Spending Fight

September 2nd, 2016 6:46 am

Brace yourself for another battle on spending and government funding as Congress reconvenes following its recess.

Via TheHill.com
Senate braces for shutdown fight

By Alexander Bolton – 09/02/16 06:00 AM EDT

Lawmakers are returning to Washington next week to confront an impasse over funding bills that threatens to cause a government shutdown, something Republican leaders want to avoid at all costs.

Senators will immediately square off over Zika funding, with aides expecting a replay of what happened in June, when Democrats blocked a GOP-authored bill that they say would unfairly block money from Planned Parenthood.

Democrats say that in some areas of the country such as Puerto Rico, a territory, Planned Parenthood is the place women can go to get treatment for a sexually transmitted disease affecting a fetus.

Also on the Senate schedule for next week is a bill funding the Department of Defense, which Democrats also plan to block.

Senate Democratic leaders don’t want to let Republicans pass the defense bill at a new funding level and lose leverage to push other spending legislation to President Obama’s desk.

“We don’t want a defense bill to pass by itself but leave other bills that have security funding for the Department of Homeland Security, FBI and the CIA on autopilot,” said a senior Democratic aide.

For Senate Majority Leader Mitch McConnell (R-Ky.), who sets the floor schedule, the Democratic blockade comes with electoral upside.

With their majority on the line, Senate Republican candidates will be able to argue that Democrats are playing politics with Zika and military funding.

Democrats counter that McConnell has designed the votes to fail by teeing up bills he knows will encounter strong objections.

The bigger problem for McConnell and Speaker Paul Ryan (R-Wis.) is the insistence by some House conservatives that a stop-gap funding measure to keep the government open beyond Sept. 30, the end of the fiscal year, extend into 2017.

These conservatives want to avoid a post-election lame duck session because they think that’s when Obama and congressional leaders will negotiate a massive omnibus package that boosts spending levels for next year. They hope to delay talks until next year in hopes that Donald Trump wins the election and will slash the budget once in office.

Senate Democratic Leader Harry Reid (Nev.) has ruled out the possibility of passing a stopgap funding bill stretching into next year. He and other Democrats expect Hillary Clinton will be president and they don’t want to saddle her with a leftover spending fight during her first 100 days in office, when she would have maximum leverage for passing legislation.

“Everyone should be alerted today that we’re not going to be doing a long-term CR,” Reid told reporters Thursday on a conference call, referring to a short-term continuing resolution to fund the government beyond this month.

Other than announcing votes on Zika funding and the Department of Defense, McConnell has given little indication of what else might come to the floor this fall. The Zika money is attached to a conference report for legislation funding military construction and the Department of Veterans Affairs.

Senate sources say one candidate for floor time is the Water Resources Development Act.

Another possibility is the conference report for the Energy Policy Modernization Act, which passed the Senate in April. It would promote renewable energy and energy efficiency.

Senate Republicans will discuss the schedule and their top legislative priorities when they reconvene next week.

The Senate is scheduled to be in session through the first week of October, but aides say its likely McConnell will recess earlier to give his colleagues more time to campaign at home.

A senior Republican aide said the spending bills or a continuing resolution to keep the government operating are the only must-pass legislation slated for September.

“There are other things like to get done but the big thing that needs to get done is funding the government, the have-to, have-to thing,” the aide said.

The Temporary Assistance for Needy Families (TANF) program needs to be extended, but that renewal is likely to be wrapped into the continuing resolution.

Among the items GOP leaders would also like to finish up is the defense authorization bill, which now is in a conference committee of Senate and House negotiators.

Congress does not face many of the same deadlines it has in previous Septembers and Octobers because McConnell and other GOP leaders made a conscious effort to clear the decks ahead of the election year.

The federal debt ceiling, an issue that has divided GOP leaders and conservative activists in the past, does not expire until next summer.

The Federal Aviation Administration authorization has already been extended until September of 2017.

Congress passed a massive tax package last year that made permanent several popular tax breaks, such as the research and development credit, the enhanced child tax credit and the enhanced earned income tax credit.

“We don’t get credit for it, but we’ve already done all that work,” said the senior GOP aide.

Reid in his conference call Thursday nevertheless bashed Senate Republicans for taking a seven-week recess over much of July and all of August.

“Next week the Senate returns from its longest recess in 16 years,” Reid said.

“It’s hard to believe that we would not be here when we have so much to do, so much to do.”

Reid criticized McConnell for not scheduling a vote on a bipartisan Zika package that would attract Democratic votes.

Some Corporate Bond Stuff

September 2nd, 2016 6:41 am

Via Bloomberg:

IG CREDIT: Trading Volume Lower as No New Issuance Appeared
2016-09-02 10:12:08.672 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $12.8b vs $16.8b Wednesday, $14.6b last Thursday.

* 144a trading added $1.5b of IG volume vs $2b Wednesday,
$1.8b last Thursday

* The most active issues longer than a year:
* RIOLN 3.75% 2025 was 1st with client flows accounting
for 100% of volume
* HSBC 3.90% 2026 was next with client and affiliate
trades taking 61% of volume; client selling 2.6x buying
* DB 3.375% 2021 was 3rd with client buying 4x selling
* ATVI 5.625% 2021 was the most active 144a issue with client
trades taking 100% of volume; buying 3:2 over selling

* Bloomberg Barclays US IG Corporate Bond Index OAS at 136 vs
135, the low for 2016
* 2016 high/low: 215 (a new wide since Jan. 2012)/135
* 2015 high/low: 171/122
* 2014 high/low: 137/97
* All time high/low back to 1989: 555 (Dec. 2008) / 54
(March 1997)

* Current market levels vs early Thursday:
* 2Y 0.790$ vs 0.809%
* 10Y 1.587% vs 1.597%
* Dow futures +18 vs +29
* Oil $43.51 vs $44.57
* ¥en 103.61 vs 103.57

More FX

September 2nd, 2016 6:22 am

Via Marc Chandler at Brown Brothers Harriman:

US Jobs Data–Higher Anxiety, Thank You Mr. Fischer

  • US jobs data have extra significance following Fed Vice Chairman Fischer’s comments at Jackson Hole
  • The median market expectation has been disappointed with the August jobs report for the last five year by an average of 49k and a median of 44k.
  • Spain’s Rajoy faces second confidence vote.  He is unlikely to garner a plurality.  A third national election in a year seems more likely.  
  • Expect much talk at this weekend’s G20 meeting, but little in the way of fresh initiatives

The US dollar is little changed ahead of the job report.  Our near-term bias is for a lower dollar.   Sterling is flat and is holding on to about a 1% gain this week.  The Japanese yen is about a 0.3% lower and is off 1.7% this week.  The euro was  coming into today for the week.  The South Korean won is the strongest among emerging markets, rising 0.4% today, recouping a little more than half the week’s decline.  The rand is little changed, nursing a 1.5% decline this week.  The Brazilian real is flat on the week that saw the president impeached and the central bank leave rates steady.  The MSCI Asia-Pacific Index posted a minor gain to extend the advancing streak to four sessions.  European shares are mostly higher, with the Dow Jones Stoxx 60 up 0.5% near midday in London.  Financials are down fractionally after losing their upside momentum yesterday.  Core bond yields are higher and the long-end of the Japanese curve were particularly hit, with the highest yields in a few months being seen.  The ostensible cause are reports suggesting the BOJ may look to steepen the curve, which may mean scaling back the purchases of long-dated bonds.  Oil is finishing its worst week since January with on flat note.  Brent and WTI are off a little more than 8% on the week.  

The US jobs report is the single most significant economic piece of economic data in the monthly cycle.  It is understood as a key barometer of the world’s largest economy.  The Federal Reserve’s dual mandate (really three, if one includes financial stability) puts full employment alongside price stability.    

At Jackson Hole, the Vice Chairman of the Federal Reserve informed the market of two things.  First, the Chair was not signaling a shift in the central bank’s stance.  She was not prejudging and ruling out a September hike or scaling the back the June dot plot to one hike rather than two.  Second, that given this,  Fischer instructed, watch today’s employment report.   

As it turns out, for the last five years, the August job growth has been reported below expectations.  The average miss is 49k, with a range of 11k-88k.  The median is 44k.    Newswire surveys are picking up a median guesstimate of 175k-180k.   If we pretend that this is statistically significant, and subtract the average/median miss from today’s expectation, the result of, say, around 130k, would likely be seen as a disappointment.  The average this year is about 186k.   

The September Fed funds futures closed yesterday implying a yield of 41.75 bp.  The way We calculate it suggested this is equivalent to about a 26% chance.    Bloomberg’s estimate is 34% chance.  Here is a major difference.  We are using the average effective fund’s rate over the last several weeks of 40 bp.  Bloomberg’s calculation is based on where Fed funds closed the month of August, which is 30 bp.  However, in fairness, Fed funds often drop at the end of a month and then return to where they were before.    

Assume then that Fed funds average 40 bp for the first 21 days in September, and the Fed hikes 25 bp, and then Fed fund averages 62.5 bp for the remainder of the month.  The average rate for the month, which is what the contract settles at is a straightforward calculation:  ((21*40)+(9*62.5))/30.  The product is 46.75, which is fair value if the rate hike hiked.   If the Fed does nothing fair value is 40 bp.   The contract implies 41.75.   That is 1.75 bp of a possible 6.75 bp (to get to fair value from the current Fed funds) or 25.9%.  There is no meeting in October, and if we look at that contract for confirmation, it is implying a 26.7% chance that Fed funds target will be 50-75 bp then.    

The US also reports the July trade balance and factory orders, but they will be overshadowed by the jobs report.  Yesterday’s news of a dramatic slide in the manufacturing ISM was a blow that weighed on the dollar.  When we look at the history of this time series, there are seemingly inexplicable one-month moves that do not portend anything significant.  We argued this was the case with the May jobs report.   

The real takeaway here in Q3 is not that the economy is veering into a recession, though of course those cries can be heard.  Rather, this quarter is likely to snap a nine-month period of sub-two percent growth.  The composition of growth is changing, and as the auto sales hinted, consumption is pulling back after its second strongest quarter since the end of the Great Financial Crisis.   Investment looks stronger.  Trade and inventories will likely be less of a drag.  Government spending may also add rather than subtract from Q3 growth.   

Outside of the US, the one economic data point that drew attention was the UK’s construction PMI.  It jumped to 49.2 from 45.9 in July.  This was better than expected and follows the record jump in the manufacturing PMI seen yesterday.     Although the construction PMI is not above the 50 boom/bust level, it does seem like the initial shock has dissipated, at least in part due to the drop in sterling and UK rates.   The risk is that the service PMI does not do as well as the manufacturing PMI, which will be released on Monday.  Services are less impacted by the decline in sterling.    

Later today, Spain will hold a second confidence vote for Rajoy and his minority coalition.  He needs a plurality and is unlikely to secure it.    Pundits can joke about how well the Spanish economy has performed with only a caretaker government for the past eight months, but it is misleading.  The economic momentum is easing.  It is at loggerheads with the EU on fiscal policy and needs to submit the 2017 budget draft to the EU next month.  It needs to do more than simply rollover this year’s spending plans.  On a cyclically adjusted basis, Spain’s deficit has grown for the past two years.  There are also practical issues.  The chief market regulator’s term expires next month.  The caretaker government is not authorized to name a successor.    

Over the weekend is the G20 meeting.  We do not expect fresh initiatives.  Look for some discussion of UK intentions to trigger Article 50.  The US-EU clash over corporate taxes is likely to air as well.  We note that ahead of the meeting, hosting by China, the yuan has firmed against the PBOC’s reference basket to flirt with a multi-month downtrend.  Ahead of the October 1 inclusion of the yuan in the SDR, it looks like officials want to engineer greater stability.    

Also, the Germany state of Mecklenburg-Vorpommern holds elections Sunday. It has been run by a Social Democrat-Christian Democrat coalition since 2006.  The latest polls have the Social Democrats with a slightly lead near 28%, while the Merkel’s CDU and the anti-immigration and anti-EMU AfD are running in a statistical dead heat.   Merkel, whose district is in this state, has tacked to the right and campaigning more on law-and-order.  There is some talk that ahead next year’s national election, Merkel may endorse a tax cut.  It would be nice to have a hint of this at the G20 meeting, but it does not seem very likely.  

Wages and the FOMC

September 2nd, 2016 6:21 am

Via Bloomberg:

Craig Torres
ctorresreporter
September 2, 2016 — 12:00 AM EDT

Elon Musk and the Terrible, Horrible, No Good $779 Million Day

‘Nobody understands the inflation process,’ Slok Says
August jobs report Friday to sharpen Fed rate-hike debate

 

It took more than a decade for Paul Volcker and Alan Greenspan to wring persistently high inflation from the U.S. economy. Federal Reserve officials now may need at least half that time to bring too-low inflation back to their target.

Fed Chair Janet Yellen, Vice Chairman Stanley Fischer and most other U.S. central bankers remain confident further improvement in the labor market will gradually lift prices to the central bank’s 2 percent objective. That’s become a divisive assumption as the Federal Open Market Committee heads into a meeting later this month.

Sharpening the debate Friday will be the August employment report. Investors and Fed watchers will be looking for signs of continued tightening of the job market — a critical component in Fed officials’ forecast that wages will eventually rise, supporting stronger demand and higher prices.

“Nobody understands the inflation process, including the Fed,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “When we are near full employment, why has inflation been so incredibly well-behaved?”

Traders late Thursday were pricing in a one-in-four chance of a rate hike at the FOMC’s Sept. 20-21 gathering, according to federal funds futures contracts. A strong advance in employment that isn’t accompanied by decent wage gains may lead some Fed officials to think they can hold off another few months.

The mystery of weak wage growth is troubling, for the short run and the longer-term. If Yellen and the FOMC majority are wrong, inflation could remain stuck below their target, setting the economy up for lower rates of inflation in the next downturn.

“The risk is that when the next crisis hits, you fall from 1.5 percent inflation to 0.5 percent inflation, and then to deflation in the next recession after that,” said Ethan Harris, head of global economics research at Bank of America in New York. “You are going down a slippery slope.”

What’s more, Harris said, very low rates of inflation can lead to higher rates of unemployment in a downturn. Rather than cut wages as their prices fall, companies tend to cut workers instead.

The jobless rate plunged from 8 percent at the start of 2013 to 4.9 percent in July. Inflation over that time was steady around an annual rate of change of 1.6 percent, according to an underlying measure of inflation tracked by the Dallas Fed, leading many economists to wonder whether parameters in traditional inflation models have shifted.

“Slack doesn’t matter” as much as it once did, said Laurence Meyer, who as a Fed governor from 1996 to 2002 was one of central bank’s biggest proponents of the Phillips Curve, a description of the tradeoff between unemployment and inflation.

Fed officials in January restated their inflation goal to say policy makers would be concerned “if inflation were running persistently above or below” its 2 percent target.
No Overshoot

Yellen said in a press conference in March that the FOMC would tolerate an overshoot, just as it allows undershooting now because the economy rarely runs at a precise inflation rate. “We are not trying to engineer an overshoot,” she added.

The communication is a tight-rope walk for Yellen. By saying officials would tolerate, though not aim for, a policy that would encourage a slightly higher rate of inflation over time, the risk is that they average inflation below 2 percent.

At least one FOMC member, Chicago Fed President Charles Evans, who isn’t a voting member of the panel this year, said it may be best to hold off raising interest rates until core inflation rises to 2 percent.

A stronger dollar which lowers import prices, plus abundant global supplies of energy and many other goods, have kept headline inflation measures unusually low. The Fed’s preferred inflation measure, the personal consumption expenditures price index, rose 0.8 percent for the year ending July, extending a run of more than four years below the central bank’ goal.
Staff’s Forecast

Fed officials in June forecast that inflation would be at 1.9 percent at the end of 2017, effectively on target. The Fed staff isn’t so optimistic, forecasting at the July 26-27 meeting that inflation would still be “slightly below” the committee’s target in 2018.

“I would think there would be a little less sanctimony about their forecast given how long they have been below 2 percent,” said Mark Spindel, chief investment officer at Potomac River Capital LLC in Washington, which manages $400 million. “Tell me how raising rates helps you get back to your inflation target?”

Risk management also figures high in Fed officials’ decision-making just now as they ponder potential distortions arising from keeping rates too low.

“Policy makers must weigh the benefits of low interest rates now against the potential costs in the future of possibly spurring financial instability,” Boston Fed President Eric Rosengren said in an Aug. 31 speech in Beijing.

Following a collapse in the housing and mortgage markets, which produced the worst recession since the Great Depression, “imbalances are also seen as a threat to the dual mandate over time now,” said Laura Rosner, senior U.S. economist at BNP Paribas in New York. “Not many Fed officials sound concerned about where inflation is now.”

Early FX

September 2nd, 2016 6:12 am

Via Kit Juckes at SocGen:

The BIS’ triennial FX survey, which reveals (in short) that FX volumes are down and London’s share of trading has shrunk, have left this forex participant in defensive mood. It would help if everyone bought and sold a lot of EUR/USD (the cross that is most responsible for the fall in volumes) after today’s NFP data. OK, I realise that EUR/USD ius frozen into a range so small that it competes with 10year Note yields for its soporific qualities, but ‘The Forex’ needs you….                                                                                                                                                  Anyway, we did our best to cobble togbether an FX weekly yesterday. Alvin wrote about (recopvering) global FX reserves (just another factor anchoring bond yields, mind you). The quant team observe that they remain in ‘carry’ mode. And team technicals think the DXY’s trundle upwards has a little further to go.                                                                                    As for me,I’ve always had a soft spot for the payroll data at the start of September. They tend to play a disproportionate role in setting the scene for market trends through the autumn/winter. We look for +225k on NFP, 4.8% U-rate, 2.5% Av hrly earnings growth. Strongish and if not specacular, enough to keep the FOMC guessing-game alive and well. And enough to push 10year note yields up towards 1.60, surely……  which would please my bullish dollar bias. I write yesterday that a good UK PMI would be an opporrtuinity to sel the pound and the data delivered. If today’s data are solid we may see pre-BOJ excitement grow too and USD/JPY have a really good look at resistance levels.                                                                                                  For the record, today also sees another round of investiture voting in Spain (guessing gridlock), UK construction PMI data (guessing a smaller bounce than the manufacturing data) and US factory goods orders….
<http://www.sgmarkets.com/r/?id=h113e47cf,1829c18e,1829c18f&p1=136122&p2=205c1bd22692aee620d3e81f59c45cf9>

Summer calm can be followed by Indian summer calm and fireworks don’t seem imminent in the FX market. For now, a mildly bullish dollar bias remains in place, watered down by a continued flow of money into anything with a bit of yield. We’ll see what Friday’s August US Labour market report gives us, and we’ll go on over-stressing about which month the Fed chooses for its next rate hike, but the next significant chapter for markets comes when the US economy, already running low on spare capacity and showing signs of ever-so-slowly losing momentum, suffers a sharper slowdown. It’s coming, even if it’s not coming just yet.

[http://email.sgresearch.com/Content/PublicationPicture/231688/1]

The slide in official global reserve holdings that started in mid-2014 ended early this year. The combination of a slightly weaker US dollar this year and stability in Chinese reserve holdings since February has allowed global reserves to rise again. Moreover, a number of significant reserve managers have continued to experience rising reserves, namely Switzerland and India. Even the experiences of major oil exporters have varied, with Saudi Arabia’s falling reserves contrasting with Russia’s growing hoard.

[http://email.sgresearch.com/Content/PublicationPicture/231688/2]

[*] Technicals

The DXY Index has tended to show lengthy consolidations as in 2012-2014. After testing the lower bound of the range in May, the DXY looks set to continue the recovery towards 97.30/97.50 with the next hurdle at 98.50. GBP/USD meanwhile is probing the neckline of an inverted H&S, but the rebound should be capped at 1.3540/80.

[http://email.sgresearch.com/Content/PublicationPicture/231688/3]

[*] Quant

The quant portfolio has maintained the long carry and EM positioning. The biggest longs are in NOK and NZD, and the most sizeable shorts are in SEK, EUR and USD.

[http://email.sgresearch.com/Content/PublicationPicture/231688/4]

Credit Pipeline

September 2nd, 2016 6:09 am

Via Bloomberg:

IG CREDIT PIPELINE: List Continues to Grow for September Deals
2016-09-02 09:48:50.136 GMT

By Robert Elson
(Bloomberg) — September expected to see an estimated
~$125b; recent history suggests that taking the over is the best
strategy.

* September may be lower than some expectations as names with
September maturities were pushed forward and issued in
July/August

LATEST UPDATES

* Sydney Airport (SYDAU) Baa2/BBB, to hold investor conference
calls Sept. 6-7, via BA,L/JPM/Sco; last issued in April,
$900m 144a/Reg-S 10Y
* Transurban Group (TCLAU) Baa1/BBB+, mandates BAML/C/JPM for
investor meetings Sept. 8-14; debt issuance may follow
* Municipality Finance (KUNTA) Aa1/AA+, to hold Green Bond
roadshows over the coming weeks, via BAML/CA/HSBC/SEB; plans
$500m 5Y-10Y 144a/Reg-S deal
* Woodside Finance (WPLAU) Baa1/BBB+, to hold investor
meetings Aug. 31 – Sept. 7, via C/CS/JPM/UBS; USD deal may
follow
* Kingdom of Saudi Arabia (SAUDI), may raise more than $10b
following roadshows in late Sept.
* Said to have hired 6 banks to lead first intl bond sale
(July 14)
* Korea National Oil (KOROIL) Aa2/AA, has mandated
C/GS/HSBC/SG/KDB/UBS for investor meetings to begin Sept. 6;
144a/Reg-S deal may follow
* Pfizer (PFE) A1/AA, to buy Medivation (MDVN) for ~$14b;
expects to finance deal with existing cash
* Moody’s maintained its negative outlook on PFE, saying
low cash levels may “lead to future debt issuance for
US cash needs.”
* Couche-Tard (ATDBCN) Baa2/BBB, expects to sell USD bonds
related to ~$4.4b acquisition of CST Brands (CST) Ba3/BB
* NongHyup Bank (NACF) A1/A+, mandates C/CA/HSBC/JPM/Nom/UBS
to hold investor meetings Aug. 29-Sept. 1; 144a/Reg-S deal
may follow
* Enbridge (ENBCN) Baa2/BBB+, files $7b mixed shelf Aug.22;
$350m maturies Oct. 1
* General Electric Company’s plan to take on additional $20b
of debt could pressure ratings, Moody’s says
* Industrial Bank of Korea (INDKOR) Aa2/AA-, mandates HSBC/Nom
for roadshow from Aug. 22; 144a/Reg-S deal may follow
* Cabot Corp (CBT) Baa2/BBB, filed debt shelf; last priced a
new deal in 2012, has $300m maturing Oct. 1
* Israel Electric (ISRELE) Baa2/BBB-; said to hire C, JPM for
at least $500m bond sale in 4Q

MANDATES/MEETINGS

* Sumitomo Life (SUMILF) A3/BBB+; investor mtg July 19
* Woori Bank (WOORIB) A2/A-; mtgs July 11-20

M&A-RELATED

* Analog Devices (ADI) A3/BBB; ~$13.2b Linear Technology acq
* To raise nearly $7.3b debt for deal (July 26)
* Bayer (BAYNGR) A3/A-; said to review Monsanto (MON) A3/BBB+
accounts as bid weighed (Aug. 4)
* $63b financing said secured w/ $20b-$30b bonds seen
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Thermo Fisher (TMO) Baa3/BBB; ~$4.07b FEI acq
* $6.5b loans, including $2b bridge (July 4)
* Zimmer Biomet (ZBH) Baa3/BBB; ~$1b LDR acq
* Plans $750m issuance post-completion (June 7)
* Air Liquide (AIFP) A3/A-; ~$13.2b Airgas acq
* Plans to refi $12b loan backing acq via USD/EUR debt
(June 3)
* Great Plains Energy (GXP) Baa2/BBB+; ~$12.1b Westar acq
* $8b committed debt secured for deal (May 31)
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Shire (SHPLN) Baa3/BBB-; ~$35.5b Baxalta buy
* Closed $18b Baxalta acq loan (Feb 11)

SHELF FILINGS

* IBM (IBM) Aa3/AA-; automatic mixed shelf (July 26)
* Nike (NKE) A1/AA-; automatic debt shelf (July 21)
* Potash Corp (POT) A3/BBB+; debt shelf; last issued March
2015 (June 29)
* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+; debt shelf; last issued USD Nov.
2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Visa (V) A1/A+; CFO says will issue $2b debt for buybacks by
yr end (July 21)
* Investment Corp of Dubai (INVCOR); weighs bond sale (July 4)
* Alcoa (AA) Ba1/BBB-; upstream entity to borrow $1b (June 29)
* GE (GE) A3/AA-; may issue despite no deals this yr (June 1)
* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* American Express (AXP) A3/BBB+; plans ~$3b-$7b term debt
issuance (April)

Walmart to Layoff 7000

September 1st, 2016 7:44 pm

Via WSJ:
By Sarah Nassauer
Updated Sept. 1, 2016 1:50 p.m. ET
126 COMMENTS

Wal-Mart Stores Inc. plans to cut thousands of back-office positions around the country, a sign that the retailer’s effort to make its cavernous stores more efficient is also changing the face of its workforce.

The largest private employer in the U.S. is eliminating about 7,000 store accounting and invoicing positions over the next several months. The jobs are mostly held by long-term employees, often some of the highest paid hourly workers in stores. The retailer wants those employees working with shoppers, not in backrooms, say company executives. Centralizing or automating most of their current tasks is more efficient, they say.

The jobs are coveted as a rare desk job in retail. “You are not running around the store on your feet all day” and receive decent pay, said a Wal-Mart store accounting employee who earns about $13 an hour, or $27,000 a year. “Everybody wants to get in there. The jobs never open up,” said this person, who has worked at the store for nine years.

The back-office cuts to Wal-Mart’s 4,600 U.S. stores is a sign that retail workers—one of the largest employee cohorts in America—face big changes as their employers spend heavily to compete with Amazon.com Inc. and grab foot traffic from other chains.

The positions Wal-Mart is eliminating manage an individual store’s daily cash flow or process claims from manufacturers delivering goods directly to stores, among other tasks. Starting early next year, much of that work will be handled by a central office or new money-counting “cash recycler” machines in stores. Wal-Mart tested the change in about 500 stores earlier this year.

The company believes most displaced employees will find customer-facing roles, said Deisha Barnett, a Wal-Mart spokeswoman. “We’ve seen many make smooth transitions during the pilot,” she said. Employees facing cuts could see their salaries go up or down in a new position, she said.

Store workers at Wal-Mart and other retailers are being asked to work differently as retailers adjust to industry changes. For example, Wal-Mart is rapidly expanding a service that lets shoppers order groceries online and pick them up curbside. That requires employees to pull produce off shelves, pack orders and deliver them to a customer’s car, jobs that didn’t exist at Wal-Mart three years ago. Wal-Mart also is doing more shelf-stocking during the day—rather than overnight—to put more employees in contact with customers.

Wal-Mart is spending billions to boost e-commerce sales and make stores more efficient and pleasant places to shop, while reducing inventory and raising wages. Last year the retailer lifted its store employee starting wage to $9, or about $18,700 a year, for a full-time employee. As of earlier this year, new hires can move to $10 an hour after completing a six-month training program.
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In August Wal-Mart said it planned to purchase discount online retailer Jet.com Inc. for $3.3 billion.

While Wal-Mart’s online sales have been sluggish, comparable-store sales have risen for eight straight quarters, outshining many competitors struggling to compete for recession-weary customers or online shopping converts. Other retailers, including Target Corp. and Costco Wholesale Corp. , are also raising starting wages.

In the wake of those investments in their workforces and online efforts, retailers are making other cuts. “Anytime one expense line goes up, you are likely to see a reduction in a corresponding expense line,” said Joel Bines, co-head of consulting firm AlixPartners LLP’s retail practice. In today’s environment “any dollar not being spent on delivering a better experience to the customer or delivering the customer online is a wasted dollar,” he said.

A typical Wal-Mart Supercenter employs hundreds of people from cashiers and cart wranglers to store managers who oversee around $100 million in annual sales in a busy location. In the many small towns and rural areas with a Wal-Mart, the store can be one of the largest employers.

“Right now I’m getting my resume together,” said one Wal-Mart employee who works in invoicing earning about $15 an hour. After almost 21 years with the company the employee said she isn’t interested in moving back out to the store floor.

Glut of High Priced Apartments in Manhattan

September 1st, 2016 11:26 am

Via Bloomberg:
Another Sign Manhattan Real Estate Is Feeling the Pain
Oshrat Carmiel
OshratCarmiel
September 1, 2016 — 5:00 AM EDT

Price cuts, gift cards, penthouse parties among sales tactics
Time is the enemy in sputtering market, broker Teplitzky says

 

Prospective buyers at one Upper East Side condo project are quietly being offered a 5 percent discount. At an almost-completed Midtown building, five-bedroom homes will be divided into smaller units. Brokers whose clients sign deals at a downtown tower before Labor Day are getting $5,000 gift cards.

Such tactics have become more common in Manhattan, where developers are coping with a luxury-condo glut and adjusting to a new reality after years of building to meet seemingly insatiable demand. With the market now sputtering, they’re altering sales plans and making behind-the-scenes deals in an attempt to create momentum at their projects before an onslaught of even more competition.

“Right now, time is your enemy,” said Jacky Teplitzky, a luxury broker with Douglas Elliman Real Estate. “The first question that people ask is how long has an apartment been on the market?”

Global economic turmoil, slumping oil prices and the uncertainty of this year’s presidential election are weighing on luxury-home buyers’ decision-making across the U.S. In New York, where more than 3,500 new apartments are hitting the market this year, developers have to work even harder for a sale. It’s a turnabout from the boom days just a few years ago, when investors quickly plunked down record-shattering sums for homes still in the planning stages. Wealthy buyers now are taking time to browse multiple options and negotiate before committing to a purchase — if they make one at all.

For the first 35 weeks of the year, contracts to buy Manhattan homes at $4 million or higher tumbled 21 percent from the same period in 2015, data compiled by luxury brokerage Olshan Realty Inc. show. The 758 properties in those deals spent an average of 291 days on the market, or 54 more days than a year earlier.

Developers have postponed plans to add even more apartments. The 3,574 units slated to reach the market this year are 38 percent fewer than what was estimated in January, according to brokerage Corcoran Sunshine Marketing Group. Of the units that have or will be listed in 2016, more than half are considered luxury, or priced at more than $2,400 a square foot.

“We’ve never had a buildup of housing inventory that has been so skewed to the high end,” said Jonathan Miller, president of appraiser Miller Samuel Inc. “There’s too much development being built at 2014 prices, and that buyer isn’t there. Conditions have changed quite a bit since then.”
Delaying Sales

Some builders with projects close to completion are touting their within-reach move-in dates, while for others, the answer has been to delay a marketing push until the chance of success seems greater.

At 111 W. 57th St., where a penthouse with direct Central Park views will be listed for $57 million, a formal sales effort won’t kick off for about a year, until the building reaches roughly 800 feet (244 meters) and can catch the eye of potential buyers. Still, two contracts were signed in June and a third is being negotiated, with the buyers getting “exceptionally good value,” said Kevin Maloney, principal and founder of co-developer Property Markets Group.

The sales were “not at the price point I wanted it to be,” he said. After a debate with office colleagues who argued he should hold off on making those early deals, Maloney decided their symbolic worth offset the reduced prices.

“It’s important for me personally to start logging sales,” he said.

At another of Maloney’s projects, in Soho at 10 Sullivan St., an 8,400-square-foot (780-square-meter) penthouse listed at $45 million was sliced into two smaller units. Neither has sold yet, and the pricier apartment got a $1 million cut to $28.5 million, he said.

“The next two years will be the year of the deal,” Maloney said. “If you have cash, I can’t imagine there’s not a condo project that’s coming out of the ground where you can’t walk into the sales office and say ‘This is the deal I’m willing to offer.’”
Price Cuts

At a condo tower under construction at 252 E. 57th St., near Second Avenue, prices were whittled by more than $2 million on some of the costliest units as part of a larger sales-boosting strategy. With the project nearing completion and move-ins possible as early as November, “getting people into the building to actually see the finished product is critical,” said Steven Rutter, director of Stribling Marketing Associates, the brokerage handling sales at the property.

The least-expensive unit at the building, whose hallmark is a curvy glass skin, had its price cut by $735,000 to $3.95 million, according to offering plans filed with the state attorney general’s office. About 30 people inquired about the listing, and its sale spurred nine other deals among those who showed interest, Rutter said.

Customer traffic has increased 50 percent since January, when strategies such as the price cuts and sweetened broker commissions were implemented, said Julia Hodgson, director of development for World Wide Group, which is building the project with Rose Associates. She declined to disclose the number of sales at the 93-unit property.

The next move will be to break up two of the larger five-bedroom homes into two- and three-bedroom units.

“In this market, you really need to be proactive,” Rutter said. “It’s not a good idea to sit and wait for the market to come to you.”

Extell Development Co., whose One57 skyscraper set a record with a $100.5 million penthouse sale in 2014, is finding buyers are more scarce now, even for its lower-priced projects. At the Kent, under construction on 95th Street near Third Avenue, 5 percent discounts are being offered as a way “to incentivize people to pull the trigger,” Extell President Gary Barnett said. Prices for the market-rate units start at $2.46 million for a 1,293-square-foot, two-bedroom condo, according to attorney general filings.

Barnett’s making the same discount available to buyers at One Manhattan Square, an 815-unit downtown project where the asking prices on most condos had already been reduced this year. A one-bedroom apartment with outdoor space on the lowest available floor is listed for $1.65 million, down from an initial $2.05 million, filings show.

“There’s no negotiation,” Barnett said of the additional 5 percent offer. “That’s what we’re giving — not less, not more.”

Other incentives amount to a discount while not cutting the apartment price. Some builders are paying the buyer’s transfer taxes and throwing in extras such as storage units, said Martin Jajan, a Manhattan attorney who represents high-net-worth overseas investors.

Jajan said his clients have grown more wary, sensing that the market’s four-year run-up in prices can’t continue indefinitely. One client has opted to buy several smaller homes in a mix of neighborhoods rather than a single trophy property, while another chose to rent apartments at both One57 and nearby 432 Park Ave. before committing to a purchase, he said.

Developers also are increasingly courting real estate agents, hosting parties at penthouses and offering gifts as a way of getting customers through the door.

 

At a June event showcasing 50 United Nations Plaza’s duplex penthouse — on the market for $70 million since 2013 — Zeckendorf Development LLC raffled off a weekend at the Miami Beach Edition hotel to brokers who attended. In July, the builder gave a party on a concrete slab at its under-construction tower at 520 Park Ave., inviting brokers in hard hats to sample the view from the 29th floor of the skeletal building, where prices start at $16.2 million. A Zeckendorf representative didn’t comment.

“Every single day in my inbox, I get private invitations,” Teplitzky of Douglas Elliman said. “If I wanted to get breakfast, lunch and dinner and not spend a dime at a restaurant, I could say yes to all the presentations, all the cocktail parties, you name it.”

Developers of 101 Wall — a conversion of a lower Manhattan office building into 52 apartments starting at $1.18 million for a one-bedroom — have been giving brokers $5,000 American Express gift cards when clients sign a contract, according to e-mails sent by Corcoran Sunshine, the firm marketing the project.

The incentive, initially offered on deals made before Memorial Day, has been extended at least twice and now ends on Labor Day. The developer, Claremont Group, didn’t return calls seeking comment on the promotion. A Corcoran Sunshine representative said it’s been successful.

The developers’ sales incentives will only go so far to help clear Manhattan’s “tremendous amount of overpriced inventory,” said Donna Olshan, president of Olshan Realty. Ultimately, what’s needed are deeper price cuts across the luxury market, she said.

“Things will sell, they’ll just sell at lower prices,” she said. “You can’t sit out there forever trying to sell one apartment a month.”

More on This Morning’s Data

September 1st, 2016 10:52 am

Via Chris Low at FTN Financial:

ISM Manufacturing

The ISM manufacturing index unexpectedly fell from 52.6 in July to 49.4 in August, under 50 for the first time in six months. Weakness was extensive, including production, new orders, the orders backlog, employment and almost everything else.

·         Production fell from 55.4 to 49.6

·         New orders fell from 56.9 to 49.1

·         The backlog fell from 48.0 to 45.5

·         Supplier deliveries fell from 51.8 to 50.9

·         Employment fell from 49.4 to 48.3

·         New export orders were unchanged at 52.5 (not in aggregate index)

·         Imports fell from 52.0 to 47.0 (not in aggregate index)

·         Prices paid fell from 52.6 to 49.4  (not in aggregate index)

Bottom line ISM: The manufacturing slowdown is back. The good news is that it is not worse. Several years of falling farm income, a cyclical peak in auto sales, low and slow global demand means global manufacturers are fighting for bigger slices of a shrinking pie.  This month, China and the US slipped to breakeven(-ish), continental Europe lost some of its recent strength and the UK was the biggest winner by rebounding from considerable weakness to modest strength. All in all, it’s a pretty bleak picture.

 

Productivity and costs

Earlier today, Q2 productivity was unrevised at -0.6%, but unit labor costs were significantly, and unexpectedly, revised from 2.0% to 4.3%. Bonds dropped as a result.

Digging deeper, the revision reflects a revision from 1.5% growth in compensation per hour to 3.7%. to a bond guy, that’s bad news because wage inflation is scary stuff. Step back, though, and here’s what you see:

·         Compensation per hour fell 0.6% in Q1.

·         Compensation is volatile. In 2015, the strongest quarter was 4.8%. The weakest was 1.1%.

·         Year-on-year growth is much smoother. Peak growth in real year-on-year compensation per hour in the past two years was 3.8% in Q2-14. Q116 was revised today from 0.6% to 1.1%.

·         Meanwhile, lest anyone is still nervous about cost-push inflation after reading the above, unit non-labor costs were revised from 3.0% to -0.1%. Year on year, they were revised from -0.1% to -0.9%.


Bottom line productivity:
There was a headline scare in a big upward-revision to unit labor costs. Upon further review, it looks like normal quarter-to-quarter volatility in a downward-trending series.

Chris Low

Data Analysis

September 1st, 2016 9:34 am

Via Millan Mulraine at TDSecurities:

US: Methodology Adjustment Pushes ULC Sharply Higher

·         The Q2 labor productivity estimate was revised modestly lower to -0.6% from -0.5%, marking the third consecutive decline in the indicator.

·         However, the big story was the sharp upward revision to the unit labor costs (ULC) measure, up from 2.0% to 4.3%.

·         The sharp upward revision in ULC was on account of a methodological change to labor compensation estimate.

Labor productivity declined for the third consecutive quarter, falling 0.6% q/q, following a similar decline the month before. The big news from this report, however, was the sharp upward revision to the ULC measure from +2.0% q/q to +4.3% q/q. However, this revision was due almost entirely to the change in the methodology used by the BEA to calculate labor compensation. The revised methodology was incorporated as part of the National Income (GDI) report that was released last week along with the second Q2 GDP estimate. This, however, should only have a one-off impact on the ULC measure. On a year-ago basis (something that has more informational value for the Fed), ULC accelerated from 2.0% y/y to 2.6% y/y. This is likely to be unwind eventually.

From the perspective of the Fed, this surge in ULC should have no bearing on policy as the one-off rise is unlikely to reflect a new trend in labor cost. We expect the pace of labor cost to moderate next quarter.