China’s Trade Data Showing More Weakness Than Strength (excerpt)

The good news is that Chinese exports and imports both rose last month by 4.7% and 15.6%, respectively, on a m/m basis and using seasonally adjusted data. The bad news is that imports are still down 6.1% y/y, while exports are up only 2.8% y/y. The former suggests that China’s domestic economy remains weak. The latter, which has been in a flat and volatile range since early 2013, suggests that global economic growth remains subpar.

Today's Morning Briefing: Playing the Averages. (1) Bearish technical signals have been buying opportunities in this bull market. (2) Central planners and central bankers intervening in financial markets. (3) Chinese officials buying ETFs, just as Japanese officials have been doing for a while. (4) Draghi still buying bonds, while Yellen magically boosts stocks. (5) “Agreekment” more likely than “Grexit” until further notice. (6) S&P 500 sectors mostly showing rising 200-dmas. (7) Forward earnings still driving sector performances. (8) China’s trade data show weak domestic economy and subdued global economy. (More for subscribers.)

China Remains Epicenter of Global Deflation (excerpt)

Monday’s WSJ included an article titled “Glut of Chinese Goods Pinches Global Economy.” The main point is that “China’s excess manufacturing capacity and slowing growth rate are … putting renewed downward pressure on prices.” I have been expounding on this theme for quite some time, so I obviously think the article is worth reading.

When China’s economy was booming, so did its demand for commodities. The result was the commodity super-cycle, which started in late 2001 after China joined the World Trade Organization on December 11 of that year. The super-cycle was briefly interrupted by the financial crisis of 2008. However, the Chinese government responded to it with a major fiscal stimulus program while the PBOC pumped lots of credit into the economy. Other governments and central banks did the same, but the Chinese led the way.

As a result, commodity prices soared again in 2009 through 2010. However, China’s factories turned expensive commodities into lots of cheap manufactured goods thanks to the availability of cheap labor. In other words, the trend in the so-called “China Price” was disinflationary, if not deflationary for the world economy. For the seven countries that report their CPIs by goods and services, durable goods prices have been falling steadily since the start of 2001: Eurozone (-1.7%), US (-12.5), UK (-13.7), Sweden (-21.6), Taiwan (-22.3), Switzerland (-23.9), and Japan (-43.7).

But China’s economic growth peaked during 2010, and labor costs started rising. The commodity super-cycle wasn’t so super, lasting just 10 years rather than 25-50 years. The subsequent drop in commodity prices since 2010 depressed commodity producers. Nevertheless, the China Price continues to fall as Chinese factories replace labor with automation. The 5/5 South China Morning Post included an article titled, “Building work starts on first all-robot manufacturing plant in China’s Dongguan.” A total of 1,000 robots will be installed at the factory, run by Shenzhen Everwin Precision Technology Co, with the aim of reducing the current workforce of 1,800 by 90% to only about 200.

To avert large-scale unemployment, the government continues to provide fiscal and monetary stimulus, which only worsens the excess capacity problem in manufacturing.

The WSJ article cited above reports, “Prices of all goods imported to the U.S. directly from China have fallen in 20 of the past 38 months, by 2.2% in all. For U.S. consumers, that is good news. But for policy makers and corporate executives, declining prices present a real challenge. The declines can sap profitability, deter investment and block wage growth, all of which are needed to help the world break out of its years of underwhelming growth.”

The article notes, as I have on a regular basis, that China’s PPI has declined on a y/y basis for 38 consecutive months. The PBOC has responded by easing credit conditions, which is likely to boost excess capacity by keeping “zombie” companies in business and by spurring even more capacity expansion.

Today's Morning Briefing: Blaming China. (1) No shortage of gluts thanks to China. (2) The epicenter of deflation. (3) Not so super super-cycle. (4) “China Price” remains deflationary as robots replace humans. (5) Deal or no deal? (6) Lots of big deals in healthcare, IT, and telecom. (7) Fed financing M&A mega-boom. (8) The fastest and easiest way to grow. (9) Challenging time for active managers. (10) Dividend-yielding stocks underperforming. (11) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

US Trade Data Confirm Weak Global Economy (excerpt)

Yesterday, the Census Bureau released March data for US merchandise trade. Imports rose significantly. However, the 10.3% m/m jump in the inflation-adjusted series reflected some catching up after the West Coast port strikes ended during February.

More significantly, real merchandise exports edged up just 1.1% m/m and are showing a flattening tendency over the past year. On a y/y basis, imports are up 10.1%, while exports are up only 0.3%. The slowdown in exports probably reflects secular stagnation in the global economy as well as the negative impacts of the strong dollar and the port strikes.

Today's Morning Briefing: The World Is Flat. (1) Thomas Friedman’s book. (2) The end of the Cold War was the end of the greatest trade barrier ever. (3) Has globalization improved or worsened income inequality? (4) Has globalization led to secular stagnation? (5) World export volumes and production growing slowly. (6) Not much action in exports of US and Eurozone. (7) China’s trade indicators are weak inside and out. (8) Summers and Rogoff agree on disease, but not cure. (9) Too much debt is one of the main causes of secular stagnation. (10) India’s problem. (11) Focus on market-weight-rated S&P 500 Transportation. (More for subscribers.)

Oil Output Continues To Gush (excerpt)

Yesterday, the price of a barrel of oil gave back recent gains after Saudi Arabia reported record production of 10.3mbd in March, a figure the country's oil minister said was unlikely to fall by much. They are obviously aiming to keep oil prices down to hurt Iran, and Russia too. In addition, yesterday we learned that US crude oil inventories soared to a record-high 482.4 million barrels during the week of April 3, 2015, up 26% y/y.

The Saudis are also hoping that low crude oil prices will significantly reduce the output of US frackers. There is no sign of that happening just yet. US oil field production remained at 9.4mbd during the first week of April, following a seven-week climb. The US still imports 9.6mbd, though that’s about as low as levels were during 1996. Furthermore, US exports of petroleum products are at a record 4.3mbd.

US merchandise trade data show that in current dollars, US oil imports have dropped by a whopping $274 billion (saar) from the most recent high of $470 billion during May 2011 to $196 billion during February. The trade deficit in crude oil and petroleum products has dropped by $258 billion to $97 billion over this period. In current dollars, US oil exports are down $70 billion over the past six months through February as lower oil prices more than offset the increase in exported barrels.

Today's Morning Briefing: The Obama Doctrine. (1) The Middle East is flat. (2) Seeking peace in our time for a troubled region. (3) Let the Arabs fight their own fights. (4) Can we all get along? (5) Obama’s utopian dream. (6) Postponing Armageddon. (7) Kicking the bomb down the road. (8) Game of the Saudi throne. (9) Talking Fed head says first rate hike may or may not be coming soon. (10) Dudley’s staff assigned snow job. (11) Transportation in the ditch. (More for subscribers.)

Is US Economy Coming Out of Ice Patch? (excerpt)

On March 18, I observed that spring is coming. Just as I predicted, it started two days later on March 20. On the other hand, the latest batch of economic indicators for March suggests that I may have been too optimistic when I wrote: “I agree with Chauncey Gardiner’s prediction: ‘In the spring, there will be growth.'”

I argued that the economy’s weakness during the first two months of the year reflected an ice patch rather than a soft patch. There are still grounds for optimism as the ground thaws. However, the latest data suggest that it could be a cold spring:

(1) Business surveys. Yesterday we learned that the latest survey of manufacturing purchasing managers showed a decline in the M-PMI to 51.5 during March from 52.9 during February. I wasn’t surprised since the overall index is highly correlated with the average of the composite indexes for the six available regional business surveys. This average fell to -0.1 during March, the lowest since April 2013.

The same can be said for the orders and employment components of the national and average regional surveys. The average regional orders index was especially weak in March, falling to -9.6, the lowest since May 2009. The national orders index (51.8) wasn’t as weak, but it was down from February (52.5). The national employment index (50.0) was weaker than suggested by the regional average, which edged higher during March.

It’s getting harder to blame the weather. Of course, other factors are working to slow the economy. The strong dollar’s negative impact is visible in the M-PMI’s new exports component, which dropped to 47.5 in March, the lowest reading since November 2012. The plunge in oil prices may be depressing energy-related new orders as well as production.

(2) Employment. Yesterday, we also learned that the ADP measure of private payroll employment rose 189,000, the weakest since January 2014. It may be that energy-related employment is taking a hit from the drop in oil prices. The four-week average of jobless claims in North Dakota, Ohio, Pennsylvania, and Texas has spiked up recently from 41,210 near the end of last year to 54,408 in mid-March.

Today's Morning Briefing: Ice & Soft Patches. (1) Full steam ahead on ECB’s QE. (2) ECB facing self-inflicted bond shortage. (3) Negative yields at the short end of the yield curve. (4) Questioning the necessity of ECB’s QE. (5) Taper talk already. (6) Central bankers co-opt the bond market that was once ruled by Bond Vigilantes. (7) Will there be growth in the spring? (8) March business surveys mostly downbeat. (9) Energy-related job losses weighing on ADP payroll gains. (10) Personal income strong, while spending is weak. (11) March data will be key, with auto sales auguring well for spring spending. (12) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)