Start of PMC challenge in august


Posted in Uncategorized |

CAI, Housing starts, Redbook retail sales

Remember all the economists pointing to this when this was going up?

Now they don’t mention it…

Not good, and last winter was even colder:

Housing Starts

Housing starts unexpectedly fell sharply in February. Starts fell a monthly 17.0 percent, following no change in January. Expectations were for a 1.048 million pace for January. The 0.897 million unit pace was down 3.3 percent on a year-ago basis. This was the lowest starts level since January 2014 with a 0.897 million unit annualized pace.

Single-family units dipped 14.9 percent in February, following a 3.9 percent decrease the month before. Multifamily units dropped 20.8 percent after rising 7.9 percent in January.

By region, the Northeast Census region fell a whopping 56.6 percent (likely weather related). Declines were also seen in other regions: the Midwest down 37.0 percent; the West down 18.2 percent; and the South down 2.5 percent.

Housing permits, however, were more positive, gaining 3.0 percent after no change in January. The 1.092 million unit pace was up 7.7 percent on a year-ago basis. Analysts called for a 1.058 million unit pace.

The housing sector is hard to read due to severe winter weather. The outlook is not as bad as current activity. But this sector is still sluggish looking forward and this is another indicator that likely will keep the Fed dovish at this week’s FOMC meeting. Also, expect analysts to nudge down first quarter GDP forecasts.

And back down to the bottom of prior cycle lows, and the population is larger now:


Not good here either- no sign of retail pickup from lower oil…


Posted in GDP, Housing |

Empire State survey, housing market index, Industrial Production

More weakness today, and in sync with my narrative about the lower price of oil
being an unambiguous negative for the US economy:

Empire State Mfg Survey
General conditions so far in March, at an index of 6.90, remain modestly favorable in the New York State manufacturing sector but order data have been very soft both this quarter and going back to the fourth quarter. New orders are in contraction in the March report, at minus 2.39 which is the second negative reading of the last 6 months, a stretch where this reading has averaged a pitiful plus 2.24. Backlog orders, which are always weak in this report, have been in severe contraction, at minus 13.40 in the March report for a 6-month average of minus 10.75.

Weak orders are not a plus for employment though the March employment index did accelerate substantially, to 18.56 vs 10.11 in February for the best reading since May last year. Yet how long this can hold is in doubt especially given the slowing the last 2 months in the general 6-month outlook. The outlook did rise more than 5 points to 30.72 but the last 2 readings are the weakest since second quarter 2013.

Shipments in March are in the positive column, at 7.93, but are down more than 6 points from February. Shipments were in the high teens and low 20s through much of the second and third quarters last year but, in line with the sagging in orders, have since tailed off to a 6-month average of 7.91. Input costs remain soft as are prices of finished goods which, however, are slightly higher in the latest report.

The Empire State report is the first of the March indicators for the manufacturing sector, to be followed Thursday by the Philly Fed. In general, the manufacturing sector has been misfiring slightly this year, as seen in today’s report. Later this morning at 9:15 a.m. ET, the Federal Reserve will post the industrial production report for February.

Housing Market Index
The lack of first-time buyers is an increasing negative for the new home market, evident in the housing market index for March where growth slowed 2 points to an 8-month low of 53. The traffic component of the index again shows particular weakness, down 2 points to 37 which is a 9-month low and directly reflects the lack of first-time buyers.

The other 2 components of the report remain well over 50, at 58 for current sales, which however is down 3 points from February for a 5-month low, and are unchanged for future sales at 59.

Regional composite data show the Midwest out in front at 61 for a striking 13 point surge in the month followed by the largest region, the South which is down 2 points to 54. The West, which is also a very important region for new homes, shows an 11-point decline to 53 with the Northeast, which is by far the least important market for new homes, down 7 points to 39.

Industrial Production
The manufacturing sector continues to struggle. Industrial production for February edged up 0.1 percent after declining 0.3 percent in January. Market expectations were for a 0.3 percent gain for February.

Manufacturing dipped 0.2 percent in February after falling 0.3 percent the month before. This was the third consecutive decline for this component. Notably, manufacturing was revised down for January from plus 0.2 percent to minus 0.3 percent. The manufacturing drop for February was worse than analysts’ forecast for a 0.1 percent rise.

The production of durable goods moved down 0.6 percent, with widespread losses among its components, and the production of nondurable goods moved up 0.2 percent. The motor vehicles and parts industry posted a loss of 3.0 percent, the largest decrease among durable goods manufacturers; most other industries moved down more than 0.5 percent. Only the aerospace and miscellaneous transportation equipment industry recorded a significant increase in production, advancing 1.2 percent. Among the major nondurable goods industries, gains in the indexes for textile and product mills, for petroleum and coal products, and for chemicals more than offset losses elsewhere. The production of other manufacturing industries (publishing and logging) moved up 0.5 percent.

Mining dropped 2.5 percent in February after a 1.3 percent decrease the prior month. Utilities surged 7.3 percent after gaining 1.0 percent in January.

Overall capacity utilization slipped to 78.9 percent from 79.1 percent in January.

Softer manufacturing may increase debate at this week’s Fed FOMC meeting on guidance.

Posted in Economic Releases |

Comments on DB research

I send my posts to both a mailing list and to my blog,, where they are posted for public viewing.

To get on the mailing list you must make a donation to the annual Pan Mass Challenge bicycle ride, which donates 100% of donations to Dana Farber in Boston, the world’s leading cancer research center. This year the donation is expected to exceed $45 million of 75% unrestricted funding critical to continue to developing the latest treatments and cures.

So let me again thank those who donated last year, and thanks in advance for donating again this year,
and I also welcome in advance all new donors who will be added to my mailing list!

Best to all!

Deutsche Bank – Fixed Income Research

Special Report – Euroglut here to stay: trillions of outflows to go
10 March 2015 (9 pages/ 370 kb)

Last year we introduced the Euroglut concept: the idea that the Euro-area’s huge current account surplus reflects a very large pool of excess savings that will have a major impact on global asset prices for the rest of this decade. Combined with ECB quantitative easing and negative rates we argued that this surplus of savings would lead to large-scale capital flight from Europe causing a collapse in the euro and exceptionally depressed global bond yields.

This is indeed strange- the notion that a current account surplus causes currency depreciation?

The current account surplus, in general, is evidence of restrictive fiscal policy that constrains domestic demand, including domestic demand for imports, along with depressing wages which adds to ‘competitiveness’ of EU exporters. Normally, however, this causes currency appreciation that works against increased net exports, unless the govt buys fx reserves. But this time it’s been different, as ECB policies and uncertainty surrounding Greece and related political events have managed to frighten global portfolio managers into doing the shifting out of euro financial assets in sufficient size to cause the euro to fall, particularly vs the $US, giving a further boost net EU exports.

With European portfolio outflows currently running at record highs, this piece now asks: Can outflows continue? How big will they be? The answer to this question is critical: the greater the European outflows, the more the euro can weaken and the lower global bond yields can stay.

Again, this is a very strange assertion, as exporters selling the dollars earned from their exports for euro needed to pay their domestic expenses in fact drain net euro financial assets from the global economy.

What can happen is that speculation and portfolio shifting can be associated with agents borrowing euro or depleting ‘savings’ which they sell for dollars, for example, to accomplish their desired currency weightings. And these new euro borrowings and savings reductions do indeed create new euro deposits for the purpose of selling them, which drives down the value of the euro as previously discussed. This leaves those selling euro for dollars either ‘short’ euro vs dollars, or underweight euro financial assets in their portfolios.

However, at some point the drop in the euro that makes EU real goods and services less expensive for Americans to import, and at the same time makes US goods and service more expensive for EU members, can cause EU net exports to increase. That is, Americans buy imports with their dollars, and the EU exporter then sells those dollars to get euro to pay their EU based production costs, and generally keep their net profits in euro as well. That is, EU exports to the US are facilitated by exporters selling dollars for euro, which is the opposite of what the speculators and portfolio managers are doing.

To review the process, speculators and portfolio managers sell euro for dollars driving the euro down to the point where the EU exporters are selling that many dollars for euro, all as the exchange rate continuously adjust as it expresses ‘indifference levels’.

And should the speculation and portfolio shifting drive the euro down far enough such that the net export activity is attempting to sell more dollars for euro than the speculators and portfolio managers desire, the evidence will be a reversal in the exchange rate as the dollar then falls vs the euro.

We answer the outflows question by modeling the Euro-area’s net international investment position (NIIP). We argue that Europeans now have to become net creditors to the rest of the world and that the NIIP needs to rise from -10% of GDP to at least 30%. We estimate that this adjustment requires net capital outflows of at least 4 trillion euros.

No ‘net capital inflow’ is needed for the EU to lend euro. As always, it’s a matter of ‘loans create deposits’. That is, the euro borrowings as I described create euro deposits as I described. The notion that borrowing comes from ‘available funds’ is entirely inapplicable with the floating exchange rate policies of the dollar and the euro.

This conclusion leads to three investment implications.

First, we continue to expect broad-based euro weakness.

They were right about that!

I say it’s from portfolio shifting and speculation desires exceeding the trade flows, even as restrictive fiscal policy and now currency depreciation from portfolio shifting and speculation has caused an acceleration of net exports.

They say it’s from a pool of ‘excess savings’.

European outflows have been even bigger than our initial (high) expectations, so we are revising our EUR/USD forecasts lower. We now foresee a move down to 1.00 by the end of the year, 90cents by 2016 and a new cycle low of 85cents by 2017.

It’s very possible, if the portfolio shifting and speculation continues to grow faster than the EU’s current account surplus grows. However, should the growing current account surplus ‘overtake’ the desired portfolio shifting and speculation, the euro will reverse and appreciate continuously until it gets high enough for the current account surplus to fall to desired portfolio and speculative fx weightings.

Second, we expect continued European inflows into foreign assets, particularly fixed income. Our earlier work demonstrated that the primary destination of European outflows will be core fixed income markets in the rest of the world, and evidence over the last few months supports these trends: most European outflows have gone to the US, UK and Canada. These flows should keep global yield curves low and flat.

Yes, to the extent that euro portfolios desire to shift to dollar financial assets due to the interest rate differential the shift can continue. However, history and theory tells us this is limited as the desire to take exchange rate risk is limited. Euro portfolios are most often matched with euro liabilities, and so shifting to dollar financial assets can result in substantial euro shortfalls should the exchange rate shift adversely. In fact, many portfolios, if not most, including the banking system, are in some way legally prohibited from exchange rate risk exposure.

Finally, we see Euroglut as continuing to constrain monetary policy across the European continent for the foreseeable future. Since our paper in September central banks in Switzerland, Norway, Sweden, Denmark, the Czech Republic and Poland have all eased.

Except this ‘easing’ is in the form of lower interest rates, which is effectively a fiscal tightening as govts pay less interest to the non govt sectors, which in fact works to make the euro stronger. Likewise, the deflationary forces unleashed by restrictive fiscal policy likewise imparts a strong euro bias.

These countries run large current account surpluses.

Yes, a force that generates currency appreciation as previously described.

This is why, once the shifting and speculation has run its course, I expect the euro to appreciate continuously until it gets high enough to again reverse the trade flows from surplus to deficit.

Feel free to distribute.

Through a unique mix of huge excess savings and structurally low yields, the entire European continent will continue to be a major source of global imbalances for the rest of this decade.

Posted in EU, Trade |

credit check

Growth rate leveled off:





Posted in Credit |

trade and the dollar/euro- supply and demand doing their thing

Note how the portfolio shifting that caused the dollar to appreciate has also caused the US trade deficit, excluding petroleum, to likewise increase. That is, it’s not wrong to say that the global portfolios shifting to dollars are getting more and more of those dollars from US resident’s growing net purchases of imports.

And likewise the EU is experiencing a rising trade surplus as the weak euro/strong dollar has increased EU ‘competitiveness’ by lowering their costs of labor and other domestic inputs vs their trading partners. From the EU point of view they are net selling to US residents and the selling those dollars/buying euro in the market place to get the euro they need to meet their domestic costs of production. This ‘removes’ the euro that are being sold to buy dollars.

This process continues as portfolios afraid of QE and negative rates continue to shift from euro to dollars, driving the exchange rate to the point where the trade flows accommodate their demands as markets continually adjust to express indifference levels.

Note however, that today, for example, the currencies are priced by portfolios where the US has a reasonably large and growing trade deficit and the EU has a reasonably large and growing trade surplus accommodating the ongoing portfolio shifting from euro to dollars. But what happens when the portfolio shifting subsides (which it sooner or later does as portfolios can only shift what they have in stock)? With the exchange rate at a level that is adding dollars and removing euro in line with the prior desired portfolio shifting, a drop in portfolio dollar buying/euro selling means the trade flows are generating an excess supply of dollars and creating a shortage of euro, in which case the exchange rate at the same time adjusts as per the new supply/demand dynamic. In other words, when that happens the dollar falls vs the euro and continues to fall until the trade flows sufficiently reverse to ‘restore’ balance.

From a trading point of view, however, I don’t know when the reversal will take place or from what level, but if any of you might know please let me know thanks!



Posted in Currencies, Trade |

Atlanta Fed, Producer prices, Consumer Sentiment

First, the economic releases have continued to lower the Atlanta Fed’s Q1 GDP estimate now down to only .6%:

My narrative seems to be holding- the drop in oil prices has lowered total spending below ‘stall speed’, after energy related spending chasing $90 oil was what kept it positive for the last couple of years:
Prices down and it’s not just energy:

The PPI for total final demand fell 0.5 percent in February after decreasing 0.8 percent in January. Expectations were for a 0.3 percent rebound. Energy was flat, following a 10.3 percent drop while foods decreased 1.6 percent, following a 1.1 percent dip in January. Excluding food and energy, producer price inflation posted a minus monthly 0.5 percent after slipping 0.1 percent the month before. Analysts called for a 0.1 percent gain. Total excluding food, energy and trade services were unchanged after dipping 0.3 percent in January. Expectations were for a 0.1 percent rise in February.

The index for final demand goods decreased 0.4 percent after falling 2.1 percent in January. Leading the decrease, margins for final demand trade services dropped 1.5 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.)
The index for final demand services fell 0.5 percent after easing 0.2 percent the month before.

On a seasonally adjusted year-ago basis, PPI final demand was down 0.7 percent, compared to down 0.1 percent in January. Excluding food & energy, the PPI final demand was up 1.0 percent versus 1.7 percent the month before. Excluding food, energy, and trade services PPI inflation slowed to 0.7 percent on a year-ago basis, compared to 0.9 percent in January.

Consumer Sentiment
There appears to have been a bubble in consumer spirits late into last year and early into this one, that is a brief surge that came and went and never materialized into a rise for consumer spending. The first read on consumer sentiment this month fell very sharply to 91.2, down 4.2 points from final February for the lowest reading since November. Sentiment peaked at 98.2 in mid-month January which was the highest reading in 8 years.

The two components of the headline index both show weakness, at 103.0 for a 3.9 point decline for current conditions and at 83.7 for a 4.3 point decline for expectations. The decline in current conditions points to weakness for consumer spending this month relative to February while the decline in expectations points to a falling off in confidence for the jobs outlook.

Gasoline prices, though low, have been edging up in recent weeks and are now lifting inflation expectations which are up 2 tenths for the 1-year outlook to 3.0 percent and up 1 tenth for the 5-year outlook to 2.8 percent.

Posted in GDP, Inflation |

JPM, MS Q1 revision, Fed labor market conditions index, German exports fall, Japan GDP

From JPM:

In light of the data we’ve received this week – January reports for real consumer spending, construction spending, and net exports that varied from disappointing to downright weak, as well as a softer February print for car sales –– we are marking down our tracking for annualized real GDP growth in Q1 from 2.5% to 2.0%. Even after this revision risks are more skewed to the downside than upside. By way of comparison, the Atlanta Fed’s tracking estimate of Q1 recently came down to 1.2%.

From MS:


Labor Market Conditions Index
The Fed’s Labor Market Conditions Index remained positive in February but decelerated to 4 in February from 4.8 in January. This was despite stronger-than expected payroll gains this past Friday. One area of weakness likely was soft wage growth. The Fed’s Research Department does not give details on this unofficial report. While the employment situation’s payroll numbers have some analysts suggesting a June rate hike by the Fed, today’s LMCI indicates that there may be considerable debate within the Fed on “liftoff” timing-especially since inflation is very sluggish.

German exports post biggest drop in five months in January

Mar 9 (Reuters) — Seasonally-adjusted exports decreased by 2.1 percent in January after a sharp rise in December. The data for December was revised down to a 2.8 percent gain from a previously reported 3.4 percent increase. An unadjusted breakdown showed shipments to the euro zone dropped by 2.8 percent in January compared with a year ago while Germany sent 0.5 percent fewer goods to countries outside of the European Union. Exports to countries within the EU that do not use the euro were the only ones to post a gain.

Japan’s 4th-qtr GDP downgraded as business investment falls

Mar 9 (Kyodo) — Gross domestic product for October-December grew an annualized real 1.5 percent, downgraded from 2.2 percent. The figure translated into a 0.4 percent increase from the previous quarter, against 0.6 percent growth in a preliminary report released Feb. 16 by the Cabinet Office. Business investment dropped 0.1 percent, against an earlier-reported 0.1 percent growth, for the third straight quarter of decline. Private consumption was upgraded to a 0.5 percent rise from a 0.3 percent increase. Exports grew 2.8 percent, revised upward from a 2.7 percent increase.

Posted in GDP, Germany, Japan, Trade |

credit check

Commercial paper/shadow banking still down and nearly $100 billion off the recent highs:



Lets see if bank lending is picking up the slack:

C and I growth decelerating some and nothing special:

Nice jump in real estate loans. Maybe some of the proceeds went to pay down commercial paper borrowings?

Posted in Credit |

consumer credit, trade deficit chart

Nothing good happening here either.
Looks like the jobs report was about 100,000 people taking menial jobs out of desperation again.

Consumer Credit
Consumer credit rose $11.6 billion in January vs an upwardly revised gain of $17.9 billion in December. Consumers did go to their credit cards in December, when the revolving credit component rose $6.2 billion, but not in January as the component fell $1.1 billion. As always, the data were boosted by the non-revolving component which rose $12.7 billion reflecting strength in auto financing and the government’s acquisition of student loans. Today’s jobs report underscores the strength of the consumer who, boosted also by low gas prices, has less and less reason to turn to credit card debt to fund purchases.

Note the rising trade deficit ex petroleum going up due to the strong dollar from portfolio shifting. And at the same time in the euro zone trade has gone strongly to surplus. This indicate the trade flows remain strongly in favor of the euro even as it declines to new lows due to portfolio managers getting underweight euro and overweight dollars due to misguided notions about QE and interest rates. And this has been happening for quite a while, from back when the dollar/euro was 130. When this shifting is exhausted, and portfolios are left underweight and short with trade removing 20+ billion euro and adding 40+ billion dollars every month to global balances, it all reverses and moves aggressively the other way. But the charts still looking like there’s still more to go as managers react to ECB QE and possible Fed rate hikes:

Posted in Credit, Currencies |