Five graphs for 2016: midyear update

 - by New Deal democrat

At the beginning of this year, I identified graphs of 5 aspects of the economy that most bore watching.  Now that we are halfway through the year, let's take a look at each of them.

#5 The Yield Curve

The Fed attempted to embark on a tightening regimen last December.  The question became, would the yield curve compress or, worse, invert, an inversion being a nearly infallible sign of a recession to come in about 12 months.  It turns out that the weakness in the wolrd economy has caused something of a compression just from the long end:

Rates on 2 year treasuries rose in advance of the Fed's move in November, but have since fallen to their pre-December range, while the 10 year treasury has fallen to all time lows (typically long rates only start to fall once the tightening cycle has caused the economy to weaken). At 0.86% as of last Friday, however, the yield curve is still quite positive when seen in a historical perspective.

Weakness in the economy has put the Fed back on hold, meaning that it will be very difficult for the yield curve to actually invert.

#4 The trade weighted US$

Perhaps the biggest story of 2015 was the damage done by the 15%+ surge in the US$ that began in late 2014 -- which not only harmed exports, but pretty much cancelled out the positive effect on consumers' wallets by lower gas prices.

Here there has been a big change:

Against all currencies, the US$ has recently ben in the range of +3% to +6% YoY  - a  more  typical if still elevated range.  Against major currencies, the US$ has actually declined YoY.   This is good news.

#3 The inventory to sales ratio

An elevated ratio of business inventories to sales means that businesses are overstocked.  This has frequently but not always been associated with a recession.  I have been using the wholesalers invenotry to sales ratio, since it has fewer secular issues.  While the raito increased in January, it has fallen slightly since then:

This is not objectively "good," but this kind of slow fall tends to happen as a recession is close to ending.

#2 Discouraged workers

While 2015 saw a big improvement in involuntary part time employment, this trend has completely stalled in the last 9 months: 

We are still at least 1,500,000 above a "good" number.

#1 Underemployment and wages

The single worst part of this economic expansion has been its pathetic record for wage increases. Nominal YoY wage increases for nonsupervisory workers were generally about 4% in the 1990s, and even in the latter part of the early 2000s expansion.  In this expansion, however, nominal increases have averaged a pitiful 2%, meaning that even a mild uptick in inflation is enough to cause a real decrease in middle and working class purchasing power. 
There is increasing consensus that the primary reason for this miserable situation has been the persistent huge percentage of those who are either unemployed or underemployed, such as involuntary part time workers. 

This expanded "U6" unemployment rate ( minus 10%)  is shown in blue in the graph below, toether with YoY nominal wage growth (minus 2%)!:

In the 1990s and 2000s, once the U6 underemployment rate fell under 10%, nominal wage growth started to accelerate.  U6 is now 9.6%, and there has been some mild improvement off the bottom.  More than anything, the US needs real wage growth for labor, and the present nominal reading of  2.5% still isn't nearly good enough.  With the expansion in deceleration mode past mid-cycle, it is not clear at all how much further improvement we are going to get before the next recession hits. 

Bonddad's Tuesday Linkfest

German Investor Confidence Tanks (BB)

German investor confidence deteriorated in July on concern that Britain’s decision to leave the European Union could weaken the region’s fragile economic recovery.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, fell to minus 6.8 from 19.2 in June. That’s the lowest level since November 2012. Economists in a Bloomberg survey predicted a drop to 9.

One Year Chart of Oil Prices

UK CFOs See Big Slowdown in Business Plans (BB)

In the survey, 73 percent of CFOs said they are less optimistic about the financial prospects for their companies, up from 32 percent three months earlier. It was the most pessimistic view since the study began in 2007 -- even topping levels after the collapse of Lehman Brothers a year later.

Eighty-two percent of CFOs said they expected their employers to reduce capital spending over the next year, while 83 percent predicted a slowdown in hiring. Those figures were up from 34 percent and 29 percent, respectively, three months earlier.

Ninety-five percent of the executives surveyed said the level of uncertainty facing their business is above normal, high or very high, up from 83 percent in the previous survey. The last time uncertainty was at similar levels was during the height of the Greek debt crisis in 2012. Also, 68 percent said they thought leaving the EU would cause a long-term deterioration in the U.K. business environment.

London Real Estate Could Drop 30% (BB)

“While in recent stress tests, the major U.K. banks were assessed with declines of around 30 percent in commercial real estate prices, we fear that London residential could experience an even more severe downturn,” Societe Generale analysts including Marc Mozzi wrote in a note to clients on Monday. “Brexit will damage the U.K. economy, and some companies will almost certainly have to relocate parts of their business to retain access to the EU single market.”

London Home Sales Drop (BB)

Sales of London homes under construction slumped 34 percent in the second quarter as the prospect of a vote to leave the European Union damped demand already hurt by higher taxes.

The number of residences sold before completion fell to about 4,600 from 6,974 a year earlier, according to data compiled by researcher Molior London seen by Bloomberg News. A spokesman for Molior declined to comment.

“The approaching referendum added more layers of uncertainty,” said Tom Bill, head of London residential research at broker Knight Frank LLP. “That’s adding to the two-year slowdown from the December 2014 tax increase, which is still the biggest damping factor.”

5-Year Chart of UK's Construction PMI

Brexit Not Having a Material Impact on US Firms (Macroblog)

We asked firms to indicate how the outcome of the Brexit vote affected their sales growth outlook. Respondents could select a range of sentiments from "much more certain" to "much more uncertain."

Responses came from 244 firms representing a broad range of sectors and firm sizes, with roughly one-third indicating their sales growth outlook was "somewhat" or "much" more uncertain as a result of the vote (see the chart). Those noting heightened uncertainty were not concentrated in any one sector or firm-size category but represented a rather diverse group.

UK CPI Rises .5% (ONS)

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

The June rate is a little above the position seen for most of 2016, though it is still relatively low historically.

Rises in air fares, prices for motor fuels and a variety of recreational and cultural goods and services were the main contributors to the increase in the rate.

These upward pressures were partially offset by falls in the price of furniture and furnishings and accommodation services.

Chart of CPI From the Report

Industrial production for June suggests March was the bottom

 - by New Deal democrat

Last week's report on industrial production for June added to the evidence that the bottom is in for the shallow industrial recession.  This post is up at xE.com.

Bonddad's Monday Linkfest

Sector Performance For the Last Week

6-Month Charts of the Major Sector ETF

Seven sectors have broken through resistance.

Ireland is Feeling the Brexit Heat (BB)

“It’s the most serious, difficult issue facing the country for 50 years,” said John Bruton, 69, who was Irish prime minister between 1994 and 1997 and later served as the EU’s ambassador to the U.S.

Exporters have warned the plummeting pound will erode earnings and economic growth, just as a recovery had taken hold after the 2010 international bailout that followed the banking meltdown. Irish shares have declined, not least because the U.K. is the top destination for the country’s exports after the U.S. and the biggest for its services.

Meantime, Prime Minister Enda Kenny is fending off demands by Northern Irish nationalists for a reunification poll as he comes to terms with the loss of a key EU ally and plotters from his own party try to topple him. Then there’s the future of the U.K.’s only land border with the EU.

Ireland's Annual GDP Growth

Ireland's Total Trade

1-Year Chart of Ireland ETF

Yield Curves Are Flattening Across the Globe (Econbrowser)

Capital Spectator on Retail Sales and Industrial Production

My Weekly Analysis is Up at XE.com

US Equity Market in Review

US Bond Market in Review

International Week in Review

Weekly Indicators Are Over at XE.com

by NDD

My Weekly Indicators post is up at XE.com. There has been a real move to positivity in recent weeks.

John Hinderaker Goes Off the Rails Again

     On Jule 28, 2005, John Hinderaker of Power posted the following paragraph:

It must be very strange to be President Bush. A man of extraordinary vision and brilliance approaching to genius, he can’t get anyone to notice. He is like a great painter or musician who is ahead of his time, and who unveils one masterpiece after another to a reception that, when not bored, is hostile.

After being mercilessly criticised -- and in an obvious attempt to walk back his public display of absolute fealty --  he posted an "update" where he claimed the statement was "tongue in cheek."  The update isn't dated, but it did occur after his original post.

     Let's be blunt: Bush was an abject failure.  He turned a budget surplus into a massive deficit, started a war that largely created the current political quagmire in the Middle East and left the country with the worst economic contraction since the Great Recession.  The only good thing he has done is to remain quiet during his retirement, possibly hoping that his silence will somehow improve his historical standing.

     Now we have this absolute gem:

We simply cannot afford another four years of such mind-numbing stupidity in the White House. Donald Trump has many faults as a presidential candidate. You don’t need me to list them for you. But he is not Hillary Clinton, he is not committed to a view of the world’s dangers that is almost literally insane, and he will not give us a third Obama term in either domestic or foreign policy. He also won’t appoint people like Ruth Bader Ginsburg to the Supreme Court. Our next president will be either Donald Trump or Hillary Clinton; we desperately need for it to be Trump. He deserves, and badly needs, our financial support.    

Donald Trump is a racist; his public statements encourage violence and stoke the fires of xenophobia. 

He has publicly proposed defaulting on U.S. debt obligations, demonstrating a remarkable lack of ignorance on the basic underpinnings of international finance.  

His primary method of communication is Twitter, which limits the writer to 140 characters or less. 

And at least half of his content is comprised of simple adjectives (great, crooked) and exclamation points.   

Perhaps the most damning indictment of Trump is the following video.

I loved the WWE -- when I was 8 years old.  But, call me crazy, I just don't think Jimmy "Superfly" Snooka or the "Iron Shiek" are qualified for higher office.

The above clip, Mr. Hinderaker, is your preferred candidate for President of the United States.  If you honestly believe that this individual is qualified to lead this country, then you're insane.  Pediod.  

Weekly Indicators for July 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com. There has been a real move to positivity in recent weeks.

Weekly Indicators for July 11 - 15 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com. There has been a real move to positivity in recent weeks.

Weekend Pitbull

     When I first started this blog, I had two Weimaraners named Kate and Sarge.  At some point, I started a weekly series called "Weekend Weimar."  Every Friday I would put up pictures of Kate and Sarge as a way to signal that the week was over.

      Since the start of this blog, I got married, making "Weekend Weimar" "Weekend Weimar and Beagle."  Then about 4 years ago, a pit bull adopted us, so it became "Weekend Weimar, Beagle and Pit Bull."

     The last time I did this was about 3 years ago.  Since then we've lost Sarge, our oldest Weimar, and Cassie, out oldest Beagle.  Both died of old age.  That left us with 1 dog, which is a few too few for us.  So we adopted another Pit Bull a few months ago named Mumphrey.  So, here is a new edition of Weekend Pit Bull with Mumph and Lite.

     This means it's Friday and it's time to stop working.  Go home.

   

Bonddad's Friday Linkfest

Cheap Money Keeps Getting Cheaper (BB)

Business Investment is Weak (Jared Bernstein)

Public Investment has also been weak

China Grows 6.7% Y/Y (Central Stats China)

According to the preliminary estimation, the gross domestic product (GDP) of China was 34,063.7 billion yuan in the first half year of 2016, a year-on-year increase of 6.7 percent at comparable prices. Specifically, the year-on-year growth of the first quarter was 6.7 percent and 6.7 percent for the second quarter. The value added of the primary industry was 2,209.7 billion yuan, up by 3.1 percent; the secondary industry 13,425.0 billion yuan, up by 6.1 percent; and the tertiary industry 18,429.0 billion yuan, up by 7.5 percent. The GDP of the second quarter of 2016 went up by 1.8 percent on a quarter-on-quarter base.

Chinese Industrial Production Increases 6.2%

Weekly Chart of the Chinese Market

Bonddad's Thursday Linkfest

Bank of England Maintains Rates at .5% (BOE)

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment.  At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.  The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.  Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.  In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.  The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.

.....

Official data on economic activity covering the period since the referendum are not yet available.  However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.  Early indications from surveys and from contacts of the Bank’s Agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions.  Regarding the housing market, survey data point to a significant weakening in expected activity.  Taken together, these indicators suggest economic activity is likely to weaken in the near term. 

6-Month Chart of the Pound Dollar

6-Month Chart of the Pound Euro

Weekly Chart of the UK ETF

Australian Unemployment Rate Unchanged 

Australia's trend estimate of employment increased by 8,300 persons in June 2016, with:

• the number of unemployed persons decreasing by 200;
• the unemployment rate steady at 5.7 per cent;
• the participation rate unchanged at 64.8 per cent; and
• the employment to population ratio steady at 61.1 per cent.

Over the past 12 months, trend employment increased by 212,000 (or 1.8%), which was in line with the average percentage year-on-year growth over the last 20 years. Over the past 12 months, the trend employment to population ratio, which is a measure of how employed the population is, increased from 60.9 to 61.1 per cent.

Weekly Chart of the Australian ETF

Canada Maintains Rates at .5%

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Inflation in Canada is on track to return to 2 per cent in 2017 as the complex adjustment underway in Canada’s economy proceeds. The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty.

.....

Now let me turn to the Canadian economy. Our discussions focused on how we should look through the choppiness in recent data to see the underlying trends, and what these trends mean for the inflation outlook. Among other factors, the fires in Northern Alberta, which have been costly for many, represent a sharp, but temporary, hit to the economy. We expect to see GDP fall by 1 per cent at annual rates in the second quarter, and then grow by 3.5 per cent in the third quarter as oil production resumes, rebuilding around Fort McMurray begins and the new Canada Child Benefit lifts consumption. In fact, fiscal measures, including infrastructure spending, provide an important support to growth over the forecast horizon.

.....

We have always said that the adjustment to the oil price shock would be a complex process. And we see evidence that these adjustments are happening, thanks to the resiliency and flexibility of the Canadian economy. On the energy side, firms have been quick to cut back investment plans and reduce costs. By the end of the year, we expect these reductions to be largely over.

On the non-commodity side of the economy, we have also seen evidence of adjustment, but it has been more uneven. Export data have been particularly volatile, and it is very important for us as policy makers to assess underlying trends. What we see is that non-commodity exports over the past couple of years have been responding largely as expected to growth in foreign activity and the Canadian dollar. Businesses are telling us that they are benefiting from stronger demand and a lower dollar. We have a great chart in the MPR that shows that non-commodity exports have recovered almost to their pre-recession peak, which puts the recent volatility into proper perspective. Exports are projected to grow in line with the US economy over the projection period. We are being conservative by assuming that exports only make up part of the ground lost over the past four months. The past depreciation of the exchange rate will continue to support the level of exports, but its effect on export growth is projected to taper off over the course of this year.

5-Year Chart of the Canadian Dollar/US Dollar

Weekly Chart of the Canadian ETF

Bonddad's Wednesday Linkfest

Are Emerging Markets Becoming the New Safe Markets? (FT)

This would be quite a turnaround from recent years, when a flight to safety has seen many investors sell out of emerging markets, deeming them too risky in the wake of China’s slowdown and the decline in commodity prices. But with uncertainty gripping the western world, market sentiment could shift once again; we are seeing a number of trends that point towards this potentially happening.

....

Protest movements of a different sort are also taking hold in many of the markets where we invest. It is strengthening the hand of leading politicians in places, including Nigeria and India, where an anti-corruption mandate is forcing genuine – and long awaited – change in regulation and the policing of theft from the public purse. Such improved governance is vital for western investors looking to invest.

More fundamentally, emerging markets are also likely to continue to offer significantly stronger growth than developed markets. The Brexit result is expected to tip the UK towards recession, while many European economies have been struggling to find ways to accelerate growth. In contrast, despite investors’ aversion to growth markets over the past couple of years, the fundamentals have not changed; namely, the rapidly expanding middle class and their desire to spend money on the things we in the west take for granted – meals out, designer clothes, consumer electronics.

1-Year Candleglance Charts of Emerging Market ETFs

EU IP Down 1.2% M/M  (Eurostat)

1-Year Chart of the IEV ETF

Labor Market Conditions Index Rose But Still Negative (Doug Short)

Small Business Having Difficulty Finding Quality Labor (BB)

Nearly half of small businesses that tried to fill jobs in the second quarter reported that they had few or zero qualified applicants for those positions, according to the June NFIB Small Business Optimism report.

As a result 29 percent of small businesses said they had job openings they were unable to fill, and 15 percent of owners surveyed said that finding quality labor was their single most-important business problem, which is almost the highest reading of this expansion

WSJ Labor Market Charts

Dividend Cuts Outnumbered Dividend Increases in June (Political Calculations)

Bonddad Tuesday Linkfest

Fed President George Argues For Slowly Increasing Rates (Denver Post)

Federal Reserve Bank of Kansas City president Esther George said Monday she wants the U.S. central bank to get back to raising short-term interest rates gradually to reflect progress on hiring and inflation.

George deemed the current level of short-term rates maintained by the Fed as “too low given the progress we’ve seen in the economy.” She also said keeping rates at super-low levels raises the risk financial markets will run into trouble as an additional factor arguing in favor of lifting the cost of borrowing.

“Gradual adjustments” in short-term interest rates mean the Fed is more likely to achieve its growth and inflation goals, George said. She added that the economy is near full employment levels, the housing sector is continuing its rebound and price pressures are moving back to the levels targeted by the central bank. All of this means short-term rates should move toward “more normal levels,” the Fed official said, while acknowledging a so-called normal rate is not a precise concept.

.....

George, as has long been the case, finds herself arguing for actions other central bankers don’t appear to be ready to take. That suggests she is very likely to be casting a dissenting vote at the FOMC meeting later this month.

Why Are Global Rates So Low (Wonkblog)

The following paragraph strongly implies that global negative/low rates are in the middle of an endless loop, which is a very scary proposition.

The rest of the world has only made this more true. That's because zero interest rates in one country exert a kind of gravitational pull on interest rates in another. They're "contagious," as economists Gauti Eggertsson, Neil Mehrotra, Sanjay Singh and Larry Summers put it. Here's why: if you have zero interest rates and are expected to for a while, then capital will flow into my economy every time I even consider raising my own. Money, after all, moves to where it thinks it can get the best return. But on a less happy note, this will push my currency up so much that my exports will start to lose competitiveness. And that, in turn, will slow my economy down enough that I won't actually have to raise rates. Instead, I'll keep them around zero — just like yours. The same kind of thing happens any time there's any financial turbulence in the world. Investors stampede into the safe haven that is U.S. government debt, pushing down yields and pushing out expectations of rate hikes.

See also this post from Prof. Krugman

What’s consistent with the data, instead, is the notion that investors are throwing in the towel and accepting secular stagnation as the new normal. Almost 8 years after Lehman, no sign of a really strong recovery in sight anywhere; perceived private-sector investment opportunities remain weak. Stock and land prices are pretty high, but probably because of low discounting rather than expected high returns. 

Profits Decline is Weak Enough to Keep Equity Prices High (BB)

The U.S. earnings recession waylaying the seven-year-old bull market has been a long one by any standard. Measured by depth, however, it isn’t registering -- either with history or investors.

Quarterly profits in the S&P 500 Index are about to fall again, extending a streak of declines poised to match the longest earnings retreat on record, data compiled by S&P Dow Jones Indices and Bloomberg show. At the same time, net income in the gauge is down 18 percent from its 2014 high -- a retreat that is less than half the size of the last three drops and pales next to the 28 percent average in recessions since 1936.

While the lack of profit growth explains why the S&P 500 struggled to advance for more than a year, the less-heralded shallowness of the decline is key to understanding the market’s resilience. The equity benchmark is heading for an all-time high after posting a second week of gains following the Brexit selloff and recovering from two separate 10 percent corrections in 10 months.

Y/Y Percentage Change in Corporate Profits from St. Louis Fred

5-Year Chart of Actual Level of Corporate Profits 

Bank Profits Are Under Pressure (FT)

Wall Street analysts have taken an axe to profit forecasts for the biggest US banks, fearing that the US Federal Reserve — spooked by sluggish job growth and the UK vote to leave the EU — will hold off on pushing up interest rates.

After the Fed’s first post-crisis bump in rates last December, many analysts had been counting on more increases to help boost bank earnings throughout this year and next.

But with JPMorgan Chase due to start the second-quarter reporting season this week, analysts now believe those assumptions look too bullish because of the market turmoil unleashed first by slumping oil prices and then the UK’s referendum on EU membership.

Analysts at Credit Suisse have stripped out any expectation of higher rates from its estimates for US banks’ profits in 2016 and 2017. Barclays and Morgan Stanley have also docked forecasts, noting that investors rate the chances of a rate rise from the Fed this year at about 20 per cent, down from about 75 per cent before the Brexit vote.

Net Interest Margins From the FDIC's Quarterly Banking Profile

1-Year Chart of the KRE ETF

1-Year Chart of the XLF ETF

XLF/SPY