RECESSION WATCH
U.S. Leading Economic Indicators Decrease
The Conference Board’s Composite Index of Leading Economic Indicators declined 0.1% (+2.1% year-on-year) during December following an unrevised 0.2% gain in November. The series is comprised of 10 components which tend to precede changes in the overall economy. As a result of the government shutdown two of the components of the index — new orders for consumer goods and materials as well as building permits — are not available for December, thus the Conference Board forecast these series. Moreover, a third component, nondefense capital goods orders is based on preliminary November data. Given this, there is a high likelihood of a revision to the December reading of the Index of Leading Indicators. The Conference Board also postponed the regularly scheduled benchmark revisions of the composite indicators until all underlying data are available.
The drop in equities prices in December was the biggest contributor to the negative reading. Weakness in the ISM new orders index as well as building permits also drove the index lower. Lower claims, looser credit conditions, improved consumer expectations for business/economic conditions, a steeper yield curve and some strength in both measures of manufacturing orders made positive contributions. Three-month growth in the leading index fell at a 0.7% annual rate, the largest decline in almost three years.
The Index of Coincident Economic Indicators increased 0.2% (4.3% y/y) in December following an unrevised 0.2% gain during November. All of the index components — changes in personal income less transfer payments, industrial production, nonagricultural payroll employment and manufacturing & trade sales — made positive contributions. Three-month growth in the coincident index increased at a 2.3% annual pace, in line with recent trends.
The Index of Lagging Economic Indicators increased 0.5% last month (2.8% y/y) following upwardly revised 0.5% growth in November. Strength in commercial & industrial loans outstanding and the six-month growth in the services CPI drove the majority of the gain. The average duration of unemployment was the only negative contributor. The three-month growth in the lagging index jumped at 6.2% annual rate, the fastest pace in six years.
(Labor Market Powers On Despite Growth Concerns Initial jobless claims, a proxy for layoffs across the U.S., fell last week to the lowest level since 1969
Initial jobless claims declined by 13,000 to a seasonally adjusted 199,000 in the week ended Jan. 19, the Labor Department said Thursday. This marks the lowest level for claims since November 1969, when applications clocked in at 197,000. (…)
Global trade cycle downturn intensifies
Another worrying development in the survey came from export data, which showed international demand for Japanese goods falling at the steepest pace since July 2016. Historically, the New Export Orders PMI has picked up the various gyrations in Japan’s export cycle. Latest official data for Japan indicated that exports declined 3.8% year-on-year in December, the fastest drop in two years, with flash data signalling a further reduction in January. Anecdotal evidence from the latest survey suggested that producers of semiconductor-related items in Japan had particularly suffered in January.
Indeed, preliminary trade data released on Monday for the first 20 days of January from South Korea, a world leader in semiconductor exports, revealed that exports of the electronic component contracted 28.8% when compared to the same period in 2018. Meanwhile, total exports were down 14.6% compared to last year in the first 20 days of January.
South Korea’s exports, often regarded as a bellwether for the health of the global economy, have faced an increasingly less hospitable backdrop in recent months, according to our PMI Export Climate Index, matching the slowing trend seen in semiconductor trade. Given the pro-cyclical nature of the semiconductor industry, falling sales is a negative signal for the global economy. (Markit)
China to step up economic stimulus in slowdown fight China will take steps to spur growth amid a trade war with the United States, but there is limited room for aggressive stimulus in an economy already laden with massive debts and a property market prone to credit-driven spikes, policy insiders said.
(…) “The room for a strong stimulus is not big, and there are very big risks, because that will rely on a flood of cash and increased leverage in the economy,” said a policy insider, declining to be named due to the sensitivity of the matter. (…) Sources have told Reuters that Beijing was planning to lower its growth target to 6-6.5 percent this year from around 6.5 percent in 2018. (…)
President Xi Jinping said this week that China must be on guard against “black swan” risks, meaning unforeseen events that have extreme consequences, while fending off so-called “grey rhino” events – obvious threats that go ignored. (…)
In December, top leaders pledged to step up “counter-cyclical” support for the economy, and said fiscal policy would be “more forceful and effective” and monetary policy would be prudent with “appropriate tightness and looseness”.
Details on the fiscal stimulus are expected to be unveiled during the annual parliamentary meeting in March.
Mario Draghi Sounds Economic Alarm for the Euro-Area
(…) After holding off in December from fully downgrading his assessment, the ECB president finally caved on Thursday by saying the risks to growth “have moved to the downside.” That’s a significant change from six weeks ago, when he described the risks as “broadly balanced” and capped monetary support. (…)
- Draghi said that the “persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment.” (…)
- Draghi said policy makers were also united in the view that the likelihood of a euro-zone recession as being low, while acknowledging that a serious downturn in one part of the bloc could spread. (…)
Fed Weighs Earlier End to Bond Portfolio Runoff Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities, putting an end to the central bank’s portfolio wind-down closer into sight.
Officials are still resolving details of their strategy and how to communicate it to the public, according to their recent public comments and interviews. With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day policy meeting of the central bank’s Federal Open Market Committee next week. (…)
The Fed’s decision about the size of its portfolio is being driven by a technical debate inside the central bank about reserves in the banking system, not over whether officials want to provide more or less stimulus to the economy.
Reserves are the funds banks keep on deposit with the Fed. When the Fed expanded its portfolio of bondholdings during and after the financial crisis, it expanded the amount of reserves in the financial system, pumping banks with money as it bought bonds. The banks in turn kept the new money on deposit with the central bank. (…)
The Fed has never said what size portfolio it wants, but a survey of financial institutions by the New York Fed provides some clues about where it could end up. The survey in December said market participants thought reserves would stabilize at $1 trillion in a year’s time. That compares to $1.7 trillion last week and $2.8 trillion in 2014. At that rate, the Fed’s asset portfolio would shrink to $3.5 trillion, larger than previous estimates of $1.5 trillion to $3 trillion. It is around $4 trillion now. (…)
EARNINGS WATCH
Refinitiv updates us on small cap earnings as of Jan. 22 when 45 companies had reported. The beat rate is a low 60%, only 48% in Financials which accounted for 21 of the 48 companies. The surprise factor is –1.7% (-3.8% in Financials).
The blended growth rate for Q4 is 1.9% (0.7% ex-Energy) on a 5.7% gain in revenues (5.4% ex-E). Smaller companies’ margins are slipping seriously.
Analysts are now expected the S&P 600 earnings to decline 3.8% YoY in Q1’19 (-2.9% ex-E) on a 5.3% revenue gain (5.2% ex-E).
Mid-cap companies are also experiencing margins compressions. The 31 S&P 400 companies having reported are expected to grow earnings 4.3% (3.9% ex-E) in Q4 on a 5.1% gain in revenues (4.2% ex-E). S&P 400 earnings are seen up 3.7% in Q1’19.
Major Mobile Carrier Halts Huawei Purchases Amid Security Concerns The world’s biggest mobile carrier outside China said it is temporarily halting purchases of some components made by Huawei, posing a threat to the Chinese company’s growth and delivering another blow to its reputation.
Vodafone Group VOD -4.87% PLC said Friday that it would pause the purchase of Huawei gear for use in the core of new 5G networks it’s rolling out across Europe because of uncertainty over whether some governments in the region will ban the Chinese company. (…) Vodafone is speaking with European government officials about the potential impact of Huawei bans, which could result in increased costs and delayed 5G launches. (…)
A Huawei spokesman said core equipment represents a small proportion of its communications infrastructure business and that it would continue to work with Vodafone. (…)