The highlight of this week? Everything moved higher. Despite disappointing earnings reports, traders seem to be buying the bad news, thinking there are good times ahead. Could this be a set up for a huge shake-down? Stay tuned.
Thanks to Dent Research, here is our weekly information roundup ending the week on April 15, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
U.S. Consumer Prices Up 0.1% in March, up 0.9% Year-Over-Year… Excluding food and energy, prices rose 0.1% last month and 2.2% for the year.
What it means – There’s a lot going on beneath the surface of this report. Home price growth slowed down, which dialed back the core reading (excluding food and energy) for both last month and the year. But energy prices jumped last month as the price of oil rebounded. Apparel and food prices also dipped. Overall, most areas excluding energy either dropped outright or slowed their growth rate. All of this is right in line with other reports released during the week, like retail sales, which I discuss below.
U.S. Retail Sales Down 0.3% in March, Pulled Lower by Autos… Missing expectations of a 0.1% gain, retail sales were dragged down by falling auto sales, which haven’t notched a gain since November.
What it means – Many parts of retail sales fell last month. In addition to buying fewer cars, we spent less in restaurants and less on clothes. So far, 2016 is shaping up to be another year of slack demand. Who would have thought? Diving deeper in to auto sales, expect the numbers to get worse. Our consumer demand research shows that car buying peaks around age 54. The highest number of boomers were born in 1961, or 55 years ago. That means car sales should have had their best showing last year. Right now, used cars are piling up on dealer lots as previous leases end. If you might be in the market for a set of wheels, give it a few months, as prices should come down.
Oil Inventory Rebounds, But Investors Are Hopeful for Supply Cuts… Analysts expected a drop in inventory, but instead supply jumped by more than six million barrels to a fresh record, 536.5 million barrels. Representatives of Saudi Arabia, Russia, and other large oil-producing states will meet this weekend to discuss production cuts.
What it means – Are you going to believe me, or your own eyes? That Marx line from an old movie comes back to me time after time. Everyone talks about global production falling sometime in the future, but supply keeps building. I don’t put much stock in suppliers cutting a deal, but I do think market forces will prevail. Right now, areas of Wyoming and North Dakota are suffering severe economic withdrawal since the oil industry scaled back. U.S. production has fallen by several hundred thousand barrels a day. The Saudi Arabian plan to drive out high-cost producers is working. Still, there should be more pain ahead before prices go up for good. When the talks fail, look for oil prices to drop back into the $30s at least.
U.S. Industrial Production Drops 0.3% in March, Capacity Utilization Fell 0.5%... Vehicle production dropped 1.6% last month, reflecting the current decline in auto sales.
What it means – The Fed should be worried. Along with energy exploration and recovery, auto production was a bright spot in the U.S. economy for the last several years. Now both of those lights are dimming. Capacity utilization fell 0.5%, but that’s on top of the 1.4% lower revision from last month. We currently use 74.8% of our capacity. In a normally functioning economy we use 80% or more. If auto sales fall as we expect, these numbers will get worse, making it even harder for the Fed to raise rates.
IMF Lowers Global Growth Forecast… The IMF cut its 2016 world growth forecast from 3.4% to 3.2%, and cut the 2017 estimate from 3.6% to 3.5%. It warned of global stagnation.
What it means – What took them so long, and why do they matter? In 2014, the IMF anticipated 2016 growth at 4%, much like our own Federal Reserve. These international bankers keep estimating that “out there somewhere” the economy will pick up. Both groups are wrong, and they know why: too much debt, aging populations, slack demand. The Federal Reserve, like other central banks, has a seat at the table when it comes to setting monetary policy, so their outlook is important. The IMF comes in handy when Greece wants yet another bailout, but the world doesn’t need the group to let us know when growth stinks.
Italy Creates Private Fund to Purchase Bad Loans… In an effort to save ailing banks, the Italian government helped create a private fund that will buy non-performing loans from financial institutions.
What it means – Creating separate entities that buy bad debt from lots of banks is an old method of freeing lenders from past mistakes. This allows the banks to resume normal deposit and lending activities unhampered by the possibility of non-performing loans dragging them down. But for this to work, the new entity, typically called the “bad bank,” must have sufficient capital. The new Italian fund was started with $5 billion. Italian banks carry an estimated $360 billion in bad loans. There’s an old saying: “Don’t bring a knife to a gun fight.” In this case, the Italians showed up empty-handed. We’ve said it a million times. Europe still isn’t fixed.
Chinese First-Quarter GDP grew 6.7%, Industrial Production was Up 6.8%... GDP came in as expected, while industrial production was just above the 6.0% consensus estimate.
What it means – The Chinese Miracle is quickly becoming the Chinese Mundane. These growth rates aren’t high enough to sustain the incredible industrial capacity sitting idle in the country. If the government doesn’t develop some sort of widespread corporate relief program soon, we can expect a lot of corporate bond defaults. When borrowers default, it destroys credit, which is deflationary. This is what worries Chinese bankers and government officials, so they need more economic activity. Before they let companies default, I expect them to devalue the Yuan again, hoping to boost exports.
U.S. Companies Started Reporting First-Quarter Earnings… Alcoa kicked off earnings season by reporting slightly better-than-expected profits, but disappointing revenue.
What it means – JPMorgan eased investor fears with slightly better-than-anticipated numbers, but then Blackrock and PNC came in below expectations. Bank of America beat expectations, but their earnings were down by double digits. The financial firms are under pressure because low interest rates hurt their ability to make money on loans. On the trading side, as central banks gobble up more bonds there are fewer trades. With global growth fading and many central banks stepping up their monetary efforts, low interest rates and falling trade volume should be with us for some time.
Next Week – The week of April 18 is very light on economic news, but will bring reports on U.S. housing starts and existing home sales.
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