Wednesday, 30 April 2014

UK economy accelerates in first quarter, eurozone and US confidence decline

The UK economy maintained its strong recovery at the start of 2014. A report on Tuesday showed that the UK economy grew 0.8 percent in the first quarter, up from 0.7 percent in the previous quarter.

Compared to the first quarter of last year, the UK economy grew 3.1 percent, the biggest annual increase since late 2007.

The euro area, however, may have started the second quarter on a weaker note. A report from the European Commission on Tuesday showed that its economic sentiment indicator for the region fell to 102.0 in April from 102.5 in March.

US consumer confidence also declined in April. A report from the Conference Board on Tuesday showed that its consumer confidence index fell to 82.3 this month from 83.9 in March.

Another report on Tuesday showed that the S&P/Case-Shiller index of property prices in 20 US cities increased 12.9 percent in February from a year ago, the smallest rise since August, after a 13.2 percent gain in January.

Tuesday, 29 April 2014

Demographics may be too "terrible" for Japan to overcome, but an edge for US

Like James Gruber (see my previous post), Cullen Roche has doubts about the sustainability of Japan's recovery.

We all know that QE has a substantial psychological impact on the market... it can be extremely powerful. One of the more noticeable stories has been that of Japan where Abenomics has appeared to be at least a marginal success in recent years... [B]ut one thing appears to be certain – the positive directional trend of many indicators appears to have changed from a steady rise to a steady sideways.

Like Gruber, Roche thinks Japan's demographics exacerbates its problem.

If the central bank is able to pull Japan out of its sustained deflation then we will likely see a permanent change in the way central banks engage their economies. But I wouldn’t get too hopeful. Not only do I fear that this has been primarily exchange rate driven, but I also fear that Japan’s terrible demographic trends are something that no central bank can overcome. And of course, that assumes QE has the power to sustain a recovery or avert disaster in the first place, which I tend to think is a position that’s overstated.

Morgan Housel traces the history behind Japan's current demographics.

Japanese fertility jumped from 3.1 children per woman in 1945 to 4.51 per woman in 1947 -- that was the baby boom -- and then plunged all the way down to 1.96 by 1961, which isn't enough to keep population growth positive.

This had a big impact on the economy. As Japan entered the 1970s and 1980s, the baby boom generation -- called "dankai," or the "massive group" -- hit their peak earning and spending years...

But over the last two decades, Japan's dankai ended their peak-spending years, and began retiring...

Japan's economy is smaller today than it was in the early 1990s. There are many reasons for this, but as Mark Steyn writes, "there is no precedent in human history for economic growth on declining human capital." In 1992, there were 86.7 million Japanese aged 15 to 64 (prime working age). Today, there are 77.5 million. That's the equivalent losing three-quarters the population of Tokyo.

Fortunately for the US, it has much better demographics.

America has some of the best demographics in the developed world, largely due to immigration. Twenty-five million more people live in America today than did in 2004... The Census Bureau projects the U.S. population will rise by another 26 million over the next decade, and by more than 80 million by 2050.

Importantly, America's working-age population is still growing, and projected to increase by 5.5 million over the next decade.

Among other things, better demographics means that the US is able to absorb the excesses of its housing bubble better than Japan did.

Indeed, a report on Monday showed that pending home sales rose 3.4 percent in March, the most since May 2011.

Monday, 28 April 2014

Japanese retail sales jump ahead of sales tax hike but possible inflation spike risks bond market blow-up

A report today showed that Japanese retail sales rose 11.0 percent in March from the previous year, the fastest annual pace in 17 years.

However, the surge is the result of consumers going on a shopping spree before a national sales tax hike took effect on 1 April and is likely to be followed by a decline in consumer spending the following month.

Indeed, James Gruber at Asia Confidential thinks that “Japan’s economy isn’t recovering, despite what the Bank of Japan and mainstream economists tell you”, and that more stimulus is likely by July.

Still, despite a weak economy, Gruber thinks that a tight Japanese labour market is likely to result in higher wages over the next 2-3 years.

“Japan’s working age population has decreased from 69 million in June 1997 to 65 million now. Those aged 15-24 have plummeted from 8.9 million to 4.9 million over the same period,” he wrote. This has contributed to a falling unemployment rate.

According to Gruber, the tightening labour market, combined with the “enormous stimulus” from policy-makers, “should produce more inflation than the BoJ bargained for”.

And if inflation spikes, so too will interest rates. “If this scenario plays out, there’s a high likelihood that Japan’s bond market will blow up,” he wrote.

Saturday, 26 April 2014

US stocks fall amid mixed economic data

US stocks fell on Friday. The S&P 500 lost 0.8 percent to end the week slightly down by 0.1 percent.

Stocks were not helped by mixed data from the US on Friday.

The US services sector slowed in April. Markit's flash reading of its US services PMI came in at 54.2 this month, down from 55.3 in March.

The fall in the services index pushed the composite index down to 54.9 in April from 55.7 in March.

However, US consumer confidence improved in April. The final reading of the Thomson Reuters/University of Michigan's consumer sentiment index this month came in at 84.1, up from 80.0 in March.

There were also mixed data from the UK on Friday.

Retail sales rose in March, but by just 0.1 percent. It was slower than February's 1.3 percent rise but was enough to push sales for the first three months of 2014 up 0.8 percent compared to a 0.6 percent rise in the fourth quarter of 2013.

A report from the British Bankers' Association on Friday showed that the number of mortgages approved fell in March for a second consecutive month to its lowest level since November but banks' lending for overdrafts and personal loans rose on an annual basis for the first time since January 2009.

Earlier on Friday, Japan reported that consumer prices excluding fresh food rose 1.3 percent in March from the previous year. Higher energy bills again drove much of the increase in prices, with electricity costs rising 10.0 percent and petrol prices rising 2.1 percent.

Data for the Tokyo metropolitan area showed that consumer inflation excluding fresh food hit an estimated 2.7 percent in April in the capital, the highest since 1992. However, stripping out the effects of a recent sales tax change, underlying inflation in Tokyo was 1.0 percent, unchanged from March.

Another report from Japan on Friday showed that Japan's all industry activity index fell 1.1 percent in February, giving up some of its 1.7 percent gain in January.

Friday, 25 April 2014

New Zealand raises rate, US durable goods orders jump

The Reserve Bank of New Zealand raised its official rate by 25 basis points to 3.0 percent on Thursday, the second time in two months it has hiked interest rates.

“It is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand,” RBNZ Governor Graeme Wheeler said in a statement.

Global economic data on Thursday were positive.

In the US, durable goods orders jumped 2.6 percent in March. Excluding transportation, orders rose 2.0 percent, the most since January 2013.

Orders for non-defence capital goods excluding aircraft jumped 2.2 percent after having fallen 1.1 percent in February.

In Germany, the Ifo business climate index rose to 111.2 in April from 110.7 in March.

Thursday, 24 April 2014

US stocks fall with new home sales, eurozone composite PMI at 3-year high

After six days of gains, US stocks ended their rally on Wednesday, with the S&P 500 falling 0.2 percent.

The decline in stocks came as a report on Wednesday showed that new US home sales fell 14.5 percent in March. It was the second consecutive monthly decline and the biggest since July.

The pace of US manufacturing expansion was little changed in April though. A preliminary reading of Markit's US manufacturing PMI for April came out at 55.4, slightly down from 55.5 in March.

The euro area economy showed improvement in April though. A preliminary reading of Markit's composite PMI showed a jump to 54.0 in April, its highest reading since May 2011, from 53.1 in March.

The services index rose to 53.1 in April from 52.2 in March while the manufacturing index rose to 53.3 from 53.0.

China's manufacturing activity also showed an improvement in April. However, the preliminary reading of the HSBC manufacturing PMI showed a rise to just 48.3 this month from 48.0 in March, indicating that the sector remains weak.

Wednesday, 23 April 2014

US stocks rise amid signs of tech bubble

US stocks rose for a sixth day on Tuesday. The S&P 500 rose 0.4 percent while the Nasdaq Composite rose 1.0 percent.

Despite the recent recovery in the Nasdaq, one prominent hedge fund is betting against technology stocks. From Bloomberg:

Greenlight Capital Inc., the $10.3 billion hedge-fund firm run by David Einhorn, said it was betting against a group of technology stocks as evidence grows of a bubble.

“There is a clear consensus that we are witnessing our second tech bubble in 15 years,” the New York-based firm said in a quarterly letter to clients today.

Greenlight said that companies it’s betting against may fall by at least 90 percent “if and when the market reapplies traditional valuations,” according to the letter, a copy of which was obtained by Bloomberg News.

In economic news on Tuesday, US existing home sales fell 0.2 percent in March but in the euro area, the consumer confidence index rose to -8.7 in April, the highest in six and a half years, from -9.3 in March.

Tuesday, 22 April 2014

US stocks rise amid positive economic data, US household deleveraging completed

US stocks rose for the fifth consecutive day on Monday. The S&P 500 rose 0.4 percent to complete a five-day advance, its longest rising streak since October, of 3.1 percent.

US stocks rose amid positive economic data on Monday.

The Chicago Federal Reserve's national activity index fell to +0.20 in March from +0.53 in February. However, the three-month moving average rose to 0.00 from -0.14.

The outlook for the US economy is also positive. The Conference Board reported on Monday that its US index of leading indicators rose 0.8 percent in March, the most since November, after rising 0.5 percent in February.

Monday also brought possibly good news for the US economy for the longer term.

A study by Bruno Albuquerque, Ursel Baumann and Georgi Krustev, economists at the European Central Bank, concluded that household develeraging in the US, which had held back the economy's recovery, “appears to be broadly completed as of the end of 2013”.

Monday, 21 April 2014

China's home price inflation cools, Japan's trade deficit surges

China's home prices continued to slow in March, according to a report on Friday.

While data from the National Bureau of Statistics showed that home prices increased year-on-year in 69 of the 70 cities monitored, unchanged from February, calculations by Reuters showed that average new home prices in the 70 cities rose 7.7 percent in March from a year earlier, down from the previous month's 8.7 percent increase. From the previous month, prices rose 0.2 percent in March, slowing from the 0.3 percent increase in February.

Meanwhile, a report on Monday showed that Japan's trade situation has continued to deteriorate. Its trade deficit quadrupled from a year ago to 1.45 trillion yen in March.

While Japan's exports rose 1.8 percent, imports surged 18.1 percent as a result of higher energy imports.

For the fiscal year to March, Japan logged a record trade deficit of 13.75 trillion yen.

Friday, 18 April 2014

Japanese consumer confidence falls, economic assessment lowered

Japan has been hit by bad news for its economy.

On Thursday, the Cabinet Office reported that its consumer confidence index fell to 37.5 in March, the lowest level since August 2011, from 38.5 in February.

On the same day, the government cut its assessment of the economy in April, the first lowering since November 2012.

On Friday, the Ministry of Economy, Trade and Industry reported that its tertiary industry index fell 1.0 percent in February, more than reversing the 0.9 percent increase in January.

Thursday, 17 April 2014

US stocks rise for third day on positive economic data, China's economy slows

US stocks rose on Wednesday, with the S&P 500 rising 1.1 percent to cap its best three-day rally in two months.

The higher stock prices were supported by economic reports on Wednesday.

The Federal Reserve's latest Beige Book released on Wednesday reported that the US economy continued to expand recently.

Other US economic data on Wednesday supported that view. Factory production rose 0.5 percent in March, helping to push total industrial production up 0.7 percent. Housing starts rose 2.8 percent in March but building permits fell 2.4 percent.

Earlier on Wednesday, China reported that its economy grew 7.4 percent in the first quarter from the previous year, down from 7.7 percent in the fourth quarter.

However, March data showed that industrial production rose 8.8 percent year-on-year, up from a combined January-February increase of 8.6 percent, while retail sales rose 12.2 percent last month, up from a 11.8 percent increase in January-February.

Wednesday, 16 April 2014

Stocks rise for second day in US, fall in Europe and China

US stocks rose for a second consecutive day on Tuesday, the S&P 500 gaining 0.7 percent after climbing 0.8 percent on Monday.

The gain on Monday had been accompanied by a positive economic report in the form of a 1.1 percent rise in US retail sales.

The gain on Tuesday was accompanied by somewhat more mixed economic data. The consumer price index rose 0.2 percent in March, up from 0.1 percent in February, suggesting a possible end to the disinflationary trend.

However, the NAHB/Wells Fargo housing market index rose only a point to 47 in April while the New York Federal Reserve's Empire State general business conditions index fell to a five-month low of 1.29 in April from 5.61 in March.

European stocks fell on Tuesday, the STOXX Europe 600 falling 1.0 percent and erasing its gain for the year amid tension in Ukraine.

Earlier on Tuesday, Asian stocks had been mixed. While Japanese stocks rose 0.6 percent, Chinese stocks fell, the Shanghai Composite Index losing 1.4 percent.

The People's Bank of China had reported on Tuesday that bank lending surged to 1.05 trillion yuan in March from 644.5 billion yuan in February the previous month. However, lending was down 12.4 billion when compared to a year earlier.

Monday, 14 April 2014

US stocks could crash...but maybe not yet

After another week of losses for the US stock market, Henry Blodget at Business Insider wrote at the end of last week that this could be the start of a stock market crash.

[S]ome signs suggest that this pullback — or another one sometime soon — could get much more severe.


Three basic reasons:

• Stocks are still very expensive
• Corporate profit margins are at record highs, and
• The Fed is now tightening

However, responding to Blodget, James Gruber at Asia Confidential wrote that stocks will not crash for now.

Asia Confidential believes Blodget makes a number of valid arguments and could end up being right. But he’s way too early with the call. And the principal reason is that history shows Fed tightening has been bullish for stocks, at least initially.

Joshua Brown at The Reformed Broker had also asked at the end of last week: Is this the beginning of a crash?

His answer:

It certainly could be, but the odds do not favor it. Statistically speaking, it is far more likely that a run-of-the-mill correction is now underway and working its way through each sector of the market, to varying degrees of severity. Counter-trend rallies are sharp and short (think Wednesday), which is fairly characteristic of a defined downtrend. The 200-day moving average is rising up just beneath us and it may offer some solid support, just as it had in December of 2012.

Saturday, 12 April 2014

US stocks fall as consumer confidence rises

US stocks fell again on Friday. The S&P 500 declined 0.9 percent to complete its worst weekly loss since 2012. The Nasdaq Composite Index fell 1.3 percent.

Stocks fell despite a rise in US consumer confidence. A report on Friday showed that the preliminary April reading of the Thomson Reuters/University of Michigan consumer sentiment index was 82.6, up from a four-month low of 80.0 in March.

Another report on Friday showed that US producer prices also rose in March. The producer price index rose 0.5 percent last month, the most since June, after falling 0.1 percent in February.

China also showed signs of accelerating inflation on Friday. Its consumer price index rose 2.4 percent in March from a year ago, faster than the 2.0 percent increase in February.

Friday, 11 April 2014

US stocks fall could turn into '87-type crash

US stocks fell on Thursday, with the Nasdaq Composite Index tumbling 3.1 percent to a two-month low. The S&P 500 fell 2.1 percent.

Marc Faber, editor and publisher of the Gloom, Boom & Doom Report, told CNBC that the stock market is setting up for a decline more painful than the sudden crash of 1987.

"This year, for sure—maybe from a higher diving board—the S&P will drop 20 percent," Faber said, adding: "I think, rather, 30 percent. Who knows. But all I'm saying is that it's not a very good time, right now, to buy stocks."

The STOXX Europe 600 fell 0.5 percent on Thursday.

European stocks were not helped by the Bank of England, which left its key interest rate unchanged at 0.5 percent at its monetary policy meeting on Thursday. The BoE also maintained its stock of asset purchases from its quantitative easing programme at 375 billion pounds.

Possibly raising concerns for investors in Europe though were trade data earlier on Thursday from China. China reported that its exports fell 6.6 percent in March from the previous year while imports slumped 11.3 percent.

Despite the unexpectedly weak trade data, China's stock market led Asian shares up on Thursday after a plan was announced allowing cross-trading between Hong Kong and Shanghai's stock markets.

Thursday, 10 April 2014

BoJ holds off further stimulus amid signs of weaker economic outlook

The Bank of Japan held off additional monetary stimulus after its policy meeting on Tuesday even as recent data indicate a deterioration in the outlook for the economy.

On Monday, the Cabinet Office reported that its leading index fell to 108.5 in February, the lowest since last August, from 113.1 in January while its coincident index fell to 113.4 from 115.2.

On Tuesday, the Cabinet Office reported that its economy watchers' current conditions index rose to 57.9 in March from 53.0 in February but the outlook index fell sharply to 34.7 from 40.0.

Somewhat more positive data on Tuesday came from the current account report, which showed a surplus in February, the first in five months. The trade deficit shrank as exports rose 15.7 percent from a year earlier while imports went up 14.1 percent. The primary income balance rose 3.6 percent.

However, a report on Thursday showed that core machinery orders fell 8.8 percent in February after having surged 13.4 percent in January.

Monday, 7 April 2014

Developing economies in East Asia to maintain fast growth

For all the market turmoil earlier this year caused by concerns over emerging economies, the World Bank at least thinks that developing countries, at least in East Asia, will maintain good growth in 2014. From AFP/CNA:

The World Bank said on Monday developing countries in East Asia will grow 7.1 per cent in 2014 as they benefit from a stabilising global economy and withstand the impact of US stimulus cuts.

The estimate for gross domestic product (GDP) expansion remains unchanged from last year, making East Asia the world's fastest-growing region, the bank said in its East Asia and Pacific Economic Update report.

Saturday, 5 April 2014

US stocks fall as valuation hits previous peak

US stocks fell on Friday, with the NASDAQ in particular falling 2.6 percent. The S&P 500 fell 1.3 percent.

Stocks declined despite a good US employment report for March. The Labor Department reported on Friday that nonfarm payrolls increased by 192,000 jobs last month after rising by 197,000 in February, with the private sector accounting for all the new jobs. The unemployment rate was unchanged at 6.7 percent.

In any case, the stock market's valuation may be getting stretched. According to JP Morgan, the S&P 500's forward P/E ratio hit 15.2 on 31 March, the same as at the last peak in 2007.

Earlier on Friday, stocks in Europe had closed at a six-year high. The STOXX Europe 600 rose 0.6 percent to 339.18, its highest level since January 2008.

A report on Friday showed that German factory orders rose 0.6 percent in February. However, the growth in January was revised lower to 0.1 percent from 1.2 percent.

Friday, 4 April 2014

ECB discusses QE as economy continues recovery

The European Central Bank left monetary policy unchanged after its meeting on Thursday.

At a press conference following the meeting, President Mario Draghi said that officials had discussed the possibilities with quantitative easing but that they had “different preferences” and that they “will continue working on that in the coming weeks”.

Economic data on Thursday showed that in the meantime, the eurozone economy continued to grow. Retail sales rose 0.4 percent in February while Markit's composite index came out at 53.1 in March, down from 53.3 in February but still indicating growth, as the services index slipped to 52.2 from 52.6.

Another report on Thursday showed that the UK services sector also slowed in March. The Markit/CIPS services PMI fell to 57.6 in March from 58.2 in February, pushing the composite index down to 58.1 from 58.6.

US services activity accelerated in March though. Reports on Thursday showed that the Institute for Supply Management’s non-manufacturing index rose to 53.1 from a four-year low of 51.6 in February while Markit's services index rose to 55.3 from 53.3, pushing the composite index up to 55.7 from 54.1.

Less positively for the US, its trade deficit widened in February as exports fell 1.1 percent while imports rose 0.4 percent.

Meanwhile, services activity in China grew in March, reports showed on Thursday. The Markit/HSBC services PMI increased to 51.9 last month from 51.0 in February while the official services PMI dipped to 54.5 from 55.0.

In Japan, Markit's services index rose to 52.2 in March from 49.3 in February. That helped push the composite index for Japan to 52.8 from 52.0.

Thursday, 3 April 2014

Fed likely to keep rates low despite better data, Brazil raises rates again

There were more signs on Wednesday that the US economy is recovering from the winter doldrums.

ADP reported that private employers added 191,000 workers to payrolls in March, the most in three months.

Another report on Wednesday showed that US factory orders rose 1.6 percent in February after having fallen 1.0 percent in January.

Despite the better economic data recently, Bloomberg reports that an interest rate hike by the Federal Reserve remains far on the horizon.

More than two-thirds of the gauges on Janet Yellen’s labor-market dashboard are still showing worse readings than before the recession, reinforcing her belief that the economy will need “extraordinary support” from the Federal Reserve for “some time to come.”

Only two of the nine indicators flagged by the new Fed chair -- payroll growth and layoffs -- are back to where they were in the four years leading up to the last economic downturn. The seven others, including joblessness, underemployment and labor-force participation, have yet to return to their 2004-to-2007 averages.

However, while the Fed remains hesitant to tighten monetary policy, Brazil's central bank raised interest rates for the ninth straight time on Wednesday, pushing the Selic rate up 25 basis points to 11.0 percent, its highest in over two years.

Wednesday, 2 April 2014

S&P 500 makes new record high

US stocks rose for a third consecutive day on Tuesday, with the S&P 500 gaining 0.7 percent to end at a record high.

Stocks rose amid generally positive US economic data. The Institute for Supply Management reported on Tuesday that its manufacturing PMI rose to 53.7 in March from 53.2 in February, Markit confirmed its March US manufacturing PMI of 55.5, while a third report showed that US construction spending rose 0.1 percent in February.

In the euro area, Markit reported on Tuesday that its manufacturing PMI for the region fell to 53.0 in March from 53.2 February but another report showed that the region's unemployment rate stayed unchanged at 11.9 percent in February.

Elsewhere in Europe, the UK Markit/CIPS manufacturing PMI fell to 55.3 in March from 56.2 in February.

China's manufacturing data on Tuesday were mixed. The HSBC manufacturing PMI fell to 48.0 in March from 48.5 in February but the government's manufacturing PMI rose to 50.3 from 50.2.

Meanwhile, Japanese business confidence has risen to a more than six-year high, according to data from the Bank of Japan on Tuesday. Its Tankan survey for the January-March quarter showed that its index for large manufacturers rose to plus 17 from plus 16 in December.

Tuesday, 1 April 2014

Japan raises sales tax as industrial production falls

Japan sees its first rise in sales tax in 17 years on Tuesday as the levy is raised from 5.0 percent to 8.0 percent. While the move is seen as necessary to curb its government debt, there is a risk that it may deter spending and dampen economic growth.

Data on Monday had already shown that Japan's recovery remains fragile. Industrial production fell 2.3 percent in February and the Markit/JMMA manufacturing PMI fell to 53.9 in March from 55.5 in February.

Elsewhere on Monday, the Institute for Supply Management-Chicago also reported that its business barometer fell to 55.9 in March from 59.8 in February.

In the UK, a report on Monday showed that mortgage approvals fell to 70,309 in February, the lowest since October last year, from 76,753 in January, which was the highest in more than six years.

However, another report on Monday showed that German retail sales jumped 1.3 percent in February.

Still, the fragility of the eurozone economy as a whole was underlined by another report on Monday that showed that its inflation rate fell to 0.5 percent in March, the lowest since November 2009, from 0.7 percent in February.