Okay, I have a bone to pick and as usual... it is in regards to financial reporters or more specifically lazy financial reporters and possibly biased or just misleading clickbait. CBS has "updated" this article throughout the day, so the original hysteria has been tamped down. Originally, it was about the markets falling based on 3M and Catepillar reporting dire earnings warnings as well as CAT being hit with a whopping $100M in additional costs due to Trump's tariffs. All of the latter based on a earnings conference call with CAT officials. The transcript from the actual conference call. Yes, there was mention of tariffs having an impact probably in the lower end of the $100M ~ $200M range, but as the CEO stated..."So the impact would be quite minor in the bigger scheme of things for Cat's results". COMPLETELY overlooked by the reporting was the $800M increase in inventory from previous quarter, which was hinted at in the conference call as being largely in the Asia Pacific region. Inventory increases are not really a problem if sales growth is increasing at the same pace. However, the Asia Pacific region's rate of growth is slowing... most notably China. CAT is heavily exposed to China and a slower growth rate will impact CAT. That's the story that needs to be discussed, as numerous Dow and S&P companies are multinationals with large exposures to China. The share price falls 7.7% and the headline was CAT is taking a hit over Tariffs, yet... Quoting the CEO..."I'm very, very proud of the Caterpillar global team for a record profit per share for the third consecutive quarter".
Not sure how or why the FED would give another rate hike, but I have my suspicions. As indicated in this chart, Inflation (red line) dipped at the beginning but then pushed higher than current (briefly) and the FED was still in Zero Bound territory and buying bonds. Even as the employment numbers increased (black Line), the FED did not start raising rates until that green line started jumping. While the employment increases are starting to ease, the number available for the workforce is also starting to ease. A clear sign of that boomer retirement lie from years past is now becoming a reality... right on schedule as predicted. With housing starting to ease up, car sales starting to ease up and inflation starting to ease up, why o why would the FED raise rates? Labor rates? Not really, as the FED is in place to protect the financial market first and foremost. Are there problems just over the horizon? Additionally all employment data is from the BLS website.
At the risk of sounding more bearish than is warranted and given my obsession of the FED's seeming insistence on raising rates, I present the following... NEW residential sales from the CB. The SAAR is about 12% below expectations for September and down 18% from last September. The sales rate of new homes has been trending downward since end of last year. Also, Black Knight reports on the mortgage delinquency rate, which has the overall rate now at pre-recession levels, BUT September's increase in delinquencies is the highest increase since November, 2008. While both those reports could be one offs, as September has been historically a wild swing month... just not quite this wild. It is not difficult to imagine an increase in interest rates would further dampen that segment of the economy. There are increasing headwinds in the U.S. economy which can be attributed, imo, to increased interest rates. That is not even factoring in Brexit's potential impact, the Italian impact and China. The latter has an enormous local government debt level, that has to be addressed. China, being an authoratative regime has the tools to both literally and figuratively beat down, but at what cost to economic growth. Frankly, I consider it a bigger impact on their growth than tariffs... but what do I know? Brexit's impact is very hard to figure. They voted for Brexit yet put a remainer in charge of Brexit. What could possibly go wrong when the fox is guarding the henhouse? Italy has the EU's attention and poses a much bigger issue than tiny Greece. The ECB is stuck in reverse, with talk of moving away from negative IOER this coming summer. A terrible mistake, imo, but what better time to send a sharp message to Italy et al, while blaming it on the British. Interesting times to sit back and enjoy, if I could determine the impact on little ole me and mitigate any negative impact.
The GDP came out last week and it was still a stellar "real" growth rate. It also indicated some serious softness in what I consider important sectors. The graph presented indicates some troubling areas, but first a bit of clarification of the graph. The data is from both the BEA and the Treasury. The BEA information is current dollars, to provide apples to apples comparison to national debt. (The difference being real growth subtracts inflation from numbers to get to real). The red line indicates 3rd quarter figures annualized. The worrying areas are in Fixed Investment, which includes nonresidential, structures and equipment. The last qtr comparison to annual shows a rather large dip, but also showed weakness in the 2nd qtr. A possible trend. Residential invesment is also in a tailspin. Residential is rather cyclical, so swings are not out of the ordinary. However, it is the 1st Qtr. that generally has the big drop off, then building thereafter into the 4th quarter. 2nd and 3rd Qtr. residential performance is starting to trend downward. Of course the exports dropping was foreseen as 2nd qtr performance saw a surge ahead of retaliatory tariffs, etc. Imports continue to surge ahead of the rollout of more tariffs starting in January. Durables seem to be holding up, but the auto sector is not participating. The national debt continues to outpace the nominal GDP, even with federal spending edging downward. A definite sign of rising interest rates, although we should all feel safer as defense spending is still rising. In any case, I estimate federal spending was $300B out of whack with the GDP growth. The useful idiots of all stripes have been distracted, so expect little to no discussion of debt. It should be noted that 3rd Qtr. GDP was July through September. The 4th quarter is where we currently are and data for this quarter starts to roll in as we tear another page from the calendar.
CPI was released this AM. My personal household inflation rate is at 1.7% Y/Y. The primary differences would be the difference in weightings of shelter and energy.
What do you think of the price of oil plunging, @Harry Havens? I am thinking the Saudis et al. are trying to keep the price below U.S. production costs.
@Harry Havens, Do you ever pay attention to European Economics. For instance Italy is spending too much for the EU Council that watches over such things. Italy has been warned they will be fined but pays no attention. Yesterday was the deadline for Italy to favorably respond. I understand they ignored the deadline. and said Italy will determine their own way and their own budgets. How sound is the European Union or do you pay attention to other economies?
That was the Saudi aim in 2015, 2015, 2016 etc. when U.S. production ramped up. It didn't work, mostly due to cheap interest rates. The low prices merely allowed the U.S. oil patch to cap production ready wells which are now opening back up. The U.S. is now (I think) the largest oil producer in the world oupacing Russia and the Saudis (over 11M barrels per day recently, compared to 8.5M circa 2014). The Saudis had hoped that cutting off Iran's oil outlets to the world would help the price rebound. That now seems very unlikely. Saudi Arabia is now looking at their own production cuts to slow the price decline. It was anticipated at the start of the year, that global oil consumption would start to outstrip oil production by now. That forecast is now debunked as consumption appears to be slipping instead of rising. That is the big problem in the oil market currently and is creating a lot of havoc with stocks. Oil consumption is a leading indicator of the state of the global economy. Right now, that economy is starting to appear weaker than expected. There are a lot of possibilities as to why, but the most prominent theory seems to center around China and their economy. China is the world's largest oil importer and signs point to a reduction in imports. That's just one possible indication of troubles. China is the largest buyer of new vehicles in the world (35% more than 2nd place USA). Sales have been flat Y/Y and lower on the near term. The IMF is deeply concerned about China's corporate debt, which rivals our national debt ($20T+). However, the IMF does not consider it as posing a significant threat to the global financial markets. There is debate that it might be unrealistic assumption. We have several U.S. multinationals with heavy exposure to China, which in turn have stock ownerships that are largely financial, whether bank owned stocks, or investment companies... not to mention debt instruments. China has always posted the most glowing reports, even when the parts did not add up. China has always managed to put lipstick on a pig, so some of the negative stories coming out are surprising. It tends to be unsettling to the market.
I try to pay attention to it, but it can be mind numbing. The basic requirements are that a country not exceed a national debt above 60% of GDP, nor have an annual budget deficit above 3% of GDP. Rarely has a year gone by, that no one breached those rules. It is impossible for a country to stay at the 3% of GDP and not eventually blow past the the 60% national debt/GDP... unless they have a growth rate near 10%. ( I just ran the number on a mythical country with zero debt at origination, a 4% annual debt service with various growth rates). If you already have a national debt of 60% of GDP, you must keep the annual deficits at or below the GDP growth rate. Hence austerity. Italy is attempting to come in with an annual deficit below that 3% but their debt/gdp is 130%+. The IMF forecast for Italy 2019, is 1.0% growth. Italy is not the only country in the EU not within standard, just the worst... excluding Greece. The European Commission might wish to take a hard line, but further penalizing Italy would simply put more pressure on the EU as a whole. Germany seems to be giving the impression of playing nice, which is what really counts. As far as the EU goes, I find it similar to the U.S. under the Article of Confederation. It took a scant 10 years +/- for those guys to figure out it wouldn't work and decided to go with our current constitution. It should be remembered that the rules of the Articles of Confederation were ignored to get our current constitution. Can you imagine the various nationalities in Europe trying something similar?
Consider this a cautionary tale... Natural Gas Storage is below the historical 5 year average... The forecast for many areas of the country this coming week is in the Brrrr category for large swaths of the country and particularly so in the New England area. Natural gas prices have shot above the $4.50 mark, having been in the $3.25 range a couple of weeks ago and has been a few years since it was last near the $4 mark. Of course this will get passed on as a fuel surcharge, so you folks using NatGas might want to slow down the spending on this Black Friday. The jump in NatGas prices apparently has electric power generators taking another look at coal, as coal prices have jumped as well. Let's hope this isn't one of those bitter cold winters that sometimes crops up. It could take a toll on the economy, imo.
They might be able to do that and linger on longer than other countries in the EU because Italy is less indebted to foreign creditors and more to their own banks, institutions, and, above all, to private households in Italy. The government is toying with the idea of urging Italian households to invest in "solidarity bonds" taking advantage of the high private wealth of Italian households. Those might be a good buffer against future shocks and a substantial source of refinancing. Alternatively, a one-time capital levy is being discussed.
While I disagree to a large extent that the current economic improvement is due to either Obama or Trump, (Generally speaking, presidents take credit for good things and lay blame for bad things.) Obama has certainly stepped into "something" with his latest pronouncement. Hearken back in time circa 2011/2012... (back when gasoline prices were hovering near $4.) Obama: "We can't just drill our way out of the problem". (U.S. Production was around 5.7M bpd) More recently, as in the past week... Obama: "Suddenly, the U.S. is the largest oil producer... that was me people... say thank you". (U.S. Production is around 11.7M bpd). Must not be drilling, but simply oozing out of the ground as in... As the above rant is in Economics, some economic information to somewhat justify this post.... the 2nd estimate of 3rd Qtr. GDP was 3.5%, same as 1st estimate. Disposable personal income stood at 2.4%. (1.8% for 2nd Qtr and 4.4% for 1st Qtr.) Economists' estimates for 4th quarter are in the 2.5% range. All figures are annualized and chained dollars.
The Fed chairman is hinting at large future rate increases; some commentators hint at the fact that he is retaliating against Trump for criticizing recent increases. Since foreign demand for U.S. Treasuries appears to be drying up just as the supply is increasing, something will have to happen to get the large buyers interested again.
Apparently he has altered his view. Feder It is likely the December rate hike will take place, but his comment suggests future hikes are not in the making at this point in time. Of course stocks rebounded sharply based on this comment. However, imo, there are still considerable headwinds surrounding interest rates, although the likelihood of any meaningful ECB action is starting to dim.