NEW$ & VIEW$ (4 SEPTEMBER 2015): Ex-Im Imports.


Overall, exports improved 0.4% in July (-4.2% y/y) after a 0.1% June dip. Goods exports increased 0.8% (-6.8% y/y) as auto exports jumped 4.7% (-9.7% y/y) following a 0.3% gain. To the downside were nonauto consumer goods exports which posted a 2.5% decline (-0.4% y/y). That reversed half of the prior month’s increase. Services exports improved 0.3% (3.1% y/y) as travel exports also gained 0.3% (4.2% y/y).

Imports fell 1.1% (-3.3% y/y) and reversed a 1.1% increase during June. Nonpetroleum goods imports declined 1.4% (+0.9% y/y). Nonauto consumer goods imports were off 5.2% (+4.4% y/y), reversing the prior month’s increase. Moving higher were automotive vehicles & parts imports by 1.1% (6.0% y/y) and that added to two months of strong increase. (Haver Analytics)

Briefly, exports remain weak reflecting poor foreign demand and the strong USD. Non-oil imports continue to decline reflecting weak domestic demand (inventory correction?)and lower import prices.


  • U.S.: Export volumes are contracting

The US export sector is indeed struggling to adjust to the strengthening dollar and that’s hurting GDP. As today’s Hot Charts show real exports remained below year-ago levels for the third month in a row in July. Such a stretch in the red hasn’t been seen since 2009. Moreover, the USD’s sharp appreciation this year is not only restraining 2015 growth but will also chop from growth next year according to the New York Fed. And that, even before considering the potential for the trade-weighted USD to appreciate further thanks to currency devaluations in emerging markets and ongoing currency debasement policies in Europe and Japan via QE. It’s not just growth that is being sacrificed because the strong USD is also causing import prices to fall and pulling the inflation rate further away from the Fed’s 2% target ─ recall the annual core PCE deflator was at a 4-year low of just 1.2% in July. All told, while the Fed has made it clear it wants to start the process of normalization of interest rates soon, the fed funds rate is set to remain far from normal for several more years.


Thus far in 2015’s third-quarter, the 10-year Treasury yield has averaged 2.2%. By contrast, in the summer of 2014, the Blue Chip consensus expected a 3.5% average for the current quarter’s 10-year Treasury yield, wherein the average of the ten lowest projections was a still far too high 3.1%. The chronic overestimation of Treasury bond yields stems from the market’s inability to fully appreciate how the world economy’s surfeit of production capabilities and a stronger dollar exchange rate put relentless downward pressure on US prices and wages.

July’s annual rate of US import price deflation excluding petroleum products was -2.8%. However, lower prices for industrial metals and chemicals may have skewed that result downward. Nevertheless, July also showed year-to-year setbacks of (i) -1.4% for the import price index of motor vehicles and parts and (ii) -1.1% for consumer goods excluding autos. (…)

Inflation may be more than well contained, according to four regional indices of prices received by manufacturers from the Federal Reserve Bank Districts of Philadelphia, New York, Dallas and Kansas City. The unweighted average of the four regional indices of prices received by manufacturers located sank to -7.4 points in August 2015 for its lowest reading since October 2009’s -7.6 points.

From June 2004 through October 2008, this regional proxy for prices received by manufacturers never fell to 0.0 or lower. In fact, it bottomed at the +5.5-points of August 2007. Not until November 2008’s -5.5 points did the average turn negative.

When this barometer of manufacturers’ pricing power averaged a much greater +16.6 during June 2004 through June 2007, the annual rate of core PCE price inflation averaged 2.1%. During that span of respectable pricing power, the proxy for prices received by manufacturers bottomed at the +7.2 points of August 2005 and even that was well above its +2.1-point average of the year-ended July 2015. The latest loss of pricing power should prevent the annual rate of core PCE price inflation from rising much above July 2015’s 1.2%.

A diminished ability to hike prices warns businesses to compensate labor with caution. The still faster year-to-year growth of corporate America’s gross value added relative to unit labor costs bodes well for both profits and the business cycle. In terms of the yearly percent changes of moving yearlong observations, each of the seven previous deficiencies of gross value added growth to unit labor costs growth overlapped a recession. The longer labor costs outrun revenues, the greater is the risk of a surge by layoffs that might trigger a recession.

Q2-2015 showed yearly increases of 3.6% for gross value added — a proxy for net revenues — and 1.7% for unit labor costs. Moreover, the year-ended Q2-2015 revealed annual increases of 4.9% for gross value added and 1.7% for unit labor costs.


imageTo me, the main point from Moody’s analysis above is that pricing power is eroding fast as lower import prices force goods prices down while wages are rising 2%+. Manufacturers and retailers need higher volume to offset the pressures on revenues and operating margins. Look at this next chart which plots YoY same-store-sales growth rates for a number of U.S. retailers. The sharp slowdown since January is a direct result of lower import prices (mainly apparel). Revenue growth is now well below wage growth pressuring margins. This Thomson Reuters’ sample is admittedly small but it reflects the reality out there.


ECB Ready to Expand Stimulus Programs European Central Bank President Mario Draghi indicated that the bank stands ready to expand its stimulus programs if slowdowns in large developing economies and turbulence in financial markets hinder its ability to boost inflation to a target of just under 2%.

(…) Weaker growth in China and other emerging markets is dragging on the eurozone’s economy, Mr. Draghi warned at a news conference on Thursday.

Asset purchases “are intended to run until the end of September 2016, or beyond, if necessary,” he said—a statement investors and economists took as a sign that the bank could extend its more than €1 trillion ($1.1 trillion) bond-purchase program, known as quantitative easing, beyond its targeted end date of September 2016. (…)

In another sign that more stimulus may be on the way, the ECB on Thursday increased the share of an individual bond issue that it can purchase to 33% from 25%.

The technical change came after a six-month review of the program—which was launched in March—and will ensure that the ECB can execute its current €60 billion per month bond-buying program. (…)

The ECB’s staff economists cut their forecasts for inflation and economic growth through 2017, and—importantly—those projections didn’t take into account market turbulence in late August.

“We had a worsening of the situation in several emerging market economies, and it’s unlikely these challenges are going to be quickly reversed,” Mr. Draghi said. “Secondly, we had a tightening of financial conditions across the board. We’ll have to see whether this is short-term volatility, or is permanent.”

“So lower commodity prices, a stronger euro, somewhat lower growth, have increased the risk to a sustainable path of inflation towards 2 per cent.”

Mr. Draghi said he expects Chinese officials to provide more details of their plans for tackling the economic slowdown and stock market falls during meetings this weekend of finance ministers and central bank chiefs from the Group of 20 largest economies in Ankara, Turkey.

“That is going to be one of the major themes,” he said. “We do expect to have much more visibility in the coming days than we do now.”

“We will have to see whether [the effects of recent turmoil] are transitory or permanent, whether [what] will happen is worsening our medium-term outlook or is just a transitory effect,” Mr Draghi said. “And then we will decide whether to do more.”

Why a big slump in South Korea’s exports matters

NEW trade figures from South Korea on September 1st surprised even the gloomiest of economic forecasters. The country’s exports shrank by the largest annual amount in six years, down 14.7% last month from a year earlier to under $40 billion, according to the ministry of trade, industries and energy. (…) though exports have dropped every month since January, they declined just 3.4% in July in annual terms.

Exports account for roughly half of South Korea’s GDP—and a quarter of all those go to China, its biggest trading partner. South Korea has been struggling with the rise of its currency, the won, against the Japanese yen in key export markets; now China’s successive devaluations have started to bite. Provisional figures released today showed that South Korean car shipments dropped steeply in August, by nearly a third. Though exports of smartphones rose, fast-rising Chinese handset makers are increasingly vying with Samsung Electronics of South Korea for global market share (its profits have dropped for five consecutive quarters). A weaker yuan is also keeping holidaying Chinese shoppers away—just as the country attempts to woo them back after an outbreak of Middle East Respiratory Syndrome (which infected 186 and killed 36) hit South Korea in May.

Low global oil prices are also behind the startling figure. Petroleum products are a key South Korean export, and their price has dropped by over 40% from last August. The ministry of trade today pointed to this distortion to downplay concerns that falling exports might presage serious weakness in the domestic economy; by volume, it said, total exports actually grew by 3.8% in August from a year earlier. (…)

Frederic Neumann of HSBC, a bank, says the plunge is “pretty serious”, not least because South Korea has “long been a reliable bellwether” for global trade. South Korean manufacturing sits at the top of the production chain, he says: a big chunk of its exports do indeed go into other finished goods, like Chinese smartphones and American laptops. But if demand slows there, so do requests for chips and screens. That means that Korean macroeconomic data “picks up very early changes in the global industrial cycle”. Neither is a slowdown in China the only source of export weakness; South Korea’s exports to the euro area plunged by 21%, more than twice the decline in exports to China.

(…) If South Korea’s bellwether status is anything to go by, central bankers elsewhere ought to be paying attention as well.

Japan Base Wages Rise Most Since 2005, Aiding Abe Reflation

Base pay climbed 0.6 percent from a year earlier, the biggest increase since November 2005, the labor ministry said on Friday. Overall wages adjusted for inflation rose 0.3 percent, the first rise in more than two years, after a steep decline in the previous month. (…)

Differences in the timing of bonus payments from year to year have contributed to swings in the wage data, with overall labor cash earnings– which include overtime and special payments — falling 2.5 percent in June from a year earlier before rebounding 0.6 percent in July. Bonus payments rose 0.3 percent in July from a year earlier.

From Markit’s Japan Services PMI report for August:

Higher staff wages were cited as a factor behind increased input costs.


David Rosenberg after poking at the bears out there::

Technical analysis is always helpful, as is valuation work, an assessment of fund flows, sentiment and market positioning, but true inflection points hinge on the macro underpinnings.

But there is no fundamental bear market without a recession – say it over and over.

This is the reason economists have jobs on Wall Street and Bay Street – to make that call when the storm clouds come in.

Forty years in this biz and still waiting for the right timely, unhedged (on the one hand, on the other…) call from economists. Tell me: what is the reason astrologists have jobs in media around the world?


Here, courtesy of Institute for Monetary and Financial Stability economist Volker Wieland and Goethe University economist Maik Wolters, is a picture of how badly economists’ models failed to predict the Great Recession:

recession chart

John Mauldin:

In one of the broadest studies of whether economists can predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, “The record of failure to predict recessions is virtually unblemished.” He found this to be true not only for official organizations like the IMF, the World Bank, and government agencies but for private forecasters as well. They’re all terrible. Loungani concluded that the “inability to predict recessions is a ubiquitous feature of growth forecasts.” Most economists were not even able to recognize recessions once they had already started. (…)

If you look at the history of the last three recessions in the United States, you will see that the inability of economists and central bankers to understand the state of the economy was so bad that you might be tempted to say they couldn’t find their derrieres with both hands.

Economists have yet to correctly call a recession:

It is often said that equity markets are the best predictors of recessions. True. They have never missed one.

To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties. (Paul Samuelson)

predictor – someone who makes predictions of the future (usually on the basis of special knowledge)

I prefer to stick to trying to assess the risk/reward probabilities…

I have been reading a lot of stuff from bullish people lately and I am struck by the depth of their analysis when it comes to macro issues, market history and technical matters. On the other hand, it is simply amazing to see how little space is used to analyze profits which keep being ratcheted down.

Investment Lessons From August’s Market Mayhem

(…) “After an extended bull run, many investors forget that it is normal for stock markets to periodically see intra-year declines in the 5 to 10 percent range.”

Intrayear drops of 5 percent from peak to trough, Evensky added, happen on average about four times a year, with a recovery period of two to three months. The drops can take place over days, weeks, or months, according to JPMorgan’s Asset Management Guide to the Markets. Investors see 10 percent declines about once a year, on average, followed by a recovery period of about eight months.

Ghost FYI:Stock_Perform_By_Month_201509_RB.gif


U.S. service providers indicated a sustained rebound in business activity and employment numbers during August. New business volumes increased at a solid pace, but the latest rise was the least marked for three months, with some firms noting that heightened economic uncertainty had weighed on client spending patterns. Meanwhile, lower fuel prices contributed to a further slowdown in input cost inflation during August and average prices charged by service providers fell for the first time since June 2013.

Adjusted for seasonal influences, the final Markit U.S. Services Business Activity Index posted 56.1 in August, above the earlier ‘flash’ reading (55.2) and up from 55.7 in July, to signal the sharpest pace of expansion since May. Moreover, the index has now registered above the 50.0 no-change threshold for 22 consecutive months. Anecdotal evidence from survey respondents suggested that improving domestic economic conditions remained a key support to business activity growth in August.


At 55.7 in August (earlier flash reading: 55.0), the seasonally adjusted final Markit U.S. Composite PMI™ Output Index was unchanged since July, to signal a further robust pace of expansion. The average index reading so far in Q3 2015 is only fractionally lower than that seen in the second quarter (55.9). August data indicated that faster service sector output growth helped to offset a slower expansion of manufacturing production.


In contrast to the trend for business activity, service providers signalled a slowdown in new order growth from the three-month high recorded in July. Moreover, the latest expansion of incoming new work was the joint-weakest since January. A number of firms noted that the uncertain global business outlook had weighed on client spending patterns in August. Softer new business growth contributed to a reduction in unfinished work at service sector companies for the second time in the past three months. Although only marginal, the latest decline in backlogs of work was the most marked since April 2014.

August data indicated another robust upturn in payroll numbers across the service economy, which marked five-and-a-half years of sustained job creation.   Moreover, the latest rise in staff numbers was the fastest since May, which survey respondents linked to new product launches and increased workloads.

Meanwhile, service providers signalled a moderation in cost pressures during August, helped in part by lower fuel prices. The latest increase in overall input costs was the slowest since March. Average prices charged by service sector firms decreased in August and, although only marginal, the rate of decline was the fastest since November 2010.


August saw the eurozone economy remain resilient in the face of ongoing headwinds, with business activity increasing at the fastest pace in over four years. Levels of incoming new business also rose at a solid, albeit slightly slower, pace to support the second-quickest rate of job creation since May 2011.

The final Markit Eurozone PMI® Composite Output Index rose to 54.3 in August, up from 53.9 in July, as output growth accelerated moderately in both the
manufacturing and service sectors. Spain recorded by far the sharpest growth of economic activity among the ‘big-four’ eurozone nations in August, seeing its second-strongest expansion over the past eight-and-a-half years.


Strong and accelerated growth was also registered in both Germany and Italy, with rates of increase hitting five- and 53-month highs respectively. The pace of growth continued to disappoint in France, easing back towards stagnation on the back of a weaker expansion of services business activity and a second successive monthly contraction of manufacturing production. Despite this, combined output nonetheless rose for the seventh month in a row. Ireland, meanwhile, recorded a further substantial increase in economic output.

The rate of job creation in the eurozone accelerated to one of the fastest seen over the past four years, bettered during this sequence only by that signalled in May. Alongside solid gains in output and new business, the latest rise in staffing levels reflected a further accumulation of backlogs of work. Outstanding business rose at the quickest pace since May 2011. Staff headcounts were raised in Germany, Italy, Spain and Ireland, although only Germany posted a faster rate of growth (44-month high). Employment in France was unchanged, following a modest decline in July.

Average input prices rose for the seventh successive month in August. A further solid increase in costs at service providers, mainly due to higher wages and
, was partly offset by the first decline in manufacturers’ purchase prices since February (reflecting lower oil prices). Average output charges increased negligibly in August, the first increase since March 2012. Selling prices were raised in Germany, Spain and Ireland, but cut in France and Italy.

The Eurozone Services Business Activity Index rose to 54.4 in August, matching June’s four-year high and slightly above the earlier flash estimate of 54.3. The headline services index has now signalled expansion in each of the past 25 months. Ireland and Spain registered the steepest growth of business activity among the nations covered by the survey, although rates of expansion edged lower in both cases. Growth picked up in Germany and Italy, reaching five- and 65-month highs respectively. An expansion of output was registered in France for the seventh month running, although the pace of increase was only moderate and the weakest during that sequence.

Higher eurozone services output reflected a further increase in incoming new business and an accumulation of backlogs of work. However, the rate of expansion in new work received eased slightly to a six-month low. In contrast, job creation accelerated to its second-fastest pace in over four years, with staff headcounts raised across the ‘big-four’ national services economies and Ireland.

Business optimism† ticked higher in August, recovering from July’s seven-month low. Confidence improved in Germany (four-month high), France (41-month record) and Ireland (three-month high). August’s survey highlighted a weakening of cost inflationary pressures in the euro area service sector, with input costs posting the slowest monthly rise since February. The current sequence of decline in selling prices was extended to 45 months, driven by lower charges from French and Italian firms.


Business conditions in the Japanese service sector improved substantially mid-way through Q3. Activity growth picked up to the strongest since October 2013, alongside a solid increase in new business. On the price front, inflationary pressures were evident as input prices rose, although at the slowest rate in four months. Charges also increased at a weaker pace.

Meanwhile, business sentiment strengthened for the third month running to the strongest since September 2013.

At 53.7, up from 51.2 in July, the seasonally adjusted Business Activity Index signalled a noticeable improvement in business activity at Japanese services companies. The latest reading was the highest in 22 months, with 19% of survey participants recording greater output. According to panellists, an economic recovery and an increase in demand had contributed to the expansion in output.


Meanwhile, output at Japanese manufacturers increased, albeit at a weaker pace than seen at the start of Q3. The Nikkei Composite Output Index pointed to a sharp expansion in overall activity, posting at 52.9, up from 51.5 in July. Moreover, the latest reading was the highest since January 2014.

An improvement in service sector activity was underpinned by a further increase in new work intakes. Despite falling slightly from July’s 26-month high, growth in new orders was the second-fastest in 2015 so far. Surveyed companies mentioned that the securing of new clients had led to the expansion.

Meanwhile, new order growth in the manufacturing sector accelerated to the fastest since January. As a result of increases in both activity and new business, pressure on capacity was evident at Japanese service providers as volumes of unfinished work accumulated in August. The rate of increase softened from July, but was in line with the average observed since the start of the year. Manufacturers also registered an increase in backlogs, although growth was only modest overall.

Despite reports of stronger output growth and an increase in new work intakes, Japanese services firms reduced their staffing numbers in August. However, the rate of job shedding was marginal overall. In contrast, manufacturers hired staff for the fifth successive month, with the rate of job creation little-changed from the seven-month high observed in July.

Inflationary pressures persisted at Japanese services firms in August as purchasing prices rose for the thirty-fourth month in a row. Higher staff wages were cited as a factor behind increased input costs. However, the rate of inflation slowed to a four-month low and was weaker than the historical average. Prices charged also rose at a slightly slower rate and one that was weaker than the average over the current 19-month period of inflation. This differed in the goods producing sector, as input prices were unchanged in August, bringing to an end a 31-month period of inflation.

Finally, forecasts towards activity over the following 12 months strengthened, with sentiment the best in nearly two years. Expectations of an economic recovery, greater demand generated from the preparations for the hosting of the Olympic Games and expansions in business were all cited as determinants behind the optimism.