Thursday, July 24, 2014

The Import of Chinese Imports (excerpt)

On July 15 we learned that China’s real GDP rose 7.5% y/y during Q2, up from 7.4% during Q1. The quality and accuracy of China’s economic data have always been questionable. That’s why I monitor all the available indicators to see when they are telling the same story, and when they are not doing so. One of the better sets of numbers is on Chinese imports. Currently, it isn’t confirming the improvement in real GDP growth.

Indeed, total imports (using the 12-month sum in US dollars) is down 0.7% in June from its record high in February. On a yearly percent change basis, it has been growing around 5% since late 2012, well below the double-digit pace of the previous three years.

I also track Chinese imports by country of origin. The recent slowdown in imports to China has been widespread among these countries, with the exception of the European Union, which is at a new record high. Australia and Brazil, the big commodity exporters to China, are flat-lining. So are Japan, South Korea, and Taiwan, which tend to ship capital equipment and technology goods to China. Chinese imports from emerging countries have been submerging a bit in recent months from February’s record high.

Today's Morning Briefing: Mad Dash. (1) A liberal labor market economist. (2) A dashboard with 19 labor market indicators. (3) The result is one index, which is posted on Fed’s website. (4) Different strokes for different folks. (5) Giving more weight to the slackers. (6) Yellen overweights wages. (7) Demographic shifts may be keeping a lid on wage inflation. (8) Easy come the bubbles. (More for subscribers.)

Wednesday, July 23, 2014

BRICs Outperforming Despite Russia (excerpt)

Global stock investors seeking some upside action seem to be finding it in EMs, especially the BRICs. The BRIC MSCI stock price index is up 17.4% since it bottomed earlier this year on March 14. They must be attracted to the relatively low valuation of the index, which has a forward P/E of 9.0 though with quite a bit of dispersion: India (16.1), Brazil (10.3), China (8.9), and Russia (4.9). On a ytd basis and in US dollars, the India MSCI stock price index is up 22.5% followed by Brazil (15.5) and China (0.9). Russia is back down by 14.5% after the downing of the Malaysian passenger jet.

Today's Morning Briefing: (1) Complacency setting stage for correction or melt-up? (2) Stock prices meandering, avoiding both extremes, for now. (3) Bearish contrarians on alert as all the bulls continue to buy the dips. (4) We are all investment strategists now. (5) Are stock investors too upbeat on Eurozone? (6) BRIC MSCI outperforming. (7) Abe may be losing his mojo. (8) US inflation in comfort zone. Too close to absolute zero in Eurozone. (More for subscribers.)

Tuesday, July 22, 2014

Beware of “False Dawns” (excerpt)


The minutes of the previous FOMC meeting noted: “The information reviewed for the June 17-18 meeting indicated that real gross domestic product (GDP) had dropped significantly early in the year but that economic growth had bounced back in recent months.” In her July 15 congressional testimony, Fed Chair Janet Yellen was a bit more cautious on the outlook: “The [Q1] decline appears to have resulted mostly from transitory factors, and a number of recent indicators of production and spending suggest that growth rebounded in the second quarter, but this bears close watching.” She was particularly concerned about housing, which “has shown little recent progress.”

Yellen concluded: “Although the economy continues to improve, the recovery is not yet complete.” That’s an astonishing conclusion given that real GDP has been expanding since Q3-2009 for 19 quarters, and has been in record-high territory since Q2-2011. The average length of the six expansions since Q2-1961 was 27 quarters, excluding the short upturn from July 1980 to July 1981. Obviously, Yellen is a monetary dove and is inclined to keep interest rates near zero for much longer than most of her colleagues on the FOMC. A weaker-than-expected Q2 GDP report would favor her approach. In her testimony, she warned about the “false dawns” that tricked Fed officials in recent years.

Yellen is right to be concerned about the recent stalling of homebuilding activity. Housing starts averaged 980,000 units (saar) during Q2, up slightly from Q1’s 925,000 unit pace, but below Q4-2013’s 1.03 million units. Single-family starts have been stuck around 600,000 (saar) since the start of the year. Residential construction could be slightly negative in the next GDP report because completions of single-family homes fell from 613,000 units during Q1 to 606,000 units during Q2. Construction spending on home improvements has been surprisingly weak this year, falling 12.5% over the past five months through May.

Today's Morning Briefing: False Dawn? (1) Q2 GDP release coincides with next FOMC meeting. (2) Curbing our enthusiasm. (3) Might it be half as much as expected? (4) Beware of “false dawns.” (5) Consumer spending still leading the way higher. (6) Residential construction has stalled, while spending on home improvements is down. (7) Capital spending on equipment looking good, but not so good on structures. (8) Inventories turn from big drag to small boost. (9) Exports are up, but imports are up more. (More for subscribers.)

Monday, July 21, 2014

Less Misery in the Misery Index (excerpt)

As I’ve noted before, bear markets tend to coincide with sharp increases in the Misery Index. It is the average of the unemployment rate and the core PCED inflation rate. The index was down to 7.8% during May from the most recent cyclical peak of 11.5% during March 2010. The unemployment rate has dropped from 6.7% at the end of last year to 6.1% during June. If it continues to drop at this rate over the rest of the year, it will be down to 5.5% by December. Inflation has edged up recently, but is likely to remain subdued around 1.5%.

Nevertheless, if the jobless rate continues to plunge, the Fed will be hiking rates sooner rather than later. Right now early next year is possible, and late this year can’t be ruled out. That might trigger financial tremors including a correction in stock prices. However, the US economy should prove remarkably resilient, which would augur well for a secular bull market.

Today's Morning Briefing: US Is Outstanding. (1) The next bear market. (2) End of NZIRP could be a shock, but might trigger a correction rather than a bear market. (3) Not much misery in Misery Index. (4) Resource Utilization Rate has room to move higher. (5) Leading indicators remain bullish. (6) Two regional business surveys are booming. (7) US oil production continues to soar. (8) Railcar loadings upbeat for autos and housing. (9) Production trending higher. (10) Semiconductors are hot, but not overheating in the US. (More for subscribers.)

Thursday, July 17, 2014

China Propping Up Growth (excerpt)


China’s real GDP rose 7.5% y/y during Q2-2014, up slightly from 7.4% during Q1. More interestingly, real GDP rose 7.9% during Q2 at a seasonally adjusted annual rate, up from 5.7% during Q1, the weakest quarterly gain since Q4-2008.

Apparently, a hefty expansion in credit was necessary to boost the economy during Q2, as I discussed yesterday. China remains dependent on credit-driven investment, which exacerbates the problem of excess capacity, as evidenced by the 28 consecutive months of deflation in the PPI. Government officials want to change that, but don’t know how to achieve this goal. So they continue to prop up growth with short-term stimulus programs. Occasionally, they attempt to tighten credit, but back off quickly when growth slips.

Today's Morning Briefing: Bubbles In Fashion. (1) Yellen makes a statement. (2) A smart-looking outfit. (3) Sign of the times. (4) Fed is monitoring junk bonds and leveraged loans. (5) Equities are fairly valued with a few small exceptions, according to Fed. (6) Senator Coburn makes a good point. (7) Too many bubbles to catch? (8) Bubbles will become more obvious once Fed starts hiking interest rates. (9) The biggest bubble of them all. (10) Beware of “false dawns.” (11) More on China’s credit bubble. (12) Focus on over-weight rated S&P 500 IT (More for subscribers.)