Small business index, BOJ on trade, China, Atlanta Fed

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Trumped up expectations largely reversed:

Highlights

At 101.7, the small business optimism index fell short of expectations in February, recovering only 5 tenths of January’s 3.2 point dip. Econoday’s consensus was looking for 102.5 with the low estimate at 101.8. Employment plans lost ground for a second straight month with a turn lower for earnings trends the biggest negative in the month. One plus is that the he outlook for economy, after dropping sharply in January, did turn positive in the month.

Bank of Japan weighs gloomier view of exports and output

(Nikkei) “We have no choice but to recognize that recent export and production trends are weak,” said a top official at the central bank, a view echoed by other senior officers there. In January, exports dropped 5.2% from the previous month in real terms, according to BOJ data, and the economy ministry’s index of industrial production shrank for a third straight month. The BOJ at its January policy meeting that both exports and industrial production were “on an increasing trend,” but it is considering revising that language during the two-day meeting ending Friday.

Sentiment among large Japanese companies plunges in 1Q 2019

(Nikkei) The Business Survey Index of large companies across all industries stood at minus 1.7 in the first three months of 2019. That is a 6-point drop from the October-December period of 2018. A negative reading means there are more companies that think business conditions are getting worse than there are that think things are improving. The Business Survey Index for Japan’s manufacturing sector, which relies heavily on exports, dropped to minus 7.3 from positive 5.5. Among large companies, the second quarter forecast is minus 0.3, and the period from July to Sep. is plus 5.7.

China’s top property developers see plunging sales in February

(Xinhua) China’s top 100 real estate developers saw a sharp monthly decline in its total sales due to the Spring Festival holiday. The total sales volume of China’s top 100 property developers was down by 22.9 percent month-on-month, and 11 percent year-on-year in February, according to China Real Estate Information Corp (CRIC). Floor area sold by Vanke, China’s housing market giant, plunged 22 percent to 2.47 million square meters, with the sales falling 12 percent to 43.19 billion yuan (around 6.4 billion U.S. dollars) month-on-month.

China car sales drop 17.4% in February to 1.22m units

(Nikkei) Sales of passenger cars fell 17.4% to 1.22 million units in February, China Association of Automobile Manufacturers, or CAAM, said. Sales of passenger cars and commercial vehicles fell 13.8% to 1.48 million units, while commercial vehicles saw an 8% increase during the month. The sales in February were hurt by weak demand during the Chinese New Year, CAAM said. The slump in February marks the eighth straight monthly decline in auto sales. Vehicle sales in China fell 15.8% in January, following a 2.8% decrease last year.

GDP forecasts are low and falling:

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Retail sales, Non financial corporate and federal debt

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A bit of an uptic from a very low number, with last month’s data revised still lower and the outlook still looking very soft:

Highlights

For retail sales, no period has more seasonal extremes than the busy days of December vs the quiet days of January. This and weather make adjustment difficult and are likely part of the explanation for the extreme volatility of the December and January retail sales reports.

Retail sales managed only a 0.2 percent headline gain in January after plunging a downward revised 1.6 percent in December. But when excluding autos, where sales were very weak in January, the latest month shows a very strong 0.9 percent gain that hits the top of Econoday’s consensus range. The report’s two core readings — less autos & gas and the control group — also show outstanding gains, of 1.2 and 1.1 percent respectively that reverse tremendous weakness in December at revised losses at 1.6 percent and 2.3 percent.

General merchandise is as good of place as any to find a reliable gauge to these unusual extremes and at a 0.8 percent January gain vs a 1.5 percent December loss probably puts in a nutshell the underlying message: deep and unusual weakness during the holiday season followed by a respectable bounce back. Nonstore retailers, where e-commerce is tracked, shows the same theme, at plus 2.6 percent in January vs severe contraction of minus 5.0 percent in December.

Vast swings are apparent through all readings which will have the Census Bureau double checking their adjustments. But it’s not all about adjustments. The government shutdown started late last year and proved a negative not only for consumer confidence readings which plunged but for consumer spending as well. How much has the consumer bounced back? Judging by January’s results the word “somewhat” comes to mind. But advance readings for February have not been favorable whether continued and deep weakness for auto sales or slowing growth in Redbook’s same-store sales tally.

For the first-quarter GDP outlook, today’s report is positive as it shows acceleration. For the Federal Reserve, the report is right in line with their move toward caution, waiting to see how events are unfolding.

Deceleration:


This is adjusted for inflation, and only through December:


No growth here:


Decelerating corporate deficit spending:


Federal govt. deficit spending has been growing:

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Employment, Housing starts, Euro slowdow, China fiscal, Semiconductor market

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It will take another few months to know if this is just ‘noise’ or it’s about to go negative. If you average the last two months, for example, it’s about 165,000 each:

Highlights

Averaging extremes is good advice to find an underlying path and February and January payrolls are an immediate example. Nonfarm payrolls rose by only 20,000 last month vs a revised 311,000 rise in January with the average at a very healthy 166,000.

Payrolls are part of the establishment survey of businesses while the unemployment rate is based on the household survey which includes those who are working but not on payrolls. Here February’s story is much more positive showing a sharp rise in the number of those employed (up 255,000) and a sharp fall in the number of unemployed (down 300,000) that make for an unexpected 2 tenths dip in the unemployment rate to 3.8 percent.

And wages in today’s report are another indication of labor market strength, jumping 0.4 percent in the month which is outside expectations for a year-on-year rate of 3.4 percent that is at the high end of expectations.

But payrolls are definitely weak with construction down 31,000 and ending a run of gains while retail, down 6,000, extended its mostly weak performance. One positive sign of labor market demand comes from professional & business services where payrolls jumped 42,000 and include a 6,000 rise for temporary workers in readings that continue to confirm employers are scrambling to build up their staffs.

Winter is traditionally the most difficult period to seasonally adjust data and related questions are certain to come up to help explain away the volatility in payrolls so far this young year. Though the drop in February may well be cited at the coming FOMC this month as a reason for caution, there is still little question that strong demand for labor, underscored by the rise in average hourly earnings, is the central strength of the U.S. economy.

Up from last month, but, again, looking at the two months together it’s still trending down:

This is a small step but in the right direction:

China to raise fiscal deficit target

(China Daily) China will raise its fiscal deficit target to 2.76 trillion yuan, or 2.8 percent of GDP, this year from 2.6 percent in 2018. The measure is being taken to stabilize economic growth by enlarging government spending, according to the annual Government Work Report. As a major measure to tackle economic risks, the proactive fiscal policy in 2019 will become stronger and more efficient, Premier Li Keqiang said. Total government expenditure is budgeted at over 23 trillion yuan, up by 6.5 percent from last year. “We will refrain from using a deluge of stimulus policies,” Li told participants of the opening of the session.

Global semiconductor market dips for first time in 30 months

(Nikkei) Worldwide semiconductor sales receded 5.7% on the year to $35.5 billion in January, according to World Semiconductor Trade Statistics, the first decline in 30 months. A market that had previously expanded at a 20%-plus clip started losing steam in the second half of 2018. Flash memory prices plunged more than 40% in a year. Chinese semiconductor sales between November 2018 and January 2019 crashed by nearly 20% by value compared with August to October, according to WSTS. China accounts for 30-40% of a global semiconductor market that amounted to $469 billion last year.

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Trade

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Downward revisions for q4 GDP. And not how both imports and exports are down for the last 6 months or so as global trade decelerates:

Highlights

Revision estimates for fourth-quarter GDP will be coming down following an unexpectedly deep $59.8 billion trade deficit in December. Not helping the quarterly deficit are downward revisions to November and October that deepened the net deficit in those two months by $1.6 billion.

The trouble is equally severe on both sides of the report as exports in December fell 2.8 percent to $205.1 billion and imports rose 2.4 percent to $264.9 billion.

Food is the standout negative with imports at a record $12.6 billion in the month and exports, at $9.6 billion, the lowest monthly total since August 2010. This looks like a smoking gun over tariff tensions with China which may well have cut back its U.S. purchases.

The bilateral trade deficit with China for full year 2018 came in at just over $419 billion, which is much deeper than deficits of $375 and $347 billion in the prior two years.

Exports of services failed to help out December, unchanged at a still very strong $69.5 billion with imports of services, however, rising 1.0 percent in the month to $47.7 billion. Turning back to goods trade, vehicles are another major weakness with monthly exports at $12.3 billion for a second month and the lowest since September 2017 with imports of $32.1 billion at a record high.

Today’s headline $59.8 billion deficit is the deepest of the expansion, since October 2008. It is also $1.4 billion beneath Econoday’s consensus range and $2.2 billion deeper than the consensus. Net exports had only been a small drag in last week’s initial estimate for fourth-quarter GDP but today’s report is pointing to a more significant one. One final detail, the nation’s total trade gap in 2018 came to $621.0 billion, 12.4 percent deeper than $552.3 in 2017 and the deepest since 2008.

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Construction spending, Auto sales, Personal income and spending, Trump on the $

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Bad. All sectors decelerating and residential looking down year over year:

U.S. auto sales tumbled 2.8 percent in February

(Detroit News) Overall sales for the month tumbled 2.8 percent from the same month a year ago, according to Edmunds.com. Sales came in at 1.26 million for an annualized industry sales rate slowed to 16.6 million. The estimated average transaction price for a new vehicle in February climbed to $36,590, according to Kelley Blue Book. That was $993 higher (2.8 percent) from the previous February. The average interest rate on a new-car loan was 6.26 percent in February, compared to 5.19 percent last year and 4.56 percent five years ago. The average monthly payment was $556, up from $527 a year ago.

U.S. personal income falls; spending weakest since 2009

(Reuters) Personal income slipped 0.1 percent in January after jumping 1.0 percent in December. Wages increased by a moderate 0.3 percent in January after rising 0.5 percent in December. Consumer spending dropped 0.5 percent in December after a 0.6 percent increase in November. When adjusted for inflation, consumer spending fell 0.6 percent in December. The saving rate jumped to a three-year high of 7.6 percent. The PCE price index excluding the volatile food and energy components rose 0.2 percent after a similar gain in November. That left the year-on-year increase at 1.9 percent.

When the understanding of trade dynamics is backwards and confused, you get one counterproductive policy after another:

Trump Says Dollar Too Strong in Renewed Criticism of Powell

(Bloomberg) President Donald Trump said Saturday that the U.S. dollar is too strong and took a swipe at Federal Reserve Chairman Jerome Powell as someone who “likes raising interest rates.” The dollar was quoted lower against the euro and the yen in early Asia-Pacific trading hours on Monday after Trump’s comments. The U.S. economy is doing well despite the actions of the central bank, Trump said during a wide-ranging speech at the Conservative Political Action Conference in National Harbor, Maryland. “I want a strong dollar but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said Saturday. He didn’t mention Powell by name, but referenced “a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.” “Essentially there’s no inflation,” Trump said. “Can you imagine if we left interest rates where they were, if we didn’t do quantitative tightening. Taking money out of the market if we didn’t do quantitative talk, and this would lead to a little bit lower dollar,” he said. Trump said the U.S. “is booming like never before,” while other countries are “doing very poorly, and that makes it even harder for us to be successful.”

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MMT on CNBC, Oil sale, Growth forecast

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Well done Professor Kelton!

Stephanie Kelton explains Modern Monetary Theory

This is particularly ridiculous:

U.S. offers up to 6 million barrels of oil from emergency reserve

(Reuters) The U.S. Energy Department said on Thursday it is offering up to six million barrels of sweet crude oil from the national emergency reserve in a sale mandated by a previous law to raise funds to modernize the facility. A law U.S. President Donald Trump signed last year requires the department to hold sales to fund $300 million improvements including work on shipping terminals to the Strategic Petroleum Reserve, or SPR, which is held in caverns on the coast of Texas and Louisiana. Previous laws have also mandated sales from the reserve, which currently holds more than 649 million barrels.

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Trade, Factory Orders, Pending home sales

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Can’t be making Tariff Man happy:

Highlights

The effects of cross-border trade actions have been difficult to pinpoint in the national economic data but outlines may be appearing in goods trade. The nation’s goods deficit swelled to a much larger-than-expected $79.5 billion in December as exports fell 2.8 percent in the month to $135.7 billion following 0.9 percent contraction in November. Agricultural exports, a focused area with China, fell 1.9 percent in the month and are down 5.5 percent year-on-year. The yearly rate for total exports is now in the negative column at minus 0.3 percent.

Adding to the downward trade pull from exports is a 2.4 percent rise in imports to $215.2 billion which are up 3.2 percent on the year. Here consumer goods are a sensitive area and are up 4.4 percent in the month to $55.5 billion though the year-on-year increase is modest at 0.9 percent. Imports of capital goods have also been climbing, up 4.9 percent on the year, but in contrast to consumer goods these goods represent business investment and will help future productivity.

For the quarterly GDP contribution, the goods deficit ran a monthly average of $75.7 billion in the fourth quarter vs $74.7 billion in the third quarter. Though this does point to another quarterly drag from trade, services for December have yet to be reported and based on U.S. strength here may yet pull the quarter even. Next Wednesday’s international trade report for December will post the services numbers as well as bilateral country data that are not published with this report.

Bad:

Highlights

Factory orders have significantly missed Econoday’s consensus for a second straight month, inching only 0.1 percent higher in December vs expectations for a 0.6 percent climb. In November when expectations were looking for a small gain, orders fell an initial 0.6 percent which is now revised to a 0.5 percent decline. October orders narrowly missed expectations, falling 2.1 percent against expectations for 2.0 percent.

The split between the report’s two main components shows a 1.0 percent dip for nondurable goods — the new data in today’s report where weakness is tied to both petroleum and coal as well as beverages — and a 1.2 percent rise for durable orders which is unchanged from last week’s advance report for this component.

But the gain for durable goods was skewed, as it often is, by a clump of aircraft orders in the month. Vehicles were also strong and when excluding these and aircraft as well as all other transportation equipment, orders fell 0.6 percent in December following a 1.3 percent drop in November.

A glaring weakness in December and November orders are sharp 1.0 percent and 1.1 percent declines for core capital goods orders (nondefense ex-aircraft). This is telling evidence that business investment is down which in turn may well betray a downturn in business confidence. And there’s an important revision in today’s report that will be trimming back estimates for nonresidential investment in tomorrow’s fourth-quarter GDP report as December shipments for this series, initially at a 0.5 percent gain in last week’s advance report, are now revised to no change. November stands at a 0.2 percent decrease for core shipments.

The third quarter was not strong for the factory sector notwithstanding, however, the 0.8 percent auto-related surge in December manufacturing production (previously released as part of the industrial production report). Manufacturing is disproportionately exposed to global demand and sector’s slump is a convincing reflection of general slowing in foreign economies, something that the Federal Reserve underscored as a key reason for its January downshift to neutral monetary policy.


Still trending down and down vs last year:

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Car sales, HK, China default, capex, EU business lending, EU sentiment, Credit card data

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Chinese state company defaults offshore, first time in 20 years

(FT) A Chinese state-owned enterprise from the country’s remote north-west has failed to repay a US dollar bond in Hong Kong, the first offshore default in 20 years and the latest sign investors can no longer rely on Chinese authorities to bail out state groups. Qinghai Provincial Investment Group defaulted on a $10.9m interest payment due on the Hong Kong note on Friday, then missed a separate principal and interest payment on a Rmb20m ($3m) onshore renminbi bond that matured on Monday, according to Caixin.

Tariff Fears Led U.S. Manufacturers to Trim Spending

(WSJ) Private-sector companies said increased tariffs and trade tensions have led them to reduce capital expenditures by an average of 1.2%, according to the Survey of Business Uncertainty. For manufacturers, the impact was larger, with a 4.2% impact on capital expenditures, according to the survey. The Atlanta Fed study finds that a rising proportion of businesses are trimming spending in response to tariff concerns, with 52% either postponing or dropping spending plans in the January survey, compared with 31% in a July questionnaire.

Euro zone business lending growth slows sharply: ECB

(Reuters) Corporate lending expanded by 3.3 percent in January, well below December’s 3.9 percent reading and its post-crisis peak of 4.3 percent hit in September. Credit growth to households meanwhile held steady at 3.2 percent, the ECB data showed. The ECB last month warned that the growth outlook is deteriorating quickly, suggesting that the bloc’s biggest slowdown in half a decade may be longer and deeper than feared. The annual growth rate of the M3 measure of money supply, which often foreshadows future activity, slowed to 3.8 percent from 4.1 percent in December.

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MMT in the headlines, Housing starts

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The notion behind what is called “Modern Monetary Theory,” or MMT, is that as long as the Fed can keep interest rates low without sparking inflation, the national debt and budget deficit won’t be an issue. MMT has been espoused by politicians including Rep. Alexandria Ocasio-Cortez, D-N.Y., and Democratic presidential candidate Sen. Bernie Sanders of Vermont.

Powell conceded that he has not read up on the theory but said he has heard some “pretty extreme claims” about how it might be implemented.

Highlights

Housing starts proved unexpectedly weak in December and will pull back residential investment in Thursday’s GDP report. A strong offset, however, is steady strength in permits which are less impacted by weather or similar one-time effects.

Starts fell 11.2 percent in the month to a 1.078 million rate that is far below Econoday’s consensus range. This compares with a long trend in the 1.200 to 1.300 million range and is the weakest showing since September 2016.

Wildfires in the West may be at play and are likely responsible at least in part for a 26.3 percent monthly drop in starts in the region to a 216,000 rate. But starts were also down 13.2 percent in the Midwest to a 125,000 rate with the South down 6.0 percent to 630,000. The Northeast was unchanged at 107,000.

Starts of single-family homes, down 6.7 percent, fell less severely than multi-units, down 20.4 percent. This should limit the pull lower for residential investment as single units have higher per unit construction costs than multi-units.

Now the good news in the report. Permits rose 0.3 percent in December to a 1.326 million rate that exceeds Econoday’s high estimate for 1.305 million. Here, however, the single-family reading is down 2.2 percent to 829,000 while multi units are up 4.9 percent to 497,000. And here the West shows strength, up 17.1 percent to 383,000.

Bad:

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Japan outlook, Rail traffic, Business inventories

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Japan downgrades industrial outlook for first time in 40 months

(Nikkei) The Japanese government on Thursday downgraded its monthly assessment of industrial output for the first time in more than three years. The Cabinet Office’s economic report for February says “weakness can be seen in some areas” of production, qualifying a view of moderate growth that had been kept unchanged since October 2015. February’s report also downgraded the assessment on corporate profits. It follows January’s downward revision on exports, which are now described as “almost flat,” and raises doubts about the durability is poised to become Japan’s longest postwar economic expansion.

Rail Week Ending 16 February 2019: Economically Intuitive Sectors In Contraction

Week 7 of 2019 shows same week total rail traffic (from same week one year ago) contracted according to the Association of American Railroads (AAR) traffic data. The economically intuitive sectors rolling averages are now in contraction.

Highlights

Volatility is increasingly the theme of recent economic data, including wholesale inventories which bloated by 1.1 percent in December against a 1.0 percent decline in wholesale sales. The inventory rise is not the result of price swings in nondurable goods as durables lead the build at a very heavy plus 1.5 percent including large builds for metals, furniture, electrical goods, and lumber.

The relationship between inventories and sales in the wholesale sector began to look unfavorable in November and really points to overhang in this report. Year-on-year, inventories are up 7.3 percent while sales are down 1.5 percent. The stocks-to-sales ratio spiked through the second of last year, to 1.33 in December from 1.30 and 1.28 the prior two months and from as lean as 1.26 in August.

The jump in wholesale inventories will provide a technical boost to fourth-quarter GDP but not a healthy one. Wholesalers may very well be looking to make their inventories more lean this year which would not be a plus for the sector’s employment. In an offset, comparable data on retail and manufacturing inventories, still not updated for December, showed less upward pressure in prior reports.

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