Profit Recession

Via the WSJ:

By THEO FRANCIS and KATE LINEBAUGH
April 28, 2016 3:37 p.m. ET
10 COMMENTS
U.S. corporate profits are set to decline for the third straight quarter, the longest and broadest slide in earnings since the financial crisis, weighed down by the energy slump and slowing growth around the world.

Weakness was felt across the board, with executives from Apple Inc. to railroad Norfolk Southern Corp. and snack giant Mondelez International Inc. saying the current quarter remains tough. 3M Co., which makes tapes, filters and insulation for consumer electronics, forecast continued weak demand for that industry. Procter & Gamble Co. reported sales declines in its five business categories despite price increases.

“We do continue to operate in a challenging and volatile macro environment,” P&G Chief Financial Officer Jon Moeller said this week. “Market growth rates on both the volume and value basis have decelerated due mainly to slower growth in developing markets.”

The concerns from company executives echo weak economic data released Thursday morning, which showed U.S. gross domestic product rose just 0.5% in the first quarter. Business investment and consumer spending on goods slowed, while consumer spending on services climbed.

“On the one hand, consumer spending continued to be the primary economic driver in the U.S. On the other hand, industrial production has been disappointing,” United Parcel Service Inc. CEO David Abney said Thursday after the delivery company reported a 3.1% revenue increase.

This would mark the S&P 500’s third consecutive quarter of declining earnings—the longest streak since the financial crisis. Revenues will have declined for five quarters in a row, outstripping even the four-quarter slide in 2008 and 2009.

Seven of 10 broad economic sectors including consumer staples and technology companies in the S&P 500 are expected to report flat to falling profits, while six are likely to report flat or declining revenues, according to data from Thomson Reuters. A handful of big companies, including Exxon Mobil Corp. and Pfizer Corp., have yet to report their latest results.

A notable exception: companies selling cars, auto parts, household appliances and other so-called discretionary goods to consumers. Thomson Reuters expects them to report profits up more than 20% over the first quarter of 2015, the fastest growth in more than two years.

Lower gas prices appear to be prompting U.S. car owners to drive more, according to data from the U.S. Federal Highway Administration—raising demand for parts. Cheap financing has helped to stoke demand for cars, as are purchases by lower-margin fleet buyers. That may prove unsustainable, Michael Jackson, chief executive of car-and-truck retailer AutoNation Inc., told investors on April 22.

“It’s not as strong out there as you might necessarily think,” Mr. Jackson said. “I think the economy has had a hesitation or a rough patch. We’ll have to see if it resumes its stride.”

Appliance maker Whirlpool Corp., which gets about half its revenues from North America, reported a 3% rise in sales in the region, and raised its predictions for industrywide sales growth to between 5% and 6% this year, up from an earlier projection of 5%.
“The global train is moving slowly, but the American consumers are powering it,” said Mark Zandi, chief economist of Moody’s Analytics.

But weaker sales in Europe and Latin America, plus the impact of the strong dollar there and in Asia, led Whirlpool to report lower profits and sales overall, pushing its shares down 3.6% on Tuesday.

Similarly, economic and currency woes in Brazil helped push down sales of Harley-Davidson Inc. motorcycles there, and United Technologies Corp. reported continued declines in sales of elevators and other products in China.

Apple, which reported its first decline in quarterly revenue in 13 years, said sales in mainland China, excluding currency effects, fell 7% from strong results a year earlier. Apple shares tumbled 6.3% Wednesday following the results.

Mondelez CEO Irene Rosenfeld said the economies of Brazil and Russia have deteriorated further and consumer demand is being hit by higher prices. “Are we at the bottom?” Ms. Rosenfeld said. “What we’re seeing is certainly worse than what we were seeing last year.”

P&G has trimmed its predictions for overall growth in its markets to about 3% world-wide this fiscal year, down from earlier projections as high as 4%. More than 10% of sales at P&G come from tumultuous regions, like Russia, Ukraine, the Middle East, Turkey, Brazil and other parts of Latin America, Mr. Moeller, its CFO, said in the company’s Tuesday earnings call.

“There are more flashpoints across the globe than at any time in recent memory with significant economic and political instability impacting incomes and consumption in many large and important markets,” he said.

Ultimately, despite the resilience of the U.S. consumer, economic growth is likely to remain sluggish given continuing woes in emerging markets, sizable inventories, a still-strong dollar and still-weak capital investment, says Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

“It’ll be hard to get a whole lot of corporate profit growth,” Mr. LaVorgna said. “It’s hard to get really bullish.”

Write to Theo Francis at [email protected] and Kate Linebaugh at [email protected]

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Kocherlakota on the Obama Economy

Via Bloomberg:

President Barack Obama thinks Americans don’t properly appreciate the benefits of his economic policies — a view he most recently expressed in an interview with the New York Times. Isolating the effects of any president’s policies is close to impossible. That said, it’s not hard to see why many people are disappointed with the performance of the economy during Obama’s time in office.

In January 2009, at the beginning of Obama’s first term, the nonpartisan Congressional Budget Office issued a 10-year forecast for the U.S. economy, including such indicators as unemployment, gross domestic product, the budget deficit, government debt and interest rates. Here’s a table comparing the CBO’s expectations for the year 2015 to what has actually happened:

The unemployment rate has come closest to expectations. Although it remained very high through much of the Obama presidency, it had fallen to near historical averages by 2015.

Elsewhere, the story is less positive. Total income growth in the U.S. has fallen well short of expectations, in both nominal and inflation-adjusted terms. And although Obama expressed pride in the recent decline in the federal budget deficit, it’s still much larger than the CBO forecast in 2009 — as is the ratio of government debt to GDP.

No number expresses the economy’s weakness better than the yield on the three-month Treasury bill, which captures market expectations of what the Federal Reserve will do with interest rates over the next three months. Instead of recovering to near 5 percent as the CBO predicted, the yield was close to zero.

Some would say this simply means the Fed is holding rates too low in its efforts to boost the economy. Yet growth remains inadequate, and inflation is still below the central bank’s target. More likely, the low rates reflect the large amount on uncertainty among households and businesses — uncertainty that even the Fed’s extraordinarily loose monetary policy cannot completely dispel.

Who’s responsible for the underwhelming economic performance? Blaming the president alone would be a big mistake. Many actors were involved, including Congress, the Fed, the president’s administration and foreign governments. Technological developments may well have played a role, too.

What matters is how we respond. Should policy makers be satisfied, as though this were the best that America can do? At times in his interview, Obama seemed to suggest that he thought so. I strongly disagree.

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Overnight Data Preview

Via Robert Sinche at Amherst Pierpont Securities:

AUSTRALIA: The lower CPI reported for 1Q2016 opens the potential for additional RBA easing, but the BBerg consensus expects that Private Sector Credit growth to have held at 6.6% YOY in March, a rate of credit growth in excess of nominal GDP growth, a source of caution against further easing.

NEW ZEALAND: The Business Activity Outlook Index in March, at 29.4, had rebounded from its August 2015 cycle low (12.2) but has held well below the Feb 2014 high of 58.5.

S. KOREA: the Bberg consensus expects that Industrial Production will slip to 0.3% YOY for March from a relatively solid 2.4% YOY gain in February. The return of China from the New Year holiday could limit the slowdown.

TAIWAN: the Bberg consensus expects 1Q2016 real GDP to be reported at -0.7% YOY, slightly weaker than -0.5% YOY in 4Q but it would be the 3^rd consecutive quarter of YOY real GDP declines.

RUSSIA: The Bberg consensus expects the CBR to hold the policy rate at 11.0% and the Manufacturing PMI for April to have increased to 48.9 from 48.3 in March.

EURO ZONE: In a major day for data releases, the Bberg consensus expects real GDP for 1Q to increase slightly to 0.4% QOQ from 0.3% but the YOY gain would slow to 1.4% from 1.6%. The consensus expects the Headline CPI to hold at -0.1% YOY and the core rate to slip top 0.9% from 1.0% in March while the Unemployment Rate held at 10.3% for March.

GERMANY: The Bberg consensus expects Real Retail Sales growth of 2.7% YOY for March following the unsustainable (and leap-year impacted) 5.4% YOY gain reported for February.

FRANCE: The Bberg consensus expects real GDP for 1Q to increase slightly to 0.4% QOQ from 0.3% but the YOY gain would slow to 1.0% from 1.4%, which was a 4-year high. The consensus also expects the EU harmonized Headline CPI will have held at -0.1% YOY, but for March Household Spending on Goods to have risen to 2.0% YOY for March from 1.8% in February.

ITALY: The Bberg consensus expects the March Unemployment Rate to have slipped 0.1pp to 11.6% and the EU Harmonized CPI to have inched up to -0.1% YOY from -0.2% YOY in March.

SPAIN: The Bberg consensus expects real GDP for 1Q to increase slip slightly to 0.7% QOQ from 0.8% in 4Q and the YOY gain to slow to a still-solid 3.3% from 3.5%, still strongest among the larger EZ economies.

UK: The BBerg consensus expects the GfK Consumer Confidence Index to slide to -0.1 from 0, which would be the first negative reading since December 2014.

BRAZIL: The Bberg consensus expects the not-SA Unemployment Rate to have jumped to 10.7% in March from 10.2% in February and 7.9% in March 2015, more bad news for President Rouseff.

MEXICO: the Bberg consensus expects 1Q real GDP to be reported up 2.4% YOY, down from 2.5% in 4Q2015 and the 7^th straight quarter in a 2.3% to 2.8% YOY range; YOY real GDP growth has been positive for 24 consecutive quarters.

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Second Opinion on GDP

Via Chris Low at FTN Financial:

GDP rose 0.5% in the first quarter, less than the 0.7% consensus and the slowest in 2 years, after growing 1.4% in Q4. Consumption slowed to less than 2% for the first time since last year’s first quarter. Business spending fell outright, exports fell and if not for government spending, GDP would have grown just 0.3%.

Consumer spending rose 1.9%. Durable goods consumption fell 1.6%, nondurables rose 1.0% and services were up 2.7%. Durables consumption was hurt in part by weaker car sales.

Residential investment was strong, rising 14.8% in Q1, the biggest increase since 2012.

Business fixed investment was downright weak. Structures spending fell 10.7% on the heels of a 5.1% drop in Q1. Structures spending is down 3 quarters in a row and four of the past five quarters. Equipment spending fell 8.6% after a 2.1% drop in Q4.

Exports fell 2.6% after a 2.0% drop in Q4. Imports rose 0.2%.

A 2.9% rise in state and local spending lifted government consumption by 1.2%. Federal was down 1.6% thanks to a 3.6% drop in defense spending.

Inventories rose $60.9bn, slower than the $78.3bn rise in Q4. As a result, they reduced GDP by -0.33%. It was the third consecutive quarter of slower inventory accumulation.

Final sales (GDP ex-inventories) rose 0.9% and domestic final sales (ex-trade) rose 1.2%. While better than the headline GDP growth rate, this is hardly indicative of strong domestic demand.

The GDP deflator rose 0.7%, the least in a year. The PCE deflator rose at a 1.0% rate headline and 2.1% core rate, both year-on-year.

Bottom line: Weakness in commercial real estate and business equipment spending spread beyond the oil patch in the first quarter, as six consecutive quarters of falling profits have taken a toll. So far, companies are still investing in human capital, but ongoing employment growth cannot be a sure thing given the extent of the weakness in business investment.

There are two silver linings. First, inventories have corrected significantly in the past three quarters and will stop detracting from growth once they stabilize. And, second, durable orders appear to be stabilizing, suggesting business equipment spending could stop detracting from growth as soon as Q2. In other words, there is good reason to expect Q2’s growth will be better than Q1’s. Still, there is not yet anything in the data to suggest the rebound will be anywhere near as strong as last spring’s. For now, the Fed is right to be cautious.

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Slow Growth in Q1

Via Millan Mulraine at TDSecurities:

TD SECURITIES DATAFLASH                   

US:  The Economic Recovery Slows to a Crawl

·         US economic recovery slowed for the third consecutive quarter, with the pace of GDP growth declining to 0.5% q/q from 1.4% q/q in Q4.

·         The drop in growth momentum was mostly on account of weaker domestic activity, as consumption growth slowed and investment activity declined.

·         The overall tone of this report was weak, underscoring the weakening in domestic economic fundamentals.

The pace of US economic growth slowed to its lowest level in Q1 since the same time last year, falling to 0.5% q/q SAAR from 1.4% q/q the month before. This was a tad weaker than the market consensus for a 0.6% q/q advance. The details of the report were quite weak, with much of the slowdown coming from weaker consumption activity (down from 2.4% q/q to 1.9% q/q), while gross investment contracted further. Final domestic sales, a very good proxy of underlying domestic momentum, also slowed sharply, rising at a very modest 0.9% q/q pace from 1.6% q/q in the prior quarter.

The decline in growth was centered around the retreat in consumption activity, which contributed a very modest 1.3ppty to growth versus the 1.7ppt last quarter. The weaker consumption backdrop was due in part to drop in durable goods spending, while spending on nondurables and services slowed. The drag from inventories (-0.33ppt) and net trade (-0.34ppt) were also key drivers for the slowdown. Government spending added modestly to growth.

The core PCE inflation rate rose to a new high of 2.1% q/q SAAR, however, we caution about reading too much into the core PCE reading. The sharp rise is simply a function of the strong showing in core PCE in January, which has eased since. Note that this is the SAAR and not the Y/Y. On an annual basis, the reading is a more benign 1.6% y/y pace. We will get a better reading on inflation tomorrow when we get the monthly print.

The overall tone of this report was weak, and the slowdown in the domestic drivers for growth points to some deterioration in underlying domestic momentum. And the sour tone of this report speaks to the renewed focus that the Fed is paying to domestic fundamentals, and unless growth momentum rebounds strongly in Q2 the prospects for a June/July hike will remain low.

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Greece in News (Again)

Via the FT:

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Robust Labor Market in Germany

Via Bloomberg:

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Norway Wealth Funds Takes Hit

Via the FT:

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FX

Via Marc Chandler at Brown Brothers Harriman:

Central Banks Roil Markets

• The Bank of Japan defied expectations and its economic assessment and left policy unchanged.
• The FOMC failed to alter investors’ skepticism about a June hike
• The US reports weekly initial jobless claims and the first estimate of Q1 GDP
• The RBNZ left policy on hold; the statement was not hawkish
• Preliminary CPI readings from Germany and Spain were poor
• Last night, Brazil’s COPOM kept rates steady at 14.25%, as expected

The dollar is broadly weaker against the majors in the wake of the Fed, RBNZ, and BOJ decisions.  The yen and Kiwi are outperforming, while the Loonie and sterling are underperforming.  EM currencies are mostly firmer.  KRW, HUF, and RUB are outperforming while MXN and INR are underperforming.  MSCI Asia Pacific was down 0.3%, with the Nikkei falling 3.6%.  MSCI EM is down 0.1%, with Chinese markets down modestly.  Euro Stoxx 600 is down 1.25% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp at 1.83%.  Commodity prices are mostly lower, with oil mixed and copper down modestly.

The Bank of Japan defied expectations and its economic assessment and left policy unchanged.  The inaction spurred a 3% rally in the yen and an even larger slump in stocks.  The financial sector took it the hardest and dropped almost 6%.  The yen’s surge helped underpin other Asian currencies, especially the South Korean won, which gained nearly 1%.

At the end of January, the BOJ surprised by adopting negative interest rates for a small part of Japanese banks’ excess reserves.  The yen strengthened markedly.  Now the BOJ disappointed by not easing policy.  Prior to the BOJ’s announcement and in response to poor data that showed the most deflation in three years (-0.3% year-over-year on a core measure of CPI that excludes fresh food), a larger than expected slide in overall household consumption (-5.3% year-over-year), the dollar had approached JPY112.00.  The dollar dipped briefly below JPY108 in early European activity.  The greenback sits near its lows ahead of the start of the North American session.  

The BOJ did do something.  It cut its inflation and growth forecasts and delayed for the fourth time in around a year when it would achieve its inflation target.  It now stands at some time in the next fiscal year.  We have long argued that it is unhelpful for the BOJ cast its inflation target as a near-term objective.  Other major central banks are talking about their inflation target as a medium-term objective, and this provides more degrees of freedom.  

BOJ Governor Kuroda sounded dovish, and pressure to ease policy in the coming months, perhaps in July, remains possible.  The ostensible argument for standing pat is to monitor the impact of the recent easing.  However, the BOJ’s economic forecasts are consistent with the aggressive easing having little positive impact.  Some speculate that Kuroda was sending a message to the Abe government, consistent with the G7/G20 concerns about the over-reliance on monetary policy.  The lack of new monetary action may add pressure on the government for a bolder fiscal policy initiative.  

The Nikkei sold off hard.  We had warned yesterday that should the BOJ disappoint, the Nikkei could fall toward 16773.  In fact, it fell to 16652 and closed on its lows.  Depending, of course, on what happens over the next 12 hours, the Nikkei could gap lower tomorrow.  The downside risk extends toward 16000 now.  

Most Asian markets fell, and the MSCI Asia-Pacific Index slipped 0.2%, extending its declining streak to the fifth consecutive session.  Recall losses at the start of last week snapped an eight-day advance.  European bourses are lower, and the Dow Jones Stoxx 600 is off 1.25%, led by health care and financials.  The S&P 500 is trading nearly 0.8% lower.  

The push higher in global bond yields ended with a bang today.  Core 10-year benchmarks in Europe are off 6 bp.  Of note is the 10-year Portuguese bond.  Tomorrow, DBRS will review Portugal’s credit rating.  It is the only rating agency that the ECB uses that gives Portugal an investment grade.  If this is taken away, Portuguese bonds will not qualify for purchases under the ECB’s bond-buying program.  It would join Greece and Cyprus.  

The US 10-year yield, which had been approaching 2.0% earlier this week, fell yesterday after the FOMC failed to alter investors’ skepticism about a June hike.  Perhaps anticipation that easier BOJ policy would spur Japanese demand for US Treasuries also weighed on yields.  Today the yield is close to 1.80%.

The US reports weekly initial jobless claims and the first estimate of Q1 GDP.  Recall that last week, the week of the nonfarm payroll survey, weekly initial jobless claims fell to their lowest level since 1973, and continuing claims fell to their lowest level since 2000.  A small correction would not be surprising.  Yesterday’s better than expected advance report of US merchandise trade balance encouraged economists to revise their Q1 GDP forecasts a bit higher.  Nevertheless, a poor number is expected today.  The US economy practically stagnated.  The median expectation is for 0.6%, which is an annualized pace.

The FOMC statement recognized the weaker demand (consumption is expected to have slowed to 1.7% in Q1 from 2.4% in Q4 15) but seemed to emphasize the strength of the labor market and that associated income that can fuel consumption going forward.  Note that the Core PCE deflator in the GDP report is expected to rise from 1.3% to 1.9%, though tomorrow with the monthly report, the core PCE deflator is expected to ease to 1.5% from 1.7%.  

The failure of the FOMC to reestablish a risk assessment in its statement failed to convince investors one iota that a June hike was likely.  Surveys suggest economists are more enthusiastic than investors about the prospects for a hike.  We agree with the Fed’s domestic economic assessment that the economy is likely to recovery in the months ahead from the soft patch it hit over the past six months, and we expect price pressures to be steady to higher.  However, our concern is that global and financial developments (which the Fed dropped as a risk but said it would continue to monitor closely) are likely to be less favorable in two months than they may appear today.  

After the Japanese yen, the New Zealand dollar is the strongest of the majors.  It is up about 1.6%, having been up closer to 2% earlier.  The RBNZ left policy on hold.  Although this seemed like the odds-on more likely decision, as we argued, the OIS market had a little more than a third of a cut discounted.  There was nothing hawkish in the statement.  There were the usual complaints about the currency’s strength, and the central bank was clear that further easing may be “required” to bring inflation toward the middle of its target range.  

Today seems to be one of the few occasions that the Australian dollar followed the New Zealand dollar.  Soft inflation reported yesterday weighed on the Aussie, pushing it down two cents to $0.7550.  Dragged higher by the Kiwi, it reached almost $0.7660 before running out of steam.  

European news has been overshadowed by the Asian-Pacific developments.  However, it should not be lost on investors that the preliminary CPI readings from Germany and Spain were poor.  Deflationary forces strengthened in Spain.  The harmonized CPI measure slumped to -1.2% year-over-year.  This matches the low from February 2015, which is just above the cyclical low from the month before (-1.5% in January 2015).  German states mostly reported softer than expected inflation and this poses downside risk for the national measure due early in the North American morning.  

Despite the German Finance Ministry and others complaining about too easy of monetary policy, and ideas that the euro is undervalued for German producers, the world’s fourth-largest economy does not appear to have escaped deflation either.  The March CPI was 0.1% above a year ago levels.  Prior to the states’ reports today, the median expected a flat reading in April.  Separately, Germany reported a decline in unemployment for the seventh consecutive month, with the unemployment rate steady at 6.2% a record low.    We note that Japan’s unemployment rate eased to 3.2% from 3.3%.  In both Germany and Japan, which have full employment, wage growth is minimal.  US wage growth is only slightly better.

Last night, Brazil’s COPOM kept rates steady at 14.25%, as expected.  If disinflation continues, we think that rate cuts are likely.  Indeed, COPOM noted progress in lowering inflation, a small change in its statement.  However, we do not think a move will be seen until the impeachment process has ended.  A cut at the June 8 meeting is possible only if the Senate acts quickly to impeach, and perhaps the July 20 meeting is most likely.  Today, Brazil reports April IGP-M wholesale inflation, which is expected to ease to 10.65% y/y from 11.56% in March.

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FX

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10613a4e,16c59d8f,16c59d90&p1=136122&p2=2fa44b726dbd07cfd3f24c786623195f>

The US economy isn’t healthy yet and the Fed is not heading back to easy-money rehab. The RBNZ is on hold but only temporarily and the BOJ’s policy-making looks increasingly uncertain. The result is a 3% appreciation by the yen, a 2% appreciation by the Kiwi and a 0.6% fall by the DXY. The only one of these we would oppose is the Kiwi move and we like short sin NZD/USD here.

The FOMC statement did nothing to help the dollar: At all! “Global and financial developments continue to pose risks” was removed, while “”continue to closely monitor inflation indicators and global economic and financial developments” was added. No reason to look for more than one more rate hike this year on that basis. The reference to market-based measures of inflation as ‘low’ shows their insouciance and matters for the dollar. DXY has a decent correlation with 10-year TIIPs yields in recent months, far between than with nominal rates/yields or US/Euro spreads. As the first chart shows, the fall in 10yr TIIPs to 14bp has dragged DXY to 94. Our technical analysts highlight the importance of the 93.25-92.50 area. A break would send a pretty compelling sell signal.

DXY is tracking real yields (and falling)

[http://email.sgresearch.com/Content/PublicationPicture/224784/2]

The increased importance of real yields as a driver of the dollar is why the recent rise in nominal yields hasn’t done much. 10year yields have risen but that’s all due to higher inflation expectations. The gap between US and European real yields has closed again overnight and a spike in EUR/USD through 1.14 is a significant risk.

Breakeven inflation has been rising. The Fed doesn’t care

[http://email.sgresearch.com/Content/PublicationPicture/224784/3]

The BOJ inaction suggests a desire to ignore the market response to January’s move into negative rates, and wait and see the effects of the policy change. That’s not going to diminish the sense that the BOJ is almost out of ammunition, despite falling equities, falling CPI, and soft retail sales data. USD/JPY 107.63, the April low, is the key psychological level to watch. With Japanese investors still buying foreign assets enthusiastically, I really don’t think we’re going back to the pre-Abenomics world of ever-stronger yen and I think we’ll see the other side of USD/JPY 115 in due course – but I’m not brave enough to should ‘Sell Yen!’ from the rooftops just yet, either.

Ahead today, we get European economic and business confidence data, German unemployment and Laender CPIs, Spanish preliminary CPI and the first look at Q1 US GDP. We look for the US growth rate to come in at 0.8%, yet another underwhelming Q1 outcome. I’m not looking for any positive reaction to the dollar, even though the market is braced for weak data.

In terms of market positions, we’ve been stopped out of our long AUD/NZD trade by the overnight move, leaving us short EUR/RUB, short GBP/NOK and short USD/CAD as oil prices remain well-supported. We are short NZD/USD and short DKK/SEK as well as of yesterday.

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