Mtg purchase apps, Gas prices, Greek debt, Euro area trade and inflation, Oil prices

Another setback for those grasping for straws looking for housing to lead a recovery:

MBA Mortgage Applications
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Gas prices up enough to hurt consumers, but not enough boost oil capex.

You might say it’s in the ‘sour spot’:
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Again, for all practical purposes this IS full debt forgiveness, and something Greece has yet to recognize as such:

IMF Proposal on Greece Sets Up Battle With Germany

May 17 (WSJ) — A new IMF proposal goes far beyond what Greece’s eurozone creditors have said they are willing to do. Germany is leading the pressure on the IMF to dilute its demands and rejoin the Greek bailout program as a lender. The IMF wants eurozone countries to accept long delays in the repayment of Greece’s bailout loans, which would fall due in the period from 2040 to 2080 under the proposal. The IMF is also pressing for Greece’s interest rate on its eurozone loans to be fixed for 30 to 40 years at its current average level of 1.5%, with all interest payments postponed until loans start falling due.

Trade continues to provide serious fundamental support for the euro, much like it did for the yen for two decades, which continued to strengthen even with 0 rates, QE, and perhaps the highest debt/GDP ratios in the world:
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This also provides fundamental support for the euro:
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And the recently rising oil prices work to increase the US trade deficit with prices and imports rising, as the price increase isn’t enough to slow the decline in US output. Again, you could call it the ‘sour spot’ for as long as it lasts:
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Chicago PMI, Pending home sales, EU inflation, G20 statement, Virginia jobless claims

As previously suspected, last month’s higher print was just a bit of volatility on the way down, as per the chart:

Chicago PMI
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Highlights
Another month and another month of wild volatility for the Chicago PMI which lurched from solid expansion in January to noticeable contraction in February. At a headline 47.6, Chicago’s PMI has fallen outside Econoday’s consensus range for a third month in a row! Still, this report is closely watched and confirms other early indications of February softness, not only for manufacturing but for services as well since this report tracks both sectors. The good news in the report is that new orders have held over breakeven 50 which hints at better readings in next month’s report. Now the bad news. Production is down sharply, backlogs are in a 13th month of straight contraction, employment is down and in a fifth month of contraction, and prices paid are contracting at the fastest pace since 2009. The resilience in new orders limits the signal of damage from this report, but production and other activity look to have slowed in February following respectable strength in January.

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Another bad one, as the weakness that began with oil capex continues to dampen the rest:

Pending Home Sales Index
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Highlights
Pending sales of existing homes slowed in January, down an unexpected 2.5 percent to an index level of 106.0 in a decline offset but only in part by an 8-tenths upward revision to December to plus 0.9 percent. Econoday forecasters were expecting a much better reading, at a consensus plus 0.5 percent for January sales. Sales in the month fell in three of the four regions with only the South in the plus column. Year-on-year, pending sales are up only 1.4 percent. Today’s report is yet another disappointment for a sector that, despite high employment and low mortgage rates, is getting off to a flat start for 2016.

The oil patch is where the recession started and it keeps getting worse which means the rest of the economy will continue to deteriorate as well:

Dallas Fed Mfg Survey
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Highlights
Dallas, together with Kansas City, are two Fed districts that are being hit hardest by the collapse in oil prices. The Dallas Fed’s general activity index came in at a deeply minus 31.8 in February vs minus 34.6 in January. New orders contracted a further 8.4 points in the month to minus 17.6 for their lowest reading since 2009 in what is a very ominous signal for the months ahead. Unfilled orders are also in contraction as are production and shipments. Price contraction deepened for both raw materials and selling prices. Inventories are down as is employment. In fact, in a rare sweep of weakness, all 17 current components are in contraction! The company outlook index is at minus 17.4 with a quarter of the sample saying their outlook has worsened during February. The latter is a telling reading and suggests very strongly, in line with all other anecdotal readings this month, that the factory sector, hit by weak exports and a weak energy sector, fell back in February.

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Fundamentally high inflation = weaker currency as higher prices means the same amount of currency buys less,etc. and deflation = a fundamentally stronger currency. However, the euro has been falling on news of deflation, as portfolio mangers, traders, etc. sell what euro they still have (or get outright short), their logic/fears being that deflation will trigger more inflationary policy from the ECB, which has yet to ‘trigger’ inflation. Meanwhile, the lower euro, driven down by selling and not ‘fundamentals’, continues to support the large and growing trade surplus that removes net euro financial assets from global markets. This has been going on for maybe a couple of years now leaving the euro more and more ‘undervalued’ and in ever shorter supply:

Euro-Area Prices Decline Most in Year as ECB Mulls Easing

By Alessandro Speciale

Feb 29 (Bloomberg) — The inflation rate in the 19-nation bloc declined to minus 0.2 from a positive reading of 0.3 percent in January,. Core inflation, which strips out volatile elements such as food and energy, was at 0.7 percent, down from 1 percent in the prior month. In Germany, the European Union- harmonized inflation rate dropped to minus 0.2 percent from 0.4 percent. The rate in France fell to minus 0.1 percent, while Spanish prices slid 0.9 percent. The ECB has already cut its deposit rate to minus 0.3 percent and is pumping 60 billion euros ($66 billion) a month into the economy via asset purchases.

Nothing good here:

The world’s top economies are set to declare on Saturday that they need to look beyond ultra-low interest rates and printing money if the global economy is to shake off its torpor, while promising a new focus on structural reform to spark activity.

A draft of the communique to be issued by the Group of 20 (G-20) finance ministers and central bankers at the end of a two-day meeting in Shanghai reflected myriad concerns and policy frictions that have been exacerbated by economic uncertainty and market turbulence in recent months.

“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the leaders said in a draft seen by Reuters.

“Monetary policies will continue to support economic activity and ensure price stability … but monetary policy alone cannot lead to balanced growth.”

Geopolitics figured prominently, with the draft noting risks and vulnerabilities had risen against a backdrop that includes the shock of a potential British exit from the European Union, which will be decided in a June 23 referendum, rising numbers of refugees and migrants, and downgraded global growth prospects.

But there was no sign of coordinated stimulus spending to spark activity, as some investors had been hoping after the market turmoil that began 2016.

Germany had made it clear it was not keen on new stimulus, with Finance Minister Wolfgang Schaeuble saying on Friday the debt-financed growth model had reached its limits.

“It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy,” he said.

This is from a story about Virginia’s claims for unemployment which are down even as the economy has weakened:

Colonna said the dip to 1974 levels in new unemployment claims is baffling since economic growth has been so sluggish in Virginia recently.

The state’s economy didn’t grow at all last year, U.S. Bureau of Economic Analysis data show.

And for the 12 months ended in July, the number of Virginians working rose by just 12,200, or 0.3 percent, the Virginia Employment Commission reports. The number who were unemployed declined by 33,000 – a figure that’s larger because it includes people who have stopped looking.

Part-time workers can’t always qualify for benefits when they are laid off, since to receive the minimum $60 a week unemployment benefit in Virginia, a person must have earned at least $3,000 during two of the previous five quarters.

And if income from any part-time job exceeds a laid-off person’s unemployment benefit, the state won’t pay the unemployment benefit. The maximum unemployment benefit in Virginia is $378, and the maximum time it is paid is 26 weeks. You can’t get the benefit if you are fired or quit your job.

Apartment market tightness, Euro area trade surplus, Spain

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This just keeps going up, which fundamentally tends to drive up the euro which tends to continue to be subject to said upward pressure until the trade picture reverses:

Euro Area Balance of Trade

The Eurozone trade surplus increased to €23.6 billion in November of 2015 compared to a €20.2 billion surplus a year earlier. Exports recorded the highest annual gain in four months and imports rebounded.
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Potential showdown that could drive up Spanish rates:

Guindos Ditches Pledge on Spain Deficit to Push Growth

By Maria Tadeo

Jan 14 (Bloomberg) — Spanish finance chief Luis de Guindos ditched his promise to meet European Union budget goals saying shoring up economic growth is more important for his country’s future.

De Guindos said worrying about whether the budget deficit comes in a few tenths of a percentage point above the country’s 4.2 percent target for 2015 would be a distraction from the fundamental challenge of protecting the economic recovery.

“What is important is to maintain the pace of growth of the Spanish economy,” he told reporters on Thursday before meeting euro-area finance ministers for the first time since December’s general election left the parliament divided between four major parties.

“The biggest risk for budget policy is that the Spanish economy slows down,” de Guindos added.

Spain risks being drawn into a clash with the European Commission which has been warning since October that the spending plans acting Prime Minister Mariano Rajoy pushed through ahead of the election don’t do enough to curb the currency union’s biggest budget shortfall. Eurogroup chief Jeroen Dijsselbloem, who saw off a challenge from de Guindos to hang on to his job last year, said this month that Spain won’t be allowed any more flexibility over its target, according to El Pais newspaper.

Speaking to reporters on Thursday, Dijsselbloem said Brussels would “wait for the outcome of the domestic political process,” before taking further action.

Euro Trade Surplus, Euro Inflation

Trade surplus still trending higher along with deflation both make the euro ‘harder to get’ and ‘more valuable’:

European Union : Merchandise Trade
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Highlights
The seasonally adjusted merchandise trade balance returned a E19.8 billion surplus in August after an unrevised E22.4 billion excess in July. This was the least black ink since March. The unadjusted surplus was E11.2 billion, up from E7.4 billion in August 2014.

The headline reduction reflected mainly a 1.3 percent monthly fall in exports to E169.5 billion, their second successive decline and their lowest level since February. Imports were up 0.2 percent at E149.7 billion, only partially reversing July’s fall. Compared with a year ago, exports now show an unadjusted gain of 6.0 percent and imports a rise of 3.0 percent.

The average surplus in July/August was E21.1B, a drop of only 1.4 percent from the second quarter average. This is probably indicative of, at best, a much smaller contribution from total net exports to third quarter real GDP growth than the 0.3 percentage point boost provided in April-June. Further reason for being cautious about the speed of the Eurozone’s economic recovery.
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Exports, News Headlines, Atlanta Fed, German Comment

They say its the strong $ that’s hurting exports.

I say it’s the drop in oil related capex after the price collapse:

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This is what news headlines have been looking like (not good):

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From Rüdiger (top German Specialist) research:

German new business orders for August were broadly lower. Compared to July, which was revised downward, they fell a seasonally adjusted 2.1pc. Compared to August 2014 orders rose 3.4pc.

However, there are two critical factors behind this figure. First, there was a huge positive base effect at work. Eliminating this statistical quirk orders would have been down an annual 0.2pc. Second, orders were helped by large scale orders for other vehicles“ (chiefly aircraft). Stripped for these orders the picture is even bleaker. It shows that the firming euro exchange rate has already significantly slowed orders from non-EMU countries.

The bottom line is that today’s order figures support our notion that the German economy is moving closer to recession.

Mtg Purchase Apps, Chicago PMI, ADP, Euro Comment

This is still going nowhere, and, most recently, trending lower, and obviously not responding positively to the ultra low rates of the last several years:

MBA Mortgage Applications
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Highlights
After surging in the prior week following the FOMC’s decision against a rate hike, mortgage activity fell back in the September 25 week. The purchase index fell 6 percent in the week but still remains up strongly year-on-year, at plus 20 percent. The refinance index fell 8.0 percent in the week. Rates continued to move lower in the week with the average 30-year mortgage for conforming loans ($417,000 or less) down 1 basis point to an average 4.08 percent.

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Yet another negative shock.

And note that it all went bad after the collapse in oil prices:

Chicago PMI
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This is their forecast for Friday’s number, and the downward trend since November continues for both ADP and the BLS payroll series:

ADP Employment Report
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Highlights
ADP’s call for Friday’s September employment report is on the high side but only slightly, at 200,000 for private payroll growth vs Econoday expectations for 190,000. ADP’s call for August, an initial 190,000 now revised to 186,000, proved much stronger than the initial government total of 140,000. Today’s result won’t likely shake up the outlook for Friday’s employment report where another month of moderate improvement is expected.
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From ADP:

Goods-producing employment rose by 12,000 jobs in September, off from 15,000 the previous month. The construction industry added 35,000 jobs in September, almost double the 18,000 gained in August. Meanwhile, manufacturing dropped into negative territory losing 15,000 jobs in September, the worst showing since December 2010.

Revealing CNBC headline, as ultimately ‘purchasing power parity’ does hold. That is, high inflation means the value of the currency is falling, and longer term currencies that experience high inflation depreciate vs currencies with low inflation. That is, high inflation policy is not the stuff of strong currencies, regardless of interest rates.

So what the headline is implying, at best, is that the ECB policy response will be to lower rates/do more QE to promote inflation, and thereby weaken the currency. It is also probably implying that a lower rate and QE per se make
the euro weaker.

My narrative is a bit different. I see the deflation as further supporting the euro area’s record high and growing trade surplus, a force which fundamentally drives the euro higher, as non residents continuously sell their currencies to buy euro to pay for imports from the euro area. This ultimately drives the euro higher, as happened with the yen for the 2 decades it ran large and persistent trade surpluses, along with a zero rate policy, and far more QE than the ECB or the Fed has done.
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Mtg Purchase Apps, CPI, Home Builder’s Index, Euro Area Balance of Trade, CEO Outlook

Looking like it’s turned south:

MBA Mortgage Applications
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Fed continues to fail to sustain enough aggregate demand to meet it’s 2% inflation target:

Consumer Price Index
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Highlights
Consumer prices came in soft in August and will not be turning up the heat on the doves at the FOMC. Pressured by gasoline, the CPI fell 0.1 percent in August with the year-on-year rate up only 0.2 percent. The core, which excludes energy and food, rose only 0.1 percent with the year-on-year rate steady at plus 1.8 percent and still under the Fed’s 2 percent goal.

And details are soft. Energy prices fell 2.0 percent in the month including a 4.1 percent decline for gasoline. Airfares were down sharply for a second month, 3.1 percent lower. Owners equivalent rent, which had been hot, rose only 0.2 percent in the month.

Showing some pressure is apparel, up 0.3 percent for a second straight month in what hints at back-to-school price traction. Otherwise, components are flat to steady such as food at plus 0.2 percent or medical care at no change.

The 1.8 percent year-on-year core rate does catch the eye but with commodity prices soft and foreign economies weak, the outlook for price acceleration remains elusive.
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Up a bit! The new home builders are still optimistic:
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New record high- very euro friendly…
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CEOs’ Outlook for U.S. Economy Dims Ahead of Fed Rate Decision

(Bloomberg) — The Business Roundtable CEO Economic Outlook Index fell to 74.1 in a quarterly survey, down from 81.3. The survey was completed between Aug. 5-26. The CEOs projected U.S. economic growth of 2.4 percent this year, down 0.1 percentage point from the previous forecast. The share of CEOs expecting a decrease in their companies’ U.S. capital spending in the next six months rose to 20 percent in the latest survey from 13 percent in the previous one. Thirty-two percent said their firms’ U.S. employment will decline, compared with 26 percent in the prior survey.

Spain, QE chart, Wholesale trade, UK and France industrial production, Import and export prices

Fyi, we will be in Spain next week.

Here are some of the details:

There is a newly formed MMT Group in Spain called APEEP which stands for “Asociación para el Pleno Empleo y la Estabilidad de Precios”.

In an effort to bring MMT into the political debate in Spain, they will be hosting me for a presentation of the Spanish translation of “The Seven Deadly Innocent Frauds of Economic Policy”, starting with a presentation in Madrid on the 14th of September, Valencia on the 15th of September, and Vila-real on the 17th of September.

Here are links for the events, including time/date/location

14th September Madrid
15th September Valencia
17th September VilaReal

And this is the press release for the events containing more details.

Also:

Asociación Para el Pleno Empleo y la Estabilidad de Precios (APEEP) (Association for Full Employment and Price Stability), is a non-profit organization devoted to raising awareness and disseminating Modern Monetary Theory amongst the Spanish public. APEEP believes that full employment and price stability are compatible if public policy is conducted within an MMT framework. The current economic crisis within the Eurozone highlights the need for a Post Keynesian and MMT approach to public policy.

You’d think by now word would be out it’s just a placebo, but ancient beliefs tend to linger on…
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Not good- sales down and inventories remain elevated:

United States : Wholesale Trade
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Highlights
Factory inventories held stable in July as did wholesale inventories, down 0.1 percent against a 0.3 percent decline in sales that leaves the stock-to-sales ratio unchanged at 1.30. Wholesale inventories look light for machinery and apparel but heavy for farm products and metals.

The nation’s inventories are heavier than they were last year which may limit future production and hiring. Next data on inventories will be the business inventories report on Tuesday.

MONTHLY WHOLESALE TRADE: SALES AND INVENTORIES July 2015 Sales. The U.S. Census Bureau announced today that July 2015 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $449.5 billion, down 0.3 percent (+/-0.5)* from the revised June level and were down 4.2 percent (+/-1.4%) from the July 2014 level. The June preliminary estimate was revised upward $1.0 billion or 0.2 percent.

This chart is now looking a lot like prior recessions:
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Inventories/Sales Ratio. The July inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.30. The July 2014 ratio was 1.19.
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Great Britain : Industrial Production
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France : Industrial Production
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United States : Import and Export Prices
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None of this is considered the ‘some improvement’ Chairman Yellen was looking for going into the Fed meeting next week…

France PMI, Germany PMI, EU PMI, EU Retail Sales, UK service PMI, US Trade, ISM Non Manufacturing, Saudi Pricing

France : PMI Composite
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Highlights
French private sector activity in August expanded at a significantly slower pace than indicated in the flash report according to the final PMI data for the month. At just 50.2, a 7-month low, the key composite output index was revised down an unusually large 1.1 points versus its preliminary reading to stand 1.3 points below its final July mark and close enough to 50 to signal a period of virtual stagnation in economic activity.

The flash service sector PMI was reduced by 1.2 points to 50.6, also a 7-month trough. As previously indicated, what growth there was reflected stronger new orders and rising backlogs although the growth rate of both hit multi-month lows. Certainly firms were not confident enough to add to headcount although, rather surprisingly, business expectations still climbed to their highest level since March 2012.

Meantime, another increase in input costs saw margins squeezed still further as service provider charges continued to fall.

The final PMI figures suggest that the French economy was really struggling last month. Total output was only flat in the April-June period and the survey data so far suggest little better this quarter.

Germany : PMI Composite
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Highlights
August’s flash composite output index was revised up a full point to 55.0 in the final data for the month. The new level was 1.3 points above July’s final reading, a 5-month high and strong enough to indicate a solid performance by the economy in mid-quarter.

The adjustment to the composite output gauge came courtesy of the service sector for which the preliminary PMI was revised some 1.3 points firmer to 54.9, also its best reading in five months. New orders rose strongly, backlogs were up and employment posted its largest gain since February. Against this backdrop, business expectations for the year ahead climbed to a 4-month peak.

What little progress they continue to make will evaporate with a strong euro, which I see as inevitable given their trade surplus:

European Union : PMI Composite
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Highlights
The final composite output index for August weighed in at 54.3, a couple of ticks stronger than its flash estimate and 0.4 points above its final July mark.

The flash services PMI was nudged just 0.1 points higher but, at 54.4, now matches June’s 4-year high. Increased output was supported by rising new orders and a sizeable increase in backlogs which, in turn, helped to ensure that employment growth remained respectably buoyant. Firms also became more optimistic about the economic outlook and business expectations for the year ahead climbed higher following July’s 7-month low. Meantime, inflation developments were mixed. Hence, although higher wages and salaries prompted another rise in input costs, margins were squeezed further as service provider charges declined for a remarkable forty-fifth consecutive month.

Regionally, the best performer in terms of the composite output measure was Ireland (59.7) ahead of Spain (58.8) and Italy (55.0 and a 53-month high). Germany (55.0) also had a good month but France (50.2 and a 7-month low) all but stagnated and remains a real problem for Eurozone economic growth.

The final PMI figures suggest that the Eurozone economy is on course for something close to a 0.4 percent quarterly growth rate in the current period, a slight improvement on the second quarter’s 0.3 percent rate. While this would be good news, faster rates of expansion will likely be needed if inflation is to meet the ECB’s near-2 percent target over the central bank’s 2-year policy horizon.

European Union : Retail Sales
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Highlights
Retail sales were slightly weaker than expected in August but with July’s decline more than halved, annual growth of purchases still comfortably exceeded the market consensus. Volumes were 0.4 percent firmer on the month after a 0.2 percent drop in June for a workday adjusted yearly rise of 2.7 percent, up from 1.7 percent last time.

July’s monthly rebound was led by a 0.8 percent jump in purchases of auto fuel and without this, non-food sales were just 0.1 percent higher having only stagnated in June. Food recorded a 0.2 percent advance. As a result, overall sales in July were 0.3 percent above their average level in the second quarter when they also increased 0.3 percent.

Regionally the advance was dominated by a 1.4 percent monthly jump in Germany. Spain (0.6 percent) also made a positive contribution but France (minus 0.2 percent) saw its first decline since March. Elsewhere, there were solid gains in Estonia (2.5 percent), Malta and Portugal (both 1.1 percent) but Slovakia (minus 0.2 percent) struggled.

Growth of retail sales has slowed in recent months, in keeping with signs that consumer confidence may have peaked, at least for now. According to the latest EU Commission survey, household morale improved slightly in August but still registered its second weakest reading since January. Consumption may continue to rise over coming months but the signs are that its contribution to real GDP growth will be only limited.
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I’ve been suggesting exports would slow more than what’s been reported so far, though year over year numbers are in decline. It may show up in revisions down the road:
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International Trade
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Highlights
The nation’s trade gap narrowed to a nearly as expected $41.9 billion in July following an upward revised gap of $45.2 billion in June (initially $43.8 billion). The improvement reflects a monthly rise of 0.4 percent in exports, which were led by autos, and a 1.1 percent contraction in imports that reflected a decline in pharmaceutical preparations and cell phones which helped offset a monthly rise in imports of oil where prices were higher in July.

Aside from autos, exports of industrial supplies, specifically nonmonetary gold, were strong in July while exports of capital goods also expanded. This helped offset a monthly decline in exports of civilian aircraft and consumer goods. Turning again to imports, other details include a rise in capital goods in what is the latest sign of life for business investment.

By nation, the gap with China widened slightly, to an unadjusted $31.6 billion in the month, while the gap with the EU widened more substantially to $15.2 billion, again unadjusted which makes month-to-month conclusions difficult. Gaps with Mexico and Canada both narrowed.

This report is another positive start to the quarter and will lift early third-quarter GDP estimates. But these will be cautious estimates as recent market turbulence pushes back conclusions and will make August’s trade data especially revealing.

Lower but still indicating ok expansion:
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Saudi price setting adjustment:

Aramco Cuts All October Crude Pricing to U.S., Northwest Europe

By Anthony DiPaola

Sept 3 (Bloomberg) — Saudi Arabia, the world’s largest crude exporter, cut pricing for all October oil sales to the U.S. and Northwest Europe and reduced the premium on its main Light grade to Asia by 30 cents a barrel.

State-owned Saudi Arabian Oil Co. cut its official selling price for October sales to Asia of Arab Light crude to 10 cents a barrel more than the regional benchmark, the company said in an e-mailed statement. The discount for Medium grade crude for buyers in Asia widened 50 cents to $1.30 a barrel less than the benchmark.

Brent, a global oil benchmark, fell almost 50 percent last year as Saudi Arabia and other OPEC members chose to protect market share over cutting output to boost prices. Brent fell from over $100 a barrel in July 2014 to less than half that six months later. It traded at about $50 on Thursday.

The Organization of Petroleum Exporting Countries led by Saudi Arabia decided on June 5 to keep its production target unchanged to force higher-cost producers such as U.S. shale companies to cut back. The producer group has exceeded its target of 30 million barrels a day since May 2014.

Saudi Arabia reduced production in August to 10.5 million barrels a day, the first decline this year, according to data compiled by Bloomberg.

quick macro update

It all started when the FICA tax cuts and a few of the Bush tax reductions were allowed to expire at the end of 2012, followed by the sequesters a few months later 2013. That resulted in 2013 GDP growth of a bit less than 2% or so that might have been closer to 4% without the tax hikes and spending cuts.

Going into 2014 GDP I suggested growth might be closer to 0 than to the 3.5% being forecast. It again printed about in the middle averaging a bit over 2% (with some ups and downs…), and then towards the end of 2014 the price of oil collapsed and it was discovered there had been $hundreds of billions of planned capital expenditures that would be cut, domestically and globally, after which I again suggested GDP growth for the year- this time 2015- would now be near 0, and in fact could well be negative. Additionally, it was revealed the extent to which it was the large and growing oil capex expenditures up to that time that had been supporting at least 1% GDP growth up to that point. And so far GDP growth for 2015 has been less than 2014, even after 2014’s recent downward revisions, and along with slowing GDP has come slowing corporate revenues and earnings growth. All subject to further revisions, of course, which lately have been downward revisions.
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Meanwhile, in the first half of 2014 the euro began falling against the $ as well as other currencies. The fall coincided with the ECB threatening and then following through with negative rates and QE, much to the consternation of global portfolio managers, including Central Bankers, pension funds and hedge funds, who collectively proceeded to lighten up on their euro allocations. And along the way, issues surrounding Greece further frightened the portfolio managers into further selling of euro assets. This relentless selling pressure drove the euro down, particularly vs the US dollar. Specifically, a euro based portfolio manager might, for example, sell his euro securities, and then sell the euros to buy dollars, and then use the dollars to buy US stocks. Or a CB might manage its reserves such that the % of euro assets declined vs dollar assets. And a hedge fund might simply buy the $US index, which is about half dollar/euro and a way to sell euro and other currencies vs the dollar. All of this, along with several other ways to skin the same cat, constituted euro selling that drove the dollar up and the euro down, and at the same time produced buyers of US stocks.

Fundamentally, however, the opposite was happening. The euro area had a (small) trade surplus, which was removing euro from global markets, but not as fast as the sellers were selling, and the euro went ever lower. But as it did this it made the euro area that much more ‘competitive’ (euro area goods and services were that much less expensive in dollar terms) which resulted in an ever larger trade surplus, with the latest release showing a record trade surplus of about 24 billion euro per month. And at the same time, the increased euro exports helped support the economy and generated forecasts for improved future growth, all of which supported euro stocks.

It now appears the curves (finally) crossed, with the euro area trade surplus now exceeding the euro portfolio selling which seems to have run its course, which caused the euro to bottom and start to appreciate. This started generating adverse marks to market for those short euro and long US stocks, for example, who subsequently began reversing their positions by buying euro and selling US stocks. And the strong euro also threatens euro area exports and therefore output, employment, and GDP forecasts, causing euro stocks to sell off as well.

So far I’ve left out what turned out to be the catalyst for this reversal- China. When China moved to allow the yuan to trade lower against the dollar, it was deemed a credible threat to both euro and US exports, and world demand in general, which set off the latest wave of selling.
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So what’s next?

More selling of US stocks and buying euro to reverse those positions. Hedge funds might move quickly, but, for example, pension funds often do their reallocating at quarterly and annual meetings, so it could all take quite a bit of time.

Additionally, buying of euro will drive the euro up, as there is no ‘excess supply’ being generated. Quite the reverse, in fact, as the trade surplus works to make euro that much harder to get. That means the euro will appreciate until the trade surplus reverses (whether there is any causation or not…), which should prove highly problematic for the euro economy and euro stocks. The other side of this coin is the weaker dollar that should lend some support to the US stock market, though a collapsing euro area economy with it’s associate debt issues and political conflicts might do more harm than the weak dollar does good, not to mention the weakening domestic demand in the post oil capex world with no relief in sight from other sectors.

Lastly, the stock market has been maybe the best leading indicator, and probably because of it’s direct effect on perceptions of wealth and its influence on spending and investing decisions. And the Fed doesn’t target stocks,
but it doesn’t ignore them either, as it too recognizes the influence it can have on output and employment, especially on the downside.

Of course all of this can be reversed for the better with a simple fiscal expansion, as the underlying problem remains- the Federal deficit is too small in the absence of sufficient private sector deficit spending needed to offset desires to not spend income. (Yes, it’s always an unspent income story…)

But politics, at least for now, renders that sure fire remedy entirely out of the question.