s largest companies are shrinking, setting a cloud of gloom over the world’s second-largest economy and piling pressure on its downtrodden stock market.
Companies including China Mobile, the world’s biggest mobile carrier, and large supermarket operator China Resources Enterprise 0291.HK +1.21% have delivered poor results and disappointed money managers as earnings season begins. (…)
The trend has amplified bearish sentiment on China, as global investors yanked a record $1.5 billion out of China funds in the week through Wednesday. A widely-traded index of Chinese companies entered a bear market for a brief period this week while the benchmark Shanghai index skirted 5-year lows in the same period. (…)
PM Li indicated the need to accelerate some spending plans to keep growth in a ‘reasonable range.’ While no figures have been given, this is the first step down the fiscal stimulus path. (ISI)
Companies driving renminbi lower Important players positioning for weaker Chinese currency for longer
Companies rather than China’s central bank are now the biggest force driving the renminbi lower, according to local traders, marking a decisive shift in trading of the currency which became a two-way bet last month.
(…) traders said important market players – from state-owned oil companies to private sector exporters – had capitulated in recent days and were now positioning themselves for a weaker renminbi for longer.
China’s devaluation will soon force other Asian countries to react to maintain competitiveness.
After Fed Guidance, Philippine Banker Fires Warning Shot on Rates The Philippine central bank is dropping hints that it’s preparing to tighten monetary policy — perhaps as soon as next week.
(…) After Federal Reserve Chairwoman Janet Yellen surprised markets overnight Wednesday by suggesting an earlier start to U.S. rate increases than anticipated, the governor of the Philippine central bank hinted he could move sooner rather than later as well. (…) Central banks around Asia are beginning to consider tightening policy as the prospect of higher interest rates in the United States sinks in. Central banks in India and Indonesia have raised rates repeatedly since last summer’s taper-related selloff underscored the need to reduce current-account deficits.
U.S. BANKS
Financial Companies Surge
The S&P 500 Financial sector index has gained more than 3% since the Wednesday statement and press conference by Janet Yellen. The broader S&P 500 index is almost flat since then, after tumbling on Wednesday and rallying on Thursday.
Financial stocks tend to benefit when longer-dated interest rates rise—which is exactly what has happened in the wake of the Fed’s comments on Wednesday. Investors in financial stocks have been waiting anxiously in anticipation of higher long-term rates because they allow banks and insurers to lend and invest money at higher rates than they borrow it, boosting margins. (…)
A roundup of banks’ fourth-quarter earnings by SNL Financial shows that margins may have bottomed in the fourth quarter, which bodes well for the sector going forward. The top 20 bank holding companies posted an average margin of 2.90% last quarter, down slightly from the prior period but up from 2.81% a year ago, according to the data provider.
Fed ‘Stress Test’ Passes 29 of 30 Big Banks The Fed’s annual test of big banks’ financial health showed the largest U.S. firms are strong enough to withstand a severe economic downturn, potentially clearing the way for banks to reward investors with dividends and stock buybacks.
(…) Only Zions Bancorp, ZION +3.19% a regional lender based in Salt Lake City, posted capital levels during the two-year-downturn scenario that didn’t meet the Fed’s minimum standards. The Fed said Zions had a Tier 1 common capital ratio of 3.5%, below the 5% level the Fed views as a minimum allowance. The ratio measures high-quality capital as a percentage of risk-weighted assets such as mortgages, commercial loans and securities. (…)
The stress-test results will be a factor in the Fed’s decision next week to approve or deny individual banks’ plans for returning billions of dollars to shareholders through dividends or share buybacks. But a good performance on Thursday’s test is no guarantee, since the Fed also will consider more subjective factors such as the strength of a bank’s internal risk management. (…)
The FT warns:
Crisis stress tests find banks face big hit Ability to return capital to shareholders under question
(…) BofA, Morgan Stanley, JPMorgan and Goldman all came out with less than a 7 per cent capital ratio – much weaker than anticipated.
In the crisis scenario, BofA would make a $49.1bn loss, the worst performance of any of the banks and its capital ratio would plummet to 6 per cent before any share buybacks or higher dividends.
The tests were used as the basis for the Fed’s assessment of banks’ capital return plans, which will be released on Wednesday.
Any bank whose dividend and buyback plans would cause it to burn through the 5 per cent capital threshold could suffer an embarrassing veto by the Fed and have to resubmit a lower request.
Those requests are private until next week. However, there are clues on whether those weaker performers risk a Fed veto, which in previous years has dealt blows to the credibility of BofA and Citigroup.
Analysts warned that on more than one measure of capital, BofA was close to the limit.
“It’s narrower than you’d like,” said Glenn Schorr, analyst at ISI Group in New York, adding that BofA should still have excess capital to allow for its share buyback and dividend plans.
JPMorgan’s stressed ratio of 6.3 per cent equates to about $17bn above the 5 per cent minimum. The bank has signalled that it intends to ask permission for a capital return of less than $10bn and therefore should pass – though the Fed can still fail an institution if examiners find other weaknesses in its capital planning. (…)
It ain’t over till it’s over:
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Sanctions hit Russian shares, rouble US sanctions expected to include more restrictions on economy
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Threat of future Russian aggression remains
(…) Financial markets and many western observers have taken Mr Putin’s words at face value, concluding that Russian forces, still carrying out huge “exercises” on Ukraine’s borders, will not enter the east of the country. Such an assumption is dangerously misguided.
Grabbing Crimea has given Mr Putin a warm glow and boosted his approval ratings to a five-year high. But it does not achieve his geopolitical aims – above all, preventing Ukraine from joining Nato. Unless he achieves those aims in other ways, Russia’s incursion into Ukraine is highly unlikely to end with Crimea. (…)
Moscow has, meanwhile, signalled more openly where its real red lines lie over Ukraine: Nato membership and, perhaps to a lesser extent, further EU integration. Proposals to resolve the crisis published by Russia’s foreign ministry on Monday morning emphasised a commitment by Kiev to “military-political neutrality”, backed by international partners and a UN Security Council resolution.
Mr Putin also made clear in his speech the grab for Crimea aimed, in part, to keep Sevastopol, home for two centuries to Russia’s Black Sea Fleet, out of Nato’s hands. “Nato remains a military alliance and we are against having a military alliance making itself at home right in our backyard or in our historic territory,” he said.(…)
Further Russian incursion, moreover, need not even mean an invasion. Moscow could attempt to peel away other Russian-speaking Ukrainian regions as it did Crimea. Or the two countries, their relations destabilised by Crimea, could simply drift into war.(…)
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Russia’s Permanent Interests
Interesting viewpoint from GaveKal via John Mauldin:
(…) the reason we should care (beyond the harrowing tales of human suffering coming in the conflicted areas), and the reason that Russia has a particular bone in this fight, is obvious enough: oil.
Indeed, in the Sunni-Shia fight that we see today in Syria, Lebanon, Iraq and elsewhere, the Sunnis control the purse strings (thanks mostly to the Saudi and Kuwaiti oil fields) while the Shias control the population. And this is where things get potentially interesting for Russia. Indeed, a quick look at a map of the Middle East shows that a) the Saudi oil fields are sitting primarily in areas populated by the minority Shias, who have seen very little, if any, of the benefits of the exploitation of oil and b) the same can be said of Bahrain, where the population is majority Shia.
Now of course, Iran has for decades tried to infiltrate/destabilize Shia Bahrain and the Shia parts of Saudi Arabia, though so far, the Saudis (thanks in part to US military technology) have done a very decent job of holding their own backyard. But could this change over the coming years? Could the civil war currently tearing apart large sections of the Middle East get worse?
At the very least, Putin has to plan for such a possibility which, let’s face it, would very much play to Russia’s long-term interests. Indeed, a greater clash between Iran and Saudi Arabia would probably see oil rise to US$200/barrel. Europe, as well as China and Japan, would become even more dependent on Russian energy exports. In both financial terms and geo-political terms, this would be a terrific outcome for Russia.
It would be such a good outcome that the temptation to keep things going (through weapon sales) would be overwhelming. This is all the more so since the Sunnis in the Middle East have really been no friends to the Russians, financing the rebellions in Chechnya, Dagestan, etc. So having the opportunity to say “payback’s a bitch” must be tempting for Putin who, from Assad to the Iranians, is clearly throwing Russia’s lot in with the Shias. Of course, for Russia to be relevant, and hope to influence the Sunni-Shia conflict, Russia needs to have the ability to sell, and deliver weapons. And for that, one needs ships and a port. Ergo, the importance of Sevastopol, and the importance of Russia’s Syrian port (Tartus, sitting pretty much across from Cyprus).
The above brings us to the current Western perception of the Ukrainian crisis. Most of the people we speak to see the crisis as troublesome because it may lead to restlessness amongst the Russian minorities scattered across Eastern Europe and Central Asia, and tempt further border encroachments across a region that remains highly unstable. This is of course a perfectly valid fear, though it must be noted that, throughout history, there have been few constants to the inhabitants of the Kremlin (or of the Winter Palace before then). But nonetheless, one could count on Russia’s elite to:
a) Care deeply about maintaining access to warm-water seaports and
b) Care little for the welfare of the average Russian
So, it therefore seems likely that the fact that Russia is eager to redraw the borders around Crimea has more to do with the former than the latter. And that the Crimean incident does not mean that Putin will try and absorb Russian minorities into a “Greater Russia” wherever those minorities may be. The bigger question is that having secured Russia’s access to Sevastopol, and Tartus, will Russia use these ports to influence the Shia-Sunni conflict directly, and the oil price indirectly?
After all, with oil production in the US re-accelerating, with Iran potentially foregoing its membership in the “Axis of Evil,” with GDP growth slowing dramatically in emerging markets, with either Libya or Iraq potentially coming back on stream at some point in the future, with Japan set to restart its nukes … the logical destination for oil prices would be to follow most other commodities and head lower. But that would not be in the Russian interest for the one lesson Putin most certainly drew from the late 1990s was that a high oil price equates to a strong Russia, and vice-versa.
And so, with President Obama attempting to redefine the US role in the region away from being the Sunnis’ protector, and mend fences with Shias, Russia may be seeing an opportunity to influence events in the Middle East more than she has done in the past. In that regard, the Crimean annexation may announce the next wave of Sunni-Shia conflict in the Middle East, and the next wave of orders for French-manufactured weapons (as the US has broadly started to disengage itself, France has been the only G8 country basically stepping up to fight in the Saudi corner … a stance that should soon be rewarded with a €2.7bn contract for Crotale missiles produced by Thales and a €2.4bn contract for Airbus to undertake Saudi’s border surveillance). And, finally, the Crimean annexation may announce the next gap higher in oil prices.
In short, buying a straddle option position on oil makes a lot of sense. On the one hand, if the Saudis and the US want to punish Russia for its destabilizing actions, then the way to do it will be to join forces (even if Saudi-US relations are at a nadir right now) and crush the oil price. Alternatively, if the US leadership remains haphazard and continues to broadly disengage from the greater Middle East, then Russia will advance, provide weapons and intelligence to the Shias, and the unfolding Sunni- Shia war will accelerate, potentially leading to a gap higher in oil prices. One scenario is very bullish for risk assets, the other is very bearish! Investors who believe that the US State Department has the situation under control should plan for the former. Investors who fear that Putin’s Machiavellianism will carry the day should plan for the latter (e.g., buy out-of-the-money calls on oil, French defense stocks, Russian oil stocks).
Sigh! Perhaps Yellen could give Poutin some pointers on forward guidance…