Friday

June 10, 2016

www.bloombergbriefs.com

 

June Consumer Sentiment; May Budget StatementBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS

WHAT TO WATCH: The is University of Michigan consumer sentiment indexforecast to drop slightly in the preliminary print for June to a level of 94 from a final print of 94.7 in May, 10 a.m. The U.S. Treasury's for May is expected to budget statementshow a $56 billion deficit for the month, 2 p.m.

ECONOMICS: Baker Hughes releases its weekly U.S. . The oil-and-gas rig countCommodity Futures Trading Commission prints its weekly reports on futures and options positions for oil and commitments of traders.

GOVERNMENT: A delegation headed by Saudi Arabia’s Deputy Crown Prince will sign agreements with several companies during a visit to Mohammed bin Salman

the U.S. that starts on Saturday, a cabinet minister said. Read more on the .terminal

MARKETS: Caution prevails, with stocks declining and the dollar climbing. Oil retreated.

(All times local for New York.)    

Read the full analysis with a live version of this chart on the Bloomberg terminal . here

Janus Capital@JanusCapital

Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one dayDetails

Charlie Robertson@RencapMan

Second highest corporate default rate in a decade - and this with super low central bank interest rates twitter.com/spglobalrating…Details

QUOTE OF THE DAY

"The desire to reach consensus on the statement makes it more vague and uncommunicative. That means it doesn’t reveal the true nature of the debate as it could or it should."  — Charles Plosser, a former Philadelphia Federal

Reserve Bank president, on FOMC statements

COMMENTARY IN THIS ISSUE

 

The rebound in oil and gasoline since the pricesstart of the year is fosteringsome degree of optimism toward overall aggregate demand in the economy: Carl Riccadonna.

The poor May jobs report should give the Fed enough pause to delay a hike until September, says , Steven Friedmansenior investment strategist for BNP Paribas Investment Partners: Q&A. Negative interest rates can be a valuable tool, but its power depends a lot on how it's used: Narayana Kocherlakota.

TWEETS OF THE DAY

Q&A

Tobin’s Q Shows U.S. Stocks Remain Slightly Undervalued

The U.S. stock market remains slightly undervalued, according to Bloomberg Intelligence Economics’ recreation of Nobel Prize-winning economist James Tobin’s Q ratio based on flow-of-funds data. Tobin’s Q is a gauge of corporate net worth that compares the total valueof the prices of corporate shares with the cost of replacing the underlying assets of those same stocks. During the first quarter, the BI Economics version of the ratio was essentially unchanged at 0.97, from a revised 0.98 during the fourth quarter. It is argued that when the stock market trades at a discount to the replacement cost of its assets, equities are inexpensive. Conversely, when the market trades at a premium to its replacement cost it is considered expensive. When the ratio is 1, the stock market is fully valued.

— Richard Yamarone, Bloomberg Intelligence Economist

June 10, 2016 Bloomberg Brief Economics 2

 Q&A

BNP Investment Predicts Volatility, September Fed Hike; Likes Credit, Risk Assets  

The poor May jobs report should give the Fed

enough pause to delay a hike until the fall, says

, senior investment strategist forSteven Friedman

, which had BNP Paribas Investment Partners

$593 billion in assets under management and

advisory as of March 31, 2016. Friedman spoke

with Bloomberg Brief editor Ben Baris. His

comments have been edited and condensed.

Q: When will the Fed raise rates?A: Back in February I officially switched my call to a September rate hike. Given the tightening we'd seen in financial conditions, a global outlook that didn’t seem like it was getting better, the fact that there was evidence in the U.S. that banks were tightening their lending standards on commercial industrial loans, corporate profit growth was declining, I thought there was enough evidence that we weren’t going to get the type of economic forecasts that the Fed had been assuming.

Q: Is a September hike all for the year?A: It's so hard to project that far out at this point given the macro uncertainties. My current base case is for a September and a December rate increase.

Q: What do you make of the May payrolls report?A: Payolls data can be volatile. We've hadinstances in the past where you have these sharp slowdowns in job growth, but at least in recent years, it tends to reverse itself in the next month. I do think it's one of those types of situations, but that said, there does seem to be an underlying trend of slowing jobs growth. In recent months, even if you look through some of the volatility in the numbers, there has been a slowing in the pace in the service sector. And I think there's enough uncertainty about that now that the Fed will again take a number of months to regain its confidence in the outlook.

Q: How will labor market dynamicsaffect the Fed's decision?

I'm still in the September camp, but to A: get a September rate increase at this point I think they’ll want to see some

 

recovery in the payrolls number, not necessarily to a 200,000 pace — I think they expect the pace to be slower going forward — but I think they'd want to see payrolls averaging at least 150,000 if not 175,000 for a few months.

Q: How do you view the Fed's communication?

I've had issues with their A:communication. They've put in a lot of energy since the April meeting in trying to manage market expectations. A number of [Fed] presidents came out and said we still expect to raise rates twice this year,or three times, and I've found this strategy somewhat problematic. I think it is in contrast with the fact that they also say they are data dependent. When they say two to three rate hikes this year, they always condition it on the data. Investors might not broadly pick up on that subtlety, and it makes it seem like much more of a date-dependent approach than a data-dependent approach. If investors don’t believe the economy is strong enough for two-to-three rate hikes, it means that those speakers don't look particularly credible. It makes policy seem tighter than the Committee envisions it will be.

Q: If there is a delay in hikes, where are the best investment opportunities?A: Fixed income, particularly short duration can be a good opportunity. More generically, this is an environment where credit and risk assets can perform well. I would caution that corporate credit spreads are near their cycle tights while similarly equity valuations are near cycle highs. This puts a greater emphasis on investors to be reactive and sensitive to

changes in economic data in anticipation of future hikes. Swings in market sentiment and repricing of future economic scenarios have resulted in periods of headline-grabbing volatility. One of the best opportunities we see is for investors to consider long volatility products such as the commonly referenced VIX or credit swaptions to hedge against potential future rises in volatility. European corporates could also be an attractive opportunity on the back of the recently launched ECB corporate buying program.

Q: What’s your outlook for U.S. corporate profits?A: For the second quarter, we expect earnings to decline. It would be the fifth quarter in a row of declines, on a year-on-year basis, although much of that is due to pressure in the energy industry. The weakening dollar, particularly after the May employment report, should ease some of the currency pressure and may provide some upside for companies.

Q: Which sectors stand out? Energy has been improving since A:

March with the increase in oil prices. Afterthe second quarter, the oil price impact should not be as punitive to energy companies on a year-over-year basis. Thebanking sector will remain under pressuredue to compressed margins as the yield curve remains relatively flat. Company investment in capex is likely to remain low given the global economic uncertainty, aswell as political uncertainty in the U.S. Profitability is not going to be great, but may be better than anticipated in 2016. Beyond 2016 is of greater concern.

Hometown: Tenafly, NJFavorite finance book: I prefer Faulkner to finance in my down timeFavorite quote: "There are seasons in every country when noise and impudence pass for worth; and...the clamors of interested and facetious men are often mistaken for patriotism." — Alexander HamiltonHobbies: Cross-country skiingFavorite vacation destination: Anywhere with my family

Source: BNP Paribas

June 10, 2016 Bloomberg Brief Economics 3

 

BIG PICTURE  CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMIST

June 10, 2016 Bloomberg Brief Economics 4

 BIG PICTURE  CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMIST

Gas Savings Still Fuel U.S. Consumers as Prices PeakU.S. gasoline prices typically peak for

the year sometime between Memorial Dayand the July 4 holiday. As a result, the current national average of $2.38 a galloncould very well be near the high point for motorists in 2016. The rebound in oil and gasoline prices since the start of the year is fostering some degree of optimism not only toward overall aggregate demand in the economy, but also toward the notion that the supply-demand equilibrium point is settling at a less onerous level for energy producers. Despite the increase, energy prices continue to provide stimulus to consumers.

Gas prices normally exhibit a distinct seasonal pattern, rising in the first half of the year before steadily declining in the second half. This occurs for two primary reasons: First, miles driven increase steadily from winter-impeded lows throughthe height of the summer driving season in June and July; and second, smog-reducing summer fuel blends tend to be more expensive.

The typical price variation is illustrated in the accompanying figure, which shows the average pattern over the past 10 years, last year’s price profile and the trajectory thus far in 2016. In an average year, gas prices rise by about 22 percent from December through June. Last year, the price change over this period was 10 percent. This year started with an irregular pattern once again, as prices declined in January and February, but larger than average gains over the following months put the price level up 17 percent year-to-date, not too far from average. In fact, this is the firmest first half gain since 2011, which provides further support to the notion that energy demand dynamics are indeed normalizing.

Despite the price increases in the first half of the year, retail gasoline prices remain 16 percent below year-ago levels, which means that they are providing a significant economic stimulus. Lower fuel costs serve effectively as a tax cut to households by freeing up income for either savings or other expenditures.

BI Economics’ analysis shows that a sustained drop in gasoline prices of 1 centincreases annual consumer spending for non-energy items by about $1 billion. Gasoline prices are currently about 45

 Read this analysis with additonal live charts on the Bloomberg terminal . here

cents below year-ago levels, which meansthat households are witnessing a “tax break” on the order of about $45 billion. The degree to which growth in retail salesexcluding gasoline are outpacing overall retail sales suggests that consumers are capitalizing on reduced energy costs, as illustrated by the figure below. This is similarly reflected in the fact that spending on discretionary items, such as durable goods, lodging, travel and recreation is outpacing the broader consumption trend.

The rebound in gasoline prices is also improving the inflation outlook. It is helping to close the gap between headlineand core inflation, which will be welcome news to policy makers fretting not only the lack of price pressures in the economy, but also foundering inflation expectations.

Even so, the narrowing is incomplete and will likely remain so until the 12-month change in gas prices ceases its decline. The core CPI rose 2.1 percent year-over-year in April, compared to 1.8 percent at the same point in the prior year. Meanwhile, the headline CPI rose to 1.1 percent versus minus 0.2 percent a year earlier. The gap between the two is currently smaller than in any of the prior five quarters; nonetheless, the moderate rebound in gasoline prices has resulted ina slower convergence — of the headline toward the core — than many inflation forecasters had previously projected.

There is also a direct impact on the core. Even though gas prices are excluded fromthe calculation of core inflation, there are notable second-order impacts related to transportation and processing costs.

Some consequences of energy price moves are relatively easily quantifiable, such as the impact on consumption or inflation. However, analysts would be wise to consider energy-price anomalies as a potential catalyst when evaluating other unusual economic developments of recent months.

The “normal” price pattern is embeddedinto many economic statistics, like retail sales and the consumer price index, through seasonal adjustment factors. However, it also indirectly impacts other aspects of the economy. For example, consumers and businesses may subconsciously incorporate a significant rise in gas prices in the first half of the year into their behavior.

As a result, an irregular price pattern can lead to all manner of unanticipated consequences, from improved sentiment and reduced input costs to surplus funds and elevated savings, some of which were observed earlier this year. It is relatively straightforward to account for gas price irregularities in the CPI or retail sales, but the effects are far more widespread and can muddy the interpretation of economic data.

DATA & EVENTS

Annual Pattern of Retail Gasoline Prices (Regular Unleaded)*

June 10, 2016 Bloomberg Brief Economics 5

DATA & EVENTS

TIME COUNTRY EVENT SURVEY PRIOR

8:30 Canada Net Change in Employment 1.8k -2.1k

8:30 Canada Unemployment Rate 7.20% 7.10%

8:30 Canada Full Time Employment Change — -2.4

8:30 Canada Part Time Employment Change — 0.4

8:30 Canada Participation Rate — 65.8

9:00 Canada Bloomberg June Canada Economic Survey — —

9:00 Mexico Industrial Production NSA YoY 0.80% -2.00%

9:00 Mexico Industrial Production SA MoM -0.0% -0.20%

9:00 Mexico Manuf. Production NSA YoY 1.90% -1.50%

10:00 U.S. U. of Mich. Sentiment 94 94.7

10:00 U.S. U. of Mich. Current Conditions — 109.9

10:00 U.S. U. of Mich. Expectations — 84.9

10:00 U.S. U. of Mich. 1 Yr Inflation — 2.40%

10:00 U.S. U. of Mich. 5-10 Yr Inflation — 2.50%

14:00 U.S. Monthly Budget Statement -$56.0b —Source: Bloomberg. Surveys updated at 5:35 a.m. New York time.

 

CALENDAR

Click on the to see the full range of economists' forecasts on the terminal.   highlighted releases

OVERNIGHT

The has European Central Bankpledged enough stimulus to return euro-area inflation to its goal, policy maker

said, in a sign that Bostjan Jazbec officials may sit tight over the summer months. “At the current juncture, I’d firmly confirm that the measures work and that we can only look forward to responding to everything that comes to our table,” Jazbec, the Slovenian central-bank governor, said in an interview in Ljubljana on Thursday. “Of course, if you ask is there anything more we can do, my answer would always be yes. But is it needed today? No.”     

An influential adviser to Prime Minister said the Bank of Japan Shinzo Abe

should bolster monetary stimulus as soon as next week, but stick to its main tool of government-bond purchases for now rather than opt for a more-negative benchmark interest rates. "It’s better for the BOJ to act as soon as possible," said

, an intellectual Nobuyuki Nakaharafather of the BOJ’s first stab at quantitative easing in 2001, when he was on the bank’s board.

China is now an equal or even bigger driver of export growth in neighboring economies than the U.S. and E.U combined, marking a significant shift in the economic pecking order since the 2008 global financial crisis. That’s according to research by Deutsche

economists who weighed up Bank AG the influence of the U.S. and China over the rest of Asia through the prism of export growth, as well as the currency and bond markets.

Europe

Asia

INFLATION

U.S. Employers Take More Time Than Ever to Fill Jobs

U.S. businesses are taking more time than ever to fill a record number of job openings. Employers on average took 29.3 days to fill a vacant position in April, the longest period in data going back to 2001, the DHI Group said Thursday. The report followed Labor Department figures Wednesday that showed openings rose to 5.79 million in April to match the highest level since records began in 2000.

— Jordan Yadoo, Bloomberg News

June 10, 2016 Bloomberg Brief Economics 6

INFLATIONBond Market Is Signaling Inflation UptickTAYLOR HALL, BLOOMBERG NEWS    

Bond-market inflation gauges show U.S. inflation may pick up in the near-term, while sustained price acceleration looks unlikely: Five-year and 10-year break-evens, reflecting yields on nominal Treasuries and equivalent Treasury Inflation-Protected Securities, are almost equal for the first time since 2008.

Rebounding oil prices have boosted the shorter-term inflation outlook, while forecasts for sluggish global economic growth weigh on longer-term price trends. “The underlying theme is deep-seated pessimism that the global economy will really achieve this robustness it’s missing,” said Aaron Kohli, a fixed-income strategist in New York at BMO Capital Markets.

Click to view a live version of this chart on the Bloomberg terminal.here

 

     

MARKET INDICATORS

Break-Even Spread Narrowest Since 2008

June 10, 2016 Bloomberg Brief Economics 7

MARKET INDICATORS

COMMENTARY   NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST

Source: Bloomberg. Updated 5:40 a.m. New York time.

June 10, 2016 Bloomberg Brief Economics 8

 

Bloomberg Brief: Economics

COMMENTARY   NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST

Don't Fear Negative Interest RatesThe world's central banks are

increasingly employing a controversial method to stimulate economic growth: negative interest rates. I'm convinced that this can be a valuable tool, but its power depends a lot on how it's used.

First, some context. A bond that promises to pay $1,000 in a year’s time is said to have a negative interest rate if its current price exceeds $1,000. Economists used to think that nobody would pay such a price: After all, anyone could guarantee themselves $1,000 in a year simply by holding a $1,000 bill. As it turns out, though, cash is costly to store and costly to secure, so people will accept negative interest on other investments — as low as minus 0.75 percent — for prolonged periods of time. Hence, by taking interest rates into negative territory, central banks can give people and companies an added incentive to spend money now before its value erodes, potentially providing a temporary boost to the economy.

I recently participated in a conference at the Brookings Institution in Washington, D.C., where economists examined the impact of negative interest rates in the euro area, Denmark and Switzerland. The broad conclusion: There's nothing special about going below zero. The effect of moving from 0.5 percent to 0.25 percent seems to be roughly the same as moving

from minus 0.25 to minus 0.5. Both will spur spending — and both will lead banks and insurance companies to complain to central banks about declining profitability.

That said, communication matters. Central banks have typically displayed a great deal of reluctance to employ negative interest rates. The U.S. Federal Reserve, for example, avoided doing so even in the depths of the last recession. This reluctance can make going below zero look like an act of desperation, damaging confidence in the economy. That's arguably why the Bank of Japan's move in January to lower its policy rate slightly into negative territory hasn’t been as effective as expected. The Fed risks falling into the same trap by insisting that negative interest rates are not under consideration, even though the rate it pays on bank reserves remains very close to zero.

Communication is particularly important given the trepidation with which people — and their elected representatives — often view negative interest rates. Here, Denmark's experience is instructive. The Danish central bank has found it easier than some others to generate political support — and even pass legislation — to employ negative interest rates. The key difference is that Danes understand and fully support the central bank's goal of

maintaining a stable exchange rate between the Danish krone and the euro. The Fed and other central banks will face fewer political obstacles in implementing negative interest rates if they do more to ensure that their mandates enjoy similarly broad public support.

Negative interest rates could eventually become an even more powerful tool. Some economists — such as University of Michigan economist Miles Kimball, who presented at the Brookings conference — point out that central banks are capable of taking rates as far below zero as they deem necessary. To increase the cost of holding currency, for example, they could charge banks a fee to change it into electronic central bank money.

Economically useful as such an option would be, central bankers must recognize that the prospect of being charged, say, 6 percent a year just to hold cash could unsettle people. For such a policy to work as intended, officials would have to do a lot of explaining ahead of time — communication that could have the added benefit of ensuring that the public understands the central bank's goals and supports its methods of achieving them.

This column does not necessarily reflect the

opinion of the editorial board or Bloomberg LP

and its owners.

 

 

 

 

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