Saturday, April 16, 2016

Weekly Indicators for April 11 - 15 at

 - by New Deal democrat

My Weekly Indicators post is up at  Over the last month, there have been some important - and significantly different - changes in trend among the leading and coincident indicators.

Friday, April 15, 2016

Industrial production nowcast is recessionary. But .. .

 - by New Deal democrat

We got two important reports this morning.  The first was Industrial Production. The second was the Empire State survey.  One is a nowcast, the other of forecast.  My discussion is up at .

Is It Supply, Weak Demand, Or A Strong Dollar That is Sinking Oil Prices?

From Marketwatch: 

Supply glut? Worries about waning demand? All of these factors may have contributed to crude oil losing nearly two-thirds of its value since its peak in June 2014. But a chart tweeted on Monday by Charlie Bilello, director of research at Pension Partners, highlights another key factor swaying crude’s gyrations.

Bilello’s graphic shows that while oil is down more than 60% over the course of the past year and a half, the dollar—as gauged by the ICE U.S. Dollar Index DXY, -0.19% —has climbed nearly 17%. The data underscore a striking negative correlation between the dollar and crude futures CLK6, -2.31%  which are priced in dollars. In other words, the stronger the greenback, the more expensive it makes oil to buyers using other monetary units.

Bonddad Friday Linkfest

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Are the XLBs Getting Ready For  A Second Upside Move?

Daily Chart of XLBs

There has been mixed news on near-term prospects for global growth.  Immediate downside risks 
around Chinese activity have lessened;  in the United States, indicators of GDP growth in the first quarter of the year have been disappointing, but those for the second quarter are more encouraging. Movements in the prices of risky assets suggest that investors have regained their risk appetite, possibly reflecting more positive global economic data and policy action by central banks. Nevertheless, given weak supply growth, the Committee continues to expect global growth to be somewhat subdued by historical standards.


Domestically, growth has been steady, and the MPC continues to expect CPI inflation to rise over the next year.  The pickup in the price of oil and sterling’s recent depreciation will support that rise. There are some signs that uncertainty relating to the EU referendum has begun to weigh on certain areas of activity, as some decisions, including on capital expenditure and commercial property transactions, are being postponed pending the outcome of the vote.  This might lead to some softening in growth during the first half of 2016.

Weekly Chart of UK ETF

Five-Year Chart of the Pound/Euro

Five Year Chart of the Pound/Dollar

Euro area annual inflation was 0.0% in March 2016, up from -0.2% in February. In March 2015 the rate was -0.1%. European Union annual inflation was also 0.0% in March 2016, up from -0.1% in February. A year earlier the rate was -0.1%. These figures come from Eurostat, the statistical office of the European Union

Y/Y Rate

Y/Y Rate Per Country

Y/Y Rate Per Category

David Madland, economist at the Center for American Progress think-tank, said while Mr Obama’s firm approval ratings suggested he was getting some credit for the improving economy, one might have expected them to have risen more.

The explanation is subdued wage growth, he said, which is more tangible to individuals than GDP growth or unemployment. “People are working more and more to stay in one place,” he said.

While some measures of wage growth have picked up and disposable incomes have been bolstered by lower energy prices, for less prosperous groups the story is one of longer-running stagnation, according to data from the Economic Policy Institute.

There is an alternative view that wages are being held down as a result of the changing composition of the US labour force. In a study released last month, economists at the San Francisco Fed argued one big factor behind wage stagnation nationally was the fact higher-wage baby boomers had begun retiring and that many lower-wage workers sidelined during the recession were again being hired, two colliding trends that together held down measures of earnings growth.

Meanwhile, the middle class, as defined by the Pew Research Center, has shrunk to just under half the US population for the first time in decades, with more of the population shifting to the extremes both above and below the middle.

April marks the last month of the first quarter for retailers. And, although March might have seen more traffic at the malls, April's mall traffic and retail sales are expected to cool down after the Easter holiday. What's more, retailers keep warning us about Q1 earnings. We've received more negative guidance since the beginning of Q1 (February) - more than four times the amount since the beginning of the quarter. In February, we had 12 negative guidance vs. 55 today 

Weekly Chart of the Retail Sector ETF -- the XRTs

Real Retail and Food Service Sales For the Last Year

Thursday, April 14, 2016

Real retail sales forecast continued lack of growth in GDP

 - by New Deal democrat

With this morning's report on consumer prices, let's take a look at inflation and real retail sales.

First of all, YoY CPI decelerated -0.1% to +0.8%:

The only thing driving the elevated core measure is owner's equivalent rent, which is due to a shortage of rental construction, as an increasingly nationwide and oligopolized market of builders focused instead on higher margin luxury houses, frequently all cash purchases by foreigners.  There is absolutely nothing in this report which ought to cause the Fed to consider raising interest rates.

Now, on to retail sales.  First of all, real retail sales have gone sideways since last July:

There hasn't been any significant decrease, but the flatness is reminiscent of most of 2006-07.

This is true even if we strip out motor vehicle sales (blue in the graph below), which have looked increasingly wobbly:

So far, not so good, especially since both real retail sales and motor vehicle sales are short leading indicators, meaning they are forecast virtually no growth in GDP in the quarter or two ahead.

Finally, let's compare these monthly measures with one of my favorite weekly indicators, Gallup's daily consumer spending.  Gallup's measure is nominal, not inflation-adjusted, and does not include motor vehicles.  They don't publish YoY charts, but here is their graph of monthly sales for the last 8 years:

On a YoY basis, Gallup consumer spending went negative immediately after Christmas 2014, and stayed that way through 2015.  So far this year, however, it has been almost relentlessly positive. 

Now here are YoY nominal retail sales for the last 2 years, both including (red)  and excluding (blue) motor vehicles:

Excluding motor vehicles, YoY retail sales suddenly went flat at the beginning of 2015, and just as suddenly went positive so far this year (even if less positive in March), almost exactly tracking Gallup, offering further validation of Gallup's daily measure as a very good real-time nowcast of consumer spending.

Bonddad Thursday Linkfest

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Bank of Canada Keeps Rates Unchanged (BOC)

Governing Council judged that the combination of slower global and US growth, a new round of cuts to investment in Canada’s energy sector, and a stronger Canadian dollar would have meant a lower projected growth profile for the Canadian economy than we had in January. I know this sounds contrary to what you have heard lately, because a range of monthly economic indicators have started the year strongly. Some of this strength represents a catch-up after temporary weakness in the fourth quarter, and some of it reflects temporary factors that will unwind in the second quarter. We think it is best to look through that variability, and note that the economy appears to be achieving average growth of close to 2 per cent in the first half of the year, which is encouraging.


Specifically, the collapse in investment in the commodity sector will mean a slowdown in the economy’s potential growth rate. In the near term, we’ve lowered potential output growth from 1.8 per cent to 1.5 per cent. You can find details in a staff analytical note we published today. Later this year, the natural sequence of higher non-resource exports and a tightening of capacity constraints should lead to higher investment and employment in the non-resource economy, and therefore growing capacity. Looking beyond the projection horizon, growth in potential output overall should pick up again. This newly-added capacity may give the economy some additional room for non-inflationary growth beyond what we are assuming today.

Weekly Chart of Canadian ETF

5-Year Chart of USD/CAD

M/M Change

Y/Y Percentage Change

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $446.9 billion, a decrease of 0.3 percent (±0.5%)* from the previous month, and 1.7 percent (±0.7%) above March 2015. Total sales for the January 2016 through March 2016 period were up 2.8 percent (±0.5%) from the same period a year ago. The January 2016 to February 2016 percent change was revised from down 0.1 percent (±0.5%)* to virtually unchanged (±0.2%)*

The bottom line: the jury’s out on what today’s numbers mean, if anything. But until (or if) we see convincing evidence to the contrary, it appears that the retail sector’s forward momentum has slowed. The big question is how the broad trend looks once this week’s numbers clear. The threat of a new recession remained low for the US as of the Apr. 10 edition of the US Business Cycle Risk Report. Will the upbeat tone survive with this weekend’s update of fresh data–including today’s retail figures? Probably, although it’s only Wednesday. Let’s see what the wind blows in for tomorrow’s weekly numbers on jobless claims and Friday’s monthly update on industrial production.

“We’re having a little bit of a soft patch here for the consumer, with no obvious rationale,” Michael Feroli, chief US economist at JPMorgan Chase, tells Bloomberg. “It’s definitely a softer start to the year. Provided job gains remain as strong as they’ve been, we expect consumer spending should be OK.”

The three-tiered deposit system with the BOJ

Commercial banking, the division run by Doug Petno, posted a 17 percent pofit decline to $496 million as loan-loss reserves, fueled by the industry’s exposure to energy companies, surged to $304 million from $61 million a year earlier.

Basic JPM Data from

JPM Weekly Chart

Complexity is the enemy of stability. Financial conglomerates have become too diverse and sprawling for their chief executives or boards to understand what they do. The same complexity creates endemic conflicts of interest and is associated with cross subsidy between activities. There are fundamental differences in the cultures required to trade derivatives, to give private financial advice to big corporations, to manage assets on behalf of savers and to provide an efficient retail banking service.

Why Aren't Low Oil Prices Leading to Increased Consumer Spending? (IMF)

Though a decline in oil prices driven by higher oil supply should support global demand given a higher propensity to spend in oil importers relative to oil exporters, in current circumstances several factors have dampened the positive impact of lower oil prices.  First and foremost, financial strains in many oil exporters reduce their ability to smooth the shock, entailing a sizable reduction in their domestic demand. The oil price decline has had a notable impact on investment in oil and gas extraction, also subtracting from global aggregate demand.  Finally, the pickup in consumption in oil importers has so far been somewhat weaker than evidence from past episodes of oil price declines would have suggested, possibly reflecting continued deleveraging in some of these economies. Limited pass-through of price declines to consumers may also have been a factor in several emerging market and developing economies.

Analysts Are Invariably Bullish When They Start Estimating Earings

Wednesday, April 13, 2016

"Less bad" producer commodity deflation - a good sign

 - by New Deal democrat

As an initial matter, while this morning's retail sales number wasn't good, after the poor report on March auto sales, I can't imagine why anybody was surprised.  Since inflation adjustments in retail sales are important, I'll withhold further comment until the CPI is reported tomorrow.

Like the big decline in corporate bond yields that I wrote about Monday, this morning's producer price report is in line with the idea that the shallow industrial recession is ending.  We have over 100 years of data on producer commodity prices, and what they show is that deflationary (or even severe disinflationary) recessions always end at very least when the YoY% decline is less than half of its worst level (1927, 1929-32), and most often right when the change in YoY commodity prices are at their worst. 

Here's 1920 -1962:

Here's 1982 - present:

Here is a close-up on the last two years:

I would like to see YoY commodity deflation of less than -4% before I would be confident that the industrial recession is over.  But we certainly appear to have passed the deepest point of YoY commodity deflation.

Bonddad Wednesday Linkfest

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

IMF Issues Global Growth Warning (IMF)

Global growth continues, but at a sluggish pace that leaves the world economy more exposed to risks, says the IMF’s latest World Economic Outlook (WEO).

The WEO forecasts global growth at 3.2 percent in 2016 and 3.5 percent in 2017, a downward revision of 0.2 percent and 0.1 percent, respectively, compared with the January 2016 Update (see table).

In a recent speech, IMF Managing Director Christine Lagarde warned that the recovery remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries.

“Lower growth means less room for error,” said Maurice Obstfeld, IMF Economic Counsellor and Director of Research. “Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,” he added.

The current diminished outlook calls for an immediate, proactive response, Obstfeld noted. To support global growth, he emphasized, there is a need for a more potent policy mix—a three-pronged policy approach based on structural, fiscal, and monetary policies.

"If national policymakers were to clearly recognize the risks they jointly face and act together to prepare for them, the positive effects on global confidence could be substantial,” Obstfeld added.

IMFs Growth Projections

UK PPI -.9% (ONS)

The price of goods bought and sold by UK manufacturers, as estimated by the producer price index, continued to fall in the year to March 2016.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 0.9% in the year to March 2016, compared with a fall of 1.1% in the year to February 2016.

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, rose 0.2% in the year to March 2016, compared with a rise of 0.1% in the year to February 2016.

Y/Y Change in UK PPI

UK CPI + .5% (ONS)

The Consumer Prices Index (CPI) rose by 0.5% in the year to March 2016, compared with a 0.3% rise in the year to February.

The rate has increased gradually since October 2015 although is still relatively low in the historical context.

Y/Y Change in UK CPI

A Look At US-Mexico Trade (Dallas Fed)

Since the implementation of the North American Free Trade Agreement (NAFTA), trade between the U.S. and Mexico has seen tremendous growth, increasing from approximately $160 billion in 1994 to currently over $530 billion. For the U.S., Mexico has become its third most important trade partner (after Canada and China), and for Mexico, the U.S. is the top trade partner.  Due to NAFTA’s reduction in tariffs and elimination of trade barriers, U.S.–Mexico intraindustry trade has also expanded notably. Currently, approximately 40 percent of content inU.S. imports from Mexico originated in the U.S., surpassing the U.S. content in imports from Canada (25 percent) and China (4 percent).1

 The increased bilateral trade and production sharing between the U.S. and Mexico resulted in stronger economic integration among the two  countries and in a synchronization of the U.S. and Mexico business cycles, as depicted in Chart 1. It is clearly visible that in the post-NAFTA period, 
bothU.S. and Mexico industrial production became quite synchronized.

US-Mexico Imports and Exports

Weekly Chart of the Mexico ETF

Health Care Sector Hit By Earnings Weakness (WSJ)

Investors were never expecting a particularly strong earnings season, but the weaknesses are showing up in unlikely places.

One of them is the health-care sector.

So far, 94 companies in the S&P 500 Index have issued earnings-per-share guidance below consensus analyst estimates, the second highest level on records going back a decade, according to FactSet. Seventeen of those companies were in health care, a record for the sector.

Daily Chart of the Health Care ETF

Last December, the FOMC decided to raise rates for the first time in seven years, increasing the target federal funds rate to ¼ to ½ percent. Now that the first interest rate increase is out of the way, the question on everyone’s mind is how rapidly interest rates will rise in the current year. Many observers have noted that central banks in some other major countries have actually moved toward easier monetary policy in recent months. In January, for example, the Bank of Japan announced that it would begin charging an interest rate of negative 0.1 percent on reserves held at the central bank. In March, the European Central Bank, which has charged negative interest rates on such reserves for nearly two years, announced further cuts to several key interest rates and expanded its asset purchase program.

These policy decisions were a response to slowing inflation and economic growth in their respective regions. But the situation in the United States is different. As I will discuss in more detail, our labor markets are strong and growing stronger, and the household sector is healthy. This is fueling steady growth in household spending, which is a substantial portion of GDP. Certainly, many American households still face significant economic challenges. But overall, the prospects for continued growth in employment and consumer spending look good. As I will discuss later, U.S. economic leadership within the global economy makes divergence between the monetary policies of the United States and other major economies that much more likely.

Tuesday, April 12, 2016

Bonddad Tuesday Linkfest

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Steel Price Recovery?

A recent recovery in Chinese steel prices has been read by some local mills as a sign of budding recovery fed by China’s seemingly stabilising economy.

However, some analysts believe that the fall in overall Chinese demand will ultimately haul back buoyant prices as prospects of significant new investment in China’s main steel-intensive industries remains poor.

Whether Chinese steelmakers can stage an orderly recovery is critical for a global market that was buffeted last year by 20 per cent year-on-year growth in cheap Chinese exports.

Brazil's Impeachment Heating Up

A Brazilian congressional committee has voted in favour of impeaching President Dilma Rousseff for manipulating the budget, bringing her ousting a step closer as currency markets rallied.

The special committee on Monday evening voted by 38 to 27 in favour of Ms Rousseff’s removal in a decision that sets the stage for a crucial vote in a full session of the lower house of congress as early as Sunday. Lawmakers supporting the leftist president’s impeachment shouted “out with Dilma”, while those against cried: “There will be no coup.”

“There no longer exists the political climate for this government, there no longer exists the political base to sustain it, no one believes any more in this government,” said Jovair Arantes, the leader of the committee, ahead of the vote.

Foreign Investors Are Pulling Out of Japanese Stocks

Starting in the first days of 2016, foreign traders have been pulling out of Tokyo’s stock market for 13 straight weeks, the longest stretch since 1998. Overseas investors dumped $46 billion of shares as economic reports deteriorated, stimulus from the Bank of Japan backfired and the yen’s surge pressured exporters. The benchmark Topix index is down 17 percent in 2016, the world’s steepest declines behind Italy.


Overseas investors, which account for about 70 percent of the value traded in Tokyo shares, bought a net 18.5 trillion yen between 2012 and 2015. Global fund managers, which were negative on Japanese shares for almost all of the five years before Abe came to power, have been overweight every month since, according to a Bank of America Corp. Merrill Lynch survey.

The company's debt problems are no secret. Out of 70 large U.S. telecom and tech hardware companies, only seven of them top Sprint's net debt of 4.3 times its adjusted earnings before interest, taxes, depreciation and amortization in the prior 12 months, according to an analysis of Bloomberg data.

The bottom line is that buybacks tend to be expensive, poorly timed, pro-cyclical, subject to cancellation without notice, not guaranteed and often serve to offset compensation for company insiders. Dividends represent a real return of cash to shareholders, are carefully considered, counter-cyclical and durable.

A company can't destroy value by returning cash in the form of a dividend. But it can surely waste money on a buyback. In order for a share buyback to return 100 cents on the dollar, a lot of things have to go just right.

Despite forecasts of an eventual improvement in the oil market, U.S. oil and gas firms have continued to face difficult decisions about how to deal with the immediate reality of low energy prices. A number of upstream firms have announced substantial cuts to their capital spending in 2016 (Chart 5). Many have also been forced to lay off workers. Nationwide, oil and gas companies shed more than 20,000 jobs in first quarter 2016. Given current oil and gas prices, it is likely that many companies will continue to face difficulties in the quarter to come and beyond.

Monday, April 11, 2016

Why the -0.75% decline in corporate bond yields is a semi-big deal

 - by New Deal democrat

I have a new post discussing the importance of this year's big decline in corporate bond yields up at .

Bonddad Monday Linkfest

We'll be doing our regular Monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Great overall summation of the current economic and market environment (SA)
Paul Ryans Parallel campaign (NYT)
GOP really doesn't want Trump (NYT)
Major donors aren't donating (Politico)
Why no boost from oil prices (James Hamilton)
Bond defaults at highest level since the Great Recession (FT)
Will this be the year for TIPS (FT)

Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future. People need to invest more today to achieve their desired annual retirement income in the future. For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.

This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.