Category Archives: UK

Brexit comment, trade, PMI services, Comments on CNBC article on Trump’s plan

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Still looks to me like the vote will have no material financial consequences?
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“The UK will have to renegotiate 80,000 pages of EU agreements, deciding those to be kept in UK law and those to jettison. British officials have said privately that nobody knows how long this would take, but some ministers say it would clog up parliament for years.”

As previously discussed, the drop in oil prices led to increased consumer imports and reduced exports, both of which fundamentally work against the dollar:
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Highlights
Goods exports were soft in May while at the same goods imports rose, making for a widening in the nation’s goods gap to $60.6 billion from April’s $57.5 billion. Exports fell 0.2 percent reflecting declines in auto exports and, unfortunately, capital goods exports as well. Imports rose a sharp 1.6 percent with imports of consumer goods especially strong in a gain that points to business confidence in U.S. retail expectations. Imports of industrial supplies show a large gain made larger by upward price effects tied to oil. But like the export side, capital goods imports were weak hinting at contraction in business investment and continuing trouble for productivity growth. Though the import data is consistent with strong domestic demand, exports point to soft global demand. Note also that the widening of May’s gap is a negative for second-quarter GDP.

Still weak:
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Highlights
Service sector activity remains slow, little changed at an index of 51.3 for Markit’s June flash. New orders are picking up but remain soft while job creation is slowing for a third straight month. Confidence in the year-ahead outlook continues to moderate. Price data are subdued both for inputs and for selling prices. The bulk of the U.S. economy is chugging along at marginal rates of growth heading into Brexit fallout and ongoing market volatility.

Here’s why Trump’s economic plan would spark a recession: Moody’s Mark Zandi

By Stephanie Landsman

June 26 (CNBC) —

If Donald Trump becomes president and implements his current economic plan, Moody’s Analytics chief economist Mark Zandi said it would create dire consequences for the U.S. economy.

“The key thing is the very large budget deficits which would ensue under his plan,” Zandi recently told CNBC’s “Fast Money.”

The large deficits would add to output and employment, as every economist who gets paid to be right knows and incorporates into his forecasts.

That is, if congress increases the deficit by cutting taxes or increasing spending, GDP forecasts are always revised up accordingly.

Zandi, a former economic advisor to 2008 republican presidential candidate John McCain, is the man behind a new report that suggested a Trump presidency would send the economy spiraling into a recession. He cites the “massive tax cuts” in Trump’s plan as his plan’s biggest problem.

“Only a small part of that is paid for so you get very large budget deficits and much higher government debt—on top of an economy that’s already at full employment,” Zandi explained. That “results in much higher interest rates which combined with a lot of other things undermines corporate earnings and ultimately stock prices.”

All evidence shows increased deficits support higher earnings. And interest rates are set by the Fed, so they would go up only if the Fed votes to raise them. And the size of the deficit per se is not the driving force of the Fed’s reaction function.

And while headline unemployment is relatively low at 4.7%, he also knows that doesn’t mean there is no one left to be hired, particularly with the ultra low participation rates that contribute to the near 10% U6 rate of unemployment.

Zandi, who’s getting ready to release special analysis of Hillary Clinton’s economic plan, believes a watered-down Trump measure is the likeliest scenario if he wins the race for the White House. Zandi added that a less aggressive economic plan would still negatively alter the current economy’s state.

“I don’t think the Congress, no matter what it (the plan) looks like, would actually pass what he has proposed,” he said. “It’s pretty clear that everyone would end up in a pretty bad place.”

Moody’s isn’t the only one to find fault with Trump’s tax plan. Just months ago, the nonpartisan Tax Foundation said the real estate mogul’s tax and spending proposals were “unrealistic”, and could explode the U.S.’s debt burden.

However, the Trump campaign took issue with Zandi’s research, firing back with salvos of its own.

“The errors in Zandi’s analysis are profound,” Trump campaign senior policy advisor Stephen Miller wrote in a statement released to CNBC.

“Closing the trade gap with China would create millions of jobs, as would lowering taxes, unleashing energy production, streamling regulations, and ending the fiscal drain of open borders,” Miller added.

Nor does any of that address Zandi’s point about the us being at full employment with no one left to hire.

Zandi, however, responded that his study is “error free.”

And they all miss the risk of depression should Trump attempt to execute his play to pay off the public debt in 8 years.

Instead, thinking that would be a good thing, it’s never addressed…

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Durable goods orders, Consumer sentiment, UK comments

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Weaker than expected, and turns out it was up in April followed by down in May as previously discussed:

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Highlights
May proved to be a generally weak month for the factory sector. Minus signs spread across the durable goods report with total new orders down a very sizable 2.2 percent and ex-transportation orders, which exclude aircraft and vehicles, down 0.3 percent.

The worst news comes from capital goods, a sector where weakness points to weakness in business investment and ultimately the nation’s productivity. Orders for core capital goods fell 0.7 percent in the month while shipments, which are inputs into the nonresidential investment component of GDP, fell 0.5 percent.

Overall shipments also fell, down 0.2 percent with inventories in thankful contraction, down 0.3 percent and holding the inventory-to-shipments ratio unchanged at 1.65. Unfilled orders, which outside of April’s 0.6 percent gain have not been strong, rose a modest 0.2 percent in May.

Vehicles, like they were in the industrial production report, were once again very weak with orders down 2.8 percent and shipments down 3.4 percent. Vehicle sales, however, have been solid and point to a rebound for the related factory data. Orders and shipments for commercial aircraft remain solid with orders in May up an unusually tame 1.0 percent. Machinery orders, at the heart of the capital goods group, are down for a second month with both primary and fabricated metals showing order declines.

The decline in capital goods is certain to pull back second-quarter GDP estimates which, in the 2 percent range, aren’t that strong to begin with. The dollar’s decline this year has not done much to lift exports or the factory sector which going into Brexit, and the ensuing spike in the dollar, was simply flat.

Revised down a bit:
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Brexit comments:

So should Parliament follow through and somehow break their EU ties, what’s left is to (re)negotiate what I’ve read is thousands of trade related agreements. And at the rate of maybe one per year that could take quite a while….

The question then is whether current arrangements are allowed to remain pending negotiations, or if trade itself is halted pending negotiations. Seems the former is in the best interest of both sides, which is not to say that’s what they will do, of course.

As for other EU members leaving, it’s a whole lot more problematic as it would entail creating new currencies, which has not had the support of the majority of the voters in any euro area member nation.

Wouldn’t surprise me if the whole thing falls out of the news cycle over the next week or so.

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UK, health care costs, US labor force

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As discussed back when the law was first proposed, this version of ‘moral hazard’ renders the entire program unworkable and to the best of my knowledge and understanding there is no ‘fix’:

Health Insurers Struggle to Offset New Costs

May 4 (WSJ) — Insurers have begun to propose big premium increases for coverage next year under the 2010 health law. The companies also have detailed the challenges in their Affordable Care Act business in a round of earnings releases. The health law instigated a sweeping overhaul to the way insurance is priced and sold in the U.S. Insurers can’t deny coverage to consumers with risky medical histories, or charge them more for plans. A number of popular insurers say the enrollees who bought plans through the exchanges have had higher health costs than they originally predicted—when they knew less about the impact of the law.

Seems to me they’ve always been there, but for one reason or another just now being ‘counted’?

And seems to me there are lots more to come, as it’s always looked to me that the decline in the participation rate was suspect. If so, this means unemployment has, all along, been pushing 9-10%:
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And this is exactly what you would expect if headline unemployment was 10%:
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China, Redbook retail sales, UK manufacturing, yen comments

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Still in negative territory:
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Still stone cold dead:
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Exporters have serious clout over there.

Intervention on their behalf would be no surprise:

Japan exporters stand to take nearly $10bn hit from rising yen

The yen’s sharp appreciation threatens to undercut profits at major Japanese exporters by more than 1 trillion yen ($9.37 billion) this fiscal year, outweighing any benefits of a stronger home currency for some companies, estimates by The Nikkei show.

Even at exchange rates of 110 yen to the dollar and 125 yen to the euro — levels on which many companies are basing their fiscal 2016 earnings estimates — 25 of the country’s biggest exporters, including Toyota Motor and Komatsu, would see their combined operating profits fall 1.14 trillion yen on the year owing to currency movements alone.

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Retail Sales, Import and Export prices, Business inventories, Consumer sentiment, Japan

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Retail Sales
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Highlights
Vehicles are back on top, helping to lift retail sales to a 0.2 percent gain in January. Excluding vehicles and pulled down by falling gas prices, sales inched only 0.1 percent higher. But retail sales excluding gasoline stations — which is a central reading given the price fall — are up 0.4 percent for a very respectable year-on-year gain of 4.5 percent. The reading excluding both autos and gasoline is also up 0.4 percent in the month for a year-on-year rate of plus 3.8 percent.

General merchandise sales, which have been soft reflecting price contraction for imports, rose a sharp 0.8 percent in January. Building materials rose 0.6 percent as did vehicles where the year-on-year rate is at plus 6.9 percent. Non-store retailers, reflecting building strength for e-commerce, are once again a standout, up 1.6 percent for a year-on-year 8.7 percent gain.

But there are soft spots in January including restaurants, down 0.5 percent but following a very strong run in prior months, and also furniture, also down 0.5 percent. Sporting goods, a discretionary but still small component, were also weak though the year-on-year rate is leading all the data at 9.1 percent.

A positive are upward revisions to December, now at plus 0.2 percent overall with ex-auto ex-gas now at plus 0.1 percent. Though many readings are modest, this report — especially the ex-gasoline reading — points to a healthy U.S. consumer and should lift confidence in first-quarter growth.

Doesn’t look all that strong to me. And there’s been an conspicuous flattening since July:
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Just an fyi on light weight truck sales- growth has been falling off:
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DOE gasoline output implied demand, year over year, 8 week moving average.

Growth rate has gone negative:
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Deflationary bias continues:

Import and Export Prices
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Highlights
Import price pressures are negative and severe but are increasingly centered in oil-based goods. Import prices fell 1.1 percent in January but fell only 0.2 percent when excluding petroleum imports. Year-on-year, total import prices are down 6.2 percent, which is steep but still an improvement from prior months. When excluding petroleum, import prices are down a year-on-year 3.1 percent (perhaps modest by comparison) which is also an improvement. But petroleum deflation is severe, with import prices down 13.4 percent in January for a year-on-year minus 35.3 percent.

Export prices fell 0.8 percent in January and reflect, in bad news for the farming sector, a 1.1 percent decline in prices of agricultural exports. Year-on-year, export prices are down 5.7 percent with agricultural products down 12.7 percent.

Price contraction for finished goods is easing though only incrementally. Import prices for both vehicles and consumer goods inched higher in the month with contraction in year-on-year rates narrowing, to only minus 0.3 percent for consumer goods. The export side also shows price improvement.

By countries, import prices with Canada, reflecting fuel prices, continue to fall severely, down 2.8 percent in the month for a year-on-year minus 12.6 percent. Latin America is next, down 1.2 percent and 7.8 percent on the year. Other regions are much narrower with China at minus 0.1 percent in the month and minus 1.6 percent on the year.

This report does fit in with FOMC expectations for an easing downward pull from import prices, at least excluding oil with prices for the latter, sooner or later as policy makers argue, certain to firm. An immediate plus is ongoing strength in the dollar which is pointing to easing import-price contraction for the February report.

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Inventories still too high and climbing as sales continue to fall short of expectations:

Business Inventories
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More softening of buying plans:

Consumer Sentiment
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Japan Finance Minister says will take necessary steps to deal with FX volatility

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ECB, Fed, Rail traffic

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Looks like they are again making hawkish noises, taking the lead of the Fed:

ECB wary of further action despite uncertain future

By: Balazs Koranyi and John O’Donnell

Jan 14 (Reuters)

* Many governors sceptical of need for further action in near term
* Governors urge countries to act instead with reform
* Oil price and inflation expectations:
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Many European Central Bank policy makers are sceptical about the need for further policy action in the near term, conversations with five of them indicate, even as inflation expectations sink and some investors bank on more easing.

Next week’s rate meeting is expected to be relatively uneventful with the big test coming when the ECB releases its initial 2018 growth and inflation forecasts on March 10.

But apparently recent market action has got the Fed thinking twice about it’s hiking intentions:

China may slow Fed’s interest rate rises: Fed officials

Jan 13 (Reuters) — The rout in China’s stock market, weak oil prices and other factors are “furthering the concern that global growth has slowed significantly,” Boston Fed President Eric Rosengren said. Rosengren also said a second hike will face a strict test as the Fed looks for tangible evidence that U.S. growth will be “at or above potential” and inflation is moving back up toward the Fed’s 2 percent target. “It’s something that’s got to make you nervous,” Chicago Fed chief Charles Evans said of the drag slower growth in China could have on economies like the United States that don’t do much direct trade. Evans also said he was nervous about inflation expectations not being as firmly anchored as a year ago, and added it could be midyear before the Fed has a good picture of the inflation outlook.

Confirming the rail traffic indicators:

CSX fourth quarter profit falls on lower freight volumes

Jan 13 (Bloomberg) — CSX said freight volumes fell 6 percent in the fourth quarter, with a huge 32 percent decline in the amount of coal hauled. Fourth-quarter net income was $466 million or 48 cents per share, down 5 percent from $491 million or 49 cents per share a year earlier. Revenue in the quarter was $2.78 billion, down nearly 13 percent from $3.19 billion a year earlier. “We have not seen these kind of pressures in so many different markets because you have multiple aspects working against you: Low gas prices, low commodity prices, strength of the dollar,” CEO Michael Ward said on the call. Except auto, housing, “you are seeing pressure on most of the markets.”

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Weather comment, oil capex reductions, NFIB small business index

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This time the warm weather is cited for the weakness as utility spending fell. Yes, capitalism is about sales, and unspent income reduces sales, unless other agents spend more than their income, etc. etc.

And with the private sector in general necessarily pro cyclical, unspent income stories beg fiscal adjustments, which at the moment are universally out of style.

U.K. Industrial Output Plunges Most in Almost Three Years

By Jill Ward

Jan 12 (Bloomberg) — UK industrial production fell the most in almost three years in November as warmer-than-usual weather reduced energy demand.

Output dropped 0.7 per cent from the previous month, with electricity, gas and steam dropping 2.1 per cent, the Office for National Statistics said in London on Tuesday. Economists had forecast no growth on the month.

The data highlight the uncertain nature of UK growth, which remains dependent on domestic demand and services. After stagnating in October and falling in November, industrial production will have to rise 0.5 per cent to avoid a contraction in the fourth quarter.

Manufacturing also delivered a lower-than-forecast performance in November, with output dropping 0.4 per cent on the month. On an annual basis, factory output fell 1.2 per cent, a fifth consecutive decline.

To the same point, capital expenditures constitute spending that offsets unspent income, etc. And so without some other spending stepping up to replace this lost capex GDP goes nowhere, as previously discussed. This $90 billion cut is only one source of capex reductions:

Oil Plunge Sparks Bankruptcy Concerns

Jan 11 (WSJ) — As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research. Together, North American oil-and-gas producers are losing nearly $2 billion every week at current prices, according to AlixPartners. American producers are expected to cut their budgets by 51% to $89.6 billion from 2014, according to Cowen & Co. In a biannual review by a trio of banking regulators, the value of loans rated as “substandard, doubtful or loss” among oil and gas borrowers almost quintupled to $34.2 billion, or 15% of the total energy loans evaluated. That compares with $6.9 billion, or 3.6%, in 2014.

Still trending lower since the oil capex collapse a little over a year ago:
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ECB comment, Retail Sales, Fed Atlanta, Oil comment

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Seems there’s no wisdom on the topic of ‘money’ anywhere of consequence:

No ‘plan B’ for ECB despite still low inflation: Praet

Jan 6 (Reuters) — Executive Board member Peter Praet said various factors, notably low oil prices and less buoyant emerging economies, meant it was taking longer to reach the goal of inflation of close to but below 2 percent. “We need to be attentive that this shifting horizon does not damage the credibility of the ECB,” he added. “There is no plan B, there is just one plan. The ECB is ready to take all measures necessary to bring inflation up to 2 percent. If you print enough money, you get inflation. Always. If, as is happening now, the prices of oil and commodities are tumbling, then it’s more difficult to drive up inflation,” he said.

From Morgan Stanley:

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Up to 1% for Q4 on the trade number, which is subject to revision.

And DB is forecasting +.5%.
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The still don’t seem to understand it’s only about pricing, not quantity:

Brent Crude Oil Drops Below $35

World’s benchmark oil fell by more than 4.8% to below $35 a barrel around 9:30 AM NY time, extending a third consecutive day of losses. It is the lowest price since 2004 as oversupply worries increased as tensions between Saudi Arabia and Iran diminish chances of major producers cooperating to cut production.

Not to forget their models use the oil futures prices, which express storage charges, as indications of future spot prices, and that this ‘rookie error’ tends to inflate their inflation forecasts:

A number of members commented that it was appropriate to begin policy normalization in response to the substantial progress in the labor market toward achieving the Committee’s objective of maximum employment and their reasonable confidence that inflation would move to 2 percent over the medium term.

However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely.

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Dallas Fed, Japan restarting nukes

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From bad to worse:

Dallas Fed Mfg Survey
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Highlights
Texas factory activity increased for a third month in a row in December. The production index, a key measure of state manufacturing conditions, rose from 5.2 to 13.4, indicating stronger growth in output. Some other indexes of current manufacturing activity also reflected growth in December, but the survey’s demand measures showed continued weakness.

New orders, an indicator of incoming demand, declined at a faster pace. The index has been below zero for five months and fell to minus 8.9 in December. The growth rate of orders index has been negative for more than a year and dipped 7 points to minus 14.3 this month. Meanwhile, the capacity utilization and shipments indexes posted their fourth positive readings in a row and inched up to 7.8 and 7.6, respectively.

Perceptions of broader business conditions weakened markedly in December. The general business activity index has been negative throughout 2015 and plunged to minus 20.1 this month. After pushing just above zero last month, the company outlook index fell 10 points in December to minus 9.7, its lowest level since August.

The survey’s price measures pushed further negative in December. The raw materials prices index declined to minus 8.6, suggesting a slightly steeper drop in input costs than last month. The finished goods prices index was negative all year and moved down to minus 15.9. Meanwhile, the wages and benefits index moved up to plus 20.4, indicating stronger wage growth.

Expectations regarding future business conditions were mixed in December. The index of future general business activity fell 9 points to minus 1.4, while the index measuring future company outlook fell but remained positive at 6.6. Indexes for future manufacturing activity declined but remained strongly positive.

Japan restarting a nuke, this will move trade towards surplus and eventually add support for the yen:

Japan court rules to restart Takahama nuclear reactors

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